THE 
 
 ELECTRIC RAILWAY 
 
 PROBLEM 
 
By DELOS F. WILCOX 
 
 Municipal Franchises, in Two Volumes. (710 and 885 
 pages) 
 
 Fundamental Planks in a Public Utility Program. (12 
 pages) 
 
 Experts, Ethics and Public Policy in Public Utilities. 
 
 (16 pages) 
 
 Financial and Administrative Preparation for Muni- 
 cipal Ownership. (12 pages) 
 
 Solving the Traction Problem: The Problem from 
 the Public Point of View. (20 pages) 
 
 Problem of Reconstruction with Respect to Urban 
 Transportation. (16 pages) 
 
 Service at Cost in Local Transportation. (8 pages) 
 
 The Transit Problems of New York City. (28 pages) 
 
 Working Capital in Street Railway Valuation. (2-1 
 pages) 
 
 What Shall We Do With The Street Railways? (4 
 pages) 
 
 flDS 
 
-ANALYSIS 
 
 OF THE 
 
 ELECTRIC RAILWAY PROBLEM 
 
 REPORT TO THE FEDERAL ELECTRIC RAILWAYS COM- 
 MISSION WITH SUMMARY AND RECOMMENDATIONS, 
 SUPPLEMENTED BY SPECIAL STUDIES OF LOCAL TRANS- 
 PORTATION ISSUES IN THE STATE OF NEW JERSEY 
 AND THE CITY OF DENVER, WITH NOTES ON RECENT 
 DEVELOPMENTS IN THE ELECTRIC RAILWAY FIELD 
 
 DELOS F. WILCOX, Ph.D. 
 
 CONSULTING FRANCHISE AND PUBLIC UTILITY EXPERT 
 
 CHIEF OF THE BUREAU OF FRANCHISES OF THE PUBLIC SERVICE COMMISSION FOR THE FIRST 
 DISTRICT, STATE OF NEW YORK, 1907-1913; DEPUTY COMMISSIONER OF THE 
 }^ DEPARTMENT OF WATER SUPPLY, GAS AND ELECTRICITY 
 
 I CITY OF NEW YORK, 1914-1918 
 
 PUBLISHED BY 
 
 THE AUTHOR 
 
 NEW YORK CITY 
 
 1921 
 

 PRINTED AND BOUND BV 
 
 AI-FERTON PRESS 
 
 NEW YORK 
 
 
TO THE MEMORY OF 
 STILES P. JONES 
 
 In his report, "Financial Mismanagement of 
 Street Railways," submitted as a part of the 
 employes' case, Mr. Jones placed before the 
 Federal Electric Railways Commission an 
 illuminating and unanswerable indictment of 
 the fatuous financial policy that has all but 
 wrecked the street railway as a public utility. 
 
 
PREFACE 
 
 On May 15, 1919, the Secretaries of Commerce and Labor submitted to the 
 President a joint recommendation for the appointment of a Federal commission 
 to study and report upon the electric railway problem. During the war the 
 traction companies had been caught between the upper and the nether millstones. 
 The increase in the cost of labor and materials had been sharp, sudden and 
 irresistible. The maximum five-cent fare, fixed by contract and by custom, had 
 stood in the way of a prompt increase in revenues to meet the increase in the 
 costs of the transportation service rendered. Through the National War Labor 
 Board, the Federal Government had taken a hand in compelling the street rail- 
 ways to pay to their conductors and motormen what at that time seemed an enor- 
 mous wage. While the nation was engaged in its gigantic struggle, continuity of 
 street railway service had to be maintained at any price. The companies paid the 
 wage bills and appealed to the Government to raise the fares. Failing to bring 
 about direct interference either by Congress or by the President through some 
 hoped-for exercise of war powers, they had to content themselves with trying 
 to get favorable publicity and helpful recommendations to the state and local 
 authorities. They sought, at the very least, the appointment of a Presidential 
 commission to serve as a sort of national sounding-board before which they could 
 beat the tom-tom and attract public attention everywhere to their financial distress 
 and to the inadequacy of the five-cent fare. 
 
 On May 31, 1919, the Federal Electric Railways Commission was appointed, 
 consisting of eight members representing various interests, as follows : 
 
 Charles E. Elmquist, president and general solicitor of the National Asso- 
 ciation of Railway and Utilities Commissioners. 
 
 Edwin F. Sweet, Assistant Secretary of Commerce, and former mayor of 
 Grand Rapids, Mich., representing the Department of Commerce. 
 
 Philip H. Gadsden, vice-president of the United Gas Improvement Company, 
 and president of the Charleston Consolidated Railway and Lighting Company, 
 representing the American Electric Railway Association. 
 
 Royal Meeker, Commissioner of Labor Statistics, representing the Depart- 
 ment of Labor. 
 
 Louis B. Wehle, general counsel of the War Finance Corporation, repre- 
 senting the Treasury Department. 
 
 Charles W. Beall, of Harris, Forbes & Company, representing the Invest- 
 ment Bankers Association of America. 
 
 William D. Mahon, president of the Amalgamated Association of Street and 
 Electric Railway Employes of America, representing that association. 
 
 George L. Baker, mayor of Portland, Ore., representing the American 
 Cities League of Mayors. 
 
 ix 
 
X Preface 
 
 The Commission organized by electing Mr. Elmquist chairman and Mr. 
 Sweet vice-chairman. Mr. Charlton Ogburn, who had served as chief examiner 
 for the National War Labor Board in street railway controversies, was selected 
 as executive secretary. At the time of its appointment, the Commission received 
 from the President's war fund an appropriation of $10,000, and that was all of 
 the public money ever made available for its work. 
 
 The Commission held one public hearing in New York in June and a series 
 of hearings in Washington, extending, with interruptions, from July to October. 
 The American Electric Railway Association was represented by able counsel, 
 and its case, prepared by a special Committee of One Hundred, was laid before 
 the Commission in an orderly and effective way. Later on, the Commission 
 invited public service commissioners, mayors and some private individuals to 
 come to Washington at their own expense and present the public side of tht- 
 problem. Among the rest, I was invited. My testimony was given at consider- 
 able length on August 13th. Under the circumstances, the case for the public 
 was necessarily presented in an uncoordinated and somewhat fragmentary way. 
 In October the Amalgamated Association of Street and Electric Railway Em- 
 ployes put in an elaborate and carefully prepared case on behalf of organized 
 labor. 
 
 In its report to the President, dated July 2S, 1920, signed by all of its 
 members, the Commission said : "At the conclusion of the final public hearing 
 the Commission engaged the services of Dr. Delos F. Wilcox to aid in analyzing 
 the testimony gathered and to make suggestions to the Commission with refer- 
 ence to its report. Dr. lVilco.v made a very comprehensive analysis of the evi- 
 dence, containing 8^j pages of matter. The Commission regrets that it cannot 
 publish this analysis with the proceedings, since it represents a complete and 
 masterful study of the ivhole electric railway problem." 
 
 The inability of the Commission to publish my analysis as a part of its 
 Proceedings is the occasion for its separate publication in this book. The 
 Commission's Report and the Proceedings, containing all the testimony and cer- 
 tain supplementary documents, were published and distributed at the expense 
 of the American Electric Railway Association, though I am advised that the 
 Government Printer had some additional copies run off, which he is disposing 
 of at cost. With respect to the publication and distribution of its Proceedings, 
 the Commission said : "A complete report of the testimony will be printed, together 
 zvith this report, and will be placed in the Congressional Library in Washington 
 and other leading libraries in the country; with all regulatory commissions, and 
 with the mayors of the leading cities of the United States." 
 
 In the belief that my Analysis ought to be available as a reference work 
 along with the Report and Proceedings of the Commission, I decided to under- 
 take its publication in the present form. 
 
 In Appendix A, I have included a review of Local Transportation Issues in 
 New Jersey, prepared immediately following the conclusion of my report to the 
 Commission. The New Jersey situation had been referred to at considerable 
 length in the Testimony. The Public Service Railway lines ramify over the 
 
Preface xi 
 
 state of New Jersey from Newark as the center, reaching 140 municipalities 
 ranging in population from 414,000 down to a few hundred. The Public Service 
 Corporation of New Jersey, controlling through its subsidiaries the street rail- 
 way, gas and electric services of two-thirds of the people of a great urban state, 
 typifies the public utility problem for the entire country. In the review of the 
 Public Service Railway proceedings most of the complex problems which were 
 brought to the attention of the Federal Electric Railways Commission may be 
 seen in cross section. 
 
 In Appendix B, I am including a report on Certain Aspects of the Traction 
 Problem of the City of Denver, prepared in October, 1920, for the Denver 
 Commission of Religious Forces, and hitherto unpublished. In it I have dis- 
 cussed a typical street railway valuation problem and have analyzed a typical 
 service-at-cost plan worked out by the Denver Tramway Adjustment Committee 
 of Fifty-Five during the very time when the Federal Electric Railways Com- 
 mission was busy with its investigation. 
 
 The Denver plan was defeated at the polls by a narrow vote. Its signifi- 
 cance lies in the fact that the Federal Electric Railways Commission recom- 
 mended service at cost as a solution of the electric railway problem, and service 
 at cost has been taken up as the program of the street railway companies them- 
 selves. The rejected Denver plan is typical of what may be expected through 
 the active cooperation of the leading business interests of any urban community 
 with a utility in financial distress upon the assumption that the solution of the 
 problem must in any event be found in continued private ownership and operation. 
 
 My analysis of the evidence presented to the Federal Electric Railways 
 Commission confirmed me in the opinion that no permanent solution of the 
 electric railway problem, consistent with the public interest, is possible except in 
 public ownership. I advised the Commission that the most important thing to 
 be done at the present time is frankly to recognize the necessity of public owner- 
 ship and operation as an ultimate policy and to concentrate eflfort upon plans 
 for the removal of obstacles in its way and for the assurance of its success when 
 undertaken. The Commission, not concurring in this view, put forward the 
 service-at-cost plan as a means of resuscitating and prolonging the life of private 
 ownership and operation. In these kaleidoscopic days the financial condition and 
 public relations of any particular street railway are likely to change almost over- 
 night. But, for all that, the underlying problems remain the same, and the need 
 for a permanent policy, based upon the recognition that the public interest in 
 urban transportation is paramount, continues to be imperative regardless of tem- 
 porary shifts in the condition and relations of particular companies. 
 
 The final solution of the problem, as I see it, lies in the full recognition of 
 public responsibility for local transportation and in the acceptance by the com- 
 munity of the primary obligation of self-help in the performance of this all- 
 important community service. 
 
 Delos F. Wilcox. 
 
 Elmhurst, Long Island, July 11, 1921. 
 
TABLE OF CONTENTS 
 
 CHAP. PAGE 
 
 Letter of Transmittal xv 
 
 I. The Street Railway an Essential Public Industry 1 
 
 II. Restoration of Electric Railway Credit a Fundamental Necessity 6 
 
 III. Fundamental Importance of Labor as a Factor in Street Railway 
 
 Operation 9 
 
 IV. Credit and Cooperation the Coordinate Needs of the Electric Railways 15 
 v. Conditions in Electric Railway Operation Normally Favorable to 
 
 Credit 16 
 
 VI. Conflicting Evidence as to Amount of New Capital Required Annually 
 
 IN THE Electric Railway Industry 21 
 
 \'IL Amount of New Capital Requirements Not Clearly Shown, but 
 
 Necessity for Restoration of Credit Proven 31 
 
 VIII. Why Has Electric Railway Credit Been Lost? 35 
 
 IX. Overcapitalization a Cause of the Failure of Credit 36 
 
 X. Neglect to Amortize Excess Capitalization 43 
 
 XI. Failure to Amortize Normal Accrued Depreciation 46 
 
 XII. Payment of Unearned Dividends and Neglect of Ordinary Mainte- 
 nance 55 
 
 XIII. Overbuilding •• 61 
 
 XI\'. Holding Companies and Banker Control 67 
 
 XV. The Uniform 5-Cent Fare 75 
 
 X\T. Special Taxation and Franchise Obligations 78 
 
 X\TI. Use of Police Power to Compel More and Better Service 88 
 
 XVIII. Public Regulation of Stock and Bond Issues 92 
 
 XIX. Share of Companies and Public in Responsibility for Loss of Credit. . 97 
 
 XX. Effect of Automobile and Jitney Competition on Credit 99 ■ 
 
 XXI. Increasing Demands of Labor 113 
 
 XXII. The War and the Dollar 116 
 
 XXIII. How Can Credit be Restored? 129 
 
 XXIV. The Pros and Cons of Public Ownership 140 
 
 XX\'. Public Cooperation and a New Deal Required 149 
 
 XXVI. Increase in Margin Available for Capital 157 
 
 XXVII. Double Purpose of Unit Fare Increases 160 
 
 XXVIII. Effect of Fare Increases upon Traffic and Revenues 165 
 
 Table I. — Analysis of Traffic Showing Relation of Revenue Pas- 
 sengers to Fare Increases 183 to 188 
 
 Table II. — Analysis of Gross Passenger Revenue Showing Relation of 
 
 Passenger Revenue to Fare Increases 189 to 194 
 
 xiii 
 
XIV 
 
 Contents 
 
 CHAP. PAGE 
 
 Table III.— Revenue Passengers Carried on Principal Urban Street 
 
 Railway Systems for the First Six Months or 1917, 1918 and 1919 199 
 Table IV.— Comparative Summary of Traffic Data in Relation to Fare 
 
 Increases 205 to 207 
 
 Table V. — Comparative Summary of Passenger Revenues in Relation 
 
 to Fare Increases 208 to 210 
 
 Table VI. — General Summary of Analysis of Effect of Fare Increases 
 
 Upon Traffic and Revenues 212 
 
 XXIX. The Zone Fare or Distance Tariff 218 
 
 ^ XXX. Relief from Taxation and Other Public Burdens 244 
 
 XXXI. Efficiency in Management and Economies in Oper.\tion 260 
 
 "^ XXXII. Control or Abolishment of Jitney Competition 286 
 
 XXXIII. Co-operative Relations Between Management and Men 300 
 
 XXXIV. Public Subsidies 303 
 
 XXXV. Abandonment of Unprofitable Lines 322 
 
 XXXVI. Financial Re-organization 327 
 
 XXXVII. No One Remedy Sufficient 343 
 
 XXXVIII. The Valu.\tion 345 
 
 XXXIX. The Rate of Return 385 
 
 . XL. Unrestricted State Regulation 405 
 
 ■— — XLI. Service at Cost 434 
 
 XLII. The Use of Public Credit 505 
 
 XLIII. The Electric Railway Labor Problem 530 
 
 Table of Conductors' Wages 532 and 533 
 
 XLIV. Labor's Public Relations Recognized 537 
 
 XLV. Limitation of "The Right to Strike" 541 
 
 XLVI. The Program of the Amalgamated 564 
 
 XLVII. Labor's Participation in Management 598 
 
 XLVIII. Electric Railway Employes as Civil Servants 618 
 
 XLIX. Service Versus Profits 621 
 
 L. The Four Choices • • 623^ 
 
 LI. Abandonment of the Public Interest no Remedy 624 
 
 Lll. Commission Regulation not Adequate as a Solution of the Problem . . 626 
 
 LIII. Where "Servhce at Cost" Falls Short 631 
 
 LI V. Public Ownership and Operation the Ultimate Solution 635 
 
 Summary 644 
 
 .Appendix A. Local Transportation Issues in New Jersey 659 
 
 .^ppENDIx B. A Report on Certain Aspects of the Traction Problem of 
 
 the City of Denver, Colorado 717 
 
 Notes and References 749 
 
 I NDEX 771 
 
LETTER OF TRANSMITTAL 
 
 Hon. Charles E. Elmquist, 
 
 Chairman, Federal Electric Railways Commission, 
 Washington, D. C. 
 Sir: 
 
 Pursuant to the action taken by the Commission October 4, 1919, and the 
 arrangement with me subsequently made by Mr. Charlton Ogburn, Executive 
 Secretary, and confirmed by you in your letter of October 20, 1919, I have gone 
 over the testimony presented before the Commission, the exhibits filed with it 
 and the data collected on its behalf by the Executive Secretary with as much 
 thoroughness as the time at my disposal would permit, and have prepared a 
 report containing an analysis of the testimony taken at the hearings and of 
 the supplementary information filed with the Commission, together with a 
 general discussion of the electric railway problem with suggestions looking 
 to the formulation and adoption of public policies designed to aid in its solution. 
 This report consists of fifty-four sections and is accompanied by a summary, 
 table of contents, and index of witnesses and authorities cited.* On account of 
 the enormous mass of material laid before the Commission, and on account of 
 the multitude and complexity of the problems under consideration by the Com- 
 mission, my report has necessarily become quite voluminous. It has been trans- 
 mitted to you, to each of the other members of the Commission, to the Executive 
 Secretary and to Dr. Milo R. Maltbie from time to time as parts of it were com- 
 pleted. As the Commission will soon meet for the purpose of considering my 
 analysis and formulating its own report to the President on the matters which 
 it was appointed to consider, I think it advisable in this letter to review as briefly 
 as possible the salient points upon which emphasis may properly be laid. 
 
 Certain aspects of the electric railway problem appear simple, but a close 
 examination of the causes that have contributed to the present financial embar- 
 rassment of the electric railway industry and a consideration of the consequences 
 to the industry and to the country likely to follow upon the application of par- 
 ticular remedies reveal the fact that the problem as a whole is not simple, but 
 extremely complicated and baffling. 
 
 The most important facts with respect to which there is little or no dispute 
 may be summarized as follows : 
 
 1. The electric railway industry at present is a factor of vast importance 
 in the urban life and, to a less extent, in the interurban relations of the country. 
 
 2. Electric railways as common carriers, primarily used for local passenger 
 transportation, have been, are, and will continue to be a public utility, subject 
 
 * As printed, the sections have been treated as chapters, and the index of witnesses 
 and authorities has been merged with the general index. 
 
 XV 
 
xvi Electric Railway Problem 
 
 to public control as to the extent and character of the service they render and 
 as to the rates they charge for such service. This is true whether or not the 
 policy of private ownership and operation is continued. 
 
 3. Until very recently public control as to the rates of fare charged for 
 electric railway service has almost universally in this country taken the form 
 of a fixed, uniform unit fare of five cents prescribed either by statute or by local 
 franchise ordinances or contracts. 
 
 4. As a result of the trend of economic forces through a period of about 
 twenty years prior to the outbreak of the World War a gradual increase had 
 been taking place in the unit prices of labor and materials entering into the 
 construction, maintenance and operation of electric railways. This gradual in- 
 crease was wholly or in part overcome by improvements in the electric railway 
 art. Following the outbreak of the World War, however, and particularly since 
 1916, an enormous increase in electric railway imit prices has taken place which, 
 at least for the time being, has quite outstripped the economies due to the progress 
 of the art and the growth of revenues due to the increase of traffic. 
 
 5. For several years prior to the war, and to an increasing extent through- 
 out the war period and up to the present time, the automobile has proven to be 
 a serious competitor of the electric railways in rendering local transportation 
 service. Jitneys and automobile buses operating as common carriers have been 
 able in many cases, through the absence of sufficient public regulation, to engage 
 in unfair and destructive competition with the electric railways for the most 
 profitable part of urban passenger traffic. The direct results of this competition 
 and the doubt as to the extent of its future development have even raised a query 
 in the public mind as to whether or not the electric railway can survive as the 
 principal means of local transportation, and this doubt has seriously aftected 
 the credit of the industry. 
 
 6. Electric railways, as a general rule, were not conservatively financed 
 in their early years and have not since made good their overcapitalization, except 
 to a limited extent, otherwise than through the process of bankruptcy and 
 reorganization. Also, they have not reduced their capital on account of the 
 accruing depreciation of their physical property and have not spent in the main- 
 tenance of their property or set aside as a depreciation reserve enough money 
 to maintain the integrity of the investment at 100 per cent. 
 
 7. The destruction of capital incident to the World War, the unprecedented 
 demands of the Government for loans during the war period, the great increase 
 in the burden of taxation growing out of the war, and the general sense of 
 increasing insecurity of invested capital have resulted in an increase in the cost 
 of new money needed in the electric railway as well as in all other industries. 
 
 8. The net income of the electric railways has been greatly diminished 
 and their credit so impaired that they cannot readily refund their outstanding 
 obligations, and cannot without great difficulty, or at all, secure new capital for 
 extensions, additions and improvements. 
 
 9. The electric railways generally have reached a condition where the 
 margin of income available for return upon investment must be enlarged or else 
 the entire capital foundation of the industry must be changed. 
 
Letter of Transmittal xvii 
 
 10. While the immediate occasion of the present evil plight of the electric 
 railway industry is the economic changes that have been incident to the war 
 period, the condition of the industry even prior to the war, particularly in its 
 public relations, was unsatisfactory and unsound. 
 
 11. The wages of street railway labor prior to the war were generally 
 insufificient from the point of view of "the living wage," and the increases in 
 wages that have taken place since the beginning of the war period have not been 
 greater, on the average, than the increase in the cost of living. 
 
 From a consideration of the foregoing points the following general conclu- 
 sions appear to be obvious : 
 
 1. Unless the usefulness of the electric railway as a public utility is to be 
 sacrificed, public control must be flexible enough to enable the electric railways 
 to secure, in one way or another, sufficient revenues to pay the entire cost of the 
 service rendered, including the necessary cost of both capital and labor. 
 
 2. Where, the cost of service has greatly increased as a result of conditions 
 over which the electric railways have no control, a corresponding increase in the 
 rates charged for the service is the remedy that first suggests itself as in line 
 with the remedies applied in other industries under similar circumstances. 
 
 3. In view of the essential nature of the service rendered by the electric 
 railways and the extent of their use it is a matter of the highest public impor- 
 tance that both the total cost of the service and the cost to the individuals who 
 use it shall be kept as low as possible without injustice to those who take part 
 in producing it. 
 
 4. Economies in operation that do not involve a harmful lowering of the 
 standard of service or an injustice to those who take part in rendering it, wherever 
 such economies are practicable, are preferable to an increase in fares as a means 
 of meeting the increased prices which enter into the cost of service. 
 
 5. Economy in the use of capital to the extent that such economy does not 
 impair the service rendered is preferable to fare increases as a means of meeting 
 the increase in the cost of capital, where such economy is practicable. 
 
 6. Savings in the cost of capital through financial reorganization and the 
 adoption of more advantageous and economical methods of financing are pref- 
 erable to rate increases as means of meeting the increase in the market rates of 
 interest, where such savings are practicable. 
 
 7. Wherever unequal or excessive public burdens have been laid upon the 
 electric railways on the theory that the community, as the grantor of the fran- 
 chise for operation, is entitled to a share in the profits of the industry, the 
 removal of these burdens is preferable to fare increases as a means of meeting 
 the necessary increase in the cost of service. 
 
 8. The restoration and development of electric railway trafific and revenues 
 through the removal of unfair, irresponsible and destructive jitney competition, 
 and through the recognition and encouragement of the principle of monopoly 
 within reasonable limits as applied to electric railway service under adequate 
 public regulation, is preferable to fare increases as a means of meeting the 
 increased cost of electric railway service. 
 
 9. If economies in operation, economy in the use of capital, savings in the 
 
xviii Electric Railway Problem 
 
 cost of capital, the removal of excessive and unequal public burdens and the 
 elimination of unfair competition cannot be made to ati'ord sufficient succor to 
 enable the electric railways to pay the entire cost of service out of the revenues 
 derived from electric railway rate schedules which the public has been accustomed 
 to pay, then the remaining deficiencies may properly be made up by an adjustment 
 of the fare schedules, subject to the limitation that in no case should the fares 
 be so greatly increased as seriously to impair the usefulness of the electric railway 
 as a public utility. 
 
 10. In communities where considerations of public policy require that elec- 
 tric railway fares shall be maintained at a fixed level or below a fixed maximum, 
 then deficiencies in the earnings of the electric railways must be made up through 
 other sources than passenger revenues to whatever extent may be required to 
 meet the full cost of electric railway service. These deficiencies may be made 
 
 I up through the levy of special taxes upon property benefited, through the loan 
 of public credit, or through direct subsidies from general taxation, but these 
 methods of relief are everywhere subject to a proper consideration of sound 
 public policies whether or not such policies are, in a particular case, embodied 
 in constitutional or statutory restrictions. 
 
 11. If under private ownership and operation, with such degree of freedom 
 from regulation or such degree of public assistance as may be practicable and 
 the community may approve, the electric railways are unable to continue to 
 render the essential service now being rendered by them, and to expand their 
 facilities in proportion to the reasonable increase in the public demand for their 
 service, then the assumption by the community of direct responsibility for the 
 performance of the function of local transportation is a logical necessity. 
 
 The salient points outlined above arc. I think, supported by the overwhelming 
 weight of testimony presented to the Commission. The conclusions which I have 
 personally reached from my previous study and experience as well as from this 
 investigation go somewhat further. I will state them briefly as follows : 
 
 1. Local transportation service, coming as it does within the accepted 
 definition of a public utility, is affected with a public interest. It has for its 
 primary purpose the rendering of a public service. The electric railways are 
 constructed, maintained and operated not primarily for the purpose of enabling 
 capital to find profitable investment ; not primarily for the purpose of enabling 
 labor to earn a living; not primarily for the purpose of enabling management 
 
 I to win the rewards of administrative ability; but primarily for the purpose of 
 I rendering an essential service to the commuifity. This fact distinguishes the 
 /electric railway industry from any and every purely private business, and makes 
 
 the public interest in the quantity, quality and continuity of the service rendered, 
 
 and in the charges made for such service, paramount. 
 
 2. Heretofore, under the policy of private ownership and operation, capital 
 has assumed the management. Capital engaged in a public service such as local 
 transportation enjoys the special guaranties which the Federal constitution and 
 
 .many of the state constitutions throw about property interests. It is entitled 
 to a fair return subject to the limitation that in no case must the rates charged 
 to the public represent more than the service is reasonably worth. The right of 
 
Letter of Transmittal xix 
 
 capital to earn a fair return has, in many respects, been limited by the effect of 
 restrictive contracts voluntarily entered into with the communities within which 
 public service is being rendered. In case these contractual restrictions are all 
 removed capital demands not merely the assurance of a fair return upon the 
 investment, but, so long as it assumes the management, demands something more 
 — a speculative chance of profit, or a special reward for efficiency. If it were 
 divorced from management capital would ask for nothing save security and a 
 fair return, which, under those circumstances, would be the minimum rate of 
 interest required to attract capital to a secure investment. 
 
 3. The cost of labor as an element in the cost of electric railway service 
 has hitherto been determined primarily by the law of supply and demand subject 
 to such adjustments as the employes could enforce through negotiation with 
 the management representing capital, or through the power of the strike. As 
 yet labor has no constitutional guaranty of the living wage corresponding to 
 capital's guaranty of the fair return, but at the present time labor is properly 
 demanding that, in the permanent settlement of the electric railway problem, 
 the living wage shall receive practical recognition co-ordinate with or even 
 precedent to the fair return guaranteed to capital. Labor does not, to an appre- 
 ciable extent, control or participate in management, and, therefore, while existing 
 relations continue it cannot demand more than the fair or living wage, except 
 under conditions where the law of supply and demand makes the payment of 
 a higher wage necessary. But if labor should assume the management, or any 
 effective share in the management, it would then logically and necessarily claim 
 something more than the living wage, just as capital now claims something more 
 than the fair return. 
 
 4. The public has so fundamental an interest in electric railway service 
 that it cannot permit itself to be the victim of the vicissitudes of an unregulated; 
 struggle between capital and labor and it cannot permit itself to be forced into 
 the position of signing a blank check to cover the cost of service at whatever 
 figure capital and labor may, by joint agreement, fix it. Therefore, it is necessary 
 that a direct relation between the public and labor, as fundamental and effective 
 as the direct relation between the public and capital, be established, to the end 
 that labor may receive adequate public guaranties and in turn acknowledge and 
 assume adequate public responsibilities in connection with the production of 
 transportation service. 
 
 5. With the establishment of direct relations between the public and labor 
 the responsibility of capital for management is undermined and its motive for 
 efficiency in management weakened if not destroyed. That the public interest 
 is paramount is proven by the constantly increasing scope of the public encroach- 
 ments upon management. With the assumption of direct public responsibility 
 for wages, hours, and conditions of work, and for the enforcement of continuity 
 of service, the next step, which is both logical and necessary, is the assumption 
 by the public of complete responsibility for management and the limitation of 
 capital to its true function of supplying funds in aid of public credit for a fixed 
 return determined by the security it enjoys. 
 
 6. The problem of credit can most effectively be solved by public ownership 
 
XX Electric Railway Problem 
 
 undertaken through the acquisition of the existing electric railway properties 
 at a fair price based upon the actual cost of existing and useful property with 
 due regard to its present condition and with fair consideration of the equitable 
 claims of invested capital with respect to losses not resulting from bad manage- 
 ment or imprudent contracts. Upon this basis capital will retire from the man- 
 agement and will assume the same subordinate but useful position that it already 
 occupies in relation to municipal improvements generally. The cost of capital 
 will be reduced to a minimum and the credit necessary for inducing new capital 
 to flow into the industry will be forthcoming on the basis of the security offered. 
 This security will be increased and the cost of capital will be reduced in propor- 
 tion to the conservatism of the financial policies adopted by the community. 
 .Ample depreciation reserves, the prompt amortization of dead capital, and the 
 gradual amortization of the entire capital out of earnings or out of taxes will 
 effectively maintain public credit for electric railway expansion. 
 
 7. The assumption of management by the public will involve the definite 
 I)ublic recognition and guaranty of the rights of labor to a living wage, reasonable 
 hours and just conditions of work, and will, at the same time, place electric 
 railwav employes in the position of civil servants with the advantages and 
 responsibilities which are implied in that relationship. Labor is different from 
 capital. It is a living thing; not inert. Its full cooperation even under public 
 management can hardly be secured merely by civil service rules and a guaranty 
 of the living wage. No doubt one of the principal jobs of public management 
 will be to work out a more eft'ective and democratic relationship with labor than 
 has hitherto characterized the electric railway industrv under either ])rivate or 
 l^ublic operation. 
 
 8. The imperative need of the present time is the acceptance of public 
 ownership and operation as a policy, and the adoption as rapidly as possible 
 of those measures which are required to clear away the obstacles to the realiza- 
 tion of such a policy, and to make it successful in the highest practicable degree 
 when realized. .Xny temporary relief granted to the electric railways and any 
 temporary readjustment of their public relations under private ownership and 
 management, such as the working out of a more complete and unrestricted 
 system of state regulation or the adoption of a service-at-cost plan, ought to be 
 consistent with and preparatory for tiie early and effective consummation of 
 public ownershii) and operation as the ultimate policy. 
 
 I think 1 have a projjcr realization of the dangers and difficulties inherent 
 in the policy which 1 have proposed, but I am confident that these dangers and 
 difficulties can readily be overcome if public opinion can be crystallized in favor 
 of a serious effort to overcome them. If public ownership and operation are 
 either inherently desirable or, in the course of events, inevitable, it is of the 
 utmost importance that the community should set its house in order and prepare 
 to assume in an orderly and effective way the responsibility that it cannot 
 ultimately escape. 
 
 Respectfully, 
 
 Delos F. Wilcox. 
 
 Elmhurst, N. Y.. June 8, 1920. 
 
ANALYSIS OF THE ELECTRIC RAILWAY 
 
 PROBLEM 
 
 Chapter I 
 THE STREET RAILWAY AN ESSENTIAL PUBLIC INDUSTRY 
 
 The magnitude of the electric railway industry was put forward by the 
 witnesses on behalf of the American Electric Railway Association as a proof 
 of its importance from the public point of view. It was shown from the infor- 
 mation collected by the Bureau of the Census that in 1917 the net capitalization 
 of the electric railways of the country was $4,889,962,096. This indicates that 
 from the point of view of nominal investment the electric railways are about 
 one-fourth as important as the steam railroads of the country, the capitalization 
 of the latter on December 31, 1916, being $19,630,610,082. The total mileage 
 of the electric railways in 1917 was 44,835 as compared with a mileage of 294,030 
 in the case of the steam railroads. These figures show a net capitalization per 
 mile of track of about $66,771 for the steam railroads, and $109,132 for the 
 electric railways, indicating that the electric railways are capitalized 63.44% 
 higher per mile of track than the steam railroads. In comparing the magnitude 
 and importance of the electric railways and the steam railroads it must be borne 
 in mind that the electric railways are engaged primarily in the transportation 
 of passengers, while on the steam roads passenger transportation, although of 
 great importance, from the point of view of both revenue and service, represents 
 only a fraction of the transportation business. The total revenues from railway 
 operation collected by the electric railways of the country in 1917 were approx- 
 imately $650,000,000 as compared with $4,119,000,000 collected by the steam 
 roads during that year, of which $825,000,000, or about 20%, was for passenger 
 service. 
 
 These statistics indicate that although the electric railway industry is one 
 of vast magnitude, it is far less important from the financial point of view than 
 the steam roads. The electric railways included in the Census Bureau's statistics 
 are primarily street and interurban railways and do not include the electrified 
 portions of steam railroads engaged in suburban service, such as the New York 
 City divisions of the New York Central, the Pennsylvania and the Long Island 
 railroads. 
 
 The figures submitted to the Commission showing the magnitude and im- 
 
 1 
 
■2-' Electric Railway Problem 
 
 pt>rttihce of the electric railway industry make no separation between urban 
 street railways and interurban electric lines, but the special Census report for 
 the year 1912 indicates that about 40% of the mileage included in the electric 
 railway statistics for that year was suburban or interurban. The mileage tigures 
 already given include sidings and car house and car yard tracks, of which there 
 were 2,731 miles in 1912. Upon the basis of the available information, it appears 
 that the main track mileage of the electric railways consists of about 25,000 miles 
 of tracks in city streets and 17,000 miles of suburban or interurban tracks. 
 No division of capitalization or earnings can be attempted from the data sub- 
 mitted to the Commission, but it is unquestioned that from the point of view 
 of investment cost, service rendered and revenues collected, the urban lines are 
 relatively much more important, mile for mile, than the suburban and interurban 
 lines. 
 
 From the point of view of freight service the contrast between the urban 
 electric railway lines ant! the steam roads is much more marked than the contrast 
 between the interurban lines and the steam roads, since the interurbans have 
 developed a considerable amount of freight and express business supplementing 
 or in competition with the freight service of the steam roads. 
 
 While the electric railways are less important than the steam roads from 
 several points of view, nevertheless they are much more in the public eye, for 
 the reason that they come into daily contact with a vastly greater number of 
 people. In the year 1917 the electric railways carried a total of 11,304,660,462 
 revenue passengers, and 3,202,254,111 transfer and free passengers, as compared 
 with a total of about 1,1-H,G9O.Q90 passengers carried by the steam roads. Thus 
 it appears that the electric railways in their passenger transportation service 
 come into contact with more than ten times as many people as the steam roads 
 do. While the average ride furnished by an electric railway, especially by an 
 urban street railway, is of very much less importance than the average ride 
 furnished by a steam railroad, nevertheless every ride is either a necessity or 
 a convenience, in connection with which the passenger comes in contact with 
 the physical property devoted to public service and with the eni|)loyes engaged 
 in rendering that service. 
 
 It is significant that although the number of passenger automobiles in the 
 United States on December 31, 1917, was estimated to be 4,643,481 as compared 
 with 79,914 electric railway passenger cars, a ratio of nearly 60 to 1, and that 
 two-thirds of the development of the automobile industrj- was subsequent to 
 1912, the number of revenue passengers carried by the electric railways was 
 approximately 1,800,000,000 more in 1917 than in 1912. This indicates that 
 in spite of the immense development of the automobile industry the demand 
 for electric railway transportation has gone on increasing at a rapid rate. In 
 this connection, Mr. Henry G. Bradlee, President of the Stone & Webster Cor- 
 poration, submitted to the Commission, in a letter dated October 1, 1919, certain 
 information with respect to the development of electric railway traffic and earn- 
 ings as compared with the development of population served by Stone & Webster 
 lines. Nineteen companies operating in Texas, Florida, Georgia, Louisiana, 
 Washington and elsewhere were included in the computations. The figures show 
 
An Essential Industry 3 
 
 an average estimated increase in population served during the ten-year period 
 
 ended June 30, 1919, of 42.3%. Upon this basis the passenger earnings per 
 
 capita increased 26.9% during that period, and the number of revenue passengers 
 
 carried per capita per annum increased 24.3%. In explanation of the reason 
 
 for the compilation of the tigures submitted by him, Mr. Bradlee said: 
 
 "The idea seems to be prevalent in many quarters that the street railway has seen its 
 day of greatest usefulness, and that the automobile is gradually driving it out of business and 
 constantly decreasing the public demand for street railway service." 
 
 Commenting upon the results shown when the figures for the entire nineteen 
 companies had been compiled, he said : 
 
 "If these figures are a fair indication of what has taken place in other cities (and I know 
 cf no reason why they should not be), the street railway is by no means a dying institution, 
 nor has it been seriously affected by the introduction of the private automobile ; on the con- 
 trary, the demand for service is materially greater than it has ever been before and is still 
 growing at a rapid rate. It would appear that something has been and is still stimulating the 
 street railway business ; possibly the automobile itself has helped in this direction. People 
 may be acquiring to a greater extent than ever before the riding habit, and may be more and 
 more inclined to move about and spend less time in their own homes or with their immediate 
 neighbors. The moving picture is probably also a factor in the situation, but whatever may 
 be the cause the fact seems pretty clear that the demand for transportation service is still 
 growing apace. This fact I think is pretty generally misunderstood; in fact I am free to 
 confess that we ourselves were surprised to see the extent of the increased demand for service." 
 
 Figures prepared by the Public Service Commission for the First Dfstrict 
 showing the rapid increase in street railway traffic in New York City tend to 
 bear out Mr. Bradlee's conclusion based upon the Stone & Webster experience 
 in smaller commtmities of the south and southwest. During the year ended 
 June 30. 1919, the total number of revenue passengers carried by the local 
 transportation lines of New York City was 2,079,942,604 as compared with 
 1,402,417.642 carried during the year ended June 30, 1909, an increase of more 
 than 48% in ten years. On the basis of the estimated population served the 
 Public Service Commission figures that the number of revenue rides per capita 
 in 1909 was 304 and in 1919, 370, an increase of nearly 22% in the riding habit. 
 The Public Service Commission's table gives the number of street railway 
 revenue passengers carried and the number of revenue rides per capita in 1860 
 and during every census year thereafter until 1900, and year by year from that 
 time on until 1919. The facts shown are so significant of the absolute develop- 
 ment of the street railway business, and of its relative development as shown by 
 the growth of the riding habit, that the figures for the entire period are given 
 herewith : 
 
 New York City Street Railway Traffic^ 
 
 Year 
 
 Total Revenue Revenue Rides 
 
 Passengers 
 
 1860 50.830,173 
 
 1870 152,463.920 
 
 1880 290,417.029 
 
 1890 569,149,560 
 
 1900 846,353,058 
 
 1901 881,344,801 
 
 1902 938.989.964 
 
 1903 1.000.767.483 
 
 1904 1,065,984,910 
 
 1905 1,130,982.696 
 
 1906 1,251,841,175 
 
 1907 1,313,381,388 
 
 Per Capita 
 43 
 103 
 152 
 218 
 246 
 248 
 256 
 265 
 274 
 283 
 301 
 305 
 
 Total Revenue Revenue Rides 
 
 Year Passengers Per Capita 
 
 1908 1,358.000,407 305 
 
 1909 1,402,417.642 304 
 
 1910 1,531,262,914 321 
 
 1911 1,603,901,397 330 
 
 1912 1,680,913.935 339 
 
 1913 1.769.876.508 350 
 
 1914 1,813,204,356 352 
 
 1915 1.807.632.726 345 
 
 1916 1,898,735.615 356 
 
 1917 1,918,812.229 353 
 
 1918 1,975,511,789 358 
 
 1919 2,079,942,604 370 
 
4 Electric Railway Problem 
 
 From the point of view of the magnitude of the street railway industry 
 and of the service that it renders, it should be added that the electric railways 
 
 J had 294,826 employes in 1917, and paid taxes amounting to $45,736,695 or 7% 
 of their total railway operating revenues during that year. No exact figures 
 are available to show what proportion of the total population of the country is 
 directly served by electric railways, but in general it may be assumed that the 
 population served is somewhat lower than the total urban population estimated 
 on the basis of the number of people living in cities and towns of more than 
 5,000 population. On this basis the urban population of the coimtry, as shown 
 by the 1910 census, was 38.517,727. It would probably be safe to estimate the 
 total number of people who are directly and conveniently accessible to electric 
 railway service at very nearly 50,000,000 at the present time. While it is true 
 that the electric railways have overflowed municipal boundaries and now include 
 a network of interurban lines in many portions of the country, it still remains 
 a fact that the electric railway as thus far developed is primarily an urban street 
 railway with its principal function the transportation of passengers within the 
 limits of municipalities. The correctness of this conclusion is confirmed by 
 consideration of the fact that the total amount of revenue collected by the electric 
 railways from railway operations in 1917 amounted to only 5.75 cents per revenue 
 passenger carried. All the figures go to show that the principal function of the 
 electric railways is to supply cheap and convenient transit for urban populations, 
 and that the amount of service demanded of them, though stupendous in the 
 aggregate, is made up of an immense number of very small units. 
 
 In an important sense the essential nature of the electric railway business 
 is demonstrated by the extent of the demand for its service. Another factor 
 
 ., that tends to establish the public character of the electric railway business is its 
 relation to the public streets. From the very beginning of the street railway 
 industry — a generation before electric traction was introduced — it was univer- 
 sally recognized that through its use of the streets as a right of way for its tracks 
 the street railway came into a peculiar relation with the public. By special fran- 
 chises granted either by direct act of the state legislatures, and by Congress in 
 the District of Columbia, or by the local authorities having control of urban 
 streets, a contractual relation was established between the public and the com- 
 panies that undertook to render local transportation service. These special 
 francTiises or contracts came to be in many communities very complex docu- 
 ments, entering into great detail not only with respect to the fares to be charged 
 but also with respect to the character of the service to be rendered and the compen- 
 sation to be paid into the public treasury for the use of the streets. Furthermore, 
 after fifty or sixty years of eflfort to control the operation of street railways in the 
 public interest through franchise contracts, with very indifferent success, the 
 public was finally compelled to invoke the police power and to establish permanent 
 regulatory commissions to enforce upon the electric railways the obligations to 
 the public which the nature of their business placed upon them. The theory of 
 continuous public regulation has come to be so widely recognized and so com- 
 pletely established as a necessary public policy that for the most part the electric 
 railway companies themselves accept public regulation as a permanent condition 
 
An Essential Industry • 5 
 
 of their operation. While many men speaking for the companies are critical in 
 their view as to the benefits thus far derived by the industry from public regu- 
 lation, there are very few left at the present time who do not, at least in public, 
 profess their belief in the desirability and necessity of a continuance of the policy 
 of regulation through public agencies. While some of the policies which are now 
 being proposed as a result of the present distress of the electric railway industry 
 would undoubtedly tend to weaken and perhaps destroy the effectiveness of 
 public regulation, no one responsible for the recommendation of such policies 
 is willing to admit that they are in eiTect adverse to the principles of public 
 regulation. 
 
 Indeed, if further proof of the essential nature and the public character of 
 the electric railway business were needed, it could be found in the nation-wide 
 appeal which the electric railway industry is now making to the federal, state 
 and local governments for help, and particularly could it be found in the perusal 
 of the testimony that has been presented before this Commission by the Com- 
 mittee of One Hundred appointed to represent the American Electric Railway 
 Association. A purely private industry would not make such an appeal. One 
 of the reasons is that a purely private industry would not be subject to the 
 governmental restrictions with respect to rates and service which have been 
 imposed upon the electric railways, but the appeal that is now being made is 
 not merely for the removal of governmental restrictions — for the removal of 
 such restrictions would mean the abandonment of public regulation and of public 
 responsibility for the welfare of the industry — but the appeal is rather for the 
 modification of existing restrictions and for the establishment of a new relation 
 between the public and the industry that will embody a clearer and fuller recog- 
 nition of public responsibility for the financial welfare of those of the agencies 
 which have undertaken to render electric railway service. The appeal of the 
 companies is not "to be left alone," which in general they recognize as something 
 that on account of the nature of their business is inherently impossible, but to 
 be helped. Their appeal is to the public to assume some responsibility in the 
 conduct of a public business. While it may be that the particular policies which 
 they ask the public to adopt in the present emergency are not in all respects con- 
 sistent with a full recognition of the essential nature and the public character of 
 the business, nevertheless their appeal in principle is based upon such recognition. 
 
 After looking at electric railway service from every angle, we reach the 
 inescapable conclusion that this service is essential in its nature and that the 
 ultimate responsibility for its performance upon terms and conditions conducive 
 to the general welfare rests upon the communities for which it is rendered. 
 
I" Chapter II 
 
 RESTORATION OF ELECTRIC RAILWAY CREDIT 
 A FUNDAMENTAL NECESSITY 
 
 The National War Labor Board, in its findings in the Qeveland Railway 
 
 wage arbitration dated July 31, 1918, referring to the condition of street railway 
 
 companies in general, said : 
 
 "The credit of these companies in floating bonds is gone. Their ability to borrow on short 
 notes is most limited. In the face of added expenses which this and other awards of needed 
 and fair compensation to their employes will involve, such credit will completely disappear." 
 
 The findings in the Qeveland case were cited in a long series of other 
 awards in which a wage scale of from 43 cents to 48 cents per hour was put into 
 effect. Since then wages in Cleveland and a number of other cities have gone 
 up to 50 cents, 55 cents and 60 cents per hour.' It is admitted that the Cleveland 
 Railway Company, operating under a service-at-cost franchise within certain 
 limitations, maintained its credit much better than the other street railway com- 
 panies of the country. 
 
 The recommendations of the joint chairmen of the War Labor Board, based 
 on the conclusions they had reached in acting as arbitrators in wage controversies 
 between the street railway companies and their men, were in large measure 
 responsible ultimately for the creation of the Federal Electric Railways Commis- 
 sion. In fact, Ex-President Taft, one of the joint chairmen, was the very first 
 witness to be called before the Commission to testify as to the condition and 
 needs of the electric railways. He referred to the companies as having "their 
 backs to the wall" financially, and in reply to questions put by Commissioner 
 Gadsden, gave the following testimony with respect to their credit (page 12 of 
 the Proceedings)': 
 
 "Commissioner Gadsden : Now. Judge, coming to the question of investment : The 
 situation today, as doubtless your investigations have shown, is that the electric railway in- 
 dustry has lost its credit ? 
 
 "Mr. Taft: Entirely. 
 
 "Commissioner Gadsden : As a matter of fact, in order that this essential industry shall 
 continue its service to the public, is it not necessary that its credit, its financial credit, shall 
 Ik' restored ? 
 
 "Mr. Taft: It is. 
 
 "Commissioner Gadsden : Otherwise if can not get the additional capital to make its ex- 
 tensions and improvements and keep the scn'ice up? 
 
 "Mr. Taft: That is true." 
 
 Mr. Harold L. Stuart, President of Halsey, Stuart & Company, investment 
 
 bankers of Chicago, was questioned at one of the early hearings about the present 
 
 demand for street railway securities. His testimony on this point is found at 
 
 page 185 of the Proceedings, as follows: 
 
 "Mr. Warren: How are street railway securities regarded now in investment circles? 
 "Mr. Stuart: They are regarded with great distnisf and disfavor, to such an extent 
 
 6 
 
Restoration of Credit Necessary 7 
 
 that it is almost impossible to distribute street railway securities, I don't care how good they 
 are. I am speaking now about bonds — not stocks. 
 
 "Mr. Warren: Yes; bonds. 
 
 "Mr. Stuart: It would be absolutely impossible to distribute street railway stocks. 
 
 "Mr. Warren: And how long has that been true? 
 
 "Mr. Stuart : So far as bonds are concerned, as I say, about two years ago. For some 
 time back of that street railway stocks had not been sought for, I believe." 
 
 Mr. Samuel R. Bertron, of Bertron, Griscom & Company, bankers of New 
 York and Philadelphia, stated that "it is practically impossible for anyone to 
 sell any street railway security to any investor — anything else, but not a street 
 railway security ; an oil stock, or any old thing, but no street railway securities, 
 and, as a result, it is impossible to raise money, because they have no credit." 
 (Page 538 of the Proceedings.) 
 
 Mr. Henry L. Doherty, President of the Cities Service Company and of 
 the Henry L. Doherty Company of New York, in his testimony on behalf of 
 the American Electric Railway Association, described the credit of the street 
 railways as "already strained beyond the elastic limit." 
 
 Mr. John G. Barry, General Sales Manager of the General Electric Com- 
 pany, after referring to the amount of equipment sold during 1917 and 1918 
 to the Philadelphia Rapid Transit Company and other companies affected by 
 war industries for which the money was provided, at least in part, by the United 
 States Shipping Board Emergency Fleet Corporation, gave the following testi- 
 mony with respect to companies not affected by war industries (page 384 of the 
 Proceedings) : 
 
 "The Chairman : Have the utilities which have not been affected by war industries pur- 
 chased much equipment during the last two years? 
 
 "Mr. Barry : They have not, Mr. Commissioner. They would like to purchase equip- 
 ment, but, unfortunately, they are not in a position to get the equipment. Their credit is gone." 
 
 Mr. Henry G. Bradlee, of Stone & Webster, in describing the conditions 
 necessary for the establishment and maintenance of credit in the street railway 
 business, made the following statement (page 209 of the Proceedings) : 
 
 "The street railway should be looked on, as I see it, not as a static thing but as a growing 
 organization, something which is e.xpanding and extending all the time and which must extend 
 and expand to adequately serve the public. It is possible to make a trade with the city by 
 which the investment which has already been made shall accept what may seem an adequate 
 return, but that is only a half truth; it is looking at only half the situation. You can make 
 a trade with a man who already has his money invested, but you cannot make a trade of that 
 kind with a man who is going to invest his money ne.xt year and the year after. That man 
 will look at the situation in the street railway field and compare it with the situation in other 
 lines of industry. There is no situation that I know of where competition is keener than 
 in the investment of money. The investor looks for the investment which he considers is 
 going to be the most favorable for him. and that is the investment which he buys. Unless 
 he can be convinced that he will have equal security and an equal chance for profit in the 
 street railway or other public utility industry that he can obtain in manufacturing and any 
 other line of industry, he will put his money into manufacturing and not into the public 
 utility. 
 
 Now. that problem is the one which lies at the basis of the solution of this whole ques- 
 tion. It is not the question of what money is in there so much as it is how you are going to 
 get additional money in order to reasonably serve the public." 
 
 From the point of view of the public, .several witnesses familiar with con- 
 ditions in Massachusetts gave especially significant testimony. Hon. Frederick 
 
8 Electric Railway Problem 
 
 J. McLeod, Chairman of the Massachusetts Public Service Commission, testified 
 as follows (pages 1454-1455 of the Proceedings) : 
 
 "The difficulty of the street railway problem, as I view it, is not so much in providing 
 means for meeting the current costs of operation, although that problem is difficult enough, 
 God knows, but it is the problem of getting in them new capital. 
 
 "It is an absolute essential that if this industry is going to go on, you have to get new 
 capital in. 
 
 "For various reasons the street railway securities have received such a black eye that 
 investors will have nothing whatever to do with them ; and I cannot see any possibility by 
 fare increases of any extent, of restoring the companies to a condition where the investors 
 will be willing to buy tlieir stock on any reasonable basis; and if you start with the theory 
 that you have got to build up fares and street railway's return to a point where you are going 
 to make that investment attractive to the people who have money to invest, you have got to 
 make your returns so much that they are going to be absolutely out of sight of what anybody 
 ever supposed was within the bounds of possibility as a reasonable return." 
 
 Mr. Homer Loring, Cliairman of the Board of Public Trustees for the 
 operation of the Eastern Massachusetts Street Railway Company, formerly the 
 Bay State system, in addressing the Commission said (page 1651 of the Pro- 
 ceedings) : 
 
 "Of course, the question Qf credit, to my mind, is the most important thing that you 
 gentlemen have to consider. It is difficult enough to establish credit anyway, and it is doubly 
 difficult to rcestal)lish credit alter it has once l)een lost. 
 
 "Now, the street railways of the country- have lost their credit. With few exceptions, I 
 think it is vcr\-, verj' doubtful whether they are going to be able to get the credit back while 
 under private management, and of course, that becomes to my mind, the most important argu- 
 ment in favor of public ownership." 
 
 This point of view was further emphasized by Interstate Commerce Com- 
 missioner Joseph B. Eastman, former member of the Massachusetts Commis- 
 sion, in the following testimony (pages 2068-2069 of the Proceedings) : 
 
 "Coming to the final point. I really think it is the vital point: You ought to make clear 
 the essential need of adjusting conditions so that necessar>' supplies of capital can \ye secured. 
 It is absolutely vital to many of the improvements which I have suggested that capital should 
 be available so that the improved ei|uipmcnt and apparatus can be bought : and apart from 
 those improvements, it is ctjually vital, so far as the extensions and developments of the 
 properties in the future are concerned. No property can go on operating in a growing city 
 unless it has the ready means of securing needed capital." 
 
 A little farther on, referring to the disappointing effects of increased fares 
 upon the financial condition of the companies, Mr. Eastman said (page 2069 
 of the Proceedings) : 
 
 "The earnings are not liigh enough to support the credit of even a conservatively capital- 
 ized company, in many cases, and even if the earnings were better, I am still afraid that the 
 credit would l>e poor; tx;cause street railways have, apparently, cea.sed to be an attractive field 
 for private investment. The investors are afraid of street railway securities. They are afraid 
 because of their exiicrience in the past, and I think they are also afraid because of their fear 
 of what may iwssibly happen in the future. They are in doubt, for instance, in regard to the 
 possibilities of automobile comiX-'tition and labor complications." 
 
Chapter III 
 
 FUNDAMENTAL IMPORTANCE OF LABOR AS A FACTOR 
 IN STREET RAILWAY OPERATION 
 
 The electric railways differ from most other utilities in the fact that they 
 require a relatively larger number of employes, and these employes come into 
 more frequent contact with the public. The electric railways render a service 
 to their patrons instead of delivering a commodity to them. In this respect they 
 are like the telephone, but even the telephone girl, on account of her invisibility, 
 seems relatively impersonal when compared with a street car motorman or con- 
 ductor. From the point of view of the public the street railway cannot afford 
 to employ human automatons or merely intelligent workmen. The conductor 
 and the motorman require a certain degree of technical skill, but this is not hard 
 to acquire. Ordinarily intelligent men can be quickly trained for platform 
 service so far as the technical end of the work is concerned. What is more 
 important is their personal appearance and their "social qualities." Moreover, 
 there is no other utility in which the management is so dependent upon the care, 
 the honesty and the faithfulness of the great body of its employes in connection 
 with the collection of its revenue. 
 
 During the war some electric railways experienced considerable difficulty 
 in getting or holding a sufficient number of men to man the cars. In some cases 
 the service was considerably curtailed, even though the managements knew per- 
 fectly well that they were losing money by their failure to run more car miles. 
 But outside of the period of most intense war activity, when labor was scarce 
 everywhere and fabulous wages were being paid in war industries, the electric 
 railways of the country have never experienced any general or prolonged diffi- 
 culty in securing an adequate number of trainmen. The men employed have not 
 always measured up to a proper standard of intelligence, character and efficiency, 
 but for this the companies themselves are chiefly responsible, since it is the 
 companies that set the standards through the wages and conditions of work 
 offered and the training given or required. 
 
 From the public point of view the labor problem in the street railway in- 
 dustry is the problem of securing an adequate number of men with the necessary 
 qualifications for rendering service, and with the sense of responsibility and the 
 spirit of cooperation that will effectively prevent them from abandoning their work 
 for the purpose of causing an interruption of service. Street railway service does 
 not last a minute after the men quit their posts, and for this reason it is essential 
 that the men be continuously in a frame of mind that will prevent strikes. 
 
 The National War Labor Board regarded wages as an operating expense, 
 and held that the payment of a just wage should not be dependent upon the 
 
 9 
 
10 Electric Railway Problem 
 
 financial condition of the employers. Upon this pyoint Ex-President Taft's testi- 
 mony, at page 2 of the Proceedings, is as follows : 
 
 "On the other hand, these matters were referred to us as arbitrators, and the issue then 
 arose : Had we any right, in considering what wages would be fair, to take into considera- 
 tion the financial condition of the coniiiany that was present before us as a party? And we 
 had no hesitation in reaching the conclusion that labor was as much entitled to an indeiiendent 
 consideration of what its wages should be as a coal man was who furnished coal or a material 
 man who furnished iron ; that that question must be determined by what was being paid in 
 similar fields of labor. Therefore we refused flatly, from the first, to consider the financial 
 condition of any company in determining the rate of wages. Of course had we done so, we 
 would have been put in the further absurd position, which seemed to demonstrate the correct- 
 ness of our original conclusion, that the man working for a company that had been badly 
 managed and was carrying on the business under conditions that rendered it unprofitable for 
 other reasons should \>c paid less for the same work, than * * * * the nian who served 
 with a company that was better managed and had a profitable arrangement. So that on all 
 sides it seemed to us that that was the just conclusion. 
 
 "We realized, however, in stepping into that field and increasing wages free from that 
 'back-against-the-wair position which the railway employers had had in the past — because we 
 were acting as judges and as arbitrators — that we might bring about, inasmuch as wages 
 formed a great factor in the cost of operation — that we might bring about financial trouble." 
 
 The awards made by the War Labor Board had the result of greatly and 
 suddenly increasing the cost of street railway operation, and this was regarded 
 by a number of the wntnesses as one of the principal factors in bringing about 
 insolvency and receiverships. Upon this point, Mr. Francis H. Sisson, Vice- 
 President of the Guaranty Trust Company of New York, after discussing the 
 effect of the decrease in the purchasing power of money and the increase in 
 interest rates upon the credit of the electric railway companies, made the fol- 
 lowing statement at page 318 of the Proceedings: 
 
 "Another factor, however, which has contributed largely to the difficulties of the situation, 
 has been the wage awards of the National War Labor Board. 
 
 "In this connection, it may be illuminating to quote the following sentence from a letter 
 written by the receiver of a New England electric railway company : 
 
 " "The receivership is a direct result of the National War Labor Board's award, which 
 placed an additional payroll burden of $125,000 per annum upon the company, notwithstanding 
 our having submitted to the Board a full statement of our funds and demonstrating to them 
 that any other increase in wages would create the situation which we now face.' 
 
 "In a hearing between the street car companies of Cleveland and Detroit and their men, 
 the comi>anies pleaded tliat they should not be required to raise wages because they had no 
 income out of which to pay the increase. They said : 
 
 "'We are working under a franchise on which we receive only three or four cents a 
 passenger carried many miles, and, if a substantial increase in wages be granted, bankruptcy 
 and a receivership follow.' 
 
 "Yet. the joint chairmen of the Board of Arbitrators in the.se cases held that the financial 
 condition of the companies could not affect the issue at slake, the issue of wages. 
 
 "Such rulings are only in keeping with the general public's attitude toward the electric 
 railways, which has compelled these companies to operate under two distinct, and in some 
 respects, diametricallv opposed kinds of law. legal and economic. The seriousness of this handi- 
 cap is apparent when it is realized that probably one-half of the gross operating expenses of a 
 railroad consist of lalxir costs, which are constantly increasing while the abnormally low rates 
 for the .ser\nce rendered by electric railways were, in many ra.ses, fixed years ago by special 
 laws, or by provisions contained in ordinances or franchises." 
 
 While there was a general recognition on the part of the witnesses repre- 
 senting the -American Electric Railway Association and those representing the 
 public that the decisions of the War Labor Board gave the electric railways a 
 decided financial shock, there was very little disposition to question the propriety 
 of the policies adopted by the Board or its decisions in particular cases where 
 wage increases were granted. But through the testimony of the witnesses rep- 
 resenting the electric railway companies, and of those representing the regulatory 
 
Importance of Labor 11 
 
 bodies, there was running an undercurrent of fear that labor had been trained 
 by the war to "take the bit in its teeth" and that the future financial status of the 
 industry was rendered unstable by the uncertainty as to the attitude of labor in 
 the future. Mr. Sisson spoke from the point of view of the investment banker. 
 Mr. William C. Bliss, Chairman of the Rhode Island Public Utilities Commission, 
 discussed the matter more from the point of view of the public. His views are 
 found at page 1186 of the Proceedings, as follows: 
 
 "I wish briefly to touch upon what I believe have been the fundamental causes of the 
 emergency situation that exists. 
 
 "The increased cost of labor and material is absolutely at the foundation of the problem. 
 It is the cause of increased fares, it is the cause of receiverships and the lack of prosperity 
 on the part of the companies. I believe the increased cost of the materials could have been 
 handled and can be handled by the company. The increased cost of labor, I see no definite 
 way of handling. I do not know any way in which it can be dealt with until the people who 
 are inconvenienced by strikes, the people who are the ones who have to pay the tremendoiis 
 increased burden of these fares, until those people rise up and educate those who represent 
 them in legislative bodies to the fact that some authoritative tribunal must pass upon these 
 matters and that the public convenience must be considered in dealing with these things, and 
 somebody must stand up and definitely and finally decide what shall be a fair wage ; and 
 strikes of the people after such a decision, or organized attempts to interfere with the carrj'- 
 ing on of business should be punished according to law. That may be the ultimate way out 
 of it. Under the present conditions I do not see any immediate prospect of relief, but I think 
 all of us must realize that it is a disorderly way of dealing with the problem of the vrages of 
 men employed in street railway employment, to force the public to suffer the inconvenience 
 of strikes." 
 
 It was Stoutly contended by witnesses on behalf of the Amalgamated Asso- 
 ciation of Street and Electric Railway Employes that the wage awards made 
 by the National War Labor Board were moderate to the point of conservatism. 
 At pages 43 and 44 of the Argtiment and Brief filed by him on behalf of the 
 employes, Mr. W. Jett Lauck, former secretary of the War Labor Board, said: 
 
 "There is a popular idea that the Xational War Labor Board in its wage awards to street 
 railway employes gave the finishing push that sent the companies upon the financial rocks, 
 but that is not the truth, -These awards affected the trainmen directly far more than they 
 affected other employes, and yet Chart A shows that in 1918. when the great majority of the 
 awards were made, the ratio of trainmen's wages to total salaries and wages remained at the 
 same point (49.1 per cent) that it was at in 1917. 
 
 "During the year 1918 (and the first few months of 1919) the National War Labor 
 Board made wage awards on about 90 street railways, including a good many of the leading 
 companies of the United States. Based upon the increase in the maximum of the wage scale, 
 the increase per company (unweighted) amounted to 23}/^ per cent, while the weighted increase 
 per trainman amounted to 22y2 per cent. 
 
 "But from December, 1917, to December, 1918. the weighted cost of living rose from 141 
 to 172 (the base being July. 1914), an increase of 22 per cent, so the awards of the National 
 War Labor Board barely kept up with the increase in the cost of living and did not enable 
 the trainmen to catch up with the loss they had already sustained since 1914. to say nothing 
 of the loss from 1902 to 1914. 
 
 "In rendering a decision upon the case of the Bay State Street Railway of Massachusetts, 
 in December, 1918. Chairman William Howard Taft pointed out that wages in the electric- 
 railway industry were low and that the employes were underpaid. But in spite of that well- 
 founded opinion the Board did not do anything to rectify the injustice it found to exist 
 except in a few of the more grossly underpaid roads such as New Orleans. 
 
 "The awards of the National \\'ar Labor Board were not of as much effect upon the 
 electric-railway industry as the increases that simultaneously took place in the other costs. 
 This is shown by Charts D and D-5. In 1917 the wages of trainmen amounted to 31.1 per 
 cent of the total operating expenses; in 1918 they amounted to 30.9 per cent. In 1917 they 
 were as large as 45.1 per cent of the other operating expenses (exclusive of trainmen's 
 wages) ; in 1918 they were only 44.7 per cent as large. In other words, during the year from 
 1917 to 1918, trainmen's wages increased 17.6 per cent in the aggregate, while the other ex- 
 penses increased 18.7 per cent. 
 
 "The primary duty of the National War Labor Board was to keep the industries of the 
 country running during the period of the war. It well fulfilled that duty. But in the case 
 
12 Electric Railway Problem 
 
 of the street railways, at least, it fulfilled it with only moderate ad\-3nces to the trainmen, 
 assisted by the patriotism and the moderation of the trainmen themselves. There is no ground 
 for any of the statements which have been made to the effect that the awards of this Board 
 were excessive, or that they crippled the street railway industry." 
 
 The itnportance of the labor factor in the cost of street railway operation 
 was discussed at length by Prof. Mortimer E. Coolcy, Dean of the College of 
 Engineering and Architecture of the University of Michigan, a witness on behalf 
 of the companies. His views appear at pages 269 and 270 of the Proceedings, 
 as follows : 
 
 "Now the fact appears to be that if we were to build properties within the last year, say, 
 or quite recently, we would have to pay fully SO per cent more to secure the same property, 
 I think 50 per cent is a very conservative estimate, and that of course is for the cost of the 
 jiropcrty. It is due to the advance in labor and materials and other elements which come in. 
 Now when you come to operate that property of course there are the platform expenses of 
 the motorman and conductor and all the labor has advanced tremendously; 1 think in some 
 instances doubled, perhaps, and with a request for a trebling. 
 
 "The importance of that labor element alone, that wage element alone almost is con- 
 clusive answer, because under pre-war conditions as I recall the fig^Jres about 50 per cent of 
 the gross operating ex|x;nses were retiuired to pay the labor, the platform expenses and the 
 other help that entered into it. This whole operating cost excluding taxes was about one-half 
 the gross income. So one-quarter of the gross income was labor and wages. Now suppose 
 you double them, that 25 per cent bc-comes 50 per cent. Suppose you treble them, see where 
 you go. You have simply absorl)od all the difference l)etween the original 50 per cent that you 
 have to pay for taxes, depreciation fund and interest on the capital, on the funded debt 
 and the other things that had to be paid out of the income over and above the cost of opera- 
 tion per se. Now you double the cost of operation, you have wiped out everything." 
 
 Dr. Thomas Conway, professor of finance in the University of Pennsyl- 
 vania, another witness for the Electric Railway Association, referred to the 
 sharj) increase in the cost of materials in 1916, and then took up the problem 
 of labor cost at page 944 and page 947 of the Proceedings, as follows: 
 
 "Then the labor phase of the situation became acute, and what I call the first crisis in the 
 labor clement was reached last summer, when the War Labor Board was called upon to re- 
 adjust wages in order to offset the increased cost of living. 
 
 "Now, as you doubtless know, the greater part of the expenses of an electric railway is 
 labor. My recollection is that the census of 1912 shows that over 60 per cent of the total 
 operating expense of electric railways were wages and salaries, and that only a little over 
 1 per cent represents the salaries of officers. A recent careful study of the cost of operation 
 of the Public Service Fvailway Company for the 12 months ending July 1st of this year showed 
 that over 75 per cent of the operating expenses were labor, and since that time the War Labor 
 Board has raised wages. 1 have not figured it out. but it must be practically 80 per cent now 
 of the operating expcn.ses of that company are labor. 
 
 "The increased wages which the War I-ilxjr Board granted to the men l)eginning last 
 summer and extending through the fall and winter brought a very serious problem, and as I 
 see it the companies have not even yet lieen able to readjust their fares and their income to 
 take up these increased expenses represented by the increased wages granted to the men last 
 summer and fall anil early winter. 
 
 "Niiw, we arc alxiut to enter, in my opinion, the third phasse. It is here. It is on us. 
 We are just coming into it. and that from the standpoint of the companies is the most serious 
 of all. on the theory that it is the last straw that breaks the camel's back. 
 
 "You know the wages of trainmen, and they carry with them collateral increases for 
 other classes of employes, have recently Ix-en increased, by one methixl or another, and 
 the pnx-ess, as I see it, of a second general rcidjustment is here. 
 
 "1 call attention to the recent increase in Detroit from -(8 cents to 60 cents an hour, and 
 in rii-velaiul 4S cents to 60 cents an hour. 
 
 "Now if I am correct in my assumption that these increases in wages which have come 
 about in the last few days are the forenmners of another general advance, such as occurred 
 in the late summer, then all of these increased rates are going to be as inadequate, or almost 
 as inadei|ua(e, as wrre the rates prior t.i the tiinr ..f the last increases. We have got to get 
 over another mountain." 
 
Importance of Labor 
 
 13 
 
 Specific figures showing the increase in the average rate per hour paid to 
 trainmen, from 1906 to 1919, were presented by Mr. James W. Welsh, statisti- 
 cian of the American Electric Railway Association. At page 111 of the Pro- 
 ceedings he introduced Chart C-133 based upon the average rate per hour paid 
 by about sixty companies having over 100 miles of single track each. The figures 
 accompanying this chart are given at page 112 of the Proceedings, as follows: 
 
 
 Rate 
 
 Per Cent 
 
 "Year 
 
 Per Hour 
 
 Increase 
 
 1906 .... 
 
 23.03 
 
 100. 
 
 1907 .... 
 
 24.11 
 
 104.69 
 
 1908 .... 
 
 24.75 
 
 107.47 
 
 1909 .... 
 
 24.57 
 
 106.69 
 
 1910 .... 
 
 25.85 
 
 112.24 
 
 1911 ... 
 
 26.10 
 
 113.33 
 
 1912 .... 
 
 26.89 
 
 116.76 
 
 
 Rate 
 
 Per Cent 
 
 Year 
 
 Per Hour 
 
 Increase 
 
 1913 ... 
 
 27.74 
 
 120.45 
 
 1914 ... 
 
 28.14 
 
 122.23 
 
 1915 ... 
 
 28.62 
 
 124.27 
 
 1916 ... 
 
 29.25 
 
 127.01 
 
 1917 ... 
 
 31.57 
 
 137.08 
 
 1918 ... 
 
 33.92 
 
 147.29 
 
 1919 ... 
 
 44.43 
 
 192.92" 
 
 Mr. Welsh explained that the rate per hour shown in each year was the aver- 
 age rate of all the companies based upon the rates paid to the men oldest in service. 
 These figures indicate a wage increase of 92.92% from 1906 to 1919, but the 
 increase from 1914 to 1919 was only 57.88%. Mr. Bently Warren, counsel for 
 the Association, stated in this connection that an investigation by a Massachusetts 
 company with which he was familiar showed an increase of 105% in the weighted 
 average prices of materials and supplies from 1914 to 1918. This and other 
 evidence produced before the Commission tended to show that trainmen's wages 
 had not increased nearly as much as the prices of street railway commodities. 
 It is shown at page 67 of the brief submitted on behalf of the employes that the 
 cost of the workingmen's budget rose from $979 in 1914 to $1,653 in 1919. This 
 was an increase of 68.8%. On page 43 of this brief, it is claimed that "wage 
 rates have not advanced as fast as the cost of living." In support of this claim, 
 a chart is presented which shows that from 1914 to January, 1917, wage rates 
 advanced 8% while the cost of living advanced 16% ; that by January, 1918, wage 
 rates had advanced 15% and the cost of living 41% ; and by January, 1919, the 
 wage rate increase had reached 48% and the cost of living increase 72%. In its 
 general conclusions the employes' brief maintains that "the present plight of 
 the electric railway industry is not brought about by any increase that has been 
 made in the wages paid to the trainmen," and contends that "quite to the con- 
 trary, the trainmen have not received an increase that is at all commensurate 
 with the great increase that has taken place in the cost of living." The employes 
 further contend that the average annual earnings at the 1919 rates of pay, 
 amounting to about $1,300, should be increased to a minimum of $2,000 to cover 
 a living wage under present conditions. They maintain that before the war they 
 were underpaid, and that now they are still more underpaid. This indicates that 
 if labor is to be induced to do its work efficiently in the electric railway field, 
 further wage increases and improvements in working conditions are likely to 
 be necessary. 
 
 The fact that both the employing companies and the riding public have 
 heretofore too much neglected the human element in considering the problem 
 
14 Electric Railway Problem 
 
 of street railway labor is strikingly set forth at page 55 of the employes' brief 
 in the following discussion of "the old theory of wages" : 
 
 "During the past few years there has been a complete change in the principles which 
 have previously been put forward as the economic justification for wage determinations. The 
 old thcor)' was that wages were determined by the law of supply and demand. Labor, in other 
 words, was viewed as a commodity whose value was determined in the same way as other 
 commodities such as wheat, coal, and iron and steel. Little, ii any. consideration was given 
 by the economists of past years to the human or ethical elements in the wage problem. Their 
 point of view was that the supply of labor as a iiroductive factor increased in geometrical 
 ratio. Through the placing of this supply at any time over against the demand for labor, the 
 rate of pay to labor was determined. In the event of any dislocation to or collapse in industry, 
 labor was the residual sufferer. The evils arising from unrestrained competition, the cutting 
 of prices, decreased indu.strial demand and industrial depression or collapse were by the alleged 
 immutable laws of economics imposed upon the wage-earner. It is no cause for wonderment 
 that industrial workers came under these pronouncements to look upon economics as the 
 dismal science of despair, I'nder its principles they were without hope. Their only oppor- 
 tunities for ad\-ancing their well-lx-ing lay in producing goods faster than the labor supply 
 increased, in reducing the birth rate. or. in the advent of some fortuitous pestilence, plague, 
 or earthquake, or war, whicii would decimate the labor supply and thus give labor a greater 
 bargaining power in dealing with employers. 
 
 "But the enlightened opinion of mankind refused to continue to give its sanction to such 
 a hopeless thcor)- of wage determination. More consideration came to be extended to labor 
 as a human and moral being. Gradually the conception was evolved that human welfare was 
 superior to considerations of relentless, economic selfishness. Industry came to be considered 
 as existing for men and not men for industry-. Industr>-, it was concluded, should be the 
 sers-ant and not the master of humanity. The verdict was accepted that any industrj- which 
 could not o[)erate under these humane and ethical limitations was anti-social. Labor was no 
 longer to be considered as a raw material of industry or to be used and have its price de- 
 termined as raw material." 
 
Chapter IV 
 
 CREDIT AND COOPERATION THE COORDINATE NEEDS 
 OF THE ELECTRIC RAILWAYS 
 
 It is clear from the preceding analysis that the two big things in the electric 
 railway situation today are the need of credit and the need of cooperation. 
 Credit will enable the electric railways to rehabilitate themselves, to adjust their 
 capital accounts through the process of normal replacements to the higher price 
 levels of the time, and to grow with their job. The cooperation of labor will 
 enable them to render continuous and popular service, to effect operating econo- 
 mies and to get into their treasuries the full amount of revenue collected from 
 the riding public. First class credit and the full cooperation of their employes, 
 if properly utilized in rendering adequate public service, would give the electric 
 railways a well-night impregnable position in their relations to the public, and 
 would enable them to disarm and overcome the prevailing antagonism against 
 them. With capital and labor doing their respective parts freely and well, 
 restrictive regulation would be unpopular and the demand for the substitution 
 of public ownership and operation for private management would shrink into 
 relative insignificance. The test of private ownership and management lies in 
 the solution of these two problems of credit and cooperation. These problems 
 must be solved, and if no solution of them is practicable under the present 
 ownership and control, then the only course open is the complete transformation 
 of the electric railway industry into a governmental business. It may be that 
 credit and labor cooperation cannot be secured without the cooperation of the 
 public in a readjustment of the public relations of the industry, and it may be, 
 on the other hand, that public cooperation in bringing about such a readjustment 
 cannot be had until the companies have secured the necessary credit and the 
 necessary cooperation of labor. If this proves to be the case, then the "vicious 
 circle" of influences cannot be broken except by the discharge of the existing 
 agencies and the liquidation of the public's obligations to them preparatory to 
 a new regime in the electric railway world. It would appear that the Commis- 
 sion's problem is to analyze the factors afifecting street railway credit and the 
 cooperation of labor, with a view to determining by what policies and measures 
 these essential conditions of effective public service can be brought about. 
 
 15 
 
Chapter V 
 
 CONDITIONS IN ELECTRIC RAILWAY OPERATION 
 NORMALLY FAVORABLE TO CREDIT 
 
 During the past two decadts the electric railway industry has gone through 
 a period of remarkable development. The special Census report for the year 1902 
 showed 4,774,000.000 revenue passengers carried and the Census report for 1917 
 showed 11,304,000,000 revenue passengers carried, an increase of nearly 137%. 
 The net capitalization of electric railways reported by the Census Bureau grew 
 during the same period from $2,117,000,000 to $4,889,000,000, an increase of 
 about 131%. The Census figures also show that the mileage of single track 
 grew from 22.577 in 1902 to 44.835 in 1917, an increase of just under 1007c. 
 The testimony before the Commission even indicated that in certain localities, 
 notably in New England, the street railways were overbuilt during the first 
 years after the introduction of electricity as a motive power. 
 
 After a period of rapid growth, such as that which has characterized electric 
 railway development during the past 20 years, it would seem that the rate of 
 expansion might slow down in a crisis, and that the demand for new capital 
 might be greatly reduced over a considerable period of years if financial conditions 
 were unfavorable. In fact, this process of curtailment in capital expenditures 
 was enforced during the war by Federal action, as well as by the inherent 
 difficulty of securing new materials and money to buy materials during that 
 time. It is true that the readjustments of industry and population in connection 
 with war activities required extensions and additional facilities in certain spots 
 and that these particular extensions and improvements were imperative. In 
 many of these cases, however, the Federal Government felt warranted, as a 
 part of its war program, in advancing the funds required. 
 
 So far as credit requirements in normal times are concerned, certain charac- 
 teristics of the electric railways and certain conditions under which they operate 
 tend to make their credit easy and almost unlimited. In the first place, they 
 have enjoyed a monopoly of the most convenient form of local transportation 
 during a period of rapid industrial development and of rapid increase in urban 
 population. They have a continuous and immediate market for their "goods." 
 They sell transportation as it is produced. While electric railway traffic fluctu- 
 ates somewhat fnim year to year according to the degree of business prosperity 
 that prevails, and fluctuates somewhat from season to season, from week to 
 week and from day to day, these fluctuations are relatively unimportant. The 
 business of transportation goes on every day in the year. Local transportation 
 is a necessity that grows out of the conditions of urban life, and the demand 
 for it will not be greatly diminished except by industrial and social changes 
 
 16 
 
Conditions Favorable to Credit ' 17 
 
 that result in reducing the population of cities or in radically changing the 
 habits of the people. I have already referred to the steady growrth of the riding 
 habit in the metropolitan district of New York over a period of 60 years and 
 to the growth in the riding habit on the Stone & Webster properties in the South 
 and West. 
 
 The increase in revenues of the electric railways is a product of three 
 factors, all of which are going up. These are the increase in urban population, 
 the increase in the riding habit and the increase in the rate of fare. The gross 
 operating revenues of the electric railways grew from $247,000,000 in 1902 to 
 $650,000,000 in 1917, an increase of 163%. For a number of years, particularly 
 during the first decade of the century, there was a strong tendency toward fare 
 reductions in many urban communities, but the figures just given show that 
 for the country at large the total amount of electric railway operating revenues 
 increased by a much greater per cent than the number of revenue passengers 
 during the 15 years ended with 1917. Since the latter date, there has been a 
 strong upward tendency in street railway fares. Statistics covering 75% of 
 the street railway traffic of the country indicate an increase of nearly 14% in 
 the average fare paid from 1917 to 1919, and an increase of about 22% in pas- 
 senger earnings during this 2-year period. Without a doubt, the enjoyment by 
 the electric railway industry of a steady inflow of revenue, of rapidly increasing 
 volume, assured by the most fundamental conditions of modern life and the 
 strongly developed habits of the people, is a condition extremely favorable to 
 credit. In what other industry could investments be made with greater assurance 
 of security and continued earning power? 
 
 But this is by no means the only condition in the electric railway industry 
 favorable to credit. The tracks for the most part are in the public streets where 
 everybody can see them. The operation of the cars is most conspicuous. It 
 would be hard to find another industry where the investment is so completely 
 visible and so easily observed by the entire local population. If publicity of 
 operation is a guaranty against the waste or disappearance of capital, then the 
 position of the electric railway where everybody can observe it every day, is 
 surely conducive to the development and retention of credit. From this point 
 of view, how different is a street railway investment from an investment in 
 mining stock, or in fruit lands of the Far West, or even in manufacturing enter- 
 prises in one's home city ! 
 
 Another thing that under normal conditions strengthens the credit of the 
 electric railway business is its relatively small need for "fluid" or working capital. 
 In this respect it occupies a position more independent than that of any other 
 utility or any ordinary private industry. It does a cash business. Almost 100% 
 of its revenues are collected in advance, through the sale of tickets, or at the 
 very time when the service is rendered, through the collection of fares on the 
 cars. The money flows into its coffers day by day in a relatively even stream. 
 Before it pays the wages of its employes or the salaries of its officers ; before 
 it pays the claims resulting from injuries and damages; before it pays rentals 
 for the use of property or interest and dividends on its investment ; generally 
 before it pays its taxes to the municipality or the state, it has already collected 
 
18 Electric Railway Problem 
 
 from its patrons in cash full compensation for the service rendered. It does 
 not have to manufacture and store up large quantities of service in advance of 
 the demand for such sT\ice. It does not have to render the service for a month, 
 or a quarter, or 6 months, and then send out bills to its patrons and wait an 
 indefinite period thereafter before receiving its revenue. It has no uncollectable 
 accounts to write off because of "dead-beat" customers. While it has to purchase 
 in advance a certain amount of materials and supplies for use in operation 
 and maintenance, and in some cases pays a fraction of its taxes in advance, these 
 prepayments attributable to the cost of service at a given period are under all 
 ordinary conditions much more than ofTset by the payments deferred until 
 after the revenues are in. Under these conditions, a street railway operated on 
 a sound business basis with conser\'ative management would have ver>' little 
 need of working capital and would have no difficulty whatever in securing it 
 in an emergency. 
 
 Moreover, it is now well recognized by street railway operators, valuation 
 engineers and utility experts that a street railway in the usual course of its 
 development is renewed and replaced piece-meal. Its individual parts have 
 different useful lives and are replaced from time to time individually. After a 
 certain number of years a street railway, under normal conditions of operation. 
 will settle down to a depreciated condition, which in the phraseology of valua- 
 tion engineers will be, perhaps, 70% of cost new. By proper maintenance, it 
 can be held in approximately that condition permanently. The protection of 
 the original investment demands either that the difterence between the 100% 
 originally put into the property when new and the 70% remaining in it after it 
 has reached a normally dei)reciated condition shall be taken out of the earnings 
 and returned to the investors, with a corresponding reduction in capital, or else 
 that a depreciation reserve equivalent to this difference shall be accumulated 
 and held as a fund for use by the company in connection with the maintenance 
 and expansion of its facilities. It is not usually regarded as practicable to 
 reduce capitalization to take care of this accrued depreciation. Most electric 
 railways are growing, and it is usually more advantageous to re-invest the 
 de|)reciation reserve in additions, extensions and improvements than to pay it 
 back to the investors, reduce the capitalization and then turn around and increase 
 it again in order to secure new money for such jnirposes. On account of these 
 conditions, a sound financial policy would result in the accumulation of a reserve 
 available for minor extensions and betterments and thus relieve the street railways 
 of the necessity of going into the market for new money at unfavorable times. 
 ICvcii if the funds in such a ilei)reciation reserve were invested promi)tly in the 
 property so that the cash accumulations at any given time were small, the fact 
 that the total physical property had been kept u]) to a level with the par value 
 of the capital account, or of the securities outstanding against it, would immensely 
 strengthen the companies' credit in a time of general financial stringency, and 
 the street railways would be in the |M)sition of a favored applicant for such new 
 capital as they imperatively required. 
 
 The capital st(Kk of electric railways does not require to be refunded, 
 and under a .sound financial policy the proportion of stock to bonds outstanding 
 
Conditions Favorable to Credit 19 
 
 would undoubtedly be much greater than has usually been the case. This is 
 well illustrated by the pohcy of the Cleveland Railway under the service-at-cost 
 franchise that has been in force in that city during the past 10 years. There 
 the amount of bonds outstanding at the time the Tayler settlement became effec- 
 tive in 1910 has been greatly reduced, and the amount of capital stock outstanding 
 representing cash at par has been greatly increased, with the result that at the 
 present time the Cleveland Railway has only about $5,000,000 of bonds out, as 
 against $28,000,000 of capital stock. On this point significant testimony was 
 presented at page 1587 of the Proceedings by Mr. Thos. L. Sidlo, of Cleveland, 
 who for several years was associated with the city street railroad commissioner, 
 and later became counsel for the Cleveland Railway Company. He says : 
 
 "It is unnecessary to rehearse the difficulties, embarrassments and tragedies in street 
 railway history that have resulted from financing by means of mortgage indebtedness. It is 
 pretty generally agreed by everybody who has made a study of street railway finances that 
 it will be a happy day when the lienholder is eliminated from street railway ownership. His 
 presence has been as hurtful to the company as to the community. He has been the chief 
 cause of the spirit of absenteeism in street railway management and has probably done more 
 to bring the industry into disrepute than the old-fashioned, 'Public-be-damned' operator. But 
 how eliminate him? With an efficient cost-of-service plan, mortgage bonds are unnecessary 
 as a mode of financing. A property can be financed by selling shares exclusively. And these 
 can be sold to purchasers living in the community in which the utility is located, and should 
 be so sold. The property will thus acquire an alert, informed body of owners, who will 
 desire, along with security and certainty of return on their investment, that proper and adequate 
 service shall be rendered the community. Such a body of security holders, and none other, 
 will see to it that the property has a management that recognizes and is able to administer 
 the profit-making aspect of the job not only, but the public service aspect as well. The value 
 of this sort of ownership arrangement has been eminently demonstrated in Cleveland. The 
 fact that at the present time there is relatively no bonded indebtedness but on the contrary 
 a predominant body of resident share-holders, is making the Cleveland plan a success as much 
 as any other factor." 
 
 It is true that under the old methods of promotion, street railway properties 
 were financed chiefly, if not wholly, through the proceeds of bond sales, but 
 in those days bonus stock was issued to the purchasers of the bonds, and the 
 amount of capital stock in the nominal capitalization often greatly exceeded the 
 amount of bonds outstanding. Later on, when state regulation became effective, 
 the issuance of bonus stock was no longer permitted, and the condition of the 
 companies' existing capitalization made it impossible to sell additional capital 
 stock under the terms prescribed by state commissions, so that during the past 
 10 years the amount of street railway bonds outstanding has increased much 
 more rapidly than the amount of stock. With this shifting in the nature of the 
 securities, the importance of refunding operations in street railway finance has 
 been increased. 
 
 Under a conservative financial policy, refunding difficulties would be almost 
 negligible. The portion of the investment represented by capital stock would 
 not have to be refunded, and the relatively smaller portion of the investment 
 represented by bonds could be refunded as a matter of course, on account of 
 the unusual security that would attach to street railway bond issues. It is 
 true that if market conditions had changed from the time when the original 
 bonds were issued it might be necessary in refunding to change the rate of 
 interest. In times past, street railway bonds bearing 6% or 7% interest have 
 often been refunded at 4^4% or 5%. In like manner bonds bearing 4-^2% or 
 
20 Electric Railway Problem 
 
 5% might have to be refunded at 6%, if at the time of their maturity the rate 
 of interest had gone up. The process of refunding does not call for new capital. 
 With an adjustment of the rate of interest in accordance with the conditions of 
 the money market, an investor who already has his money in an electric railway 
 would be satisfied to leave it there rather than go to the trouble of taking it out 
 and investing it somewhere else at the same rate of interest. The thing that 
 makes refunding operations difficult in an electric railway enterprise is some 
 condition of insecurity or fear of insecurity that has intervened since the original 
 bonds were issued. But the bondholders' sense of security would be strongly 
 maintained, even in a great emergency, if a street railway had been conducted 
 up to that time on the basis of conservatism and sound finance, with a proper 
 depreciation reserve invested in betterments and a large proportion of the actual 
 cost of the property represented by shares of stock. 
 
 If street railway credit is languishing or dead it must be the result of an 
 extraordinary combination of causes, for in the entire industrial field it would 
 be hard to find a business in which the inherent conditions are more favorable 
 to robust and long life so far as credit is concerned. 
 
I 
 
 Chapter VI 
 
 CONFLICTING EVIDENCE AS TO AMOUNT OF NEW CAPITAL 
 
 REQUIRED ANNUALLY IN THE ELECTRIC 
 
 RAILWAY INDUSTRY 
 
 General Guy E. Tripp, Chairman of the Committee of One Hundred ap- 
 pointed by the American Electric Railway Association to prepare and present 
 to the Commission the testimony on behalf of the companies, in his opening 
 statement, referred to the electric railway industry as having "an investment 
 capital of something like seven billion dollars and an annual income of 
 $730,000,000" and as being "in extreme danger of complete collapse and dissolu- 
 tion" (page 67 of the Proceedings). He also referred to the electric railways 
 as "an industry which requires $200,000,000 of new capital each year and a larger 
 sum than that for its refunding operations," and stated that this industry 
 "cannot indefinitely remain in its present condition without an effect upon the 
 financial system of the country" (page 67 of the Proceedings). 
 
 Mr. Henry G. Bradlee, President of the Stone & Webster Corporation, 
 presented a diagram showing the amount of capital required in various industries 
 to carry on a business of $100,000 in gross earnings (page 202 of the Proceed- 
 ings). This diagram had been prepared by Stone & Webster as a result of an 
 investigation, undertaken about three years ago and extending over a period of 
 about a year, to determine "the amount of capital required for various branches 
 of industry." Referring to this diagram, Mr. Bradlee testified at pages 202 and 
 203 of the Proceedings : 
 
 "You will see from this diagram that the amount of capital required to carry on, for 
 example, the construction business, that is a contractor, is low. A capital of less than $50,000 
 will do $100,000 of business. The same is true in what we have termed the trading; that 
 means retail and wholesale business. In manufacturing, the capital appears to just about equal 
 the gross annual business transacted. In mining, due to the large amount of investment in 
 mining lands, mineral lands, the investment materially increases. Then we come to the group 
 of public utilities, telephone, gas, electric light, street railway and steam railway, in which 
 the capital required is from four hundred thousand to five hundred thousand dollars at least 
 to carry on $100,000 of gross earnings. Last of all is agriculture, which is even higher than 
 public utilities. 
 
 ******** 
 
 "There is no other industry which apparently requires an operating plant equal to its 
 annual gross earnings. The public utility requires a plant several times its annual gross 
 earnings, from four to five times. 
 
 "Now this has a direct bearing on the earnings of the utility, the necessary earnings. 
 If a retail merchant is able to turn over his capital three times a year and in turning it over 
 makes y,^ per cent profit on each turn-over he will make 10 per cent a year on his entire 
 investment. A public utility, on the other hand, will turn its capital over only once in every 
 four to five years and in order to make a reasonable return on that capital or rather to make 
 the same 10 per cent, if it were 10 per cent, it would be necessary to pay out from 40 to SO 
 per cent of the gross earnings as a return on the investment. In other words, the trader or 
 merchant may get along with 3% per cent profit and earn 10 per cent on his capital whereas 
 the public utility must pay out 40 to SO per cent of its gross to earn an equal return on the 
 public utility capital. 
 
 21 
 
22 Electric Railway Problem 
 
 "The capital rc(|uircments of the r"blic \itility are not as they are soinetimcs supposed, 
 paid in in the creation of a property at the start and then continued at a more or less uniform 
 rate. On the contran,-, there must be, as Mr. Stuart told you. a continual contribution of 
 capital ■>ear by year and month by month. The public utilities in all parts of this country 
 ^re growing and growing steadily, and there is continually increased demand for service due 
 to increased population and also to increased demand per capita in a given population, and to 
 meet this increase in service it is necessary lor the public utility to continually add to its 
 investment. 
 
 "The addition of capital follows very closely the increase in business. I have brought 
 with me here two charts of one of our street raijway companies ; they are identical, .^nd on 
 those charts you will sec two lines. The black line shows the increased investment in the 
 property, starting at the beginning of the period, and then running through the long series 
 of years, adding each year the new capital which was invested that year, in that way produc- 
 ing the black line which you see on the cur\'c. The green line is four times the increase in 
 gross business, and those two curves, as you will .see. run very closely together, showing that 
 we have invested year by year four dollars of new capital for each dollar of increased gross 
 business, and that it has been necessary to do that in order to adequately carry on that business 
 and serve the public." 
 
 At page 203 of the Proceedings Mr. Bradlee introduced a statement with 
 respect to the gross earnings and expenditures for construction of Stone & 
 Webster companies for each year from 1902 to 1918. showing construction 
 expenditures aggregating $91,852,000 as compared with gross earnings of 
 $334,485,000. The figures in detail are as follows: 
 
 ".'>lPPRC)X1M.\TE GKO.SS E.\RNIXGS .\N'n .\PPROXlM.\TE EXPENDITURES 
 FOR CONSTRUCTION OE STONE & WEBSTER COMPANIES FOR THE 
 YEARS 1902 TO 1918, INCLUSIVE 
 
 Construclion 
 Year Gross Earnings Exfcndilures 
 
 1902 $3,5a\000.00 $2,750,000.00 
 
 1903 6.338,0(X).00 3.623.(»00.(X) 
 
 1904 8.4S2.000.00 2.414.(K10.00 
 
 1905 9,504,000.00 2,900,000.00 
 
 1906 12,212,000.00 5.(XKUKK).(H) 
 
 1907 13,776,000.00 a.^OO.OOtUXI 
 
 1908 16,357.000.00 6.962.000.00 
 
 1909 19,133.000.00 5.703.000.00 
 
 1910 20,747.000.00 7.286.000.00 
 
 1911 21,389.000.00 9,077.000.00 
 
 1912 23,925.000.00 5.467 .(XIO.OO 
 
 1913 26,305.000.00 7.531.000.00 
 
 1914 28.881. 0(X).00 6,840.000.00 
 
 1915 27,044.000.00 3.371.(X)0.00 
 
 1916 29.456.000.(X1 3.736.(XK).0O 
 
 1917 31,029.000.(X) 5,001.000.00 
 
 1918 36,322,000.00 5,691,000.00 
 
 $334,485,000.00 $91,852,000.00" 
 
 Mr. Bradlee stated that the figures above given were for ,ill cif tlie utilities 
 operated by Stone & Webster, including street railway, gas and electric light 
 properties. Out of a total of approximately thirty-five companies about twenty- 
 five were either street railway, or combined street railway and light companies. 
 He thought that these Stone & Webster companies "are reasonably typical of 
 what has occurred in the industry." At page 206 of the Proceedings he gave 
 the following additional testimony: 
 
 "The Chairman : Do you feel that the other companies have been devoting about as much 
 money to new constnution annually as you have? 
 
 "Mr. Uradlcc: .Mnnit a year ago a report was made to Mr. John Skolton \Villiams out- 
 lining the conditions in the street railway industry. If I remcmlier the figures correctly, the 
 gross earnings of the street railways were placed in that report at $l,500,tXK).000. It was 
 estimated that the annual expenditures for extensions and improvements would be from 
 
Conflicting Evidence on New Capital 23 
 
 $600,000,000 to $700,000,000 a year. That would correspond verj' closely to those figures. 
 Those figures would figure out just about $600,000,000 a year on a gross business of $1,500,- 
 000,000, so that the statistics which were gathered for all the companies correspond very 
 closely with those for that group." 
 
 Later on, in response to questions asked by Commissioner Gadsden and Mr. 
 
 Warren, the witness explained that his Stone & Webster charts included three 
 
 utilities and then referred specifically to the capital needs of the street railway 
 
 industry as distinguished from those of other utilities. This testimony is found 
 
 at pages 207 and 208 of the Proceedings: 
 
 "Commissioner Gadsden : This statement you have rendered is a combined statement of 
 the three utilities, gas, street railways (.'water,' in the original), and electricity, is it not? 
 
 "Air. Bradlee : Yes. 
 
 "Commissioner Gadsden; If it were made up entirely of street railways as you have in 
 the first chart the proportion of capital would be larger? 
 
 "Mr. Bradlee: The proportion of capital would be larger on the street railway than on 
 the other two. 
 
 "Commissioner Gadsden: This chart shows a proportion of about four and a half to one. 
 
 "Mr. Bradlee: Yes. 
 
 "Mr. Warren: That proportion holds true as regards additional or increasing earnings 
 and increasing capital expenditures, as I take it. 
 
 "Mr. Bradlee : Y'es. 
 
 "Mr. Warren : The proportion is larger than that, is it not, as regards the original or 
 initial capital? 
 
 "Mr. Bradlee: In some cases yes, and in some ca.ses it would be about the same. 
 
 "Mr. Warren: In some cases it would run five or seven to one, would it not? 
 
 "Mr. Bradlee: Yes, it certainly would. I might say that those figures you will under- 
 stand are average figures. We have one public utility, a large water power, which was built 
 entirely new and in which the investment is 10 to 1. So that those figures should not be used 
 or considered as applying definitely to any particular industry. They simply represent the 
 average of the group. 
 
 "Now to meet the requirements, such as those, we must sell securities. There is no other 
 way to meet them. The earnings of the properties are not adequate to even meet operating 
 expenses. I am speaking of street railways now — to meet operating expenses, taxes and in- 
 terest on bonds in many cases. There is nothing left there to apply to extensions and im- 
 provement. It must all be obtained from the investor in some form and unless it is obtained 
 from the investor it will be hopeless for the street railways to attempt to adequately serve 
 the public. The service today is inadequate. It will continually grow more and more in- 
 adequate unless some means is found to improve the credit of the street railways and enable 
 them to raise the money needed to meet these demands for further service, and that amount of 
 money as is indicated in these figures is a very large sum in proportion to the gross earnings 
 of the company. 
 
 "The railway industry as a whole must in some way, if it is to fairly serve the public, 
 raise six or seven hundred million dollars a year for new work and in addition it must provide 
 for the refinancing of maturing ohiications to an anioimt varyini: from $250,000,000 to $300,- 
 000,000 a year, so that there is approaching a billion dollars a year to be raised in some way 
 for the street railway industry in order to adequately serve the public." 
 
 Subsequent to the close of the hearings, in response to a request from the 
 Executive Secretary for infonnation as to the basis for General Tripp's estimate 
 of $200,000,000 as the average amount of new capital required by the street 
 raifways, Mr. James W. Welsh, statistician of the American Electric Railway 
 Association, submitted the following data said to have been taken from the 
 advance sheets of the 1917 special electric railway census: 
 
 YEARLY CAPITAL ADDITIONS BASED ON INCREASE IN 
 NET CAPITALIZATION 
 
 Year Net Capitaliaation Yearly Increase 
 
 1902 $2,117,619,302 . .'. 
 
 1907 3,400,107,899 $256,498,000 
 
 1912 4,243.317,727 168,700,000 
 
 1917 4,889,962,096 129,400,000 
 
 Average Yearly Increase taken as $200,000,000 
 
24 Electric Railway Problem 
 
 A reference to the last available special census report on street and electric 
 railways shows that the "net capitalization" figure is arrived at in the following 
 manner: The total capital stock, both common and preferred, the funded debt, 
 and the floating debt and real estate mortgages are added to obtain the total 
 capitalization. From this total is deducted the amount of stocks and bonds of 
 other electric railway companies held and the treasury securities. This leaves 
 the figure described in the census report as "net capitalization." From this, 
 further deductions are made for "investments in other securities and non-railway 
 properties" and also for "floating debt and real estate mortgages." In this way 
 a gross capitalization of $5,010,827,183 in 1912 was brought down to the $4,243,- 
 317,727 figure used by Mr. Welsh in the data submitted as shown above. It 
 will be noted that this figure includes only the net capitalization as reflected in 
 capital stock and funded debt. If floating debt and real estate mortgages were 
 added, as perhaps they should be, the net capitalization figure for 1912 would 
 be $4,545,576,769, or approximately 7 per cent greater than the figure used by 
 Mr. Welsh for that year. However, on the basis of the figures which he used, 
 it will be observed that the average yearly increase in net capitalization for the 
 first five year period — from 1902 to 1907 — was $256,498,000; for the second 
 five year period, $168,700,000; and for the third five year period, ended with 
 1917, $129,400,000. The average for the entire fifteen years figured out $184,- 
 822,853, which is nearly 50 per cent more than the average for the five years 
 from 1912 to 1917. Clearly, the use of the outstanding securities as a measure 
 of new capital retiuired is at best a very rough and uncertain way of estimating 
 the actual cash requirements of the industry. 
 
 If it could be assumed that all new securities issued in recent years repre- 
 sented new cash investment at par, the results derived by Mr. Welsh's comparison 
 would still be untrustworthy. This is true because of the eflfect of reorganizations 
 following receiverships and other means by which the nominal capitalization of 
 individual properties has been reduced at different times. The amount of new 
 capital indicated by a comparison of the census figures would fall short of the 
 actual amount of new capital required during any given intcr-census period to 
 the extent that securities outstanding at the beginning of the period disappeared 
 through dccapitalization before the end of the period. The census figfures of 
 net capitalization indicate a steadily decreasing annual average of increase, and 
 if these figures were reliable it would be entirely inappropriate to use a sum 
 in excess of the liftccn year average as an estimate of future requirements when 
 the figures show that the annual requirements are steadily and rapidly decreasing, 
 but for the reasons given a comparison based on net capitalization is wholly 
 unreliable for the purijoso of drtcrmining the amount of new money required 
 each year. 
 
 In the memoranda submitted to lion. John Skelton Williams, Comptroller 
 of the Currency, under date of January 8, 1918, by a committee representing the 
 American Electric Railway Association, the National Electric Light Association, 
 the American Gas Institute, and the National Commercial Gas Association, the 
 following statement is made : 
 
Conflicting Evidence on New Capital 25 
 
 "The electric railway, gas and electric light and power companies up to tlie beginning 
 of the war were spending between $600,000,000 and $700,(XK),000 in new construction. Shortly 
 after the outbreak of the war a drastic policy of retrenchment was generally adopted. 
 
 "They are now faced with the necessity of raising from $100,000,000 to $200,000,000 in 
 new capital to furnish additional railway, gas and electric power and lighting facilities to 
 shipyards, munition plants, cantonments, navy yards, and industry generally to meet the 
 exigencies of the war program." 
 
 It was also stated in these memoranda that the funded obligations of public 
 utilities maturing in 1918 were estimated at approximately $232,000,000, and 
 that the public utilities would also have to pay or extend bills payable, in the 
 form of corporate unsecured paper held by banks, of approximately $250,000,000 
 during the year 1918. The amount of bonds and other public indebtedness of 
 the public utilities to mature in 1919 was estimated at $265,000,000. In these 
 memoranda the electric street and interurban railroads are referred to as "moving 
 upwards of 20,000,000,000 passengers annually." 
 
 Mr. Bradlee, in the testimony quoted above, attributed an annual require- 
 ment of $600,000,000 or $700,000,000 of new capital, and of $250,000,000 to 
 $300,000,000 of refinancing to the electric railways alone, whereas, substantially 
 these same figures presented to the Comptroller of the Currency by the com- 
 mittee in January, 1918, referred to the three utilities — electric railways, electric 
 light and power, and gas. The reliability of the committee figures is brought in 
 question to a certain extent by its statement that the electric railways carry 
 upwards of 20,000,000.000 passengers per annum, whereas, the United States 
 Census figures for the year 1917 showed only 14.506,914.573 passengers in all, 
 the revenue passengers alone numbering 11,304,660,462. The figures submitted 
 by Mr. Welsh for the year 1918, based on reports from the companies who are 
 members of the American Electric Railway Association, indicated that the total 
 number of passengers carried in 1918 was somewhat less than the number carried 
 in 1917. It is clear from this evidence and from other data collected for the 
 Commission after the close of the hearings, that the traffic in 1918 remained at 
 practically the same figure as in 1917, the last census year. Without having all 
 of the data upon which the committee representing the three utilities made up 
 their estimates of new capital requirements, it is impossible to say how much 
 dependence should be placed upon the figures. 
 
 On account of the discrepancies between estimates of new capital require- 
 ments given by General Tripp and Mr. Bradlee in their testimony before the 
 Commission, the Executive Secretary called the matter to Mr. Bradlee's atten- 
 tion and received from him, in a letter dated December 8, 1919, a further 
 statement on the subject matter: 
 
 "My statement that the new capital required per annum for all public utilities is approxi- 
 mately $700,000,000 was based primarily on certain memoranda and data prepared in January, 
 1918, and submitted to ofHcials of the Treasury Department for their information. This data 
 was prepared under the direction of Messrs. Gadsden, Hall and Crowell, and was finally 
 printed in pamphlet form. 
 
 ******** 
 
 "On page 4 of this pamphlet, under item 6, you will notice an estimate of annual capital 
 expenditures. Since this pamphlet was published, I have made some further inquiries as to 
 capital requirements, and while I have obtained nothing in definite form which would be of 
 value to you, all of the information which I did obtain tends to confirm the figure of 
 $700,000,000 as being approximately correct. 
 
 "As to street railways, I enclose herewith a typewritten statement giving figures obtained 
 
26 Electric Railway Problem 
 
 from the United States Industrial Census of 1917 and from the Street Railway Journal of 
 the samt.- year. These figures give the total gross earnings and estimated capital investment 
 for the street railway industry lur the years lyU2, 1907, 1912 and 1917. Comparing the capital 
 investment m these several years, it appears, as is indicated on the enclosed sheet, that there 
 has been an average increase in capital investment during the 15 years irom VA)! to 1917 of 
 approximately $20(),U00,U00 (should be $267,000,UOO— D.F.VV.; per year, an increase during the 
 lU year period irom 1907 to 1917 oi approximately ^230,000,000 per year, and for the 5 years 
 irom 1907 to 1912 approximately $210,000,000 per year. This corresponds quite closely 
 with General Tripp's statement that the street railway industry requires $200,00t),000 of 
 new capital per annum, and compared with the data in the report to the Treasury Department 
 would show that the new capital required for electric light and gas is from $400,000,000 to 
 $500,000,000 per year. 
 
 "Comparing ihe enclosed figures as to capital invested in the street railway industrv- with 
 the figures tor the entire public utility indu.stry given in the report to the Treasury Depart- 
 ment, It appears that the total amount invested in the street railway industry is about half that 
 invested in all public utilities. I think this is consistent with the estimates of increased capital 
 required per year. The street railway industry, as we all know, has not increased in earnings 
 and capital requirements during the past decade as rapidly as has the electric light, power 
 and gas iiidustr>', esi)ccially the electric light and power industry. Ten or fifteen years ago 
 most electric light and power companies obtained a very large percentage oi their gross 
 earnings irom electric light and a small percentage irom power. Through the introduction of 
 the steam turbine and economies brought atwut through its use, and the establishment ni large 
 central power plants, it has been possible to sell power to manuiacturers cheaper than the 
 cost oi production with a small power plant on the manuiacturer's own premises. This has 
 brought about a rapid expansion in the power business oi central stations so that today many 
 electric light and power comianies are doing more power than lighting business and some 
 have reached the point where lighting is almost a by-product oi power. This has resulted in 
 an abnonnal growth of the light and power business and more than ordinary demand for 
 increased capital expenditures. 1 think, therefore, that General Tripp's statement is con- 
 servative and that we may reasonably say that the amount of new capital required for the 
 street railway industry is in the vicinity oi $200,000,000, possibly running a little over this 
 amount. 
 
 "The requirements for new capital during the next few years for street railways may 
 somewhat exceed this figure because during the war most street railways have been forced 
 to postpone needed extensions and development and have been crowding their cars, track and 
 power plants to an unreasonable extent and giving inadequate service. To bring the street 
 railway back to the efficiency and character of service which existed before the war, this 
 postponed expenditure must be made up as well as providing for future requirements. 
 
 "1 would also call your attention to item 10 on page 5 in the pamphlet submitted to the 
 Treasury Department. .Ml public utilities have maturing txmds and notes to take care of 
 each year, as well as providing for new capital. You will see under item 10 that it is estimated 
 that maturing obligations oi this kind for the entire utilitv industrv would be during 1918 
 $232,000,000. and during 1919 $265,000,000. During the war such fin'ancing as has l)cen done 
 has ticen largely on short tcnn notes which will iall due and retiuire refinancing during the 
 next icw years. The credit oi public utilities must Ix; put into such shape as to provide ior 
 this refinancing on a more permanent l>asis as well as for new capital. 
 
 "You ask in your letter what 1 mean by capital requirements. It is mv idea that this 
 covers only money needed for extensions and additions to meet requirements for additional 
 sei;vicc It docs not include replacements or renewals oi existing property. In all .•\merican 
 cities, there is. as you know, a constant increase in demand ior public utility service. This is 
 created partly hy an increase in population and partly by an actual increase in use per capita. 
 In the letter which I sent you .some weeks ago I called' attention to the fact that the number 
 of rides per capita on the street railways in which we are interested have increased during 
 the past decade nearly 25'7r, and that in addition to this there has been a further increase in 
 riding due tn approximately -W^r increase in population in the cities concerned. Because of 
 this steadily increasing demand the normal coiulilion of the public utility industry is one of 
 growih. In this it differs iuiidamentally from a manuiacturing enterprise. A manuiacturing 
 plant may successiully continue ior many years without im-rea<ic in capacity, and when an 
 increase in rapacity is made Ihe owners of the property arc iree to extend the plant when and 
 as they think tx-st and to sclirt a time when construction and financial conditions are favor- 
 able. The public utility on the other hand, because it is a natural monopniv must constantly 
 meet every increased demand for ser\-ice if Ihe public is to be adcquatelv ser\ed This means 
 that there muM Ik- .nddilions to the plant every year and such additions occur at a more or 
 les« uniform rale, ripeciallv if average.1 over a considerable numt)cr of properties This is 
 indicated by Ihe enrlos«l fiRure-; in reference to street railwavs The public utilitv there- 
 fore. IS not free to make extensions when and as it thinks l>esi and to select favorable con- 
 stniction and financing periodv Ii must have credit sufficient for constant growth in good 
 time^ and f«d. and must consider the raising of new capital and sale of additional securities 
 as much a part of its regular business as the operation of its property. This is a peculiar 
 
Conflicting Evidence on New Capital 27 
 
 feature of the industr}' which is not always understood, but it is inherent in the nature of 
 the business and cannot be avoided. 
 
 "To return a moment to the question of replacements and renewals. Most street railways 
 at this time are not earning sufficient to make adequate provisions for such replacernents and 
 renewals. They must, therefore, for the immediate future and until net earnings are improved, 
 issue additional securities (perhaps temporary in character) to provide cash needed for this 
 purpose, or they must allow their property and service to deteriorate. This means for the 
 next few years the sale of securities for this purpose as well as for actual new capital require- 
 ments and for refinancing maturing bonds and notes. It is hard to estimate just what the 
 requirements may be for this purpose, but I think they may easily be 3% of the gross earnings 
 of the industry or approximately $25,000,000 per year. Of course this expenditure may be 
 postponed by permitting the properties to further deteriorate, but this is undesirable from 
 all points of view if it can be avoided." 
 
 The separate tj'pewritten statement with respect to street railways alone, 
 which Mr. Bradlee attached to his letter, is as follows : 
 
 ELECTRIC RAILWAYS IN UNITED STATES 
 
 (Data from U. S. Industrial Census of 1917 and Street Railway Journal, 1917.) 
 
 ig02 igo7 igi3 igiy 
 
 Total Gross Earnings $250,000,000 $430,000,000 $586,000,000 $730,000,000 
 
 Capital Investment 2,560,000,000 4,263,000,000 5,315,000,000 6,570,000,000* 
 
 $6,570,000,000 
 2,560,000,000 
 
 $4,010,000,000 IS years (1902 to 1917) 
 
 $206,000,000 per year (should be $267,000,000 per year— D.F.W.) 
 
 $6,570,000,000 
 4,263,000,000 
 
 $2,307,000,000 10 years (1907 to 1917) 
 
 $230,000,000 per year 
 
 $5,315,000,000 
 4,263,000,000 
 
 $1,052,000,000 5 years (1907 to 1912) 
 
 $210,000,000 per year. 
 
 * Estimated. 
 
 It will be observed that the figures representing the capital investment used 
 by Mr. Bradlee are quite different from the figures used by Mr. Welsh in the 
 data submitted by him. For example, for the year 1912 Mr. Bradlee gives 
 $5,315,000,000, whereas Mr. Welsh gives $4,243,317,727 as the net capitalization. 
 A reference to the special census report for 1912 shows that Mr. Bradlee's figures 
 are not the net capitalization, nor the construction cost, but a combination of 
 the gross capitalization and current liabilities. If net capitalization, based on 
 street and electric railway property, plus floating debt and real estate mortgages, 
 had been used, the census figure would have been $4,545,576,769, or about 
 $770,000,000 less than the figure used by Mr. Bradlee for that year. It will also 
 be observed that Mr. Bradlee uses for 1917 an estimated figure of $6,570,000,000, 
 as compared with Mr. Welsh's census figure of $4,889,962,096. The final census 
 figures show that the gross capitalization and current liabilities were $6,115,- 
 804,332 in 1917, instead of $6,570,000,000 as estimated by Mr. Bradlee. This 
 indicates an exaggeration of approximately $454,000,000 in his estimate. Upon 
 
28 Electric Railway Problem 
 
 the basis of net capitalization, including real estate mortgages and floating debt, 
 the figure shown by the census is $5,056,554,324, or $1,513,445,676 under the 
 figure used by Mr. Bradlee. 
 
 In reducing the figures to annual averages he compares the entire fifteen 
 year period from 1902 to 1917 with the ten year period from 1907 to 1917, and 
 the five year period from 1907 to 1912, but does not show the average for the 
 five year period from 1912 to 1917, which, on the basis of the figures used by him, 
 would be approximately $250,000,000. Moreover, in figuring the average yearly 
 increase in investment for the entire fifteen year period Mr. Bradlee evidently 
 made an error of computation. The result he gives is $206,000,000, whereas by 
 a correct division the result would be S267 .000.000. The different results obtained 
 by Mr. Welsh and Mr. Bradlee by the use of census figures will be seen from 
 the following comparison: 
 
 AVERAGE YEARLY IN'CREASE IN CAPITAL 
 
 Period Welsh's Figures Bradlee's Figures 
 
 1902 to 1907 $256,498,000 $340,600,000 
 
 1907 to 1912 168.700,000 210.400.000 
 
 1912 to 1917 129,400.000 251.000,000 
 
 Entire period 1902 to 1917 $1&»,800.000 $267,300,000 
 
 Obviously, nothing can be made out of this without an independent checking of 
 the sources of information. If the basic census figures used by Mr. Welsh be 
 modified to include floating debt and real estate mortgages, the results will be 
 approximately as follows: 
 
 Xet Capitalization Inclusive of Az'erage Annual 
 
 Year Floating Debt and Real Estate Mortgages Increase 
 
 1902 $2,200,000,000 (Estimated) 
 
 1907 3.()Ri.()94.8()l $296,600,000 
 
 1912 4,545.576.769 172,400.000 
 
 1''17 5,056.554.324 102.200.000 
 
 Kntire period 1902 to 1917 $190,000,000 
 
 In passing, it should be stated that the figures for "total gross earnings" used 
 by Mr. Bradlee are not "gross passenger earnings" or "total railway operating 
 revenues" but include also the electric railway companies' "income from other 
 sources," or what is usually termed "revenue from other operations" and "non- 
 operating income." 
 
 On the assumption that for every dollar of annual increase in revenue new 
 capital to the extent of four or five dollars is required, it would appear from Mr. 
 Bradlee's figures that the electric railways during the fwc vcars period from 1912 
 to 1917 should have required from $576,000,000 to $720,000,000 of new capital, 
 whereas the increase in capital investment estimated by him was $1,255,000,000. 
 This tends to show that the basic figures used in the estimate of new capital 
 requirements have been very loosely compiled, or that the yard sticks by which 
 such requirements have been measured are very unreliable. 
 
 The data compiled for the Commission showing passenger revenues on 
 systems fining 75 per cent of the electric railway business in the country in 1917 
 and 1919 indicate an increase of more than 20 per cent in gross earnings in this 
 two year period. This is at the rate of about $75,000,000 a year, and according 
 
Conflicting Evidence on New Capital 29 
 
 to Mr. Bradlee's rule of thumb would call for new capital of at least $300,000,000 
 annually. 
 
 It is noteworthy that even the investment bankers have been confused by 
 the testimony presented before the Commission with respect to the annual capital 
 requirements of the electric railway industry. This is indicated by the annual 
 report of the committee on public service securities of the Investment Bankers 
 Association^ submitted by O. B. Willcox, Chairman, in October, 1919, at the 
 meeting of the Association in St. Louis. After referring to the appointment of 
 the Federal Electric Railways Commission, and the hearings which the Com- 
 mission held, the report proceeds: 
 
 "The street railways have needed about $300,000,000 each year to refund maturing obliga- 
 tions and between $600,000,000 and $700,000,000 new capital each year for improvements and 
 extensions to meet the demands of industry and commerce for local transportation. The 
 destruction of street railway credit has effectually checked expansion and the deadening in- 
 fluences will be increasingly felt in every branch of industry throughout the country, until 
 some new foundation for credit and investment has been found which will permit the profitable 
 operation and the renewed and continuous expansion of street railw^ay systems." 
 
 The confusion of the electric railway industry with the entire group of 
 utilities whose needs were laid before the Treasury Department in January, 
 1918, has extended to the estimates with respect to refunding operations as well 
 as to the needs for new capital. In the report just quoted the refunding require- 
 ments of the street railways are put at $300,000,000 per year. This estimate is 
 not borne out by the evidence presented to the Commission nor by other available 
 information. In the Electric Railway Journal of December 29, 1917, appears 
 an article taken from the Wall Street Journal, purporting to show that the 
 aggregate of public utility securities to mature in 1918 amounted to $210,427,780, 
 of which $126,817,030 was the total for the railways. Nearly one-half of this 
 entire amount was represented by the $57,735,000 Brooklyn Rapid Transit notes 
 maturing in July. It was stated in this article that the aggregate amount of 
 public utility securities maturing in 1918 was $126,500,000 more than matured 
 in 1917, and was "larger than any amount in the past five years." 
 
 In the preparation of the estimates of new capital requirements presented 
 to the Commission, the witnesses for the American Electric Railway Association 
 appear to have given no consideration to the possible reduction in the require- 
 ments for new capital due to the abandonment of unprofitable street railway 
 lines and curtailments of service resulting from decreases in traffic due to increases 
 in fare. 
 
 On the other hand, little or no attention seems to have been given to the fact 
 that with the present high level of prices a given amount of new construction 
 will require a much larger amount of new capital than in the days before the war. 
 This fact, if givei: consideration, would tend to swell the estimates. 
 
 Moreover, on account of the prevailing high prices, new capital is required 
 in considerable amounts in connection with the continuous process of replace- 
 ments. No matter how well a street railway may be constructed and maintained, 
 and no matter how sound the financial policies pursued with respect to it inay 
 be, the replacements required from year to year in an era of high prices will 
 have to be made at a cost in excess of the original cost of the items replaced. 
 
30 Electric Railway Problem 
 
 If, at the present time, rails, cars and other elements of street railway property 
 cost twice as much as they did ten years ago. then a new car or a new piece of 
 track installed at the present time in place of an identical car or piece of track 
 that is worn out will require twice as much capital as was originally required. 
 Under the system of accounts prescribed by the Interstate Commerce Commission 
 and generally by the public service commissions of the states, the difference be- 
 tween the present cost of the new item and the original cost of the old item, 
 even though the new item is identical in size and capacity with the old, has to 
 be charged to capital account. The result is that in the process of making 
 replacements during a period of high prices, the capital account is gradually 
 adjusted to the higher price level, and for this purpose new capital must be 
 provided even though no expansion or enlargement of street railway facilities 
 is going on. Mr. Bradlee stated in his letter of December 8, 1919, that according 
 to his understanding replacements were not included in the figures submitted 
 showing new capital requirements. It is clear, however, that the portion of the 
 cost of replacements charged to capital account and represented by capital securi- 
 ties or other corporate obligations would be included in the census figures used 
 by Mr. Bradlee as a basis for his estimates. His rough figure of $25,000,000 
 based on an allowance of 3 per cent of gross earnings for replacements apparently 
 refers to expenditures that ought to be taken care of out of earnings, and not 
 to the portion of the cost of replacements that is properly capitalized. 
 
Chapter VII 
 
 AMOUNT OF NEW CAPITAL REQUIREMENTS NOT CLEARLY 
 
 SHOWN, BUT NECESSITY FOR RESTORATION 
 
 OF CREDIT PROVEN 
 
 It may be assumed that the tendency of the representatives of any industry, 
 when they are endeavoring to enlist public interest and cooperation in its condition 
 or affairs, will be to exaggerate its importance. In the case of the electric railways 
 the uniform systems of accounts prescribed by the Interstate Commerce Commis- 
 sion and the various state commissions during the period of public regulation 
 ought to have resulted in such a clarification of the financial transactions of the 
 industry as to remove the excuse for loose or exaggerated figures. Most electric 
 railway companies have for several years been required to submit detailed annual 
 reports in accordance with forms prescribed by the commissions. In addition to 
 this they have been called upon, in many cases, to compile and present financial 
 statements to the commissions in connection with applications for the approval 
 of security issues or for fare increases. In view of these facts, it is somewhat 
 astonishing that the figures presented to the Federal Electric Railways Commission 
 with respect to so fundamental a matter as the annual requirements of new capital 
 should be so conflicting and unreliable. The need for the restoration and mainte- 
 nance of street railway credit is the cornerstone of the companies' case. It is 
 fortunate for them, and perhaps also for the public, that the proof of the need 
 for a continuous inflow of new capital into the industry is not dependent upon 
 the unsatisfactory and uncertain figures presented. The fact that new capital is 
 required at the present time and will be required in the future is shown with suffi- 
 cient clearness both by the general testimony of the witnesses and by the basic 
 conditions of the industry that are brought to light by analysis. 
 
 I have already referred to the increasing demand for street railway facilities 
 and service. Urban population continues to grow apace ; the riding habit develops. 
 While the evidence shows that in certain parts of the country the street railways 
 have been overbuilt and that a considerable mileage of lines has already been 
 or is likely to be abandoned in the present process of readjustment, and while it 
 is unquestionably true that in many cities unnecessary trackage was constructed 
 in the early days because of the competition of rival companies, nevertheless, these 
 facts do not warrant the conclusion that extensions and additions are no longer 
 required. The overbuilding in many cases has been in locations where the lines 
 can never be used to their full capacity, and in some cases the shifting of population 
 and business has even rendered lines relatively useless that at one time were in 
 the highest degree useful. The shifting and spreading out of population, as well 
 as the increase of population, are responsible for the demand for additional trans- 
 
 31 
 
32 Electric Railway Problem 
 
 portation facilities. While the electric railway industry during a period of finan- 
 cial distress may properly curtail its program of extensions and improvements, 
 this curtailment cannot be prolonged indefinitely. It is a matter of common 
 knowledge that the year 1919 witnessed an immense revival of street railway 
 traffic following the return of the soldiers from France and the demobilization 
 of the National Army. It may well be that the experiences of the war have 
 made the population of the country more mobile and that in the future traffic will 
 increase even more rapidly than in the past. At any rate, there is no sign that for 
 the country as a whole the business of local transportation by street railways is 
 on the decline, or that the future requirements for additional transportation 
 facilities will be materially less than the requirements of the past. 
 
 It is a well-known fact that in the bitter controversies which have arisen 
 between the street railway companies and the public in most American cities, one 
 of the principal causes of public hostility has been the failure or refusal of the 
 companies to make extensions and improvements as rapidly as the people de- 
 manded. This has been particularly true of companies operating under limited- 
 term franchises at times when their existing franchises had only a few more 
 years to run. While it may be contended that the necessary extensions and 
 betterments should be built out of depreciation reserves and that under certain 
 conditions they might properly be built out of surplus earnings, it is clear that 
 such a policy is less feasible now than it would have been a few years ago, since 
 the electric railways are at the present time so greatly impoverished that many 
 of them have difficulty in meeting out of revenues their ordinary operating charges 
 and bond interest. It is hardly to be expected that depreciation reserves can be 
 built up during these abnormal times to make good the depreciation which has 
 already accrued. If such reserves are sufficient to take care of depreciation now 
 accruing, it is about all that can be expected of them. But when a street railway 
 has settled down to an equilibrium on the basis of the normal condition of an old 
 property, the appropriation to depreciation reserve from year to year will be 
 approximately oft'sct by the calls upon the reserve for necessary replacements. 
 Thus it is not to be expected that capital for extensions and additional facilities 
 can be taken from depreciation reserves to any considerable extent, at least not 
 until the electric railway industry has been put upon a sound financial basis and 
 has had several years in which to get itself into good running order financially. 
 
 1 have previously called attention to the fact that in an era of high prices 
 new capital is required in the ordinary process of rci)laccnients. At a period like 
 the present when the cost of materials and labor entering into construction is 
 about double what it was before the war, the replacement of the entire property 
 would mean a doubling of the capital account. If the high prices continue 
 through a complete cycle of street railway life, this doubling of the capital 
 account will be effected by degrees. 
 
 In 1918 the Board of Public I'tility Commissioners of New Jersey passed 
 upon the emergency application of the Public Service Railway Company for the 
 approval of an increase in fares. In the report of the Hoard dated July 10, 1918,' 
 an analysis of the company's appropriations to depreciation reserve and of its 
 expenditures from the reserve for the 5 years from 1913 to 1917 is given. This 
 
New Capital Required 33 
 
 analysis shows that for the 5-year period the cost of replacements charged to 
 depreciation reserve amounted to about one-half of one per cent per annum on 
 the total fixed capital of the company as shown by its books. In figures, the 
 amount taken out of the depreciation reserve for replacements averaged for the 
 5-year period $447,862 per annum. These are figures for a company which had 
 approximately 850 miles of single track. They indicate an annual expenditure of 
 a little over $500 per mile of track for replacements charged to reserve. If it be 
 assumed that under the prices of the present year the same replacements would 
 cost twice as much money, then it would be necessary to secure new capital to 
 cover this increase in cost amounting to another $500 per mile. If we apply this 
 figure to the entire electric railway mileage of the country we get as a rough 
 estimate of the amount of new capital required in connection with current replace- 
 ments approximately $22,000,000 a year. In this connection the question may arise 
 as to whether the method of financing replacements prescribed by the uniform 
 systems of accounts is the most advantageous one. In Qeveland, under the terms 
 of the Tayler franchise, a different policy obtains. There the entire cost of 
 new replacements is taken out of earnings and the capital account is not increased, 
 no matter how great the difference may be between the cost of the new article 
 and the original cost of the article which it replaces. Under the Cleveland plan 
 this particular source of the continuing demand for new capital, and for the credit 
 with which to procure it, does not exist. But the Qeveland plan tends to swell 
 operating expenses and could not easily be adopted by street railways generally 
 in a period of financial distress resulting from the shrinkage of the net income. 
 The need of credit is in large measure created by the conditions and practices that 
 have destroyed it, and the conditions and practices that would restore it would at 
 the same time diminish the need of it. Thus, the Cleveland Railway, having 
 reorganized its aflfairs some years ago, and put them on a sound financial basis, 
 has now no need of credit in connection with this particular aspect of street 
 railway development, but other street railways have the need and cannot readily 
 at the present time take the steps that Cleveland took to do away with it. 
 
 Another factor entering into the present need of the electric railway industry 
 for credit and the capital that credit brings is the run-down condition of many 
 of the street railway properties. For example, the Bay State Street Railway 
 system of Massachusetts was found to be in need of general rehabilitation, and 
 when the act was passed in 1918 providing for the appointment of a board of 
 public trustees to operate the Bay State lines, the State of Massachusetts deemed 
 it necessary to provide $4,000,000 of capital for this purpose on the credit of 
 the state. It may be admitted that rehabilitation is not a capital charge. An 
 electric railway that has been properly maintained out of earnings would not 
 have to be rehabilitated. The need for rehabilitation arises from an extraordinary 
 waste of capital resulting from neglect. Theoretically, it is unsound to maintain 
 the old capital account intact and to increase it by the amount of new capital 
 required in rebuilding a street railway property. Such a policy results in the 
 inflation of the capital account and is particularly indefensible where the history 
 of the enterprise has shown its inability to take care of itself. Nevertheless, many 
 electric railways are now confronted by a condition and not a theory. Their 
 
34 Electric Railway Problem 
 
 property has been neglected and a portion of their capital is gone beyond recovery. 
 They have no reserve or other sources upon which to draw for the funds required 
 to put the property back in shape where it can be maintained and operated so as 
 to give adequate and continuing service. In such cases, even though the original 
 capital account has been written down to the extent of the accrued depreciation, 
 the money for rehabilitation can be secured only from new capital. That many 
 of the electric railways of the country are in a condition where general rehabili- 
 tation in the near future will be necessary, was clearly shown by the testimony. 
 
 Irrespective, therefore, of the fact that the evidence laid before the Commis- 
 sion did not furnish an accurate measure of the amount of new capital required 
 to keep the electric railways going and to enable them to function properly, it is 
 clear that new capital is essential for the construction of extensions and better- 
 ments to meet the constantly increasing demands of population and traffic; to 
 provide for the adjustment of the capital account to the prevailing high prices 
 through the process of replacement and to provide for the general rehabilitation 
 of properties where a portion of the original capital has been lost through neglect. 
 
Chapter VIII 
 
 WHY HAS ELECTRIC RAILWAY CREDIT BEEN LOST? 
 
 I have pointed out the fact that the witnesses representing public regulatory 
 bodies and those representing the general pubHc were in substantial agreement 
 with the witnesses for the companies with respect to the present deplorable con- 
 dition of street railway credit. They also agreed that the problem before the 
 Commission could not be solved unless some plan could be found for restoring 
 such credit. We have already referred to the factors inherent in the street railway 
 business that are favorable to the establishment and maintenance of credit, and 
 have concluded that although the claims of the companies with respect to new 
 capital requirements are inexact and may be greatly exaggerated, nevertheless 
 there is no escape from the conclusion that under conditions now prevailing, and 
 that are bound to prevail in the immediate future, a continuous flow of new capital 
 into the industry will be required if it is to perform its full function and render 
 adequate service to the public. No rehabilitation of credit can be successfully 
 undertaken without an understanding of the causes which have led to its present 
 debilitated condition. If the credit of this industry, with everything in its favor, 
 has failed, an analysis of the causes of failure must precede the formulation of 
 any plan for restoring it to health and vigor. For these causes we must look 
 to the financial policies which have prevailed in electric railway management, and 
 for which the electric railway companies themselves may be held, in large measure, 
 responsible; also to the policies of public regulation with respect to this industry, 
 for which the companies and the general public may be regarded as jointly respon- 
 sible ; and finally, to changes in economic conditions that have fundamentally 
 affected the conditions of street railway operation, or of street railway finance. 
 For these latter changes, neither the companies nor the car riding public can be 
 held responsible, except indirectly and to a minor degree. 
 
 35 
 
Chapter IX 
 OVERCAPITALIZATION A CAUSE OF THE FAILURE OF CREDIT 
 
 Upon the assumption that new capital is to be secured mainly through the 
 sale of additional securities, it requires no argument to show that overcapitalization 
 is a disease that strikes at the foundation of credit. Street railway stocks and 
 bonds can have no value except as they re]>resent actual property or actual earning 
 power. The fact of overcapitalization in the early days of the electric railway 
 industry was affirmed by many of the witnesses, admitted by others and assumed 
 by still others, but there was a wide divergence of opinion as to the proper dis- 
 tribution of the historical blame for it and as to its present importance as a factor 
 in the existing financial distress of the companies. The attitude generally assumed 
 by the spokesmen of the companies is that even if overcapitalization existed as 
 a result of unsound financial methods in the early days of the industry, we should 
 now forget about it and "let bygones be bygones" in an attempt to get together 
 for a solution of the acute problems of the present day. Clearly, overcapitalization 
 cannot now be ignored in consideration of the problem of credit unless it has 
 ceased to exist or through some change in methods of financing has ceased to 
 have significance in that connection. The claim is made by some that the original 
 overcapitalization has been overcome by the enhancement of the value of the 
 physical property or by the recognition of intangible values which fill up the gap 
 between the physical value and the par value of the securities. Here we must 
 distinguish between an actual increase in the value of the property which may 
 have resulted from appreciation in land and construction materials, or through 
 enlargements made out of earnings, and a mere putative or fictitious increase in 
 value due to the invention and formal recognition of various incorporeal elements. 
 Credit cannot be conjured up for an overcapitalized concern by a mere fiat of 
 regulatory authority. "Let there be value, and there is value," will not satisfy 
 new investors. 
 
 Public regulation is not supposed to pay much attention to the capitalization 
 of a utility. It limits earning jMiwer to a fair return upon the recognized value 
 of the property. The owners are allowed so much as return on the investment 
 and often they are at liberty to distribute this sum in any way they see fit among 
 the security holders. Thus, under regulation, if a company were allowed an 8 
 per cent return upon a value of $1,000,000, it could pay fixed charges of 5 per 
 cent on $1,500,000 of bonds and still have a margin of $50,000 for the stock. 
 A company in this condition would be greatly overcapitalized, but its capitalization 
 might he ignored in the fixing of its charges for service. Sometimes these facts 
 have led to a confusion of thought. Public regulation of rates may ignore capi- 
 talization, but that does not mend a company's credit when new capital is needed. 
 
 36 
 
Overcapitalization 37 
 
 Bonds are insecure unless the value of the property is considerably greater than 
 the face value of its obligations. Stock is relatively worthless even though offered 
 for cash at par under public utility regulation, if it has to take its place beside 
 shares already outstanding that have no intrinsic value. It is also maintained 
 that in many cases initial overcapitalization has long since been overcome by 
 reorganizations in foreclosure proceedings, but even so, it cannot be doubted that 
 a trail of financial failure running through its past history is not conducive to 
 present credit for a street railway company. 
 
 The question we have to answer here is this : Has overcapitalization been 
 a potent influence in the undermining of electric railway credit? and, if so, do 
 we need to say anything about it now? 
 
 Ex-President Taft, in his opening statement to the Commission, referred at 
 page 4 of the Proceedings to the matter of overcapitalization. He said : 
 
 "It is charged that there has been a good deal of watered stock, and doubtless there 
 has been — not of ver\- recent years, I should think, because watered stock, to be useful, has 
 to be disposable ; and I do not think anybody can dispose of street railway stock except in 
 banks that are nm by gentlemen that have an optimism that would justify their being removed 
 from the bank trust. That, of course, makes it most important that the situation should be 
 considered in a large way."' 
 
 Later on, at page 15 of the Proceedings, in response to questions by Commis- 
 sioner Meeker, he expressed himself as follows : 
 
 "I think you ought to take into consideration that these properties do change hands, and 
 that the people who are now sweating are not the people generally, who were guilty of those 
 original 'rich' investments that have so reflected on the character of the investment, in stirring 
 up the hostility of the people. * * * 
 
 "In other words, I think that those people who water stock and engage in other transac- 
 tions that give property a meretricious value, get out from under the load as promptly as 
 possible, and allow others to bear it. I think that is generally the history of these transactions. 
 That cannot be defended." 
 
 Still further on, in response to qtiestions by Commissioner Sweet, Mr. Taft 
 testified at pages 17 and 18 of the Proceedings: 
 
 "Commissioner Sweet : In view of your quasi-parental relation to this Commission, would 
 you recommend that we should go at all into the subject of past profits of these companies? 
 
 "Mr. Taft: If you do, you will never get down to business. I can tell you that. 
 
 "Commissioner Sweet: Can you see any profit in an inquiry of that kind, in relation to 
 the question that we are really to consider? 
 
 "Mr. Taft : I do not mean to say that there may not be instances in which you ought 
 to go back, just to determine the facts that you are trying to find out; but to entertain 
 evidence of the corruption and the methods of ten years ago, or twenty years ago, and the 
 historj' of transactions that have been made the basis for hostility to street railway companies, 
 will occupy all your time, so that you will never get down to the real question, and I think you 
 could separate the two by finding out what is the actual money that is invested now. 
 
 "Commissioner Sweet : The real question now has very little relation to big profits or 
 corruption that may have been received or practiced years ago? 
 
 "Mr. Taft : Except in its psychological effect upon the attitude of the public. 
 
 "Commissioner Sweet: Is it not an old sore that had better be left alone? 
 
 "Mr. Taft : We declined to go into it. 
 
 "Commissioner Sweet: Don't vou think we should decline to go into it? 
 
 "Mr. Taft : Yes, I do." 
 
 General Tripp frankly admitted on behalf of the electric railway companies 
 that overcapitalization in the past had been responsible for losses to investors and 
 the development of public hostility toward the companies. His testimony is found 
 at page 154 of the Proceedings, where he refers to the financial history of the 
 
38 Electric Railway Problem 
 
 Metropolitan Street Railway Company of Xew York. This was in response to 
 questions by Commissioner Sweet, as follows : 
 
 "Commissioner Sweet : How do you account for the prejudice in the public mind against 
 these railway corporations? There is such a prejudice, is there not? 
 
 "Gen. Tripp : Ves ; and it is perfectly clear why it should exist. The Metropolitan 
 Street Railway Company wa.s largely overcapitalized. 
 
 "Commissioner Sweet : .\nd overcapitalization is one of the reasons why the public is 
 prejudiced against these companies? 
 
 "Gen. Tripp: Yes. Large fortunes were made. 
 
 "Commissioner Sweet: Yes? 
 
 "Gen. Tripp: They were made, however, out of capitalizing its future and selling the 
 securities, and not out of the 5-cent fare rider. The 5-cent fare never produced more than a 
 fair return upon the fair investment of the property, but hoiK-s were capitalized, and _hopes 
 were sold, and the investors have lost money. But the car riders have not paid for it." 
 
 Mr. J. K. Newman, street railway engineer and banker, also a witness for 
 the companies, was perfectly frank in his description of early promotion methods 
 and the processes of inflation. Mis testimony on these points is found at pages 
 554 and 555 of the Proceedings, where he says: 
 
 "Now, the one tiling that was uppcnnost in my mind always was the franchise; and I 
 wanted to be sure that there was a 5-cent fare in the franchise, and that I had a franchise for 
 as long a term as possible. 1 have rei>eatedly refused to be interested in street railway 
 propositions that did not emlxxly a S-cent fare and a lonu-term franchise. This franchise 
 gives an enormous value to the property, over and above its physical worth. 
 
 "The bankers were keen to see that. I want to confess to being a banker also, or I try 
 to be a banker. 
 
 "Taking advantage of the situation, we commenced to capitalize. We capitalized the 
 earning power, because we had a monopoly. If we did not have a monopoly, we went on 
 and bought the other road, and put them togetlicr as a basis of some additional capitalization. 
 
 "The Chairman: Are you speaking now about the bankers? 
 
 "The bankers and the street railway men. They work together always, and the result was 
 that it was about as lucnilive a business as there was in this country. The public got the idea, 
 and it has it tixlay, that the street railway men and the liankers associated with them made 
 enormous profits, and that is tnie only on paper. It was true, in reality, in the early stage 
 of the game, and the securities became vcr)' desirable. l>ccame generally distributed, and. next 
 to steam railroad securities, were the most piipular form of investment on the part of the 
 general public." 
 
 Mr. Sisson, of the Guaranty Trust Company of New York, in discussing 
 the attitude of the public toward the street railways, at page 327 of the Proceed- 
 ings, said : 
 
 "It is in part justified, and in part blind, unreasoning ignorance oi >cli-interest. It is 
 justified in a measure, by s-imc had practices — t)ad financial practices and operating practices 
 in the past, thai have aroused resentment, and proper resentment, but from which the public 
 have reacted to a point of antagonism that is just as unfair and unwarranted and unjustified 
 as the actions whicli they themselves have criticised." 
 
 And further on, at page 328, in presenting an apology for overcapitalization, 
 he adds : 
 
 "In the development of any new industry, like a railway or public utility, the in\-estment 
 Kinker ver>' often finds it necessary, in order to secure direct investment in the obligation 
 of the company, to give a profit sharing interest in the future of that com|>aiiv. in the form 
 of a stix-k Ninus, in order to induce investment. Where these things are a haz.ird. their profit 
 earning is all estimated as a matter of guess-work, the speculative possibility in the situation 
 is the only thing that attracts the investor, and stock bonuses have been given simply to make 
 the direct oflfering attractive." 
 
 Another, but somewhat milder, apolog>' for overcapitalization was presented 
 by Mr. Bradlec at page 220 of the Proceedings, where he said: 
 
 "The question of issuing Ixnius slock as I see it has liecn this: rightfully or wrongfully 
 the practice develoiK-d of selling bonds in a new company and of selling preferred stock and 
 
Overcapitalization 39 
 
 givinK the purchaser of the bonds and the preferred stock a certain amount of common as a 
 bonus; the idea being that the bonds and the preferred stock would represent their invest- 
 ment, the common stock would represent, as Mr. Tripp .said this moniing. their hopes; and if 
 the proposition worked well, the common stock might be worth something; if it did not work 
 out well, it would have no value. 
 
 "Now that practice grew up. I do not know when it started or where, but it did grow up, 
 and there was a time when it was practically impossible to finance a new corporation without 
 following that practice. You were in competition with that method, and the investor liked it, 
 and if you were going to get the investor's money and get him interested in the enterprise 
 you were more or less forced to fall in line to a greater or less extent with that method of 
 handling the business. 
 
 "I think the public utility people recognized, perhaps not at the start, but many years ago, 
 the fallacy of that method of financing. I think most of them would have done away with 
 it many years ago if it had been in their power to do away with it and go on and develop the 
 business. But it has taken time, and it is onlv gradually that the public have been perhaps 
 educated up to a greater extent to handle the financing of such corporations in that way." 
 
 It remained for Mr. William J- Oark, of the General Electric Company, 
 who stated that he built the first electric street railway in the world, to enter a 
 qualified denial by saying that this question of overcapitalization is much over- 
 stressed, and that it does not exist to the degree generally claimed. His views 
 appear at pages 137 and 138 of the Proceedings : 
 
 "To speak plainly, gentlemen. — I know the accusation has been made — there is far less 
 water in the capitalization of the street railways than is generally supposed. There is some, 
 but what now may seem excessive capitalization has been created to a greater extent through 
 this continual change, change, change, through advancement in the art to better meet the 
 requirements of the public in the way of service. 
 
 "Now. turning back, electricity did not bring about a manipulation of finance into the 
 electric railway field. It began long before that, as I could trace for you if I had certain data, 
 which I will have here tomorrow. A very large part of what may be considered over- 
 capitalization today can be traced back to those periods. 
 
 "In the horse-car days, there were certain contracting concerns who used to do this thing 
 in a sort of a wav. They disappeared, almost all of them, with the advent of electricity. 
 They were the fellow^s who built track with a 20 or 25 pound rail. As long as they had 
 something to run cars over, on which to sell securities, bonds especially, they were contented. 
 
 "That, as I said, was more common in the days before the advent of electricity than 
 afterwards." 
 
 So far as overcapitalization is concerned, the state of Massachusetts appears 
 to be about the only bright spot in the country, as the result of anti-stock watering 
 laws enacted many years ago. In fact, the capitalization of Massachusetts electric 
 railways is frequently used as a yardstick to prove capitalization elsewhere. For 
 example. Mr. Lauck, in his Argument and Brief, filed on behalf of the labor 
 interests, cited the fact that in 1912 the street railways of the United States gen- 
 erally were capitalized at an average of $104,930 per mile, while the figure for 
 Massachusetts was only $57,786 per mile. From this comparison, he inferred a 
 total overcapitalization of 45 per cent or $2,119,000,000 in the country at large. 
 Yet the testimony shows that the Massachusetts lines have led the procession in 
 the great Parade of Distress that has been going on during the past few years, 
 and some of the apologists for overcapitalization appear to get considerable com- 
 fort out of this fact. Yet it is shown that even in Massachusetts there was con- 
 siderable initial overcapitalization in certain cases. Instances are cited at page 10 
 of Mr. Lauck's brief, and Mr. Homer Loring, Chairman of the Board of Public 
 Trustees operating the Bay State lines, refers to the matter at page 1642 of the 
 Proceedings, where he says: 
 
 "In the so-called Bay State valuation in 1916, the Public Service Commission very liberally 
 slashed capitalization to take care of what they thought — they thought there was evidence of 
 an inflation in the early days of the company, so they took that out with great care. Of 
 
40 Electric Railway Problem 
 
 course, wc have had. as you understand, stock watering laws in Massachusetts which have 
 been fairly effective since 1892, is it not. Mr. Warren? 
 
 "Mr. Warren ; So far as street railways, it runs hack ai far as 1874 on the stock. 
 
 "Mr. Loring : Yes, but in the early days water did creep in in some few instances and 
 the Public Service Commission in making its actual cost appraisal, as they did, took out many 
 millions which they suspected, and 1 have no doubt rightfully so, was water." 
 
 Upon the question as to whether the Commission in its consideration of the 
 present crisis in the electric railway industry and the possible remedies for existing 
 evils should gloss over the redolent past, Interstate Commerce Commissioner 
 Eastman's testimony is illuminating, particularly as he is fresh from several years 
 of intensive study of the Massachusetts situation and of practical administrative 
 responsibility for the formulation of public policies in that state. At page 2064 
 of the Proceedings, he says that, in considering what he would do if he were 
 a member of the Federal Electric Railways Commission, he reached the conclusion 
 that he would start otT by enlarging upon and describing the importance of street 
 railway transportation, and adds : 
 
 "Then I think I should frankly state the past evils from which many of the companies 
 still suffer. I do not think it is desirable in any way to gloss those over. There is no doubt 
 that overcapitalization has taken place in many cases, there have been extortionate rentals; 
 bad financial policy; mismanagement in various respects. In some cases the history of the 
 street railways in this country has been absolutely disreputable, as we all know. These facts 
 ought to be frankly stated. .\t the same time, 1 think you ought to make clear that not all 
 companies have Ix'cn guilty of those practices in the past, and that some of them have done 
 penance by reorganization, getting down to basic facts." 
 
 That overcapitalization cannot be considered merely as a "bygone," having 
 no pertinency at the present time, is clearly set forth by Chairman William U. B. 
 Ainey, of the Pennsylvania Public Service Commission. .Xt pages 1390 and 1391 
 of the Proceedings, he says: 
 
 "When an epidemic touches a locality its effect upon the individual depends in part upon 
 any organic or fundamental physical weakness which that individual possesses. It is an a.xiom, 
 I think, that disease usually makes its most sinister attack upon the weaker organ of the 
 patient. A physician in diagnosis would be recreant if he did not. therefore, take into con- 
 sideration these iundamcntal difficulties in each patient. While analogies are not always 
 logical, it is without question that the high costs of labor and material, the lessened purchasing 
 power of the dcpllar, perhaps the changing riding habits of the people, have borne down 
 u|»n the electric railway interests of the land most heavily in places where there are funda- 
 mental weaknesses in cnr|iorate historx. n;.iMaginient ur gcninil oonditidns. 
 
 "Shall we stop short of inquiring into these weaknesses? If, then, these higher costs are 
 liable to be continued, the companies in order to survive and meet the responsibilfies of the 
 new conditions under which they are called upon to operate must not deceive tliemselves. 
 They must not gloss over any organic difficulties if they e.>tist. but even at the expense of 
 much travail subject thenvselvcs to rigid sell-examination. It has been remarked lx;fore you, 
 I understand, that some companies have capitalized 'hopes.' It would be inexpedient for me 
 to name or even have in mind particular companies, but making a ciim|H>site statement of 
 several to which my attention has been directed, let me iiKiuire what you would recommend 
 to public service commissions who were seeking to determine the fair return in the cases of 
 companies which on outlays of from two million to three million dollars without an additional 
 rail, spike, car or dollar of inveslment capitalized such properties at seven or eight million 
 dollars. Where increases were not made on the Ivisis of money invested or upon the physical 
 value of the proiHTty devoted to public service, but the then or anliqi|>ated net incomes Were 
 capitalized, these incomes have necrssarily Ix^en lessened by the increased costs. Naturally 
 such conijianies do not wish to rcadjnvt ilieir capital issues to meet present net incomes on the 
 kivis ihev were established, hut they now desire to increase their income to meet their former 
 increases in capital. 
 
 "The payment hy the public of a fair return upon watereil stock on the ground that that 
 stock h.id passed into the hands of widows and ori>hans, no matter how just or equitable it 
 might .-ipprar to the advocate of such a policy, nor how stronglv entrenched in law, nor 
 persuasive the argument as an ad linminrm appeal, would with difficultv secure a consenting 
 riding public to supi>ort it and would, of course, re<iuire changes in the organic law of every 
 
I 
 
 Overcapitalization 41 
 
 state regulator}' tiody of the land, for valuation for rate-making purposes is by law based 
 primarily upon original costs and reproduction costs new, neither of which would respond 
 to such a suggestion. Moreover, we would then be confronted by a situation in which the 
 company whose capital issues bore fair relationship to the value of its property devoted to 
 public service would be faring much worse than the one burdened with watered stock." 
 
 Dr. Milo R. Maltbie, who for many years was a member of the Pubhc Service 
 Cominission for the First District of New York, also lays emphasis upon the evil 
 efTects of overcapitalization on credit. His testimony is found at pages 2091 and 
 2092 of the Proceedings : 
 
 "The street railway companies at the present time are laboring, among other things, under 
 a great disadvantage in any attempt to secure new capital for equipment which could be 
 operated, possibly, at less expense to the company and greater advantage to the public. One 
 of the things to' which I wish to call your attention as an explanation of that situation, and 
 something which prevents readjustments being made that ought to be made, is the fact that 
 in many instances the companies have been overcapitalized ; that is, they are capitalized for a 
 par value of stocks and bonds very greatly in excess of either the cost of the property as it 
 stands today, or the value of the property. Of course, in such instances it is difficult to raise 
 money, because those who are asked to accept the new securities fear that when the rates 
 come before a public body for review, a public service commission, for example, the value 
 of the property will be found at less than the par value of the securities, and that some of the 
 securities — of course, the junior securities — will be placed in such a position that they do not 
 get — not a fair return — but do not get an amount appreciably toward a fair return, and 
 consec|ucntly there being no one to take the securities, there not being earnings sufficient to 
 provide funds for their paying fixed charges and to purchase the property that is needed, 
 there is no way of securing funds which might be used to advantage in the operation of the 
 company, and the companies are compelled to go on with rolling stock, for e.xample, which 
 is not well adapted to the conditions that exist today." 
 
 The psychological effect of overcapitalization upon the employes as well as 
 upon the riding public is clearly illustrated by the character of the argument sub- 
 mitted on behalf of the Amalgamated Association. That document dwells upon 
 the fact of overcapitalization at length and cites many specific instances and 
 methods of inflation. It exhibits resentment that the present crisis in street 
 railway finances should be so generally attributed to advances in wages. Upon 
 this point, at pages 9 and 10 of the brief, Mr. Lauck states: 
 
 "Exaggeration of the degree to which the present plight of the street railways of the 
 United States is due to overcapitalization and to improper or unwise financial management 
 would be difficult, if not impossible. No structure can stand whose foundation is rotten and 
 whose framework is weak and loosely reared, and every examination that has been made of 
 the street railway business of this country shows it to be such a structure. The testimony 
 adduced is overwhelmingly conclusive, for there is no one so ignorant or so audacious as to 
 deny that there have been overcapitalization and financial mismanagement. There have been, 
 it is true, apologists for the practices responsible for this phase of the condition of the street 
 railways. There are those who minimize its importance in connection with the problem now 
 before this commission, and there are others who will agree with the Honorable William H. 
 Taft in his statement to you that 'the subject is an old sore and should be left alone except 
 in some cases where it will be necessary to go back and take judicial notice of the facts 
 involved.' When as a result, however, of all the evils of indirect, unregulated, absentee owner- 
 ship and through the application of the gambler's methods to the control and maninulation 
 of the properties, we have almost universal excess capitalization, inflated claims of value, 
 and reckless financiering in all its aspects, and the effort is made to attribute the predicament 
 of the street railways to increased and undue labor costs, we submit that the public is entitled 
 to the facts." 
 
 It is true that Mr. Warren filed with the Commission on behalf of the Amer- 
 ican Electric Railway Association a document entitled "Comparison of Valuation 
 and Capitalization of 26 electric railways based upon letters to the A. E. R. A. 
 and records of valuation and fare cases," dated August 11, 1919, purporting to 
 show that the aggregate capitalization of these 26 companies was only 10.8 per 
 
42 Electric Railway Problem 
 
 cent in excess of the valuations. This exhibit was vigorously attacked by Mr. 
 Stiles P. Jones, of Minneapolis, who for many years has been a close student of 
 public utility affairs throughout the country, and who appeared as a witness for 
 the labor interests. Following Mr. Jones's testimony, Mr. Warren withdrew the 
 capitalization exhibit for rechecking and such correction as might be found neces- 
 sary. It was somewhat revised and subsequently refiled with the Commission, 
 bearing the date of November 18, 1919.' This document does not even purport 
 to disprove the charges of initial overcapitalization made against the electric rail- 
 ways. It merely tends to show that at the present time most of this early over- 
 capitalization may have been absorbed by the increased cost of reproduction and 
 by the recognition in certain cases of franchise and other intangible values in 
 recent valuations. 
 
 The evidence is clear, uncontroverted, and almost unanimous that overcapi- 
 talization was a policy of the electric railways in the early days, that its ultimate 
 effect upon credit was disastrous, and that both cause and effect persist at the 
 present day. During the war period and even now, one of the urgent points made 
 for the relief of the industry by means of rate increases, by removal of tax bur- 
 dens, by public subsidies, or otherwise, is the paramount importance of saving 
 the financial structure of the industry by keeping the companies out of receivers' 
 hands. This appeal in effect asks that the public condone the past sins of the 
 companies, and guarantee them against the normal results of the mistakes they 
 have made and the unsound policies they have adopted. The companies say: 
 Do not punish us, but forgive us and carry our losses. This raises an issue that 
 makes a satisfactory adjustment of the relations of the public to the industry and 
 a restoration of electric railway credit most difficult. The old sore has never 
 healed ; it is still draining the vitality of the industry. It cannot be ignored. 
 
Chapter X 
 NEGLECT TO AMORTIZE EXCESS CAPITALIZATION 
 
 Another cause for the break-down of the credit of the electric railways may 
 be found in the fact that they have steadily and stoutly resisted as a matter of 
 policy any general writing off of initial excess capitalization as their earnings 
 have developed. Their aim has been to "make the common stock pay," not to 
 get rid of it. It is quite conceivable that under favorable circumstances an electric 
 railway, starting out with the handicap of inflated securities, might nevertheless 
 by a rigid policy of conservatism gradually reduce its capitalization or build up 
 its property out of earnings so as ultimately to overcome the original unsoundness 
 of its financial structure and get upon a living basis. It is doubtless true that 
 some electric railways have invested earnings in improvements and extensions. 
 It is also true that in some cases, in later years, the bankers have insisted in 
 connection with new bond issues that sinking funds be established to provide for 
 the ultimate retirement of the bonds. Nevertheless, it may be confidently stated 
 that up to this time street railway bonds have almost never been paid except 
 through a process of refunding. The street railways have adopted no effective 
 policy for the reduction of their capitalization through the process of amortization. 
 Of course, receiverships have resulted in a number of cases in reductions of 
 capitalization, and occasionally, in the process of consolidation, a little "water" 
 has been squeezed out where it was obvious that the amount of outstanding 
 securities representing no investment did not even have "hopes" to sustain them, 
 but in general every element of intangible value or claim of value that has once 
 found its way into capitalization has been religiously retained and defended by 
 the street railway interests. 
 
 On this particular point comparatively little evidence was produced before 
 the Commission. Undoubtedly, the "water" in street railway securities is for the 
 most part, though not entirely, represented by capital stock, which never falls due. 
 The companies have known no easy way of reducing excessive stock issues, and 
 ordinarily have not tried to find any. Where they have felt the necessity of doing 
 something to overcome the baneful effects of initial overcapitalization on credit, 
 their policy has been to build up earning power by scamping service or by other 
 devices, and to pay dividends, or else to "forego" them for a time so that the 
 surplus earnings could be put into the building up of the property. In the latter 
 case, the hollow shell of capitalization furnished by the investors would be filled 
 up out of the car riders' contributions, and the stockholders would graciously 
 defer the declaration of dividends until the public had supplied the real capital 
 on which the dividends could be paid. From the bondholders' point of view, 
 a safer way of filling in the capital account would have been by the accumulation 
 
 43 
 
44 Electric Railway Problem 
 
 of a sinking fund out of earnings for the retirement of the bonds when due. By 
 this policy the cost of the companies' property, represented by bonds, would be 
 gradually paid off from the contributions of the public, and the stockholders who 
 contributed little or no capital to the enterprise would ultimately find themselves 
 in possession of it free of debt. The bondholders, in this case, would be treated 
 as temporary investors in the street railway business. They would "hold the fort" 
 until the public could be induced or compelled to pay for the property and g^ve it 
 to the stockholders. But even this device for overcoming initial overcapitalization 
 was seldom adopted. 
 
 At page 344 of the Proceedings, in response to a question about the adequacy 
 of the 5-cent fare for the establishment of depreciation reserves, Mr. Sisson refers 
 to the general failure of the companies to pay off their debts. The question and 
 answer are : 
 
 "Commissioner Gadsden: If they (the electric railways) had set up, as they should have, 
 a proper provision (or depreciation, and cxtraordinar>' obsolescence, is it not questionable 
 whether the 5-ccnt fare ever was an adequate compensation? 
 
 ■'.\Ir. .Sisson: Yes. and as a Ijankcr I very frankly think they should have gone further 
 than that and set np sinking funds which would have provided for the liquidation of their 
 indebtedness, which almost none of them have done, and they could not do it, as a matter 
 gf fact, out of the 5-ccnt fare." 
 
 The question as to whether the companies could have amortized a portion 
 of their securities out of earnings will not stay answered in the negative by mere 
 assertions to that effect at this late day, for the whole history of the industry 
 proves that those in control of its policies have not tried to amortize, but have 
 been intent on increasing capitalization at every opportunity. A notable illus- 
 tration of the refusal to cut capitalization down to bed rock, even after bankruptcy, 
 is found in the attitude assumed by the reorganizers of the Metropolitan Street 
 Railway and the Third Avenue Railroad cc'm|)anies in New York. In these cases 
 when the Public Service Commission tried to enforce upon the reorganizers the 
 rule that the securities to be issued should not exceed the fair value of the prop- 
 erty, tiic jurisdiction of the commission was successfully contested in the courts 
 and its orders disobeyed. These men preferred to take lluir chances t)n the 
 possible development of future earning power to support an excessive amount of 
 securities, rather than content themselves with an amount of securities no greater 
 than the v.ilue of the ])roperty at the time. General Tripp, in telling the history 
 of the Metropolitan Street Railway reorganization at pages 147 and 148 of the 
 Proceedings, stated that the par value of securities issued by the new company 
 was less than the physical value of the property, and cited an appraisal bv Ford, 
 Bacon & Davis to i)rove this assertion. He made no reference to the fact that the 
 Public Service Commission found quite the contrary. The methods by which 
 appraisal engineers interested in i)romotion and finance often build up values to 
 fit capitalization arc from the public point of view and from the point of view 
 of conservative street railway policy one of the scandals of public service regu- 
 lation of the present day. 
 
 Some light can he tliri>wn upon the general policy of the street railways to 
 foster and maintain their overcapitalization by a study of certain of the prop- 
 erties listed in the schedule filed on behalf of the Electric Railway Association 
 
Excess Capitalization Not Amortized 45 
 
 comparing capitalization with valuation. For example, there is the Kansas City 
 Railways Company, a reorganization of the Metropolitan Street Railway of 
 Kansas City. The total capitalization is given as $28,353,300, which is shown 
 to be nearly $5,000,000 less than the reproduction cost new of the property as 
 fixed by the Missouri Public Service Commission in 1918. The property was 
 not new at the time of the valuation. As to the capitalization, the exhibit shows 
 the capital stock to be only $100,000, as against $28,253,300 of funded debt. A 
 reference to Moody's Manual reveals the fact that this nominal issue of $100,000 
 has been made the basis of 62,716.7 Preferred and 63,620.5 Common certificates 
 of participation of no par value. If these certificates be counted at $100 apiece, 
 the $100,000 of capital stock swells into $12,633,720 of participating certificates. 
 The persistent overcapitalization of the Chicago Surface Lines could also 
 be cited in support of the point here being emphasized. The New York, Kansas 
 City and Chicago companies should have learned better by their own previous 
 experiences with overcapitalization, shattered credit, and the ruin of bankruptcy. 
 Many representatives of the electric railway companies still cite with indignation 
 the enforced reduction of the capital stock of the Cleveland Railway in 1910, 
 although it is now admitted on all sides that the Cleveland Railway Company 
 today enjoys much better credit than the other street railway companies of the 
 country. 
 
 Even in the Cleveland settlement, with its conservative valuation of the 
 property, the value of unexpired franchises, superseded by the new arrangement, 
 was permanently capitalized at $3,615,843, and pavement which belonged to the 
 city was permanently capitalized at $1,897,357 plus the general overheads. In 
 the recent arbitration upon the demand of the Qeveland Railway Company that 
 the rate of return upon its capital stock be increased from 6 per cent to 7 per 
 cent, witnesses for the company called attention to the fact that these items for 
 franchise and pavement value are still in the capital account, and referred to this 
 fact as constituting a serious impairment of the stockholders' security. And in 
 fact the Board of Arbitration unanimously recommended an amendment of the 
 franchise to provide for the accumulation of a reserve of not less than $300,000 
 per annum, to be held in trust for at least ten years. Then, if the franchise is 
 renewed, this accumulation of not less than $3,000,000 would be put into better- 
 ments and extensions without being capitalized, and the process of building up 
 the reserve during another ten-year period would be begun forthwith. If the city 
 failed at the end of any ten-year period to renew the franchise, then this reserve 
 would be held for the liquidation of the capital stock upon the expiration of the 
 franchise 15 years later on.' 
 
 If the Qeveland Railway, with its most unusual conservatism in capitaliza- 
 tion, is still in need of a reserve fund for the amortization of intangibles in order 
 that its credit may be properly maintained, what may we not allege as to the 
 effect upon credit of the millions of dollars of franchise values, promoter's re- 
 muneration, superseded property and cumulative deficiencies that are depended 
 upon in most of the electric railway properties as a warrant for the perpetuation 
 of excessive capitalization? 
 
Chapter XI 
 FAILURE TO AMORTIZE NORMAL ACCRUED DEPRECIATION 
 
 Still another cause of loss of credit which had its foundation in the specu- 
 lative spirit that controlled the electric railway industry and in the lack of business 
 foresight, or in the carelessness of future business results, was the almost uni- 
 versal practice of neglecting depreciation. We have discussed initial overcapi- 
 talization and the subsequent failure of the industry to adopt a policy of reducing 
 the capitalization and of working the intangible and speculative elements out of it 
 as the earnings developed. On account of the failure to provide for depreciation 
 the credit of the business was further undermined by the gradual deterioration 
 and partial disappearance of the physical assets representing the actual original 
 investment. The electric railways appear to have assumed that the gradual attri- 
 tion of their physical property would not decrease its value so long as it continued 
 to be serviceable. The particles rubbed off in the process of wear, in their opinion, 
 constituted a sort of halo of intangible value which stayed with the physical prop- 
 erty and left the assets securing the original investment unimpaired. Indeed, this 
 theory was even carried to the extent of covering with its mantle of hope the 
 superseded mules, abandoned cables and other wreckage that marked the pathway 
 of mechanical progress in the development of the local transportation industry. 
 
 The great confusion that exists with respect to depreciation and particularly 
 with respect to the distinction between the normal accrued depreciation found 
 in a well-maintained old property and the current depreciation that results from 
 neglect of maintenance was referred to by Professor Mortimer E. Cooley in his 
 testimony. Dean Cooley belongs to the school of engineers which maintains that 
 for rate purposes no deduction whatever should be made on account of normal 
 accrued depreciation. His discussion of the diflference between the two kinds of 
 depreciation is found at pages 263 to 265 of the Proceedings, where he says : 
 
 "The subject of depreciation is prolKihly as little umierstoixl as any subject connected 
 with a iniblic utility. It is almost imimssible, apparently, for even well-informed men to Ret 
 a clear conception of what is meant by depreciation in connection with a utility company, 
 particularly with an electric street railway property. I think the Ixjst way to present it is 
 like this : 
 
 "When we build, when you gentlemen b\iild a street railroad property, all the elements 
 are brand new, the ties and the rails and cars, power houses, engines, dynamos, overhead 
 wire, evcnthinK is new. brand new ; it stands in what we call a 1(10 per cent condition. Some 
 of these elements are long lived, some are short lived. .\n engine may last thirty years, a 
 lie may last six. eight or ten years; a car may last in between .somewhere But the elements 
 have different lengths of lives and it becomes necessary- to replace them at different intervals. 
 After the property has Iwen nmning for ten or twelve vears. say, or fifteen years, it will be 
 made up of items some of whicJi are brand new, some of which are partly worn out and some 
 of which are all worn out. .-Xfter it has l>een running through twenty-five to thirty years, the 
 length of the longest lived element, it will be made up of elements of all conditions as to 
 the length of remaining life. 
 
 "Thus, when y<iu make an appraisal you examine these different elements and you find 
 some standing at 100 per cent, some standing at 75 per cent, some standing at 50 per cent 
 
 40 
 
Accrued Depkeciation Neglected 47 
 
 and some standing at zero. But when you have taken the weighted average of all these 
 elements you tind they stand somewhere between 80 and 90 per cent of the original 100. In 
 other words, there has been, say, 15 per cent of accumulated wear, (jr wear that lias come into 
 the elements, so that the IWI per cent condition is represented liy an 85 per cent condition. 
 
 "Now here comes the point that is so hard to understand. It makes no difference if the 
 property lasts a thousand years, the per cent condition in which it remains after it has come 
 through its longest cycle remains practically constant, say, 85 per cent. You cannot raise 
 that 85 per cent, if that is the mean, because in order to raise it you have got to throw away 
 property before it is worn out. A tie will not be entirely worn out, a car may not be worn out, 
 and if you replace them too soon you will bring up the average condition at the expense of 
 property still usable. 
 
 "Likewise, you cannot let that property drop very much below, because then it becomes 
 dangerous to operate and it does not render the service for which it is designed. Then the 
 conclusion is this : that the 85 per cent condition that I am speaking of for all practical pur- 
 poses throughout all life, whether ten years or thirty years or a thousand years, is the 100 
 per cent operating condition. 
 
 "Now you cannot have that 85 per cent except you buy it with 100 per cent. Thus you 
 must allow the 100 per cent as the basis for rate making and not the 85 per cent. You cannot 
 have the 85 except you pay 100 for it. It is the cost of the 85 per cent condition which 
 is the maximum practical operating condition. All this money that comes into the treasury 
 of the railroad comes through a property that necessarily exists at an 85 per cent condition. 
 
 "Now that is one kind of depreciation. You might call that a fixed depreciation. And 
 the proper way, if you are not going to allow the 100 per cent as an earning, is to allow out 
 of earnings something in the nature of a sinking fund. You must contribute to this sinking 
 fund through an annuity taken out of earnings which in a given time, say the life of the 
 franchise, will bring you back the difference between 85 and 100 per cent. So whether you 
 allow the 100 per cent or allow the annuity, its equivalent, it comes out of earnings. 
 
 "Now the second depreciation 
 
 "Mr. Warren : May I ask one question there. Suppose instead of a determinate fran- 
 chise you had an indeterminate franchise, would you allow 15 per cent? 
 
 "Air, Cooley : There would be difficulty in an indeterminate franchise to determine what 
 the annuity would be. 
 
 "Mr. Warren : Because if a property was expected to last forever you would never 
 make up the 15 per cent? 
 
 "Mr. Cooley : Not at all, and so I say we should always figure our rate of return on 
 what it costs to get that property in its working condition. 
 
 "Now with regard to this second depreciation item. In order to keep this property in 
 the 85 per cent condition you have got to renew elements as they wear out. Cars, engines, 
 boilers, rails, ties, they all have to be renewed from time to time as they wear out, and you 
 have to put aside a sum of money to do that work, to make these renewals. A car may 
 wear out or it may become obsolete even when it is in splendid working condition, as was 
 the case in Detroit with the old single-truck cars. They stood at a physical condition close 
 onto 80 per cent and yet every last one of them was scrapped because the public demanded 
 double-truck cars and they had to throw them away. 
 
 "Now;' this second fund that I speak of. to keep the property in the 85 per cent condition, 
 has likewise to come out of earnings, and it is a much bigger amount than people think. And 
 I could give you a demonstration of that. If you will take all the elements of the physical 
 property which can wear out and take the length of life of those different elements and per- 
 form the arithmetical computations, you w-ill find that the average life of the elements that 
 can wear out is, say, 12. 13 or 14 years, something of that sort, the composite life. So that 
 it is necessary to put into this fund for renewals somewhere around 6, 7 or 8 per cent of the 
 items that wear out. 
 
 "Now it happens that the items that wear out are only about nne-third or perhaps one- 
 quarter of the total cost of the property. So when you spread this 6, 7 or 8 per cent over the 
 total cost it means anywhere from 114. 2 or 2>4 per cent of the total cost of property has 
 got to go into this renewal fund, or what is ordinarily spoken of as a depreciation fund, 
 being a different fund from the one I first spoke of, namely, the one that makes up the 
 difference between the 85 and 100 per cent." 
 
 I have cited Dean Cooley's testimony at length becau.se it states so admirably 
 the difference between the permanent depreciation here being considered and the 
 current depreciation that will be considered in the next chapter of this report. In 
 quoting Dean Cooley upon these points, I do not wish to be understood as assent- 
 ing to his percentages or his theories as to the proper treatment of accrued 
 depreciation. From his own description of the nature of permanent depreciation, 
 it ought to be obvious that any ordinary street railway property cannot be kept 
 
48 Electric Railway Problem 
 
 permanently in anything like an 85 per cent condition. The Tayler franchise 
 prescribes 70 per cent of reproduction value as the standard of maintenance for 
 the Cleveland Railway property. In the recent arbitration proceeding, Mr. Henry 
 J. Davies, Secretary and Treasurer of the Cleveland Railway Company, testified 
 that in his judgment the condition of the property was nearer 65 per cent than 
 70 per cent; yet he regarded the Cleveland Railway as the finest street railway 
 property in the United States. His testimony on these points was given before 
 the Board of Arbitration at Oeveland on September 18, 1919. It was brought 
 out upon cross-examination by Judge Fielder Sanders, City Street Railroad Com- 
 missioner, who had appeared a few weeks earlier as a witness before the Federal 
 Electric Railways Commission. The Cleveland arbitration record shows: 
 
 Cross-examination by Judge Sanders. 
 
 Transcript, pages 74 to 75. , , ^ , ^. 
 
 "Q. Now, in the nine years of operation under the Tayler grant, fifteen or sixteen million 
 of new stock has Ix-en issued, that is correct, isn't it,— renewal stock? 
 
 "A. Yes, fourteen or fifteen million. 
 
 "Q. \'arious improvements and additions have been made, haven't they? 
 
 "A. Yes. 
 
 "Q. The property has developed into a fine railroad property, hasn t it? 
 
 "A. It is a good railroad property. 
 
 "Q. Do you know of a better surface street railroad company? 
 
 "A. I do not. 
 
 "Q. It is the finest surface street railroad property in the United States, isn t it? 
 
 "A. 1 am willing to admit it, you needn't argue it." 
 Pages 78 to 79. 
 
 "Q. What percentage of its reproduction value do you think the system is at now? 
 
 "A. I think it is at a little less than seventy, nearer sixty-five than seventy. 
 
 "Q. Is it possible, Mr. Davies, to keep a system physically at a reproduction value of 
 one hundred per cent? 
 
 "A. No, unless you regard as i>art of the physical property a proper reserve in cash or 
 otherwise to take care of the depreciation. 
 
 "Q. What is the usual standard of reproduction value maintained by street railroad 
 systems ? 
 
 "A Exclusive of any reserve for depreciation? 
 
 "Q. Yes. 
 
 "A. I think less than seventy per cent. 
 
 "Q. It is about fifty per cent, isn't it? 
 
 "A. If the system were not a growing .system, a system to which additions were made 
 from time to time, the average would be alxjut fifty plus the sal\-age value, the value of the 
 property as scrap, which might he ten per cent. In a growing city where investment is made, 
 additional investment ever\- year, on a system to which additions are made every year, in 
 tracks and cars and power plant, in other property, the average would be higher, approximating 
 sixty-five, possibly seventy per cent; because in the first case we may assume. I think, the 
 property is one-half worn out, while in the latter case the depreciation on the new propert> 
 does not get down to fifty per cent until the new property has been in use eight or ten years 
 possibly. 
 
 "Q I'"'t it !» fa<^ that the best maintained public utilities including the best maintained 
 street "railways are not at more than fifty to fifty-five per cent of their reproduction value, 
 isn't that a fact ? 
 
 ".'\, I think that they are at a higher average \'alue than that, if you include in it the 
 scrap value." 
 Page 80. 
 
 "Q. Your jiKlgmcnt is that the present street railway in Cleveland is maintained at 
 sixty-five per rent or seventy per cent? 
 
 ".•\. Nearer sixty-five than seventy. 
 
 "Q. The ordinance, then. bn< been sub'^tantiallv complied with? 
 
 "A, Yes. except for that ditTerence iK'tween sixty-five and seventy." 
 
 In its findings, published in December. 1919. the Board of .Arbitration in the 
 Oeveland case stated that "the valuation fixed upon the physical property at the 
 time the franchise was passed was conservative and unquestionably by subsequent 
 
Accrued Depreciation Neglected 49 
 
 improvements and betterments and liberal expenditures for upkeep, the property 
 
 has greatly increased in value." In the memorandum opinion signed by the 
 
 majority of the arbitrators, consisting of the chairman of the board and the 
 
 company's representative, the condition of the property is described as follows : 
 
 "The evidence shows that this railway property has been maintained at a high standard ; 
 that it justly enjoys the reputation of being the best managed, best equipped and most suc- 
 cessful street 'Car enterprise in the country. We have been shown that a higher percentage 
 of expenditure for maintenance and upkeep has been in force here than in other cities. Ex- 
 perts have analyzed the situation and presented the conclusion to us that by reason of efficient 
 and intelligent executive management, and by reason of the high rate of upkeep and main- 
 tenance, a large appreciation in the value of the property has resulted." 
 
 Mr. James D. Mortimer, President of the Milwaukee Electric Railway and 
 Light Company, and also (at that time) of the North American Company, testified 
 before the Commission on July 24th, and again on October 3, 1919. His earlier 
 testimony had primarily to do with his experience in Milwaukee with state regula- 
 tion, and his theories with respect to depreciation. Upon his later appearance, he 
 gave an extended analysis and criticism of the Cleveland service-at-cost plan, with 
 particular relation to what he characterized as its failure to include adequate provi- 
 sion for depreciation in the cost of service and the rates. He also severely criticised 
 on the same score the Philadelphia Rapid Transit Company's claims of profitable 
 operation on a 5-cent fare. Mr. Mortimer does not clearly distinguish between 
 the perinanent accrued depreciation and the "second depreciation" described by 
 Dean Cooley. Apparently, he does not share Dean Cooley's view that accrued 
 depreciation leaves the investment unimpaired. It appears from Mr. Mortimer's 
 testimony that Milwaukee is a shining exception to the general rule of electric 
 railways with respect to the accumulation of a reserve to offset permanent accrued 
 depreciation. At page 812 of the Proceedings, he says : 
 
 "We have, by the practical setting up of 22% of the operating revenues of the urban and 
 suburban system, been able to accumulate, in the case of the Milwaukee Electric Railway & 
 Light Company, a replacement reserve approximately equal to the estimated accrued deprecia- 
 tion, or the difference between reproduction cost new and so-called depreciated value, so that, 
 so far as utility capital accounts are concerned, the utility has been maintained intact, and 
 we have, as a rule, carried through that practice, irrespective of the return we were actually 
 earning on this utility. We have shaded it in some years. Tliat is. in the last year we did so, 
 when it was necessary to show a sufficient margin over bond interest." 
 
 Just before this, Mr. Mortimer had explained to Commissioner Meeker at 
 considerable length his idea of the purpose of a depreciation reserve, and had 
 indicated that a reserve equivalent to the full amount of accrued depreciation 
 is necessary in order to preserve the balance of the balance sheet. This, of course, 
 is necessary only where the plant account on the assets side has been written down 
 to a depreciated basis, which might occur in a case like that of the Alilwaukee 
 company after the original valuation of its property by the Wisconsin Railroad 
 Commission or in a case like that of Cleveland, after Judge Tayler's valuation, 
 with accrued depreciation deducted from cost new, had been written into the 
 service-at-cost franchise. Mr. Mortimer's depreciation theories are fully set forth 
 at pages 810 and 81 1 of the Proceedings, where he says : 
 
 "The purpose of accumulating a reserve for so-called depreciation is fundamentally to 
 create a reserve out of earnings so as to insure the future replacement of the element of 
 physical property at the end of its probable lifetime. No elements of physical property of 
 the same class have all equalized. The lives of cedar trolley poles may vary from 8 to 20 
 years. There is, of course, as the statisticians know, one certain year in each class of 
 
50 Electric Railway Problem 
 
 property where the number of replacements is at a maximum. Replacements or abandonment 
 mvariably begin within a very short time after the initial construction takes place. Th 
 curve of mortality of the elements of physical property, to the extent that such mortalit 
 curves have been computed or arranged, is quite similar to the curves of mortality of huma 
 lives. 
 
 "The problem of providing for so-called depreciation is not to provide for the wearini 
 out, so much as it is to provide for the replacement. 1 am speaking now from the utilit; 
 standpoint. Every utility is presumed to operate in perpetuity. Its obligations to operat 
 and conserve its capital account do not necessarily terminate at the expiration of its deter 
 minate franchise, if it has such a thing. Xo rates of fare have ever been allowed which wil 
 amortize the value of physical property to its scrap value within the life of the determinat 
 franchise. All the rates of fare provided for in any plan never make an allowance in anioun 
 greater than what will insure the replacement of the elements of physical property at th 
 end of their probable lifetime. 
 
 "Now, we have a piece of track, which, for simplicity in calculations, we will assum 
 has a life of 15 years. It is the duty of the utility to appropriate a sufficient amount of mone; 
 out of its earnings which, with equal increments, if you please, each year, together with th 
 interest upon the reserve balances, will provide a sum at the end of 15 years which wil 
 enable the utility to replace that element of property — a piece of track — to the extent of th 
 original cost thereof. 
 
 "Now, that will apparently result in the creation on the balance sheet of the corporatioi 
 of a liability very much larger than the amount that the corporation can use in any one yeai 
 but the recognition of that liability is essential if the balance sheet of the corporation is t( 
 fairly show the assets and liabilities, because the balance sheet purports to represent funda 
 mentally the liability of the corporation as a group of shareholders to the various creditor 
 and the public, to the extent that the public is interested in the continued operation of thi 
 utility. By that, I mean that the depreciaion or replacement reserve created by the method 
 that I have generally indicated records the liability of the corporation to the utility to eflfec 
 these replacements at tlic end of the probable lifetime of the physical property." 
 
 When Mr. Mortimer appeared before the Cotnmission the second time, t( 
 discuss the service-at-cost plan, he undertook to show that Qeveland has beet 
 operating under a service-at-less-than-cost plan. Upon this point, at pages 197^ 
 and 1972 of the Proceedings, he makes the following statement : 
 
 "One of the fundamental objections to the Cleveland franchise lies in the fact that th( 
 franchise does not require that any reserve for future replacements be accrued out of curreii 
 earnings, thereby requiring that the replacements of the physical property be taken care o 
 either through charges through current operating e-xi)eiises or by suspending them for on( 
 year, two years, four years, and charging them up through the earnings of subsequent years 
 In other words, according to the Johnson-GofF appraisal, the Cleveland Railway started ou 
 with estimated accrued depreciation, the liability to effect future replacements, of abou 
 seven and a half million dollars. The capital was stated at something like $19.tXX).000 net 
 but that was represented by properly having a value of $26,(XX).000. It was depreciated ii 
 other words 30 per cent. 
 
 ******** 
 
 "Commissioner W'chle : Your point is that the valuation on the basis on which the rati 
 was begun, as it was. was a valuation which was 30 per cent under the valuation based or 
 present cost of reproduction? 
 
 "Mr. Mortimer: .\nd based upon the amount of money that had gone into the property 
 into the physical property; in other words, taking into account just the investment of cash an< 
 the physical property, ihc security holders suffered a shrinkage of 3(1 per cent — a sacrifice o; 
 30 per cent of the cash that had been invested. Since that time capital expenditures havi 
 been added, and all the money for those capital expenditures must come from the sales o 
 new securities. The company has no surplus earnings of any kind whatsoever with whicl 
 to create additions to its plant and property account." 
 
 Mr. Afortimer's difliculty here seems to be that he is unable to forget th< 
 permanent accrued depreciation that was written otT the books in 1910. In this 
 respect Cleveland shines in a little different way from Milwaukee. In Oevelanc 
 the amount of permanent depreci;ition was actually decapitalized ; in Milwaukee 
 according to Mr. Mortimer, the amount of the permanent depreciation was accu- 
 mulated in a reserve fund which was invested in betterments and extensions 
 He alleges that the 30 per cent written off the cost new figure in Qeveland ir 
 
Accrued Depreciation Neglected 51 
 
 the 1910 appraisal was a sacrifice of cash investment. Secretary Baker testified 
 that Tom L. Johnson had himself been active in the formation of one of the 
 principal consolidations preceding the formation of the Cleveland Railway Com- 
 pany, and had described to him the method by which the consolidation had been 
 effected. It involved the issuance of 5 shares of stock in the consolidated com- 
 pany in exchange for each share of stock in the several constituent companies. 
 At page 997 of the Proceedings, he describes the transaction as follows : 
 
 "The Chairman : At the time when that plan was consummated can it fairly be stated 
 that the stock of the consolidated represented as five to one of the stock of the constituent 
 companies ? 
 
 "Secretary Baker: Substantially that. That was Mr. Johnson's general statement about 
 it. There are no secrets in that business now because this has all been talked out in full in 
 Cleveland, and the situation is so changed that nobody would object, I am sure, to my quoting 
 Mr. Johnson's statements to me on that subject. Nobody has any sensibilities about it any 
 more. But what they did was to turn in the hose, and they gave five shares of consolidated 
 stock for each share of constituent stock, although the market value of the constituent stock 
 at the time of the consolidation was very little, if any, above par in any of the constituent 
 companies. Of course, what they were doing was capitalizing the advantages of consolidation 
 and centralized management and the speculative advantages of the future growth of the 
 city of Cleveland." 
 
 In view of Mr. Mortimer's statement, it is also interesting to note what 
 Mr. John J. Stanley, President of the Oeveland Railway Company, says about 
 the reduction of capitalization in 1910. At pages 993 and 994 of the Proceedings, 
 the following question and answer appear : 
 
 "The Chairman: Do you regard the value of that plant as fair? 
 
 "Mr. Stanley: No, sir; we were not satisfied with the valuation at the time the settle- 
 ment was made. They cut our stock down from par to 55. I will frankly say that if we 
 were allowed at that time about 80 we would have been satisfied." 
 
 Evidently, Mr. Mortimer as an outsider has a more intimate knowledge of 
 the amount of cash invested in the Cleveland Railway property than those who 
 were in the midst of the long struggle preceding the adoption of the Tayler plan. 
 
 In answer to questions by Commissioner Meeker, Mr. Mortimer elaborated 
 his criticism of the Qeveland arrangement from the viewpoint of accruing depre- 
 ciation. This testimony is found at page 1975 of the Proceedings : 
 
 "Commissioner Meeker : It puzzles me a little as to how the company can get away with 
 a three-cent fare if it has not made the proper reserves for depreciation, replacement and so 
 forth. 
 
 "Mr. Mortimer : It is not permitted to make these reserves under the terms of the 
 franchise. 
 
 "To give you an illustration of that: The company started out with an accrued deprecia- 
 tion on its property of, in round figures, seven and a half million dollars. The accrued 
 depreciation on its property today is, in round figures, $12,000,000. 
 
 "Commissioner Meeker ; That is, the plant is continually wearing out. 
 
 "Mr. Mortimer : Yes. 
 
 "Commissioner Meeker: And it is not replaced? 
 
 "Mr. Mortimer: No, I do not mean that. Its liability to effect future replacements has 
 increased from seven and a half million dollars at the end of the year 1909 to $12,000,000 
 at the end of the year 1918. That is, the liability of the company to effect future replace- 
 ments of its physical property, assuming that it is to continue in operation. That is the 
 liability over and above the amount of replacements. 
 
 "Commissioner Meeker: The period of reckoning has not yet come, but it hangs off 
 in the future? 
 
 "Mr. Mortimer: It is exactly the same problem as confronts assessment life insurance 
 companies. There is no one of us that would care particularly to buy any large quantity 
 of insurance, life insurance, in an assessment life insurance company. 
 
 "If any of us wanted to buy insurance, we would go to a legal reserve company, a com- 
 pany that created a reserve against the accruing liability because of future deaths. We have 
 that exact, same problem in providing for the replacement of physical property. The courts 
 
52 Electric Railway Problem 
 
 have all held that. They have supported it. It is the universal theory of providing for 
 maintenance and depreciation adopted by regulating commissions in the determination of 
 rates. 
 
 "Commissioner Meeker: Is my understanding correct, that the day of reckonmg has 
 not yet come, but it will eventually come, and the company will either have to get more liberal 
 terms or be forced into bankruptcy — either the company or the city, I don't know which? 
 
 "Mr. Mortimer: The day of reckoning for the company would come — if the property was 
 currently maintained — the day of reckoning for the company would come at the end of the 
 franchise, it might have to suflrer on negotiations with a substantial loss in its invested 
 capital." 
 
 It i.s clear that Mr. Mortiincr's critici.sm harks back to the failure of the 
 Cleveland franchise to establish a reserve for the amortization of the accrued 
 depreciation that was written off the books in 1910. and for the amortization 
 of the permanent depreciation of property installed since that date. The talk 
 about liability to effect future replacements is based on the exploded theory that 
 the 30 per cent representing permanent depreciation ever can be replaced. Ac- 
 cording to Dean Cooley's analysis, which in this respect appears to be sound, it 
 will never be necessary or even possible to restore this accrued depreciation by 
 renewals or replacements. It is permanent ; it will remain for "a thousand years," 
 if the property lasts that long. .'Xs to the current depreciation and the replace- 
 ments required from time to time to keep the pruperty continuously in standard 
 operating condition, the evidence seems to be conclusive that these costs have been 
 fairly met by appropriations from earnings. With current maintenance and 
 replacements taken care of in this way, it is reasonably clear that under the 
 Qeveland franchise there is no substantial accumulation of omitted or deferred 
 maintenance that will result ultimately in the need for a general rehabilitation 
 of the jiroperty. The only thing not jirovided for by the annual maintenance and 
 depreciation is the permanent accrued depreciation on the new property installed 
 since the T.nyler settlement went into effect. Roughly, that would ultimately 
 amount to ^0 ])er cent of the new capital invested since that time. As neutralizing 
 the effect of this accruing depreciation, it should be recognized that the Cleveland 
 franchise prescribes a peculiar rule with respect to replacements. The uniform 
 systems of accounts prescribed by the Interstate Coniniercc Commission and bv 
 the slate public utilities commissions provide that where a repftlcement is made 
 of an identical article at a higher cost than the original cost, the difference 
 between the original cost and the replacement cost shall be charged to capital 
 account. In this way the cai)ital account is gradually readjusted through the 
 process of replacement to the higher scale of prices. The Cleveland plan, on 
 the other haiul. rer|uires that the entire cost new of the replacement, if it is iden- 
 tical in size and capacity with the article replaced, shall be charged to current 
 maintenance, no matter how great the increase in the cost of the article mav have 
 been. While prices are going uj) and until the street railway lines have gone 
 through a complete cycle of renewals at the higher i)rice level, this system tends 
 strongly to conservatism in the capital account. It is immensely more conservative 
 than the reproduction-cost-new method of valuation advocated by the American 
 ICIectric Kaihvay Association and generally by the valuation experts appearing 
 for the electric railway companies in rate cases. It is even more conservative 
 than the actual co.st method, because it prevents the readjustment of book cost 
 to the higher prices, which is somvthing entirely consistent with ihe actual 
 
Accrued Depreciation Neglected 53 
 
 cost method as advocated by those who believe in the Massachusetts theory of 
 vahiation. 
 
 Dean Cooky's 85 per cent standard for street railways is based upon assump- 
 tions that appear to be quite untenable. In his testimony, above quoted, he says 
 that "the items that wear out are only about one-third or perhaps one-quarter 
 of the total cost of the property." How he arrived at such a conclusion would 
 be a mystery, if we had only his testimony before the Commission to go by. It 
 is quite evident that tracks, paving, cars, electrical equipment, buildings, machinery, 
 etc., wear out in time. That these elements should represent only from one- 
 quarter to one-third of the cost of the property seems quite absurd on its face. 
 But light is thrown on Dean Cooley's methods and theories by his valuation of 
 the Public Service Railway property (of New Jersey) to which extended refer- 
 ence was made in the testimony before the Commission. In that case, he classed 
 as undepreciable the following elements of property : land, grading, ballast, track 
 and roadway labor, and all overheads except contingencies. These undepreciated 
 overheads alone constituted about 40 per cent of the estimated base cost of the 
 physical property. It seems reasonably obvious that at least 75 per cent of the 
 physical property of an ordinary street railway is subject to depreciation. Clearly, 
 the 70 per cent standard set up in the Cleveland franchise is a much safer one 
 to go by than the 85 per cent standard based upon Dean Cooley's reasoning and 
 estimates. This means that in order to keep the legitimate investment in an electric 
 railway unimpaired, the original capital should be ultimately reduced about 30 per 
 cent, or else as an incident of growth a reserve equivalent to 30 per cent of the 
 original capital should be built up out of earnings and invested in betterments and 
 extensions in order to protect the integrity of the capital account and preserve the 
 credit of the enterprise. 
 
 I am referring here to the normal and necessary permanent depreciation of 
 a street railway property, and to the inevitable supersessions that have taken place. 
 The companies now generally make the claim that a well-maintained old property 
 is as good as a new one, and worth as much, certainly for rate purposes. The 
 report of the Committee on Valuation of the American Electric Railway Asso- 
 ciation' is most emphatic in the assertion that accrued depreciation should not 
 be deducted from reproduction cost new in the determination of value for rate 
 purposes or for sale to municipality, state or government. It is claimed for the 
 companies that their revenues were insufficient to enable them to provide for 
 depreciation. But who knows — when they never tried? They lived in "a fool's 
 paradise," to use General Tripp's phrase, and did not think it necessary to try. 
 
 In this connection consideration should be given to the fact that the City 
 of Glasgow, Scotland, has been able to amortize its entire investment in its electric 
 tramway system out of the earnings, and that Liverpool and other British munici- 
 palities have gone a long way in the same direction, in spite of the fact that the 
 average fares collected on these British lines have been exceedingly low. More- 
 over, the city of San Francisco, which has been operating an incomplete but 
 growing system of municipal railways since December 28, 1912, on a 5-cent fare, 
 was able to accumulate a depreciation fund during the first six and a half years, 
 up to June 30, 1919, amounting to $1,258,323, or more than $20,000 per mile of 
 
54 Electric Railway Problem 
 
 track owned at the end of the period.- It is doubtless true that some of the electric 
 railways of the country could not have paid all their operating expenses and taxes, 
 earned a fair return upon the original investment, and also amortized the accrued 
 depreciation under a 5-cent fare, but it is by no means certain that the majority 
 of them, including those which serve the great urban communities of the country, 
 could not have done so if they had started out with a conservative capitalization, 
 and had recognized the importance of maintaining a parity between their capital 
 accounts and the depreciated value of their property. 
 
 At the present time, their policy is to deny the impairment of their capital 
 through accrued depreciation, and to overrule the repeated decisions of the United 
 States Supreme Court upon advice of their consulting engineers. With respect 
 to the financial policies of electric railways so far as they have a bearing upon 
 credit, it may well be said that "whom the gods would destroy, they first make 
 mad." Who can doubt for a moment that the failure to amortize the portion of 
 the original investment represented by the difference between the cost new of a 
 street railway property and its "per cent condition" when it has come down to 
 the level at which it can be permanently maintained has been a factor tending 
 to undermine its credit? Who can suppose for a moment that the policy of re- 
 taining superseded property in the capital account, even if it be approved by 
 commissions and courts, could be other than disastrous to the permanent credit 
 of the electric railways? This is one of the fruits of initial overcapitalization. 
 The history of the electric railway industry has demonstrated the necessity of 
 conservatism in capitalization as a ])rercquisite to financial soundness and adequate 
 credit. It is not so long ago since the indu.>;tr)- was started that the men then in 
 control of it could not have foreseen at least in some measure the requirements of 
 the situation, if they had been actuated primarily by desire to render public service 
 rather than to exploit for personal profit the needs of the urban public and the 
 possibilities of electricity. It is now generally admitted that the men who launched 
 the electric railway consolidations and other deals through which the securities 
 were heavily "watered" made their fortunes by disposing of tbeir holdings, not 
 by keeping them. On this point. General Tripp's testimony at page 155 of the 
 Proceedings is significant. Questions by Commissioner Sweet brought out the 
 following : 
 
 "Commissioner .'>wcct : The individuals who were chiefly responsible for that, and who 
 made money out of it, are they still in the business, or, for the most part are they out of 
 it, and have they turned over the capital to innocent purchasers? 
 
 "Gen. Tripp: Of course, that question is a general question, and there may be exceptions. 
 
 "Commissioner Sweet : Oh. undouhtedl\ . 
 
 "Gen, Tripp : I should say it would be found tliat very few of these electric railway 
 securities will l>e found in the strong-bo.xes of tlie estates of the men who originally pro- 
 moted them " 
 
 All this goes to show that provision for accrued depreciation was far from 
 the thoughts of the manipulators. "Where there's a will, there's a way," but 
 where there was no will, there was no wav. 
 
Chapter XII 
 
 PAYMENT OF UNEARNED DIVIDENDS AND NEGLECT 
 OF ORDINARY MAINTENANCE 
 
 In the preceding chapter of this report I have considered the failure of the 
 electric railways to amortize normal accrued depreciation. The next thing to be 
 considered in the analysis of the financial policies that have contributed to the 
 ruin of electric railway credit is the fact that in many cases they have neglected 
 current depreciation to the extent of putting dividends ahead of maintenance. 
 No matter what difference of opinion may exist among engineers and economists 
 with respect to normal accrued depreciation as an impairment of capital, there can 
 be no difference of opinion as to the effect of "deferred" or "omitted" mainten- 
 ance upon the integrity of the investment. Yet many electric railway companies 
 have been known to pay dividends while they were neglecting maintenance, on the 
 theory that it was necessary to continue to pay dividends in order to maintain 
 their credit. 
 
 It is Dean Cooley's "second depreciation" that we are concerned with here. 
 Without agreeing to his percentages, we may readily admit the validity of the 
 general distinction which he makes. But his "second depreciation" is, according 
 to his own analysis, swallowed up in maintenance. I do not mean to contend 
 that no depreciation reserve whatever is needed for this particular purpose, but 
 merely that the purpose of this reserve is to even up the charges for maintenance 
 and renewals so as to avoid violent fluctuations in operating expenses from year 
 to year. 
 
 I have quoted Mr. James D. Mortimer at length in the preceding chapter, 
 but his testimony with respect to depreciation was so important, even if some- 
 what confusing, that I shall quote him again. In spite of the severe criticism 
 which he leveled at the Cleveland plan, he does not seem to attribute to the 
 Cleveland property any neglect of maintenance which, according to the testimony 
 of the Massachusetts witnesses, leads to a deterioration that ultimately requires 
 a complete rehabilitation. In other words, he seems to admit that the Cleveland 
 Railway is in what Dean Cooley would term a 100 per cent operating condition. 
 What he is troubled about is not the ultimate replacement of the physical property 
 but its "financial replacement" when the franchise expires. This point is brought 
 out in his answers to questions by Commissioner Wehle and Mr. Warren at 
 page 1983 of the Proceedings, as follows : 
 
 "Commissioner Wehle : But the existing property as I understand is in good condition. 
 
 "Mr. Mortimer: Oh, it is in good condition for the purpose of running cars over it. 
 but that does not in any way reduce the liability of the company to replace that property at 
 some future date. The question of good condition is a factor entirely separate from the 
 factor of financial replacement. 
 
 "Commissioner Wehle : Your idea is. then, is it not, that the companies which may come 
 
 55 
 
56 Electric Railway Problem 
 
 to own these properties at the end of the period of the contract are running the risk all the 
 time lest the proiK-rties will not be kept in good condition and that although the properties are 
 in good condition at the present time, yet m the period intervening lx;t\veen the present and 
 the expiration oi the contract between the companies and the city there are many possibilities, 
 and that there has not been such a resene as according to the bookkeeping standards of 
 public service companies heretofore would sufficiently protect the company. 
 
 "Mr. Murtinier: Mr. Commissioner, it is not so much a question of operating condition, 
 or as you say good condition : it is a question of protecting themselves against second hand 
 value at the end of their franchise period. 
 
 "Mr. Warren: They would have to do it, if there was no end to the franchise, would 
 they not? 
 
 "Mr. Mortimer : Yes. 
 
 "Mr. Warren: Under an indeterminate franchise? 
 
 "Mr. Mortimer: Under an indeterminate franchise it would be required because all in- 
 determinate franchises carry with them some right on the part of the state or municipality tO' 
 purchase or condemn the property and tlicy always have to look out for tlw conditions that 
 may obtain at the time of condemnation. .\nd testimony of engineers that the property was 
 in 100 per cent condition would not absolve the company from having to meet the liability 
 for the second hand value of the proi)erty." 
 
 Upon being pressed to explain the point of view of those who differed with 
 him in regard to the merits of the Cleveland depreciation policy, Mr. Mortimer 
 continued at page 1984 of the Proceedings, as follows : 
 
 "It is typical of, say, the Boston Elevated Railway. The Boston Elevated Railway, as I 
 understand, in the days when it was paying dividends and its stock was selling in e.xcess of 
 par, reached the conclusion that a depreciation or reserve of $1,0(XU)00 was adequate, and 
 thereupon declared dividends up to the amount available after providing a reserve of $1,000,000. 
 This was not an annual reserve. They said. "We will take care of maintenance and replace- 
 ment through operating expenses. We will always try to maintain our reserve at $1,000,000.' 
 .^nd I think they did maintain it at $l.fl(KUXX). But the character of rolling stock and the 
 condition of inaiiiteiiance of the physical proi>erties of the Boston Elevated is indicative of 
 properties that take that viewpoint, that they can provide for modernization of their equip- 
 ment, write olT obsolete property and plants through current maintenance expenses. They do 
 not do it. Now, that is one of the fundamental things that is wrong with the electric railway 
 business. It is one of the things that is wrong with the .Massachusetts Electric Railway situation. 
 
 "Commissioner Welile : That they have never charged off to depreciation enough and 
 never have set up depreciation funds in the whole history of the industry? 
 
 "Mr. Mortimer: (ienerally the electric railways of Massachu.sctts have not created 
 depreciation reserves, neither did they appropriate or spend out of earnings sufficient money 
 to keep their properties in modeni condition. 
 
 "Commissioner Mahnn : Has not that been the fault of the whole country, not only 
 of Massachusetts but of the entire industry, it never created a depreciation fund sufficient? 
 
 "Mr. Mortimer: I think, Mr. Commissioner, that that is a fundamental defect in the 
 business. There are some exceptions to the rule." 
 
 Mr. Mortimer's reference to the past policy of the Boston Elevated Railway 
 Company as practically the same as the policy enforced upon the Cleveland Rail- 
 way Company does not appear to be consistent with the facts brought out by 
 various witnesses and by records filed with the Commission with respect to the 
 actual present physical condition of the Cleveland Railway as compared with 
 that of the Boston Elevated when the Public Trustees took possession, July 1, 1918. 
 In the one there is very little deferred maintenance; in the other there was a 
 great deal. The (-r(<lit of one was the best in the country; that of the other had 
 disappeared. 
 
 In this comicction Interstate Commerce Commissioner Eastman's testimony 
 is illuminating. At page 205S of the Proceedings, where he is reciting the various 
 causes for the present unhappy condition of the electric railways of Massachu- 
 setts, he says : 
 
 "Now, in the fifth place, and this is true not only in Massachusetts but in all other parts 
 of the country, there has l)een the ordinary failure to care for depreciation; the need of 
 caring for that was not recognized and depreciation was not cared for." 
 
Dividends Preferred to Maintexance 57 
 
 A little further on in his testimony he refers to the sources of strength of the 
 street railways of ]\Iassachusetts, and speaks of the advantages they enjoyed 
 because they had a plentiful supply of local capital as a result of favorable laws 
 exempting street railway securities from taxation and placing them under strict 
 regulation. He then proceeds, at pages 2059 and 2060 of the Proceedings, as 
 follows : 
 
 "That in a sense it has developed into a sort of weakness is rather a paradox, .■'it the 
 same time, I think it is true. In other parts of the country the e.xploitation which took place 
 resulted in early smash. That came about in Cleveland, that came about in Chicago, and 1 
 think in other large cities and they had to begin all over again about the year 1907, and they 
 started in on a depreciated basis and proceeded to rehabilitate the property and they have since 
 had the advantage of that rehabilitation. 
 
 "Now, in Massachusetts, the fact that the securities were regulated and the capitalization 
 was relatively low resulted in prolonging the life of the companies until they began to receive 
 the full effects of accrued depreciation and they are suffering from that now. If you go 
 back 10 or 12 years, Massachusetts was, I think, receiving as good railway service as any part 
 of the country. We used to boast of the street railway service we received at that time and 
 we were proud of the service which was being given in Boston in comparison with the service 
 which was being given in many other large cities. But at the present time the failure to 
 take care of depreciation, added to the other elements and factors which have entered into the 
 situation in recent years, has resulted in a very weak and undesirable situation." 
 
 Still further on, at pages 2061 and 2062 of the Proceedings, Commissioner 
 Eastman says : 
 
 "Speaking again of the situation of investors, we were constantly confronted by this 
 situation. We asked companies : 'Now, why did you continue dividend payments when you 
 knew that dividends were not really earned, taking into the consideration the necessity of 
 maintaining the property and taking care of depreciation?' Those dividends, I might say, 
 in most cases were small and not large, .^nd the answer we almost always received was this : 
 it was necessary to continue dividends in order to maintain the credit of the properties. That 
 means, in other words, the investors looked at the thing in the most superficial way, that so 
 long as the company is paying dividends they are satisfied that it is all right without making 
 any endeavor to find out the real facts and whether or not it is earning the dividends which 
 it is paying. I consider a statement of that sort as a whole a reflection on the intelligence 
 of investors. .\nd I might say also that in the Bay State case we were actually confronted 
 by the claim that depreciation was a newly discovered science, that nobody knew anything 
 about depreciation until a few years ago when that theory was developed, although as a 
 matter of fact, if you will examine the laws of Massachusetts, you will find that the earliest 
 law applying to the capitalization of street railways which was passed away back in 1874 was 
 based directly upon the theory of depreciation. In other words, it was provided that the 
 Commission should not allow increases in stock if it found that the value of the property 
 was impaired. That law was afterwards. I am sorry to say, emasculated. But depreciation is 
 not a new science, but has been recognized for many years, as you know." 
 
 Qiairman McLeod of the Massachusetts Public Service Commission dis- 
 cussed at considerable length the policies of the Board of Public Trustees operating 
 the Boston Elevated Railway Company with respect to the inclusion of deprecia- 
 tion in the cost of service. After stating that the trustees had spent during the 
 past year about $2,500,000 more on maintenance than was spent the year before 
 and that in addition they had set aside over $2,000,000 of depreciation reserves 
 representing an increase of $1,650,000 over the preceding year, he stated that all 
 these monies were charged to operation. He called attention, at page 1444 of the 
 Proceedings, to the fact that the depreciation fund now being established is not 
 intended to cover depreciation in roadway and track and that renewals of ties, 
 paving and roadways are made a part of the maintenance charge. It was brought 
 out by Chairman Elmquist's questions that the result of the Boston plan will be a 
 substantial rebuilding of the Boston Elevated property out of earnings and the 
 company's failure to provide for depreciation in advance of paying dividends in 
 
58 Electric Railway Problem 
 
 past years was not the fault of the public regulatory bodies. The testimony on this 
 point is found at pages 1445 and 1446 of the Proceedings: 
 
 "The Chairman : Then in a nutshell the state took over a run-down plant and is going 
 to build it up and make it perfect, turn it back to the corporation and get none of the cost 
 back. 
 
 "Mr. McLeod: Of course, a large part of this expenditure represents current mainten- 
 ance and current depreciation requirements. I might say while this ten-year period is in 
 operation there is a certain amount of depreciation going on during that period in addition 
 to what has occurred in the past, but I have no doubt in my own mind, and I think I am 
 supported in that by investigation made of the matter by our engineering department, that 
 the present maintenance and depreciation expenditures on the Boston Elevated property, 
 while absolutely desirable and projjcr from the standpoint of putting the property as soon 
 as possible into good physical condition, and a policy which I believe in the long run will be 
 of advantage to the public, does for the immediate present impose upon the public an additional 
 burden owing to the necessity of making up neglected depreciation in the past. 
 
 "Commissioner Gadsden: If I understand your general statement it was to the effect 
 that rates in the past have never been sufficient to yield a proper and fair return on the 
 property and set up the proper depreciation and that these properties had been allowed to 
 run down so far as their physical condition was concerned in order to pay the dividends. 
 Now if that is so. is it not entirely proper that when the public takes over the property in 
 the hands of the public trustees the public should pay a fare to put the property in good 
 operating condition, which it has not done in the past? Is there really any injustice in that? 
 Is not the public only now paying what it should have paid all these years? 
 
 "Mr. McLeod: I think that is an element that undoubtedly must be recognized in the 
 situation; that is to say, if it can be shown that the properties failed to earn their way in 
 the past, by reason of being prevented from charging a proper fare, and the public has had 
 the iKMietit of those lower fares, and saved a certain amount of money, that it would other- 
 wise have paid, rt might be said that it was only just that the public, who had been the 
 beneficiaries of the old scheme, should pa\ the cost of making that up, and put on to one 
 generation the burden that ought to have been borne, perhaps, by the former generation. 
 
 "\t the same time, I believe that that is a problem to be worked out by the companies 
 themselves, under the general economic scheme of regulation and supcr\'ision. and when there 
 is a new phase of the problem, by reason of the public stepping in and temporarily taking 
 charge of the properties, all that could rcisonably be expected of them would be to turn the 
 properties back in the same condition, and then, at the end of that period, if the companies 
 believe that they can put lack the values into the property by charging increased fares, there 
 is no reason why they should not do so. 
 
 "Of course, this whole matter is afTectcd by the underlyine problem as to how far th'ise 
 past values can be put back into the properties by any system of fares which may be charged. 
 
 "The Chairman : Have you not permitted the companies at any time to come before 
 your commission to get adequate revcniics? 
 
 "Mr. Mcleod: That is true, and bro.idly speaking, no claim can be made, at least I have 
 never heard of any claim at any time from any responsible source up to the present time, 
 that the unfortunate financial condition of the companies in Massachusetts was due to the 
 fact that they asked for an increased fare which was denied ; because there was absolutely 
 no jti'.tiliration for any such claim. 
 
 "In Massachusetts the rate-making power began only in 191,3. The old railroad com- 
 mission simply had a power to deal with rates upon complaint, and never really took any 
 active part in matters of rates at all; and the most that was done in the whole period of 
 the existence of the old railroad commission was to put in a few little minor rate adjustments 
 at certain points, not. however, Kised upon any valuation of the company or any determina- 
 tion as to how much money the company was entitled to earn, but upon the basis of making 
 the fares between points .'X and R consistent with the general fare scheme which the company 
 itself voluntarily had put into effect for its entire system; in other words, merely to correct 
 discriminations. 
 
 "The Chairman : Then, in so far as they are charging higher fares now to permit the 
 cnmp.iny to build up its property, it is penalizing the present passengers for the delinquencies 
 of the company in the past? 
 
 "Mr. Mcl^ixl: I think that is proliably true. 
 
 "It must he Ixirne in mind that the companies were placed in an exceedingly difficult 
 position Ijccause it was absolutely ncccssan,-, as it is necessan,- now. and necessary always, 
 that the company should l)e kepi in good financial credit, because a new inflow of capital is 
 constantly necessary ; and in nnler to get that capital they had to keep on paying dividends, 
 and they h.id to put a gtxxl fuiancial face on their properties. The moment that they would 
 come in to a commission to ask for an increase of rates, they would have to disclose their 
 nrrtls. and the disclosing of the actual condition of the company would undoubtedly have 
 affected their irclit " 
 
Dividends Preferred to Maintenance 59 
 
 Surely, there is nothing mysterious about the destruction of the Boston 
 Elevated Railway Company's credit, in the light of testimony like this. 
 
 The policy of paying dividends while neglecting current depreciation and 
 maintenance has not been confined to Massachusetts, as will be evidenced by the 
 report and order of the Board of Public Utility Commissioners of New Jersey, 
 dated July 10, 1918,^ in the matter of the application of the Public Service Rail- 
 way Company for approval of an increase in rates. In this report the New Jersey 
 commission says : 
 
 "The continuous maintenance of safe, adequate and proper service is the paramount duty 
 of a public utility. 
 
 "Such continuous service can only be assured by the maintenance of a proper depreciation 
 reserve. 
 
 "This fact is recognized in the system of accounts adopted by this Board and by the 
 company in the setting up of a depreciation reserve. This depreciation reserve is built up out 
 of the rates. In the year 1917 the appropriation for depreciation reserve, which should have 
 been credited thereto, was depleted to the extent of over 5500,000 and used to pay dividends. 
 
 "To divert to the payment of dh'idends monies credited to or zvhich should go to the credit 
 of this reserve, and so destroy the assurance of the continuance of safe, adequate and proper 
 service, is luholly unjustified and a violation of the paramount duty of the utility. 
 
 "If the earnings of a utility will not admit of the maintenance of a proper depreciation 
 reserve and a fair return upon the property used and useful, the remedy is not to be found 
 in the reduction of the amount carried to or the depletion of the depreciation reserve, but in 
 a prompt application to this Board for relief, before which the inter-related question of the 
 continuous maintenance of safe, adequate and proper service and of just and reasonable rates 
 may be considered, and all parties affected — the utility and the public — heard." 
 
 A similar situation was developed in the case of the Scranton Railway Com- 
 pany, where the City of Scranton instituted a proceeding before the Pennsylvania 
 Public Service Commission for the disapproval of the increased fares which the 
 company had put into effect under the Pennsylvania law. The Scranton Rail- 
 way Company is controlled by the American Railways Company of Philadelphia, 
 a holding company, of which Mr. C. L. S. Tingley, one of the witnesses before 
 the Federal Electric Railways Commission, is Vice-President. It developed in 
 the Scranton Railway fare case that dividends were paid by the company after it 
 had begun to neglect its maintenance. Mr. Tingley's testimony before the Penn- 
 sylvania Commission upon this point is illuminating. The extract is found at 
 pages 159 and 160 of the Brief of Complainant filed by the City of Scranton. It 
 appears that Mr. Tingley sought to excuse the action of the Scranton Railway 
 Company in paying dividends to the stockholders, while omitting ordinary main- 
 tenance on the ground that the payment of dividends was necessary to maintain 
 the company's credit and enable it to sell its bonds. Upon this point, under cross 
 examination by Mr. R. S. Houck, City Solicitor of Scranton, Mr. Tingley gave 
 the following testimony : 
 
 "Q. The dividends of 1917 and 1918 were partially paid out of the surplus of the 
 company, were they not? 
 
 "A. Yes, sir. 
 
 "Q Now, according to your testimony, during this same period the maintenance of the 
 road was considerably curtailed and neglected? 
 
 "A. Yes, sir. 
 
 "Q. Did the necessities of the road require the payment of dividends on stock? 
 
 "A. I think so, yes, sir. With a bond issue about to mature and a necessity for selling 
 new securities to replace that issue, there was necessity of maintaining our credit. 
 
 "Q. When a road neglects its maintenance does its credit likewise fall? 
 
 "A. No, because that is not a matter of financial knowledge, and it can be overcome 
 in a year or so. 
 
60 Electric Railway Problem 
 
 ••Q. It was the judgment of the management of the road, then, that it was more essential 
 to pay the dividends than it was to repair the road? 
 
 "A. To that extent; yes, sir." 
 
 On the same general subject, Mr. Oiarles A. Fagan, one of the receivers of 
 the Pittsburg Railways Company, ga%e significant testimony before the Federal 
 Electric Railways Commission, at page 620 of the Proceedings. After describing 
 the circumstances of the receivership he was asked by Oiairman Elmquist whether 
 the company had been operating successfully prior to the recent increase in 
 prices. The testimony upon this point is as follows : 
 
 "The Chairman: The condition that confronts you is due entirely to the increased cost 
 of labor, supplies and materials, is it not? 
 
 "Mr. 1-agan: 1 would say vcs tu that question. ; 
 
 "The Chairman : because up to the ri.sing tide of prices you were operatmg successtuUy, 
 
 were you not .'' ... 
 
 "Mr l"agan: Well, if you mean that from a financial standpoint, by paying the interest 
 on the capital charges, yes. If you mean satisfactorily so far as the ser\'ice of the system 
 was concerned, I would say no. In other words. 1 think this system is about at least six years 
 behind in the rehabilitation and upkeep of the physical system. 
 
 "The ChairnKiii : How many years ago did this let-down in the maintenance and con- 
 dition of the property Income apparent? 
 
 "Mr. l-agan : .\l)out six years ago. 
 
 "The Chairman: What was the cause of it six years ago? 
 
 "Mr. l-agan: Well, mv opinion is that the company in the beginning or at ditterent 
 times was over-ca!>italized ; that the capital stock was too high ; that the l)onds were not sold 
 at par: that favorite contractors were given the contracts for the building and rehabihtation 
 of the road, and that all of those things tended to the situation which finally developed." 
 
 Ur. Milo R. Maltbie. one of the last witnesses before the Commission, added 
 
 the weight of his experience and authority to the destructive etlfect of neglected 
 
 maintenance upon street railway credit. At page 2092 of the Proceedings, he says : 
 
 "It has been the law in many states for years that dividends could not be declared unless 
 earned. Some of the states have recognized in the law depreciation, and other states have 
 not referred to it specifically. Of course, it is a matter of common knowledge that in the 
 pa-st, say 20 years ago, many of the companies paid no attention to depreciation, expecting 
 that the growth oi the business and the increases in earnings resulting therefrom would be 
 sufficient to take care of replacements and renewals when it became neces.sary to make them; 
 and, of course, for a considerable time, their ex|)ectations were justified. That is exactly 
 what hai)pened : and they did not find themselves in a critical situation. 
 
 "Sooner or l:iler. however, that condition is iKUind to catch up with a company, and 
 put it in a position like the street railways were in in New York City alxnit ten years ago, 
 when they went through reorganization, in 1907, and the years following, where the lack of 
 provision for depreciation meant that the proficrty had a ser>'ice value far below the cost 
 of the property and where, when it became neccssarj- to make provision for renewals and 
 replacements, there were not sufficient sums available, and the public authorities would not 
 let them issue securities for the replacement of property. Many companies today are in that 
 silu.nlion; not all. but many of them arc in the situation where they have not adequate 
 <!iprrriati<in reserves, and where in order to meet that (lilin<|iK'ncy it is necessary to resort 
 In other metho<ls which, of course, makes it particularly difficult to secure money from any 
 financial house which has an examination made of the property before approving any con- 
 siderable amount of securities." 
 
 As has been demonstrated under the Chicago settlement ordinances of 1907, 
 rehabilitation is a very costly jiroccss. Even where the old capital account is 
 cut to tile bone, as seemed to be the case in Cliicago, general rehabilitation makes 
 a tremendous call upon the investors. It demands that they shall send a lot of 
 good money after bad. I'niess the old investors are squeezed out entirely, re- 
 habilitation almost inevitably leads to overcapitalization, strained credit and 
 costly financial arrangements. Alas the day that gave birth to the fatal thought 
 that credit can be kejit alive by dividends made possible through neglect of 
 maintenance. 
 
Chapter XIII. 
 
 OVERBUILDING 
 
 During the period wlien horses and mules were the motive power in street 
 railway operation, short Hnes and many of them were the rule. Many separate 
 companies, partially competitive, sprang up in all the principal urban centers. 
 Access to the traffic center was generally indispensable to each separate line. 
 The result was that in many cities tracks were constructed in the downtown dis- 
 tricts far beyond what would have been required under unified operation. Later 
 on, after the period of electrification and consolidation set in, many of the cities 
 still clung to the fetish of competition and gave franchises for circuitous and 
 partially paralleling routes to new companies. The new lines, after their con- 
 struction, were almost everywhere swallowed up in the general consolidations 
 forced by the monopolistic character of the street railway business. A few of 
 the competing lines still survive under diverse ownership and management. For 
 example, Dayton, Ohio, still boasts of four street railway companies, and even 
 the District of Columbia has two. In Detroit the 3-cent lines, built under a com- 
 peting franchise granted as a part of the late Mayor Pingree's campaign to bring 
 the old traction company to its knees and secure a reduction in street railway 
 fares, were soon swallowed up in the Detroit United Railway, but until very 
 recently these lines were operated as a separate system with different rates of fare 
 and transfer regulations. The City of Richmond, Virginia, furnishes another 
 illustration of the effects of competitive street railway building. During recent 
 years it has been one of the great problems of the Virginia Railway and Power 
 Company to secure from the city authorities of Richmond the right to abandon 
 lines that, in its opinion, have proven unnecessary and ought never to have been 
 built. For j'ears the Attorney General of the State of New York, at the instance 
 of the Public Service Commission for the First District, was engaged in litigation 
 to enforce the legal abandonment of street railway mileage in downtown New 
 York which had originally been constructed under perpetual franchises by separate 
 and competing companies, and which was being held in nominal use by the opera- 
 tion of a "franchise-carrying" car with an irregular 24-hour schedule. 
 
 No evidence was presented to the Commission to indicate the precise extent 
 to which the overbuilding of street railway lines in the days when competition was 
 recognized as a desideratum of public policy still survives to plague the industry, 
 but it cannot be doubted that if the problem of laying out transportation lines 
 could be tackled anew, without any embarrassment from the existence of the 
 present structures, great economies could be effected and great improvements in 
 service made by the adoption of lay-outs better adapted to the requirements of 
 electric railway traction of the present day. When Secretary Baker was on the 
 
 61 
 
62 Electric Railway Problem 
 
 stand, he was asked by Qiairman Elmquist what there is about the Cleveland 
 situation that permits the company to operate at a 5-cent schedule today and 
 meet all of its fixed charges and operating costs. ^ In reply he cited "a sound 
 capitalization," representing approximately the physical valuation of the property, 
 as the first reason for the fortunate condition in which the Oeveland Railway 
 Company finds itself. His second reason was the absence of overbuilding. Upon 
 this point, at page 1008 of the Proceedings, he says: 
 
 "Another thing, of course, is the fact that Oeveland has been a very rapidly growing 
 city, and its lines of street railroad have been extended to meet that growth solely in the 
 interest of service. 
 
 "What I mean by that is this: There has been no competition between competing lines, 
 and there has been no building; lor speculative purposes. When you have a privately owned 
 street railroad, it sometimes happens— I do not mean that this is the usual thing, but it some- 
 times happens — that the persons who manage the railroad go out and buy large farms in the 
 suburbs, and then they extend their railroad out to their farms and sell the farms cut up into 
 building lots, and they operate the street railroad as a feeder to a real estate venture. That 
 has not happened in Oeveland. because the street railroad is operated in the interest of the 
 people, and it has had no heavy losses in long hauls to sparsely settled communities, for the 
 purpose of aiding real estate speculation. That is a thing which has happened in a great 
 many street railroad enterprises, and it has not happened in Oeveland in a great many years, 
 because this settlement has been going on for a long time." 
 
 What Secretary Baker says is undoubtedly true of the development of the 
 Oeveland Railway sy>tem under the Tayler franchise, but there is little doubt 
 that in the early years, before the original competing lines were consolidated, 
 there was excess trackage in Cleveland, as in other cities. \\"hat happened in 
 Milwaukee is shown by Mr. Mortimer at pages 7i>5 and 7i>6 of the Proceedings, 
 where the following testimony is found : 
 
 "Mr. Warren: Was there any substantial increase of line going back to the electrification 
 of this system, in mileage? 
 
 "Mr. Mortimer: No; in this system, there has been no substantial increase in mileage 
 within the city limits, Ixicause the company was built up of seven separate sy.stems, many of 
 which closely paralleled one another, and in a process of gradual rehabilitation, the lines that 
 have been too close together have fieen removed ; so that while, say, at the end of the year 
 1910, there was less actual track mileage in the city of Milwaukee than there was in 1896. it 
 reached farther o>it into the residential and manufacturing districts and was much better 
 distributed to serve the population. 
 
 "Mr. Warren: .So thai there were e.xtensions? 
 
 ".Mr. Mortimer: Oh, there were extensions. 
 
 "Mr. \\ arren : But you have eliminated some unneccssan,' mileage. 
 
 "Mr. Mortimer: Yes; we have eliminated some unnecessary mileage. 
 
 "Mr. Warren; Were those different lines merged into one company, or were they all 
 in one company before that ? 
 
 "Mr. Mortimer: The Milwaukee Electric Railway & Light Company is a reorganization 
 of the Milwaukee S'rret Railway Company, and all lines were merged in the Milwaukee 
 Street Railway Company. 
 
 "Ktr. Warren: .After or before electrification? 
 
 "Mr. Mortimer: The process extended over a period of about three years, electrification 
 and merger simultaneously." 
 
 It will be seen from the above that, according to Mr. Mortimer, the excess 
 mileage resulting from horse car competition has been gradually eliminated in 
 Milwaukee and a more scientific and economical system of lines evolved during 
 the period of electric traction. I'ndoubtedly the cost of lines abandoned in this 
 way generally figures in the capital account of an electric railway company where 
 such abandonment has occurred, and goes to swell its claim on account of super- 
 seded property in the determination of fair present value for rate purposes. It 
 
Overbuilding 63 
 
 is thus a source of overcapitalization which, in turn, has a weakening effect 
 on street railway credit. 
 
 One of the unfortunate incidents in the early history of street railway 
 development was the use of different gauges in the construction of competing 
 lines. In the process of consolidation, where lines having different gauges were 
 brought together, it was necessary either to spend large sums of money for a 
 change of gauge on one set of lines, or to continue the physical operation of the 
 two sets of lines separately. The Public Service Railway Company of New 
 Jersey, for example, carries in its capital account items of expense aggregating 
 about $4,000,000 charged to "rehabilitation," which it appears from testimony 
 recently offered by the con^pany in the railway fare case were incurred in changing 
 gauges to permit unified operation in the northern part of the state. It is note- 
 worthy, moreover, that this company still has the broad gauge in its southern 
 division in and about Camden, although all of its lines in northern New Jersey 
 are of standard gauge. For many years, unnecessary trackage and uneconomi- 
 cal operation were maintained in the City of Norfolk, Virginia, by the Virginia 
 Railway and Power Company, by reason of the existence of two gauges on dif- 
 ferent parts of its system. The lines of the Los Angeles Railway, which supply 
 most of the local service in the City of Los Angeles, are of narrow gauge, while 
 the Pacific Electric lines, spreading out from Los Angeles as a center, are of 
 standard gauge, with the result that on routes where both local and interurban 
 cars are operated it has been necessary to encumber the streets with three rails 
 instead of two. No doubt there are many other illustrations not brought out 
 in the evidence before the Commission where competitive building in the early 
 days of street railroading and the use of different gauges have resulted in exces- 
 sive charges to capital account originally, and in further excessive charges for re- 
 habilitation and change of gauge following consolidation ; or else in continued 
 wastefulness in operating methods. 
 
 Not only did the electric railway inherit a large amount of overbuilding from 
 the horse car days of competition and diverse gauges, and not only did additional 
 overbuilding result after the introduction of electricity as a motive power from 
 the continued effort of the municipalities to preserve the imagined benefits of 
 competition, but the electric railway may be charged with overconstruction on 
 other accounts. The introduction of electricity gave rise to a period of high hopes 
 and intense speculation. Promoters of transit schemes thrived, and when they 
 were not engaged in the pastime of overcapitalization in connection with the con- 
 solidation of competing properties, they branched out into the highways and by- 
 ways and procured the extension of electric railway facilities into the suburban 
 and rural districts where nothing but the over-sanguine expectations of a "green" 
 art gave promise of financial success. Witnesses for the American Electric Rail- 
 way Association laid great emphasis in their testimony before the Commission 
 upon the statistics of abandonment as indicative of the poor financial condition 
 of the electric railway industry at the present time and of the danger that the 
 industry may collapse entirely, and an essential public service disappear. The 
 abandonments effected and proposed on the Bay -State lines of Massachusetts 
 have been called prominently to the attention of the Commission, and have fre- 
 
64 Electric Railway Problem 
 
 quently been referred to in the propaganda carried on by the electric railways 
 during the past two years throughout the United States. Mr. James \V. Welsh, 
 statistician for the Association, presented a list of certain electric railways, as 
 of June 7, 1919, showing sixty-two companies with 5.912 miles of single track 
 in the hands of receivers ; si.xty-one companies with 791 miles of single track 
 dismantled and junked, and thirty-eight companies with 257 miles of single track 
 abandoned, making a total of 6,960 miles of track, or about 16 per cent of the 
 total track mileage of the electric railways in the United States. The statistics of 
 dismantlement and abandonment start with the year 1915. They include 30.4 
 miles of track abandoned by the Bay State Street Railway Company. There is 
 little or nothing in the evidence presented to the Commission to show that the 
 abandonment of lines, as far as it has gone up to the present tirrie. is anything 
 other than a tardy but necessarj' recognition of the financial mistakes made in 
 the early days of street railway development. It would appear from the testi- 
 mony that the abandonment of 30 miles of Bay State track is an extremely modest 
 beginning in the direction dictated by sound financial policy. From the point of 
 view of the electric railway industry it is only the fact that lines once built create 
 a species of vested rights in real estate values and social conveniences dependent 
 upon the e.xistence of transportation facilities that makes questionable a policy of 
 wholesale abandonment of unprofitable lines. 
 
 Mr. R. S. Bauer, of Lynn, described what he learned when, as President 
 of the Lynn Board of Trade as far back as 1908, he took up the study of the 
 develo])ment of the Bay State system. He gave this significant testimony at 
 pages 1622 and 1623 of the Proceedings: 
 
 "1 fomul further that the ground hogs in the different communities, the land speculators, 
 had brought certain influences to l)ear on the Icxral govennnents which compelled the street 
 railways tu Inn'UI extensions into property lor the sake of adding rental and sale values to 
 pasture land, and the ixiliticians in charge of the localities in those times brought sufficient 
 influence to benr on the roilri>ads to compel them to build that kind of extensions, which 
 were never profit producing lines. 
 
 "So when the unit system was eventually fi>rmed. it took in all of these miles of non- 
 productive track, together with, of course, a certain number of miles of very productive track. 
 
 "Tlie Hay .Stale system has arourd one tliousand miles oi' trackage. Out of that thousand 
 miles there arc alxiut .520 miles that were built purely for speculative or competitive purposes, 
 that have never Ik-cii profit producing from the time they were first laid. They would not be 
 profit producing today at any rate of fare that the people would pay to ride on the trolleys." 
 
 In the "Statement" of Chairman McLeod for the Massachusetts Public 
 Service Commission- before the Street Railway Investigation Commission of the 
 Massachusetts legislature, November 2S, 1917, the history of electric railway de- 
 velopment in Mas.^achusctts is set forth at some length. At pages 3 to 5 of this 
 document we find the following: 
 
 "Mr. Warren has told you that Massachusetts 'has more .street railway mileage in pro- 
 portion to its )N>pulalion .md to its area than any other state in the Union,' and he is sul>- 
 stantiallv correct • • • • J\,^. t"a,-: i, iniportant and significant. Voii have be n told inat 
 people then l)elieved that electric railways were a Iwnanza, or. as Mr. Sullivan puts it. 'that 
 you could carry iieople any distance, anywhere, any time, for a nickel." But this is only 
 partially true. lU-giiuiing in 18").?. the Hoard of Railroad Commissioners, under the able 
 leadership of John !•". San ford, time and again warned investors against this belief and 
 demc iislratcd its falhcv in great detail • • • » 
 
 "The fart is that Massachusetts was beset, in the nineties and even later, by a throng 
 of promoters who laid out lines anywhere and everywhere, bid against each other, and in 
 their eagerness for lix-ations accepted franchise grants subject to burdensome restrictions. 
 The subsequent disregard of these grants, which the local authorities supposed were binding 
 
Overbuilding 65 
 
 contracts, has, as you know, been a fruitful source of public irritation. In a number of cases 
 they have been carried to the courts. You may wonder why this craze for building should 
 have fastened upon a state where the law permitted no bonus stock and where no promoters' 
 profits were directly recognized. Such profits were, of course, in some way secured. The 
 fact seems to be, as nearly as we can determine it, that the promoters awarded to themselves 
 the contracts for construction, that the Board of Railroad Commissioners, until 1902, had no 
 power to prescribe standards of construction; that it was dependent in the supervision of 
 security issues, until 1902, upon experts paid by the companies themselves; and that there 
 has never been any regulation of the creation of floating indebtedness. The result was that 
 many of the roads were poorly and cheaply built, and it is a fair deduction that costs were 
 at times less than the estimates upon which security issues were based, and that the promoters 
 added the difference to their profit and further enriched themselves, in some cases, through 
 the medium of floating debt. 
 
 "An even worse result was that this thirst for construction profits led to the building 
 of many badly-located roads, with no reasonable financial excuse for existence. * * * Xhe 
 building of these ill-advised, poorly-designed and cheaply-constructed roads has been an 
 important factor in producing the situation which you are now considering." 
 
 In his testimony before the Commission, at pages 1435 and 1436 of the 
 Proceedings, Mr. McLeod emphasized the effects of overbuilding upon the present 
 condition of the companies. His testimony is : 
 
 "In Massachusetts the financial stability of the street railway industry has been impaired 
 by overproduction. Massachusetts has more street railway mileage in proportion to its 
 population and area than any other state in the Union, and this mileage is not only large in 
 amount, but in many cases badly located. This condition is the result of the era of speculation 
 in street railway building which set in with the advent of electrification. Competitive lines 
 were built where there were traffic possibilities for a single line only, and the lines were 
 extended anywhere and everywhere into the sparsely settled rural districts where there was 
 no reasonable financial excuse for building at all. It might have been better in the long run 
 if this boom period had been allowed to run its natural course, if unnecessary lines had then 
 been abandoned and if a number of small companies which had sprung up during this period 
 of mushroom growth had reorganized by scaling down their securities to correspond with the 
 traffic possibilities of the territories they served. Instead, these speculative companies were 
 saved from prospective bankruptcy or the scrap heap by the policy of consolidation, under 
 which they were taken over, with all their questionable debts and obligations, on a share-for- 
 share basis by the more prosperous urban companies. From this union of prosperous and 
 potentially bankrupt companies there emerged a number of street railway systems with just 
 sufficient vitality to keep their heads above water during fair weather, but incapable of meeting 
 the stress of hard times and war conditions." 
 
 Mr. Richard T. Higgins, Chairman of the Public Utilities Commission of 
 Connecticut, indicates by his testimony that overbuilding was not unknown in that 
 state. At page 1108 of the Proceedings, he says: 
 
 "During the era of street railway development many lines were extended into rural 
 sections. These sections developed because of the e-xtensions and became dependent upon 
 the trolley for transportation, but the volume of traffic now received on many of these lines 
 is not sufficient to pay operating expenses." 
 
 Again, at page 1111, he says that "in the pioneer days of street railway 
 operation, when the street railway business was more or less profitable and the 
 nickel was worth a good deal more than it is today, the spirit of greed or avarice, 
 high financing, possibly of extension of unprofitable lines, crept into many 
 companies." 
 
 Thus far I have discussed overbuilding in the form of unnecessary trackage 
 constructed originally as a result of competition or as the result of the pressure 
 of real estate interests or as a result of optimistic promotion. Attention should 
 further be called to the overbuilding that has progressively characterized the 
 development of the electric railway right down to the war period. I refer to 
 the tendency almost everywhere manifested during the fifteen or twenty years pre- 
 ceding the invention of the one-man safety car to install heavier and heavier track 
 
66 Electric Railway Problem 
 
 construction and heavier and heavier equipment in connection with the replace- 
 ment and extension of street railway property. A large amount of the additional 
 capital that has gone into the electric railway business during its period of phe- 
 nomenal expansion has been required by this increase in the size and weight of 
 cars and the weight of rail, and by the larger power plants required on account 
 of the heavier equipment. While the testimony before the Commission is in- 
 complete on this point, it is noteworthy that the Committee on One-Man Car 
 Operation of the American Electric Railway Transportation and Traffic Asso- 
 ciation, in its report, presented at tiie .-\llantic City convention in October, 1919,* 
 called attention to the fact that two large street railway systems reported their 
 purpose to reduce the weight of rail to the extent of 20 per cent to 30 per cent 
 if safety cars become the standard type of equipment in the future. The safety 
 car itself, weighing less than half as much as the average double-truck modern 
 car in use on city systems, and only a fraction as much as the big interurban 
 cars, represents a much smaller investment per passenger seat than is represented 
 by the old type of cars. While there is still considerable mystery and doubt 
 about the revolution fn street railway equipment and operation predicted bj' Henry 
 Ford, it is significant, nevertheless, in connection with this matter of overbuild- 
 ing, that Mr. Ford's engineer, in an interview recently published, is reported to 
 have said that with the new type of cars a 40-pound rail would be ample in place 
 of the 91 -pound rail now used by the Detroit United Railway.* No doubt the 
 municipalities have been in part responsible for the introduction of extremely 
 heavy types of rail in many places. Upon the assumption that heavy, grooved 
 rails were essential for the protection of the pavement and the preservation of a 
 smooth street surface, this type has been required by franchise, contract or by 
 ordinance in a great many cities. 
 
 It seems clear that overbuilding in its various forms has been one of the 
 most important factors in swelling the capitalization and the construction accounts 
 of the electric railways. Its effect upon credit could not have been otherwise 
 than adverse and cumulative, particularly when the idea dawned upon the hori- 
 zon of the street railway investor that many street railway lines and an enormous 
 amount of street railway equipment were becoming obsolete as a result of auto- 
 mobile competition and a sharp reversal of the tendency of development in the 
 street railway art. 
 
I 
 
 Chapter XIV 
 HOLDING COMPANIES AND BANKER CONTROL 
 
 It has been said that the electric railway companies of Massachusetts have 
 always been nearly free of initial overcapitalization, and the conservative figures 
 of capital stock and bonds outstanding per mile of track seem to bear out this 
 statement. Those who wish to gloss over the evil eftects of overcapitalization on 
 credit and to treat it as a "dead issue" at the present time point to Massachusetts 
 for their proof. We have seen that there was some "water" in street railway 
 capital even in Alassachusetts, that the roads were recklessly overbuilt and that 
 they grossly neglected to provide for depreciation. But the evidence goes farther 
 and show's that the holding company nuisance developed in Massachusetts as a 
 means of evading state regulation and creating overcapitalization in the street 
 railway industry in spite of laws and commissions. There are those who would 
 excuse the optimism of early promoters and speculators on the theory that ordi- 
 nary good business judgment was used in the development of the electric railway 
 industry and that the men who built and managed the roads twenty or twenty- 
 five years ago did not foresee and could not have foreseen the disappointments 
 that were in store for the industry even before the Great War brought on the 
 present crisis. This view is clearly controverted, at least so far as Massachu- 
 setts is concerned, by the annual reports of the Massachusetts Board of Railroad 
 Commissioners, extracts from which appear as an appendix in the documentary 
 "Statement" filed by the Massachusetts Public Service Commission with the 
 special legislative investigating committee of 1917. For instance, the Twenty- 
 Fourth Annual Report of the Railroad Commission, for the year 1893, right in 
 the heyday of electrification, contains the following statement at pages 105 and 
 106: 
 
 "There is an active 'boom' in electric railway building and speculation now in progress. 
 It is stimulated by the apparent cheapness of electricity as compared with horse power, by the 
 expectation of large profits, and in some cases probably by the hope of successful deals in 
 the securities of the company. Little attention is paid to the fact that the plants and equip- 
 ments of the companies using electric power are new. that their cost is charged to construction 
 and not to expense, and that the point has not yet been reached where extensive repairs and 
 renewals are required. When this point has been reached, and the cost of repairs and renewals 
 is charged to the current expense of operation, the margin of apparent profit which is now 
 shown by some of the companies will probably be materially reduced. 
 
 "The horse railway has been usually a local enterprise, built by home capital, and con- 
 trolled by residents of the city or town in which it was located, whose interests were identified 
 with those of the community which the railway served. It is notorious that to a large and 
 increasing extent our street railways are passing into the control of syndicates and traction 
 companies, so called, organized in other states whose easy-going laws allow to corporations 
 there formed a license which is forbidden in this State. The stock of the railway company is 
 bought up. in some cases at prices much beyond its market or intrinsic value, is conveyed to the 
 syndicate or traction company, or to trustees for its benefit, and the purchasing syndicate or 
 trust, as it is said, thereupon proceeds to make, without regard to the amount of cash paid in 
 or paid out, largely watered and inflated paper issues of its own stock and securities, upon 
 which the public using the railway is expected somehow to pay a return. Such speculative 
 
 67 
 
68 Electric Railway Problem 
 
 deals and stock operations are against public policy if not against public morality, and tend to 
 the introduction of a system and method of financial and business management which in the 
 end must prove pernicious to the interests of the public." 
 
 Again, in the report for 1894, the Railroad Commissioners discussed the 
 financial prospects of electric traction as compared with horse railway operation, 
 and, after pointing out that the cost of renewals and replacements was not yet 
 being felt, reached the following conclusion at pages 109 and 110 of the 
 report : 
 
 "We must conclude, then, taking everything into the account, that there has t>een thus 
 far no demonstration of the superior net earning capacity of the electric as compared with 
 the horse system, but rather the reverse. It is not, however, intended to raise the inference 
 that the electric system is, or is likely to prove, under conservative and proper management, 
 a serious financial failure. The conditions attending its further and fuller development will 
 probably l)c found to differ in no essential respect from those attaching to the old horse rail- 
 way system, or to the steam railroad system. .\ well located and well inanaged electric rail- 
 way, it may be fairly said, stands a similar chance of financial success with a well located 
 and well managed railroad or horse railway. Upon the present showing and outlook, it cer- 
 tainly stands no better chance. If ladly located or badly managed, there clearly has not 
 been manifestecl as yet any miraculous power in its peculiar system of locomotion to save it 
 from the familiar fate of the railroad or horse railway when struggling under the same 
 difficulties. 
 
 "It can and should be said, however, without hesitation or qualification, that the electric 
 system has not shown or indicated any such margin of profit as to justify the expectation of 
 more than moderate and ordinary returns on money legitimately invested in it. The idea, 
 which seems to have obtained some currency, that the electric railway system is a bonanza 
 of rare and inexhaustible wealth, is clearly a delusion, and has doubtless proved to some a 
 snare. The absolute cost and expensivencss of the system, under the most conser\'ative, 
 able and honest management, are sufficient to task its earning capacity to the full limit. 
 There is no margin for fictitious or inflated capitalization. It presents no safe or inviting 
 field for speculative enterprise or manipulation, unless it be to the un.'icrupulous operators 
 of an inside ring who are willing to practice on the credulity of a misinformed public. Wher- 
 evcr there is reason to Ix-lieve that water has been, or is about to be, injected into the stock 
 or bonds of an electric railway company, the only safe course is to let its securities severely 
 alone. 
 
 "Instcid of inflating the li.nbilities and straining the earnings and surplus for the di- 
 vision of ostensible profits, the manifestly safe and imperative policy for the electric com- 
 panies — and that without special regard to the present unusual stringency of the times — is 
 to keep the capitalization and charges upon income within the narrowest practicable limits. 
 and to set apart year by year some substantial portion of the earnings as a fund for future 
 contingencies, and for the increasing burdens of expense which are sure to come and whose 
 weight is now only partially felt or known." 
 
 The extent to which Massachusetts street railways are now controlled by 
 holding companies, and the way in which these companies have brought about 
 overcapitalization outside of the law is shown by the following extract taken 
 from pages (•> and 7 of the Massachusetts Commission's "Statement" of Novem- 
 ber 28. 1917: 
 
 "To facilitate the process of consolidation, and for other reasons, stock control of many 
 of the companies was acquired by holding companies, organized without express statutor>' 
 authority in the fonn of voluntary associations or express trusts. Last year, excluding the 
 Boston KIcvated. out of a total $52.4J4.IO(f common stock of all operating companies, 
 stock anmunting to $,?9.476.88<). or 75 per cent, was in the hands of these voluntarj- associations. 
 Ah our .^uprrtnc Court has said, 'they are not corporations, although they are organized with a 
 view to exercise many of the privileges of corporations without assuming their statutor>' liabili- 
 ties.' Their securities liaN-c been issued entirely without public regulation. As a rule, they have 
 both common and prcfcrrctl shares. The common shares arc practically all "water" and the in- 
 flation in some cases extends to the preferred issues. By this means large profits were in some 
 case rraix-d by the organizing syndicates. Not a few investors have purchased shares of 
 these holding companies in the belief that they were buying the securities of Massachusetts 
 public .service roriioralion-. i>>ue<l under public supervision. M.iiiy more have been inisletl 
 by the wnni "preferretl." failing to realize that the frfffrred shares of these associations 
 were no letter than and frequently not so good as the common shares of the underlying 
 street railway companies. The effort to inaintain dividend payments upon these inflated se- 
 
Holding Companies and Banker Control 69 
 
 curities has at times proved injurious to the underlying properties. The failure of these 
 associations to satisfy expectations, and the consequent disillusionment of investors, has 
 impaired street railway credit generally. You will find that many of the investors who have 
 appeared before you are holders of these 'watered' shares." 
 
 These facts were further emphasized by Chairman McLeod and Interstate 
 Commerce Commissioner Eastman in their testimony before the Commission. At 
 page 1447 of the Proceedings, Mr. McLeod says : 
 
 "A great part of the street railway management of the state, and a large number of 
 the companies in the state, very much more than the majority, outside of the Boston Elevated 
 Company, is represented by holding company control ; and the securities underlying the 
 street railway company are taken over by the liolding company, either as a single asset or 
 in conjunction with the assets of other companies; and the holding company floats a set 
 of new quasi-securities of its own and markets those ; and of course those are handled 
 through the investment bankers in the same way as ordinary industrial issues. 
 
 "The Chairman : So that the investment bankers were putting out a security, then, 
 without examining the physical condition of the property ? 
 
 "Mr. McLeod : I do not know to what extent they examined it ; but an examination 
 ought to have disclosed, if it were an intelligent examination, the fact that the property 
 during this entire period was not on a self-supporting basis." 
 
 Mr. Eastman's prepared testimony on this subject is found at page 2058 
 of the Proceedings, where, in enumerating the causes for the bad present con- 
 dition of the Massachusetts street railways, he says : 
 
 "In the third place a factor of weakness. I think, was the control of the companies in 
 many instances by holding companies organized in the form of voluntary associations, or to 
 use a more technical term, express trusts. Although the stock and bonds of the street railway 
 companies themselves were issued under public supervision, these voluntary associations which 
 corralled all their stock were subject to no regulation whatever and issued shares upon an 
 inflated basis, and that had the result of accentuating the desire to draw every possible 
 drop of income out of the underlying companies that could be secured in order to support 
 earnings upon the inflated shares of these voluntary associations." 
 
 Later on, Chairman Elmquist brought Mr. Eastman back to the subject of 
 holding companies, and the latter reiterated and amplified his previous statement. 
 This additional testimony appears at page 2075 of the Proceedings: 
 
 "The Chairman : You were discussing the holding companies and mentioned that as one 
 of the weaknesses of the Massachusetts system. To what extent is a holding company a 
 weakness in the system of operation? 
 
 "Commissioner Eastman : ^\'ell, I think it is a weakness in this way, where the securi- 
 ties of the holding company are issued on an inflated basis as they were in Massachusetts, 
 that two things result : 
 
 "In the first place, there is a tendency to draw from the underlying companies every 
 r-ossible cent which you can in order to make a showing on these inflated securities ; and 
 outside of that, there was in Massachusetts a very deep seated tendency to mislead investors. 
 For instance. I have known of investors who bought preferred shares of the Massachusetts 
 Electric Companies, which was the holding company, which controlled the Bay State, and 
 they were under the impression that they were buying preferred stock of the street railway 
 company, whereas the preferred shares of that holding company were no better than the common 
 stock in the underlying company. Now, when they are disillusioned by their experience, that 
 all tends to injure the credit of street railway companies." 
 
 The extent to which holding companies have come into control of public 
 utilities throughout the United States is shown by a note that appears in printed 
 "Memoranda and Data Submitted to the Officials of the Treasury Department 
 and referred to in the correspondence between the President and the Secretary 
 of the Treasury, January 8, 1918," prepared by the special committee of three 
 representing the joint electric, street railway and gas interests of the country,^ 
 which states : 
 
 "Approximately 75% of the public utilities of the country are owned in whole or in part 
 by so-called holding companies which are responsible for financing the operating companies. 
 
70 Electric Railway Problem 
 
 This financing is done tliroufih the securities of the parent company, which securities are 
 supported by the securities of the various operating companies. This gives a strength to 
 the securities of the parent company which a single localized operating company could not 
 present. It it were not for the supporting strength of these parent companies many of the 
 individual o|)crating companies would have gone under hcfore Januan' 1. 1918. It is essential 
 that any arrangement for assisting the general public utility financing should be broad enough 
 to include within its provisions these parent companies. If the Government financial aid is 
 extended through the parent companies wherever possible, the process will be very much 
 simplified and the demands upon the guaranty fund on the part of the Government reduced 
 to a relatively nominal amount." 
 
 Mr. Richard Schaddelee. a manager of several street railways in the Middle 
 West, who testified before the Commission on behalf of the Electric Railway 
 Association, expresses the opinion that the holding companies have been instru- 
 mental in postponing the bankruptcy of some of the operating companies. At 
 page 871 of the Proceedings, he says : 
 
 ".\nother reason a good many street railway companies are not yet in bankruptcy is 
 due to the fact that there are .some strong holding companies standing back of them and 
 they are putting the credit tx;hind those companies, that is. they are holding a lot of them 
 up. and if they were standing on their feet there would be a whole lot more bankrupts than 
 there arc now. That is another thing you have to consider." 
 
 The evidence submitted to the Commission on the theoretical functions and 
 practical workings of holding companies in the country as a whole was much 
 more meagre than the evidence with respect to their activities in Massachusetts. 
 Mr. Marion M. Jackson, representing Mayor James L. Key, of Atlanta, placed 
 upon the record considerable testimony on the ramifications of holding company 
 control, particularly in the South and West, and the matter of concentrated finan- 
 cial control was referred to by Mr. W. Jett Lauck in his Brief for the Amalga- 
 mated Association of Street and Electric Railway Employes. Also, Mr. James 
 L. Quackcnbush, general counsel for the Interborough Rapid Transit Com- 
 pany of N'ew York, described from his point of view the relation of the Inter- 
 borough-Metropolitan Company and its successor, the Interborough Consoli- 
 dated Corporation, to the Rapid Transit lines and the surface lines of \ew York. 
 Mr. Morris L. Cooke, fomier Director of Public Works of the City of Phila- 
 delphia, organizer of the two national conferences on public Utilities that were 
 held in Phil.idelphia during the Hlankenburg administration, and acting director 
 of the Utilities Bureau, referre<l in his testimony to his pamphlet "Snapping 
 Cords"' published in 1913, in which he commented upon "the changing attitude 
 of American cities toward the utility problem." At pages 5 and 6 of this pam- 
 phlet, a copy of which he filed with his testimony, at page 1690 of the Proceedings, 
 Mr. Cooke has this to say about the methods by which public service corporations 
 have been overcapitalized and about the banker's role in the financial drama : 
 
 "We .should understand the way in which the so-called 'water" has been introduced 
 into the securities of these comp,inies. 
 
 ".•\t the l>CKinninK ol the process stands a hanker who. having purchased all or prac- 
 tically all of the stock of a lix-ally owned property, proceeds to introduce better methods 
 of ninnagcment and to improve and extend the equipment, accepting for the money advanced 
 for such pnr|>oses whatever security the company is able to issue. 
 
 ".•\s s<H>n as the earnings ..f the com|Mny reflect these improved conditions, or results 
 are sufficiently assured to warrant an adequate engineering repon, a plan of reorganization 
 is dcvi.sed. 
 
 ".\ company is formed to take over one or more smaller companies. This company 
 usually authorizes ciiouRh b<inds to provide for the refunding of all the mortgage indebted- 
 ness of the comiMiiics consolidated and to pay back to the lianker the monev expended by 
 
Holding Companies and Banker Control 71 
 
 him in the purchase of the stock of these companies and also the improvements made and 
 sometimes a cash profit besides, but this is not usual. Very often they do not get back all 
 of the money put out. But you will recognize when they do get back all of the money put 
 out, the stix:k of the company becomes theirs for services without any actual cost. 
 
 "Preferred and common stock are issued in amounts according to the particular plan. 
 The preferred stock is generally sold as soon as the earnings make this possible for cash, 
 which is either profit or to a considerable extent profit and the common stock representing 
 the control of the company and its prospects has a material immediate \'alue on account of 
 this. Very often, a considerable part of the preferred has to be used for greasing the 
 wheels. Up to this point, with slight variations, the process is as old as the modern cor- 
 poration." 
 
 Mr. Cooke then describes the holding company as the banker's next device 
 and shows the part it has played in overcapitalization. At pages 6 and 7 of his 
 pamphlet, Mr. Cooke says: 
 
 "It is the ne.\t step — the formation of the holding company — which has caused so much 
 criticism. As a device for the injection of water the efficiency of the holding company com- 
 pares with the high finance which preceded it as a high pressure fire main does to a garden 
 hose. Thus, a banker having the stock of several companies, the aggregate of which pro- 
 duces a considerable sum in dividends, forms what is known as a holding company and he 
 turns the stock which he holds into this company for what is known as collateral trust bonds, 
 and preferred and common stock. He sells the bonds, thereby getting cash for his stock 
 which he turned into the company, without losing control of the individual company. There 
 are a number of instances where several small holding companies have been turned into one 
 large holding company. The end is not yet. 
 
 "The only serious defence I have ever heard made of this method of fiancing is based 
 upon a belief in the absolutism of prii-ate property, for certain it is that the capitalization 
 of a company under this method of financing has no relation whatever to values. 
 
 "Of the $8,000,000,000 or more of capital, employed in electric, gas, street and inter- 
 urban railway companies, nearly five and a half billion dollars are controlled by holding com- 
 panies and their subsidiary companies. Holding companies control 76 per cent, of the two 
 billion dollars of capital invested in electric light and power companies ; two-thirds of the 
 one and one-third billion dollars in artificial gas companies, and two-thirds of the five billion 
 dollars of capital in street and interurban railway companies." 
 
 The early syndicates and private banking houses were undoubtedly respon- 
 sible for the inflation of securities and the frauds perpetrated on the investing 
 public. How these niatters worked in the early days of electricity is vividly 
 described by Mr. Lauck at pages 17 and 18 of his brief, where he says: 
 
 "Adventuring in the financial exploitation of street railways on a large scale dates from 
 
 the early eighties, and more particularly from the beginnings of cable-line construction and 
 electrification of horse car lines, and extended over a period of more than a quarter of a 
 century. During the eighties and nineties few, if any, restrictions through state or municipal 
 laws and regulations were thrown around operations of this character, the 'game' was new, 
 opportunities were innumerable, and the practice was almost universal. Every city had its 
 traction speculators, the public was uninformed or indifferent, and, therefore, gullible, and 
 enormous fortunes were made in a few months or a few- years of frenzied financiering. 
 Shrewd men were quick to see the possibilities in this field, and, as might have been expected, 
 a few of the more shrewd and more energetic speedily associated themselves in groups or 
 syndicates to conduct their operations on a large scale and to monopolize the opportunities. 
 One such group in its personnel, its methods, and its performances is typical of all, and for 
 the purposes of illustration we may cite what was popularly known as the Widener-Elkins- 
 Dolan-Whitney-Ryan syndicate. This group of capitalists and political manipulators was 
 not a compact corporation, it had no legal existence, and did not always act as a unit, and 
 has been described as 'rather a federation of capital than a well-defined union.' 
 
 "In the course of twenty to twenty-five years these men, w-orking separately or together, 
 entered city after city and State after State until they controlled or dominated the street railway 
 systems in New York, Chicago, Philadelphia and Pittsburgh, and in at least one hundred 
 smaller cities and towns in seventeen states. The total capitalization of the street rail- 
 ways they thus controlled in 1907 exceeded one billion of dollars, which was considerably 
 more than one-fourth of the capitalization of all the street railways in the United States at 
 that time. Their power in politics was as potent as their exercise of it was pernicious. .Their 
 profits in the aggregate are not ascertainable from authentic records, but may be estimated 
 at hundreds of millions, for these profits represented not merely the water which they in- 
 
72 Electric Railway, Problem 
 
 jected into the securities of the companies they controlled, but the market price — often two 
 or three times the par value — at which they were able to unload these watered securities on 
 the investing public." 
 
 Things quieted down sontcwhat after state regulation became general, but the 
 early syndicates were succeeded by the modern holding companies, engineering 
 and management cotporations, and investment banking houses, all of which were 
 free from publicity of accounting and regulation by the state public utility 
 commissions. The control and financing of street railway companies became 
 more centralized than ever. The advantages of local ownership were lost, and the 
 appeal was made from the local investors, who might know what was going on, 
 to the great investing public of the nation as a whole, who probably would be 
 "innocent" of such knowledge. 
 
 Mr. Francis H. Sisson, of the Guaranty Trust Company, in discussing the 
 issuance of bonds in street railway financing transactions, at page 345 of the 
 Proceedings, says: 
 
 "Misht I add that I think one of the fallacies of our public utility financinR, which 
 has been particularly true of the railroads and in a measure true of street railway lines, has 
 l)een the building up of this burden of debt (tionds) all the time, instead of making the stock 
 attractive so people will buy it. We have been piling up fixed charges instead of giving 
 these roads a credit based upon earnings which would permit a sale of stock to the public 
 at a fair price. The railroad burden of debt has been increasing ratably year after year, 
 because you cannot sell railroad stock, the public will not buy it, because it is not assured 
 of a fixed return. 
 
 "Mr. Warren: We have a law in Massachusetts designed to provide for that, by which 
 funded debt can be issued only to the par \-alue of the stock, and as the stock can only be 
 issued at par. the result has been the piling up of a floating debt which is far more inimical, 
 because it invites a receivership over night. 
 
 "Mr. Sisson : A proper financial construction ought to provide for a bonded obliga- 
 tion of not more than 60 per cent of the real value and the balance in stock." 
 
 Strange as it may seem, these unsound policies are probably due in large 
 measure to the fact that the electric railways have come to be, to a great extent, 
 a banker-controlled industry. Those who have the ultimate say in matters of 
 street railway policy from the point of view of the investors have been dependent 
 for their profits and their power upon the volume of securities outstanding and 
 the frequency with which these securities were exchanged or refunded. The 
 big margins are made on the bankrupt or semi-bankrupt concerns. But in the 
 case of the electric railways the controlling financial interests that profited by 
 keeping them in a speculative and precarious condition carried their policy too 
 far, even from their own point of view. The war came on and the enfeebled sick 
 man suddenly had fainting spells, so that the doctors who had been keeping 
 him in condition to require their services found themselves in serious danger of 
 losing a lucrative patient and in danger even of being called upon to contribute 
 to the expenses of his obsequies. Under these circumstances, the problem of 
 rehabilitating street railway credit generally comes pretty nearly to being a prob- 
 lem of restoring the dead. 
 
 The facts of street railway history substantially bear out the testimony of 
 E.y-Governor Eugene N. Foss, of Massachu.sctts, who at page 792 of the Pro- 
 ceedings referred to the evils of banker control, h.iving in mind particularly the 
 steam railroads. He said : 
 
 "Ranker management has got to cease from all of these railroads and public service 
 corporations. It is a failure. Why? Because the temptation to wreck these roads and re- 
 
Holding Companies and Banker Control 73 
 
 organize them is too great. They do it every ten years or thereabouts, and that is what 
 happens. Do these railroad presidents and these railroad managers who own very little of 
 the stock of the companies, you will find — do they ever consult their directors or stockholders 
 in reference to any measures? No. they go right down to Wall Street and talk with the 
 banker who is running the proposition. That is the man who appointed them, the banker, 
 not the directors." 
 
 Another Massachusetts witness, Mr. Ralph S. Bauer, of Lynn, described his 
 study of the development of the Bay State lines, and paid his respects to banker 
 management in no uncertain terms. At page 1622 of the Proceedings, he said : 
 
 "In the early days of the street car service there were four competing companies in 
 Lynn, each one of them to a very large extent paralleling or feeding into the other's terri- 
 tory, a waste of investment, a waste of service, a condition that really forbade, if extended 
 to any great extent, a return on the capital invested. 
 
 "Then I found that a little later on in the nineties, banking interests in New England 
 became interested in the street railway problem, and believed that by consolidating these 
 competing companies there could be evolved from such consolidation a unit system which 
 would pay tremendous profits. Securities were advertised and sold with that statement con- 
 nected with them, through the most responsible banking houses in New England. 
 
 "It created a state of mind in everj'one that the street railway service was a tremendous 
 profit-producing arrangement, and that all anyone had to do was to invest in securities and 
 in a year or two lie back and reap the reward." 
 
 Further on, at page 1625 of the Proceedings, Mr. Bauer adds: 
 
 "The banker control of our street railways has been the real reason of their existing 
 during all these years without anyone finding what the real question was, without anyone 
 understanding the philosophy relating to the community on the one side, the car riders on 
 the other and the street railway system as a factor in both. They have regarded it purely 
 as a speculative dollar-producing arrangement, nothing else. Their whole drive has been 
 along that line. And the time has come now that any rate of fare which will pay a return 
 on the capital invested is a larger rate than that at which the people will ride. Therefore, 
 the thing that presents itself to you men as I see it is to recommend some readjustment of 
 the railway service that will restore to the communities the service-producing possibilities 
 that the communities are entitled to have from that factor.'' 
 
 Mr. John J- Stanley, president of the Cleveland Railway Company, in his 
 testimony before the Commission, rather naively gave support to this idea that 
 the investment bankers are primarily interested in concerns whose credit is poor 
 rather than in those whose credit is good. Chairman Elmquist was questioning 
 him about the benefits of the Cleveland service-at-cost plan. At page 598 of the 
 Proceedings the following questions and answers appear: 
 
 "The Chairman : Do you think this is as good a plan as can be devised to take care of 
 the companies, as well as the public, during good as well as during bad times? 
 "Mr. Stanley : Yes. 
 
 "The Chairman: Do you feel that this plan establishes a good credit for the company? 
 "Mr. Stanley: Without a doubt. I do not know what a banker is in my business. 
 "The Chairman: And creates an absolutely safe return for capital? 
 "Mr. Stanley : Yes." 
 
 There can be no doubt that the exceptionally good credit of the Cleveland 
 Railway Company during these troubled times has been due in large part to its 
 simple corporate organization and its direct relation to the local investing public. 
 The Cleveland Railway has been operated as a public utility, not as a stock- 
 jobbing enterprise. That holding companies and banker control have "made a 
 mess of it" in trying to finance the electric railway industry is reasonably clear. 
 The record does not show the extent to which the holding companies outside of 
 Massachusetts have been overcapitalized, but there is reason to believe that they 
 have taken advantage of their freedom from publicity of accounts and from regu- 
 
74 Electric Railway Problem 
 
 lation by public service commissions to pursue the same policies which the electric 
 railways themselves pursued until they were stopped by law. 
 
 The first fundamental cause of the electric railways' loss of credit is un- 
 doubtedly their false basis of capitalization and the improper use made by them- 
 selves or on their behalf of the credit which they had. Ever since the introduc- 
 tion of electric traction, if not before that time, they have been "riding for a fall." 
 
 Overcapitalization served two purposes: it was a means by which pro- 
 moters and speculators in the early days were enabled in many cases to build up 
 big fortunes through the sale of securities that represented little or no investment. 
 It was also a means, under certain circumstances, of artificially stimulating credit 
 and enabling companies that needed new capital for construction purposes to get 
 it, albeit upon difficult and disadvantageous terms. It is reasonably clear that 
 direct overcapitalization of the electric railways and the holding-company device 
 for securing additional capital that could no longer be secured directly by the 
 electric railways, resulted in an inflation of credit which in the nature of things 
 led inevitably toward a day of reckoning, regardless of the occurrence of an un- 
 expected emergency such as the World War. Electric railway credit must needs 
 have been like a cat with its proverbial "nine lives," to withstand the multiplied 
 follies of financial mismanagement that have characterized the development 
 of the industry. 
 
Chapter XV 
 THE UNIFORM FIVE-CENT FARE 
 
 It is apparent that the reasons already adduced, inherent in the spirit and 
 policies of the electric railway industry as it has been built up in this country, 
 leave little to be desired in accounting for the wrecking of credit that has taken 
 place. Still, to make the picture complete, it is necessary to point out a number 
 of influences, which were in a measure external to the industry, that contributed 
 to the ultimate result. I refer to certain types of restrictions imposed by public 
 authority and to certain reactions of public sentiment which have characterized 
 the public relations of the industry. Undoubtedly the uniform inflexible 5-cent 
 fare in its inception represented a more or less unconscious conspiracy between 
 the public and the promoters of the street railway business to relieve the com- 
 munities in their organized capacity from the necessity of treating local trans- 
 portation as a public function, and to put the business of local transportation on 
 a basis that would encourage private speculation and the exploitation of trans- 
 portation service for private profit. The fixed 5-cent fare was in the early days 
 the very corner-stone of the towering structure of capital inflation built up by 
 the promoters and manipulators of the industry. The fact that labor costs were 
 low, and the hope that economies resulting from the use of electricity as a motive 
 power would make the 5-cent fare an inexhaustible gold mine in urban commun- 
 ities, were largely responsible for the speculative spirit and the unsound policies 
 that characterized the industry. It was not foreseen in 1896 that the time would 
 come when the purchasing power of the gold dollar would undergo a shrinkage 
 of 50 per cent. The margin of profit in a 5-cent fare under the old conditions 
 was sufficient to encourage speculation and to promote overcapitalization and 
 neglect of depreciation. .\t that time the fixed 5-cent fare was looked upon as a 
 guaranty of continuously increasing earning power for the street railway busi- 
 ness, and in this way the inflexible fare, which the street railway men now regard 
 as a fatal limitation upon earning power, was an indirect means of stimulating 
 the abuse of street railway credit in the ways which I have already pointed out. 
 
 I have already cited Mr. Newman's testimony where he pointed out that in 
 the old days bankers and promoters insisted upon having the 5-cent fare provi- 
 sion in their franchises. It is a strange irony of fate that the 5-cent fare, which 
 was then eagerly sought for and became the basis for almost unlimited specula- 
 tion and inflation of securities, should later on, by its inflexibility, have been a 
 cause of the destruction of credit. General Tripp, after describing the bank- 
 ruptcy and partial disintegration of the New York Railways Company, incor- 
 porated as a reorganization of the old Metropolitan Street Railway Company, 
 expressed very emphatically the view that the inflexible fare was a condition that 
 
 75 
 
76 Electric Railway Problem 
 
 made the destruction of credit inevitable, in the war emergency, and that, if 
 retained, will make the restoration of credit impossible. Upon this point he 
 testified at page 151 of the Proceedings, as follows: 
 
 "Mr. Warren: Would vou sav that that situation had resulted entirely from the reduced 
 purchasing value of the nickel, or, to state it in another way, from the increased cost of 
 labor and materials and operating expenses generally? 
 
 "Gen. Tripp : Yes, sir. 
 
 "Mr. Warren: .^nd which was something which was entirely unforeseen when the re- 
 organized property was launched? v 
 
 "Gen. Tripp: Yes. sir. Of course, we acted, and we were all livmg m a fools paradise 
 in the street railway business and \vc suddenly woke up when the war woke us up. to find 
 that no business which cannot increase its revenue under any conditions can live or is sound. 
 The street railway credit, in my opinion, can never l)e restored under the present system of 
 relationship between the municipalities and the companies. It is necessary to have a credit 
 on a basis that is good not for two years or three years, but for long periods. Capital stock 
 never falls due. Bonds usually run for from 20 to 30 years, and in order to attract private 
 capital into that class of securities hereafter, there must be a basis of relationship which 
 will reasonablv assure the investor that for the period for which they are to use his money, 
 there is a reasonable assurance that he will receive a return, and that he will be protected 
 against unforeseen and unusual things, such as this war has brought alxsut." 
 
 T.ater on, at page 152 of the Proceedings, General Tripp expressed the 
 opinion that "the unfortunate situation of the street .railway is a * * * 
 condition for which no one is to blame, e.xcept, perhaps, the investors or early 
 promoters of these companies, who could not look far enough into the future to 
 see that it was a fallacy and a fundamental error to invest money in a project 
 where it was impossible to increase your income." "However," he continues, 
 "that was universally done, and we can only regret it now." Mr. Warren brought 
 the witness back to this subject of credit at page 153, where he expresses the 
 conviction that credit cannot be restored on the basis of a fixed fare. The Pro- 
 ceedings show : 
 
 "Mr. Warren: Reverting to the question of credit. Gen. Tripp, do you think that the 
 investing public is now aware of the effect of this limitation upon income to such an extent 
 that it will be impossible in the future, with a fixed limit substantially higher, perhaps, than 
 5 cents, to rehabilitate the credit of the companies? 
 
 "Gen. Tripp: It is not. to my mind, so much a question of what th^ individual investor 
 feels about it. The individual investor usually invests upon the advice of his bankers, but 
 there is no doubt but what the bankers of the country arc thoroughly familiar with and 
 thoroughly alarmed over the situation. 
 
 "Mr. Warren: .\n(l any remedy ought to involve the elimination of the fixed maximum? 
 
 "Gen. Tripp: No other solution, in my opinion, would be adequate, even if cities should 
 remit all taxes, and relieve the sta'ct railway companies of the burdens of paving, and all 
 charges of that character. It would not affect the real situation. In the first place, the 
 amount involved is not sufficient to make up the difference, and, in the next place, it is attack- 
 ing the symptoms. Kven pennission to increase the fare on the basis of the present rela- 
 tionship is entirely in.ulequate. That does not solve the problem. The problem is one which 
 requires a sound basis upon which to rest, but which permits of different solutions in different 
 localities. Some communities may require a street railway scr^-ice that the population in 
 itself would rot warrant, and |ierhaps it would be impossible to assess a fare liigh enough 
 to pro<hirr sufficient net. In thu-c particular localities, if they desire such service, the remedy 
 is through taxation to support it. or some other methods. Zone svstems may be desirable 
 in some cases ; and so, I think, the liasis must be fixed upon which these \'arious solutions 
 may rest. 
 
 "Mr. Warren: So it is not only a matter of possibly higher fares, but a matter of rela- 
 tione l)etween the company and the car-riding public that it serx-es? 
 
 "Gen. Tripp : I think a new scheme of relationship must first be devised." 
 
 Whether the 5-cent fare was sufficient, during the pre-war period, to pay the 
 full cost of electric railway service appears to be a question of local conditions 
 and point of view In vii w of what is now being accomplished by the Cleveland 
 
The Five-Cent Fare 77 
 
 Railway Company, the Interborough Rapid Transit Company, the Philadelphia 
 Rapid Transit Company, the Chicago Surface Lines, the Capital Traction Com- 
 pany, the Union Street Railroad Company of New Bedford, the Detroit United 
 Railway, the Indianapolis Traction and Terminal Company, the San Francisco 
 and Seattle Municipal Railways, and certain other electric railway systems, it 
 cannot be doubted that prior to the era of war prices the 5-cent fare furnished 
 ample revenue in many localities to pay the full cost of service including full pro- 
 vision for depreciation and a fair return upon a conservative investment.' Some 
 of the witnesses for the Electric Railway Association gave sweeping testimony 
 to the effect that under the 5-cent fare the companies could not have done these 
 things, but their testimony is not convincing except with respect to electric rail- 
 way properties that were constructed and operated under relatively unfavorable, 
 physical conditions, or in sparsely populated districts, or under exceptionally 
 severe franchise or tax conditions. It is surely demonstrated by the testimony 
 and by the supplementary data submitted to the Commission that the nickel is 
 a convenient coin and the 5-cent fare a habit, but that otherwise there is no logic 
 in a uniform rate of fare for all communities alike, regardless of location, topog- 
 raphy, density of traffic and other major elements entering into the cost of 
 service. The fact that the flat 5-cent fare had no fixed relation to the cost of 
 the service rendered to individual car riders or to the average cost of the service 
 rendered in particular communities was undoubtedly an encouragement to specu- 
 lation where the fixed fare was supposed to be more than enough, and deterrent 
 to necessary credit where the fare was proven to be too little. There is great 
 force in General Tripp's contention that there is little likelihood of electric railway 
 credit ever being fully restored on the basis of an arbitrary, fixed fare, whether 
 it be five cents or some higher figure. So long as credit rests upon earning 
 power, and earning power rests almost exclusively upon passenger revenue, the 
 fixed, uniform fare is theoretically a broken reed for credit to lean upon. Prac- 
 tically, it may serve as a reasonably adequate support in certain communities 
 where operating conditions are favorable and the five-cent psychology strong. 
 
Chapter XVI 
 SPECIAL TAXATION AND FRANCHISE OBLIGATIONS 
 
 Out of the riot of speculation and overcapitalization in the early days, 
 coupled with the general belief, fostered by the policies of the companies them- 
 selves, that they were earning enormous profits, grew a spirit of jealousy and 
 hostility on the part of the people who deemed themselves to be the owners of the 
 public streets and looked upon themselves as silent partners in the street railway 
 business, entitled to a share in the profits because of their contribution of the rights 
 of way over which the street cars run. This jealousy and hostility was greatly in- 
 tensified by the overcrowding of cars and other faults of service which seemed to 
 be the result of an arrogant and selfish spirit on the part of the street railway 
 managers, fostered by their possession of a monopoly and by the increasing 
 public need for the service they rendered. It is now recognized by spokesmen 
 of the street railway companies, and by every student of street railway policy, 
 that private ownership and operation of this utility cannot be successful at the 
 present or in the future without the existence of a spirit of cooperation between 
 the communities and the companies that serve them. The financial policies and 
 conditions discussed in previous chapters of this report developed not merely an 
 estrangement but a feeling of bitter antagonism on the part of the public against 
 the companies. The lure of prospective profits under the 5-cent fare had un- 
 questionably led street railway promoters into devious paths and corrupt prac- 
 tices in their efforts to secure favorable franchises and beneficial legislation. 
 Reprisals were now in order. The people found that a franchise, even if cor- 
 ruptly granted, was irrepealable. Bribed aldermen had authority to give away 
 public rights that the coninninity cii masse had no power to recover. The public 
 realized that in the power of taxation it had a weapon by which it could force 
 the street railway companies to give up some share of their profits, even where 
 the franchises were perpetual and the fares fixed. In those parts of the country 
 where franchises had been granted for a limited term, the public made their re- 
 newal the occasion for imposing upon the street railway companies heavy finan- 
 cial burdens on the theory that the cities should be compensated for what were 
 considered to be immensely valuable grants. Out of these conditions and out of 
 this feeling of resentment, public policies were developed that undoubfedly im- 
 posed upon the electric railway business unusual financial burdens, burdens which 
 fell upon the companies while they were operating under the fixed fare and had 
 sufficient earnings so that they could be compelled to render adequate service. 
 Taxation becomes a habit with ]>ublic bodies wherever subjects of taxation are 
 discovered from which large revenues can be derived without danger of reaction 
 at the ballot box. The policy of laying burdens upon the electric railway industry 
 
 78 
 
Special Taxation 79 
 
 gained a momentum that was very little checked by the change in the financial 
 condition of the companies resulting from stricter public regulation and altered 
 economic conditions. Even where the arbitrary limitations of the fixed maximum 
 fare has been removed in the process of the establishment of the policy of con- 
 tinuous state regulation, so that taxes and franchise burdens are included in the 
 operating expenses and recognized as an element of the cost of service to be 
 reckoned with in fixing the fares paid by the car riders, comparatively little has 
 been done to relieve the electric railway industry from the special taxes and 
 burdens formerly imposed. The extent of these burdens, and perhaps more par- 
 ticularly the spread of public antagonism indicated by their imposition, were un- 
 doubtedly a factor in the shrinkage of the companies' net earnings and the im- 
 pairment of their credit. In the era when the street railways were capitalizing 
 hopes the effect of public antagonism and the public use of the taxing power had 
 not been properly discounted. 
 
 Nevertheless it does not appear upon analysis that the efifective burdens laid 
 upon the electric railway industry through special forms of taxation and through 
 special franchise requirements are as great as they are sometimes assumed to be. 
 The figures accompanying Chart C-122, introduced by Mr. James W. Welsh, statis- 
 tician of the American Electric Railway Association, show the total amount of 
 taxes paid by the electric railways during the census years 1902, 1907, 1912 and 
 1917, and the estimated amount of taxes paid during 1918. The figures also 
 show, except for the year 1918, a distribution of the taxes into two classes : 
 (1) taxes on real and personal property, and (2) taxes on earnings, capital, etc. 
 The 1918 figures are estimated from the returns of a large number of companies 
 made to the Association. Mr. Welsh's figures, introduced at page 117 of the 
 Proceedings, to accompany Chart C-122, ^ are as follows: 
 
 "Item 1902 1907 1912 1917 1918 
 
 Taxes (Total) $13,078,899 $19,775,602 $35,027,965 $45,756,695 $49,496,334 
 
 On Real and Personal Property 5,835,542 9,464.616 15,658,239 21,804,619 
 
 On Earnings, Capital and Other 
 
 Taxes 7,243,357 10,310,986 19,369,726 23,952,076 
 
 Per Cent of Operating Expenses 9.19 7.87 10.55 10.11 9.93" 
 
 It is noteworthy that the ratio of taxes to total operating expenses has not in- 
 creased very greatly since 1902. It is shown that during that year taxes amounted 
 to 9.19 per cent of operating expenses, while during 1917 they were 10.11 per cent. 
 Mr. Welsh's estimate for 1918 indicates that although the amount of taxes paid 
 was about $3,760,000 more than in 1917, this increase was proportionately less 
 than the corresponding increase in operating expenses. 
 
 Mr. Welsh also introduced Chart C-132 to show the extent of the combined 
 burden of "paving and other imposts and taxes." Expenditures other than taxes 
 are not based upon the census returns, but upon answers to a questionnaire sent 
 out by the Association "to determine the amount expended annually by the electric 
 railway companies on paving, cleaning and sprinkling the streets, transportation 
 of municipal employes, and tolls and maintenance of otherwise public bridges, 
 etc." The figures accompanying the chart indicate the amount of taxes paid, the 
 amount of paving and other imposts, the gross earnings, the per cent of gross 
 earnings used in payment of taxes, and the per cent of gross earnings required 
 
80 Electric Railway Problem 
 
 for paving charges and other imposts for each year from 1912 to 1918 inclusive. 
 The estimated figures are shown in parentheses; other figures being taken from 
 the census reports. The figures introduced by Mr. Welsh at page 122 of the 
 Proceedings are shown in the table on the opposite page. 
 
 It will be observed that, expressed as a percentage of gross earnings, taxes 
 have remained relatively steadfast during the seven years covered by these fig- 
 ures. They represented 5.98 per cent of gross earnings in 1912, and 6.47 per cent 
 of gross earnings in 1918. The paving charges and other imposts as estimated 
 by the American Electric Railway Association in terms of a percentage of gross 
 earnings showed a somewhat greater fluctuation, but in this case the percentage 
 was lower in 1917 than in 1912, and still lower in 1918, based on the Association's 
 estimates for that year. The total of taxes, paving charges and other imposts 
 combined, shows 8.55 per cent in 1912; 9.38 per cent in 1913; 9.68 per cent in 
 1914; 9.61 per cent in 1915; 9.01 per cent in 1916; 8.67 per cent in 1917, and 
 8.57 per cent in 1918. However, we must not lose sight of the fact that included 
 in the paving charges and other imposts are items which may represent, at least 
 in part, items of expense to the municipalities caused by the presence and opera- 
 tion of the electric railways and which, therefore, may be regarded as legitimate 
 elements of operating expense, not as special burdens imposed upon the street 
 railway. 
 
 Prof. Charles J. Bullock, of the Economics Department of Harvard Univer- 
 sity, was produced as a witness on taxation by the American Electric Railway As- 
 sociation. His testimony was based in part upon the statistics collected by Mr. 
 Welsh. At page 649 of the Proceedings he makes the following statement : 
 
 "In the year 1917, according to the U. S. Census, the electric railways of the United 
 States paid taxes and other contrihutions amounting to $63,279,000, which may be classified 
 as follows : 
 
 Taxes on real and personal property $21,804,000 
 
 Taxes on earnings and capital and other bases 23,952.000 
 
 Total taxes $45,756,000 
 
 Other public contributions 17,522.000 
 
 ToUl ta.xes and other contributions $63,279,000 
 
 'The total payments for taxes and other contributions amounted in this vear to 8.67 
 per cent of the gross earnings of the electric railways. This percentage would be moderate 
 in the case of a business where the gross receipts, or annual turnover, amounted to two or 
 three times the capital investment; but it is exceedingly heavv in an industn- where there 
 IS a capital investment amounting to sevet^il dollars for every dollar of annual gross receipts." 
 
 Professor Bullock advocated the theory of "equal taxation" and took the 
 position that the electric railways ought to be taxed as nearly as possible on the 
 same basis as other industries. His analysis of the taxation policies of the 
 country shows that in certain respects the electric railways have been discrim- 
 inated against and, as shown by the statement quoted above, he indicates that 
 on account of the low ratio of gross earnings to investment in this industr>' 
 taxes levied on the basis of a percentage of gross receipts bear more heavily 
 upon the electric railways than upon most other industries. He recognizes that 
 some of the public contributions which the street railways have been compelled 
 to make came from the days when they "were not regulated and frequently 
 derived large profits from the use of the franchise which they enjoyed." His 
 characterization, from the point of view of the theory of equal taxation, of the 
 

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82 Electric Railway Problem 
 
 various taxes and special imposts levied upon the electric railways is found at 
 pages 643 and 644 of the Proceedings, where he says : 
 
 "Now looking over the taxes that street railways pay you find that Federal income and 
 excess profit taxes so far as they fall upon street railways are perfectly conformable to the 
 theory of equality and ought not to be removed unless there is an emergency that justifies it. 
 You find that local property taxes are in principle perfectly conformable to the theory of 
 equality and that they ought not to be removed unless there is a very serious emergency that 
 justifies it. You find that these miscellaneous taxes on gross receipts, capital stock and license 
 charges levied in addition to property taxes are frequently more in the aggregate than other 
 properties bear. Sometimes they are not. Y'ou will find in various states — I have alluded to 
 the southern states, and some of the western states — you will find there property subject to 
 special taxes and also to pnvilcge and license taxes, and under tiio.sc conditions there is no 
 inequality in imposing similar charges on street railways. But where, as in New York or 
 Pennsylvania, you have taxation on property and have in addition a gross receipts tax or some 
 other kuid of a tax that other property docs not pay, you have a departure from the principle 
 of equal taxation and you have a special taxing on transportation which is not consistent 
 with the theory of equal taxation. 
 
 "Now I come to the miscellaneous public contributions that I have already alluded to, 
 which in the aggregate are so large, and invite your attention to them. They are an 
 inheritance from the past. They came from the days when street railways were not regu- 
 lated and frequently derived large profits from the use of the franchise which they enjoyed. 
 Under a system of regulation of public utilities the charges must be assumed to fall upon 
 the street car rider and they amount to a special tax on the transportation industry in all 
 cases where they exceed a figure which fairly represents the special charge that the presence 
 of the street railway tracks in the streets occasions the city. 
 
 "About that point, about the amount of the special expense to a city occasioned by street 
 railway tracks, there has always Ixjen difference of opinion. The companies have been in- 
 clined to think that the presence of the tracks, at least under modem conditions, did not occa- 
 sion great expense, and the wearing out of the pavement and the surface was due to the use 
 of the tracks by other vehicles than the cars. The cities, on the other hand, have undoubtedly 
 made this theory of charging for upkeep of the streets an excuse for levying special taxes 
 on the transportation industry far in excess of the legitimate charges that the users of street 
 cars should pay. The correct jirinciple seems to be, however hard it may be to apply it, that 
 any special damage, any siHjcial extra expense for upkeep of streets under normal conditions 
 may very properly be put upon the street car riders. It should be considered just like an 
 equal amount of tax similar to that which other similar enterprises pay, and the car riders 
 should pay it. Anything Ix-yond that point under normal times violates the principle of 
 equality in taxation and in a crisis like the present is in every way objectionable. A thorough 
 revision of those charges in all cases where they exceed a fair charge for extra cost of upkeep 
 of streets would seem to be one of the things needed." 
 
 Professor Bullock's suggestions as to the best way to bring about a modi- 
 fication of the public burdens of the electric railways are full of interest. At 
 pages 644 and 645 of the Proceedings, he says : 
 
 "1 suggest first the revision of these special charges. They used to be a means of securing 
 to the public treasury a part of the frequently excessive profits of unregulated monopolies. 
 They are tixlay a special charge on the industry of railway transportation and they are not 
 consistent with the principle of equal taxation. 
 
 "I suggest in the next place that the other special taxes levied by the states, the addi- 
 tional t.ixcs, gross receipts and capital stock and licenses ought also to be reconsidered and in 
 so far as they lead to a burden of taxation on street railways exceeding that borne by other 
 business enterprises, thev should Ix- reduced or abolished. 
 
 "I suggest in the Ihinl place that relief from the ordinary taxes imposed upon property 
 ought to he the last remedy. It can t)c justified only upon the ground of extreme emergency 
 and the failure of other relief measures. Ilcfore you reduce the ordinary taxes levied on 
 proKrty you should raise your fares to the maximum point that is practicable, looking at the 
 mailer from the revenue result. The industry should not Ix; relieved of the ordinary property 
 taxes which other property pays except as a last resort. In some cases, apparently, we are 
 aUiiit at that point. The increase of fares in my own slate has certainly reached the' revenue 
 point and the revenue result is somewh.Tl disappointing. We verv likelv liave got to give relief 
 in taxation if we want to keep a good many of our street railroad tracks down. 
 • •*****• 
 
 "I suggest in the next place that if relief is to be given from the property tax it would 
 be better not to repeal the lax but to suspend its operation for a term ot years and to provide 
 for an income tax on the companies during that interval, • * • ♦ a tax on net income, if there 
 are any companies that are prosperous. We have one company in Massachusetts, if I remem- 
 
Special Taxation 83 
 
 ber, that was prosperous, or was prosperous six months ago; at least it was not unprosperous. 
 If any companies are earning a substantial amount of net income they might pay a moderate 
 income tax. This substitution for a term of years of a tax on net income for a tax on 
 property would maintain the principle that street railways ought to be taxed, and it would, 
 as the industry revives and begins to see better days, bring in a normal contribution to the 
 public treasury. 
 
 "I finally suggest that if the Federal Government is to lead the way, reduction might 
 very well be made or total exemption might very well be granted from the Federal income 
 and excess profits taxes. The revenue sacrifice by the repeal of those taxes would be a small 
 thing for the Federal Government. The Federal Goveniment by a very small sacrifice 
 can afford substantial relief. For the state and local governments to set aside their property 
 taxes means a comparatively large sacrifice for a particular locality." 
 
 It is undoubtedly true that the taxing and other public burdens levied upon 
 the electric railway companies are far from uniform in the different jurisdictions, 
 and that in some jurisdictions these burdens are extremely heavy. It appears 
 from the testimony that Rhode Island furnishes a good illustration of this fact. 
 Mr. Zenas W. Bliss, Chairman of the Rhode Island State Tax Commission, one 
 of the receivers of the Rhode Island Company appointed at the suggestion of the 
 Attorney General of the State, and the Chairman of the Special Commission 
 which submitted a report on the affairs of the Rhode Island Company to the 
 General Assembly in March, 1918, appeared before the Commission and de- 
 scribed the complicated system of taxation in Rhode Island. His description of 
 the taxes to which the Rhode Island Company is siibject is found at page 1196 
 of the Proceedings, where he says : 
 
 "The Rhode Island Company pays a property tax, that is. upon its real estate and tangible 
 personal property, in all of the municipal jurisdictions in which it operates. It is also liable 
 to pay a franchise tax in each municipal jurisdiction. These franchise taxes are somewhat 
 controlled by the general law, in that it limits them both up and down. In some municipali- 
 ties they are not allowed, under the general law, to charge less than a certain per cent. In 
 others they are allowed to charge up to a certain per cent. 
 
 "There is a rather peculiar condition in some of our towns, where the town is divided 
 into fire districts. They have delegated to them, these districts, the taxing power, and so 
 they put on a tax in addition to the regular municipal tax, based upon the local municipal 
 valuation. So that, in many towns, the railroad company has to pay two property taxes. 
 
 "The state imposes a 2 per cent gross receipt franchise tax and also a 1 per cent gross 
 receipt tax which is, or at least has been, up to the present time, considered a property tax 
 in lieu of any tax upon the stocks and bonds, securities and other intangible property in the 
 corporation in the hands of the holder or owned by the corporation itself. 
 
 "The City of Providence imposes a franchise tax of 5 per cent upon the gross receipts 
 of this corporation within the city limits, that, in addition to the taxes imposed by the state, 
 making 8 per cent tax upon the gross receipts of the Rhode Island Company within that juris- 
 diction. Of course, that is the largest jurisdiction, so far as receipts are concerned, and 
 about 65 per cent of the total gross receipts of the company are collected within the municipal 
 boundaries of the City of Providence. 
 
 "I have not the figures brought down exactly to date, but the last available information 
 is to the effect that the total taxes imposed upon this company are approximately 12^ per 
 cent of the gross receipts. It is one of the heaviest taxed public utilities that I know of in 
 the country ; and of course the taxation is very excessive." 
 
 Mr. W. E. Creed, counsel for the San Francisco-Oakland Terminal Railways 
 Company, which operates the traction lines in nine cities on the east side of 
 San Francisco Bay, and also the trans-bay service from Oakland, Berkeley and 
 Alameda to San Francisco, testified that the condition of the trans-bay lines was 
 extremely precarious, and in this connection he called particular attention to the 
 effect of special taxes and paving burdens. At pages 884 and 885 of the Pro- 
 ceedings, he said : 
 
 "I regard the situation there on the east side of the bay as extremely hazardous for the 
 continuance of the service. I feel the death rattle is in the throat of those companies and 
 
84 Electric Railway Problem 
 
 that the only relief which will be of any ser\-ice is immediate relief. The company cannot 
 wait for a complete linal and i)erfected solution. It must have more money to continue that 
 service. 
 
 "The difficulties on the east side of the bay under which the company has struggled are 
 common to all of California. These difficulties as I see them are, first, the 5'4 per cent state 
 franchise tax on gross revenues, and that 5J-4 per cent, of course, acts as a reducer of every 
 increase in revenue. Secondly, the old franchise ta.xes which we collect under the Broughton 
 act, which I should say approximately average around 2 per cent; they amount to 1 per cent 
 under extensions, but I think on an average they would amount to 2 per cent, taking in all 
 cases. Then the paving tax. This situation has occurred in several places in California. 
 The pavement which is perfectly good for ten years has been changed by the municipal 
 authorities to very high class, the pavement lx;ing ordered is the ver)- best class of pavement. 
 Now that has resulted in abandonment of pavement which had Ikvu paid for by the traction 
 companies, the investment of a. tar larger sum of money in the most modern approved pave- 
 ment. That has l)een a very .'-erious burden to the Traction Division on the east side of the 
 bay, and also to the Key Division, because there never was any reserve to take care, call it 
 depreciation reserve or whatever you want to, of that abandonment of pavement which had 
 an assumed life, we will say, of ten years to run, and yet it has been replaced by more ex- 
 pensive pavement and an absolute loss of the ten years of service of the old pavement borne 
 by the comiany, and if was an absolute capital loss." 
 
 It should not be inferred from Mr. Creed's testimony that heavy taxes and 
 pavinjj obligations are the only cau.-;es of the present financial difficulties of the 
 San Francisco-Oakland Terminal Railways. For several years prior to the in- 
 crease in fares the traffic and revenues on this system remained practically sta- 
 tionary, and the company has been before the California Railroad Commission 
 more than once during this period. The commission in its decision of May 24, 
 1915, found that this company had a net capitalization of $45,457,000, consisting 
 of $28,175,000 of stock. aii<r$17.2S2.000 of bonds: that the total cash realized 
 from the issuance of these securities was only $13,1%,705.12; that stock of the 
 par value of $18,794,738.41 was issued against "intangible property," and that 
 the reproduction cost less depreciation as of June 30, 1914, including multiples, 
 cost of acquisition, and interest during construction as applied to operative 
 lands was $23,641,893.30. These matters are set forth in Decision No. 2412 of 
 the "Report of Decisions of the Railroad Commission of California" at pages 
 4 to 6 and 39 and 40. On August 11. 1919. the California Railroad Commission, 
 in an order permitting certain increases of fares in addition to increases previously 
 authorized, said : 
 
 "It has iK-on re|>caledly pointed out by this Commission that the only permanent remedy 
 for the finaiu-ial ditliculties of this company is a thorough-going reorganization of its finances. 
 As long as the Key .System rests on the present unsound financial structure, it is bound to 
 continue in financial difficulties in the future as it has in the past. Tlic rate increases will 
 not cfTect a complete or permanent remedy of this situation. If it were practicable to do 
 so, we would make reorganization one of the conditions of this order." 
 
 .■\s a matter of fact, the taxes paid by the San Francisco-Oakland Terminal 
 Railways Company, at least during recent years, have not been out of propor- 
 tion to the average taxes paid by the electric railways of the country, as will be 
 seen by the following: 
 
 ,. Per Cent of 
 
 ' *■'"■ Gross Taxes to Gross 
 
 hntird June so Operating Rerenue Taxes Operatmii Revenue 
 
 •'"•' S-4..'^47..W)S JJl.lMn.Ol 4 7 
 
 !'"•» 4..';f).MI.V.M .'.W.SR4..y 5 24 
 
 •915 4..1.vV,'<')l .") J.M SS2.0I 5 76 
 
 \9\6 4.417.847.89 264.992.27 6.0 
 
 '""•■•.- 4.4I6.J9829 268,.W.36 0.08 
 
Special Taxation 85 
 
 It will be observed that during the period from 1913 to 1917 the taxes increased 
 considerably faster than the company's gross revenue, although in 1917 the taxes 
 were only 6.08 per cent of the gross operating revenues, which is slightly less than 
 the average for the entire country as shown by the census report. The California 
 Railroad Commission's order of August 11, 1919, shows that during the ten- 
 months period from September 1, 1918 to June 30, 1919, while increased fares 
 were in elTect on this company's lines, the gross operating revenue was $4,654,465 
 and the taxes were only $220,281, or 4.73 per cent of the gross operating revenue. 
 Figures are not available to show the amount of paving charges and other 
 special imposts borne by this company, but the tax figures seem to indicate that 
 Mr. Creed in his testimony overestimated the importance of this particular factor 
 in the financial troubles of the company for which he spoke. 
 
 Mr. Harlow C. Clark, a witness for the American Electric Railway Asso- 
 ciation, called attention to another point that is of considerable importance in 
 connection with a discussion of the effect of special franchise obligations upon 
 the credit of the electric railways. In the valuation of street railway properties 
 for the determination of the fixed capital to be recognized in resettlement fran- 
 chises, acrimonious controversies have frequently arisen with respect to the dis- 
 position of the item of paving. The cities often object to this item on the ground 
 that the pavements are public property, notwithstanding the fact that the com- 
 panies may have been called upon, under the provisions of their franchises, to 
 install the pavements in and about their tracks at their own expense. At page 
 909 of the Proceedings, Mr. Clark says : 
 
 "If you will look into the capitaliEation account of those companies you will find a very 
 large amount of capital which is there because the investments in paving and other municipal 
 requirements, and which are fixed charges, are now paid by these companies. I have in mind 
 that when the Rhode Island Company was valued by a commission appointed by the legislature, 
 it was discovered that almost one-tenth of its capitalization was due to payments made on 
 account of paving and other requirements of that kind." 
 
 New York City is peculiar in that it still has a large number of operating 
 companies. With the partial disintegration of the New York Railways system 
 and the Brooklyn Rapid Transit surface lines the number of these operating 
 companies has recently been increased. At the present time there are approxi- 
 mately thirty-five separate companies.- The aggregate operating revenue of all 
 these companies for the year ended June 30, 1919, was $110,191,682.33, and the 
 total amount of street railway taxes accrued during that year was $7,909,678.82 
 or 7.18 per cent. One of the heaviest taxes in New York is the special franchise 
 tax which applies to the structures of the electric railway companies found in 
 the public streets and the intangible rights under which these structures are 
 maintained and operated. The burden of taxation in terms of a percentage of 
 gross revenues shows wide variations among the different companies operating 
 in New York City, as will be seen from the table on the following page, com- 
 piled from the Public Service Commission's Summary for the year ended June 
 30, 1919: 
 
86 
 
 Electric Railway Problem 
 
 Street Railway Revenues and Taxes in New York City 
 
 Total 
 Street Railway 
 Company Operatimj Revenue 
 
 Hudson & Manhattan R. R. Co $ 5,633„^S7.25 
 
 Inlcrborough Rapid Transit Company 
 
 Subway division 24,632,207.96 
 
 Elevated division 18.575.001.87 
 
 New York Consolidated R. R. Co 15.667.098.37 
 
 Brooklyn Heights R. R. Co 8.621.560.27 
 
 Bridge Operating Company 222.326.90 
 
 Brooklyn, Queens Co. & Suburban R. R. Co.. 1.356.871.11 
 
 Coney Island & Brooklyn R. R. Co 1.871.734.97 
 
 Coney Island & Gravescnd Rv. Co 91.802.60 
 
 Nassau Electric R. R. Co 4.965.758 83 
 
 South Brooklyn Ry. Co 845.497.96 
 
 New York Railways Co 11.8()3.601.14 
 
 Second .•X venue R. R. Co., Receiver 842.749.71 
 
 Brooklyn & North River R. R. Co 193.331.48 
 
 Third .-Vve. Ry. Co. (incl. Kingsbridge Ry.) 3.887.170.28 
 
 Dry Dock. E. B'way & Battcrv- R. R. Co.... 530.060.80 
 42nd St., Manhattanville & St. Nicholas Ave. 
 
 Ry. Co. (incl. 3rd .Avenue Bridge Co.).. 1,705.121.07 
 
 Belt Line Corporation 562.869.79 
 
 ,Mid-Crosstown Ry. Co 36.781.10 
 
 New York City Inlcrborough Ry. Co 709.246.84 
 
 Pelham Park & City Island R. R. Co 19.012.f>5 
 
 Southern Boulevard R. R. Co 224.847.48 
 
 Union Rv. Co. (incl. Bronx Traction Co.).. 2.767.735.84 
 
 Westchester Electric R. R. Co 623.005.15 
 
 New York & Queens Co. Ry. Co 1.044..).?4.43 
 
 Long Island Electric Ry. Co 237.287.44 
 
 New York & Long Island Traction Co 566.163.28 
 
 Ocean Electric Railway Co 174.684.')4 
 
 New York & North .Shore Traction Co 157.705.40 
 
 Manhattan &• Queens Traction Corp., Rec'vers 270.1.=i().12 
 
 Richmond Light & R. R. Co 491.577.64 
 
 .Statcn Island Midland Rv. Co 307.534.04 
 
 Southficid Bcich Rv. Co 16.370.60 
 
 Manhattan Bridge Three-Cent Line 153.110.78 
 
 lUush Terminal R. R. Co 252.943.17 
 
 Van Bnmt Street & Erie Basin R. R. Co. . . . 71.169.37 
 
 .Ml Companies in New York City $110,191,682.33 
 
 Per 
 
 centage of 
 
 Stre, 
 
 :t Railway 
 
 
 Taxes to 
 
 Street 
 
 Operating 
 
 Railivay Taxes 
 
 Revenue 
 
 $ 330.698.80 
 
 5.98 
 
 882.175.29 
 
 3.58 
 
 2.251,981.61 
 
 12.12 
 
 864.451.10 
 
 5.52 
 
 756.905.46 
 
 8.78 
 
 11.868.86 
 
 5.34 
 
 74.112.70 
 
 5.46 
 
 115.088.12 
 
 6.15 
 
 4.767.49 
 
 5.19 
 
 187.735.87 
 
 3.78 
 
 80.580.76 
 
 9.53 
 
 1,248.196.88 
 
 10.S2 
 
 85.920.97 
 
 10.20 
 
 11.509.61 
 
 5.95 
 
 286.295.33 
 
 7.37 
 
 48.849.91 
 
 922 
 
 112.784.51 
 
 6.61 
 
 42.961.50 
 
 7.63 
 
 2.749.14 
 
 7.47 
 
 50.755.59 
 
 7.16 
 
 2.718.63 
 
 14.30 
 
 13.559.37 
 
 6.03 
 
 183.663.86 
 
 6.64 
 
 30.238.21 
 
 4.85 
 
 58.481.97 
 
 5.60 
 
 12.591.68 
 
 5.31 
 
 29.544.96 
 
 5.22 
 
 6.027.70 
 
 3.45 
 
 12.698.82 
 
 8.05 
 
 12.456 88 
 
 4.61 
 
 27.112.89 
 
 5.52 
 
 18.833.68 
 
 6.12 
 
 2,551.30 
 
 15.58 
 
 23.686.86 
 
 15.47 
 
 14.161.85 
 
 5.60 
 
 4.960.66 
 
 6.97 
 
 $7,909,678.82 
 
 7.18 
 
 For the year ended June 30. 1918. the aggregate taxes of the electric railways 
 of New York City amounted to $8,232,321 as against total railway operating 
 revenues of $103,500,189. Tlie taxes were 7.95 per cent of the revenues. The 
 Intcrhorough Rapid Transit Company's 1918 taxes on account of the subways 
 were $1,649,411, almost double the amount for 1919. It appears that the Inter- 
 borough Rapid Transit Company's federal taxes for the year 1918. just before 
 its profits disappeared, were so great as to cause a taxation "peak" in that year 
 for ail tiic electric railways of New York City taken together. 
 
 The census figures show that the aggregate revenues of the electric railways 
 of the country from railway operations were $650,000,000 in 1917. The final 
 figure, $73O.(XX).0OO, used in the testimony, was reached only by the inclusion of 
 nearly $60,000,000 of revenues from auxilian,- operations and over $20,000,000 
 
Special Taxation 87 
 
 of non-operating income. As we have seen, several witnesses called attention 
 to the fact that several dollars of capital are required in the electric railway 
 business to produce one dollar of annual revenues. If we were to take the net 
 capitalization including real estate mortgages and floating debt as the measure 
 of the investment in 1917, we should have $5,056,554,324 of capital producing 
 $650,149,806 of revenue, or 7.85 to 1. Taxes amounting to 6.27 per cent of 
 gross earnings would, on this basis, amount to only %o of one per cent on the 
 investment; and the 8.47 per cent of gross earnings representing taxes and 
 paving and other imposts taken together would be only l.OS per cent on the 
 capital. This suggests the conclusion that, after all, the electric railways are 
 not very heavily taxed on the value of their property, or else that their net 
 capitalization is subjected to an enormous shrinkage to get it down to the basis 
 of taxable value. What a conservative investment means to street railways 
 and to their credit is clearly indicated by the contrast between the situation in 
 Cleveland in this respect and that in the rest of the country. The earnings 
 of the Cleveland Railway in 1919 were approximately 44 per cent of capital 
 value, while the earnings of the electric railways of the country at large were 
 only 12.86 per cent of the net capitalization as found by the Census Bureau. 
 This is 31.4 to 1 in favor of Cleveland. It indicates either gross overcapitalization 
 in the country at large or tremendous street railway earning power in Cleveland 
 as compared with other cities. 
 
 In any case, taxes are the enemy of credit, for they fight with capital charges 
 for what is left of the revenues after operating expenses are paid, and the larger 
 the capital in proportion to annual earnings the more sensitive will credit neces- 
 sarily be to every increase in taxes and special imposts. 
 
 I 
 
Chapter XVII 
 
 USE OF POLICE POWER TO COMPEL MORE AND 
 BETTER SERVICE 
 
 About fifteen years after the introduction of electric traction the public 
 gradually awoke to the fact that it could use the police power as well as the 
 taxing power to bring the electric railways to time. It came to appreciate that 
 with all the privileges and guaranties which they had obtained through their 
 charters and their franchises, they were still under legal obligation to render 
 adequate service and that they could be forced to give such service as a condition 
 of the monopoly privileges they enjoyed. The result was the passage of public 
 utility laws and ordinances and the creation of public service commissions with 
 power to fix and enforce standards of service. It had long been an axiom in the 
 street railway business that the profits were in the straps, but the public began 
 insistently to demand seats instead of straps and refused to recognize the right 
 of the companies to exploit the straps for profit. While it was not found prac- 
 ticable to compel the companies to supply a seat for every passenger during the 
 rush-hour, nevertheless standards of ser\'ice were established which, under the 
 conditions of the most congested traffic, required the companies to move as 
 many cars during the rush hours as the track facilities would permit. The public 
 also insisted on the equipment of cars with vestibules for the protection of the 
 motormen and upon better heating, lighting and ventilation for the comfort and 
 convenience of the passengers. 
 
 The extent to which street railway service has been brought, at least theoreti- 
 cally, under public service commission control is well illustrated by the testimony 
 of Mr. W. D. George, one of the receivers of the Pittsburgh Railways Company, 
 at page 306 of the Proceedings, where he says: 
 
 "I think the piibHc scrA'ice laws of the different states have very well covered that. In 
 the State of I'eniisylvania, it is very effective. We cannot move in the manaBemeiit of the 
 company in I'ittsburgh without complaint being resistered by the City of Pittsburgh before 
 the public .service body of the State. They tell us to put on more cars. If some citizen 
 in some community complains of the ser\'icc that is afforded that particular community, he 
 has a right to be heard iKfore the Public Service Commission, and they say whether we 
 shall put that service on, or whether we shall not put that service on." 
 
 A particularly bitter complaint against the policies that have been pursued 
 by public service commissioners in their relation to the electric railways was 
 voiced by Mr. James L. Qiiackciibush, General Counsel of the Intcrborough Rapid 
 Transit Company, who followed Ex-Govemor Foss of Massachusetts on the 
 stand. After stating that a public service commission has existed in New York 
 for twelve years and that the troubles arising from state commission control 
 arc not "with the law, but with its administration," Mr. Quackenbush says at 
 pages 817 and 818 of the Proceedings: 
 
Police Power and Improved Service 89 
 
 "The first time that anything has been done by the PubHc Service Commission in the 
 First District, which is the New York City District, of the slightest benefit to tlie railroads, 
 was done last week by Commissioner Nixon. Since the first day of July, 1907, down to the 
 first day of July, 1919, I have been in daily contact with the administration of the Public 
 Service Commission in the First District, and I cannot now recollect a single transaction that 
 has been of the slightest benefit to the railroads under their jurisdiction. 
 
 "Now, the trouble has been that, instead of the members of the commissions carrying 
 out the theory of Gov. Hughes in the Session of 1907, when the Public Service Commission 
 Law was first enacted, namely, that the commission would be a tribunal, impartial and 
 fair, between the industrj- and the public, that it would be a means of the prevention of any 
 further prejudice against the industry on the part of the public, that it would ascertain the 
 truth and tell the people the truth, that the people, learning the truth, would be educated up 
 to carrying out what is always the desire of the people — to do justice — that function com- 
 pletely and absolutely failed." 
 
 A little farther on Mr. Ouackenbush expresses sharp disagreement with the 
 testimony of Mr. Foss. He alleges that the public service commissions in New 
 York have failed to give the companies proper protection, and at page 819 of 
 the Proceedings, he says : 
 
 "In other words, it has been a failure on the part of individuals to recognize that they 
 were there as protectors of the people who had their investments there. I go further than 
 that. I say that the Public Service Commission regulation in New York City failed because 
 it did not courageously put a stop to the prejudice that was shown by the former Governor 
 of Massachusetts here this morning. 
 
 "Now. I challenge, so far as it relates to the City of New York, the accuracy of every 
 statement made by that gentleman. There is no warrant for it, and yet it exists, and it 
 exists solely and only because those men who were in a position all those years to know 
 the truth and did know the truth, kept the truth to themselves and did not convey it to the 
 public whom they represented. 
 
 "From the time that the commission took office, on July 1, 1907, down to this act of 
 Commissioner Nixon, the whole problem was to control the outgo of the utilities, and no heed 
 or regard was paid to their income whatever. Notwithstanding that the surface lines, of the 
 New York Railways Company, were going down-hill, were going fast towards a receiver- 
 ship last year; notwithstanding that we warned them of it, advised them of it, that our 
 monthly reports, quarterly reports, annual reports, frequent hearings under oath, showed the 
 fact, they continued to make orders to increase service. They took the view, and both com- 
 missions took the view, that they were not concerned with the question of how we were going 
 to get the money to provide the service — and when I said a while ago that I was slightly 
 familiar with the operation of the so-called up-state commission. I meant [not] by actual 
 appearance before them, although I represent two roads that are within their jurisdiction, but 
 I do know about their operations, because it is my business to watch the operations of both 
 commissions." 
 
 Mr. Quackenbush emphasized the fact that the New York Commission kept 
 on issuing service orders regardless of the financial condition of the companies. 
 In Connecticut the police power, or perhaps it would be more correct to say the 
 "police influence," was used to force additional service through unprofitable ex- 
 tensions. Mr. Lucius S. Storrs. President of the Connecticut Company, described 
 the situation at pages 434 and 435 of the Proceedings, as follows : 
 
 "One little line of New England of interest in a small village was a stage running from 
 the railroad station up into the village, as so many of these villages were founded away back 
 from what was ultimately the line of transportation, or on the line of transportation of those 
 days, the stage; and when the steam railroads came through, the lines of transportation 
 changed. The stage was operating from this small station to the little rural community, an 
 attractive little New England village. Some mill owner who had made a lot of money up 
 there perhaps thought it would be a good idea to put a horse car line, and he put in a horse 
 car line two and a half miles long. 
 
 "It was very profitable and ran along. The car ran on rails instead of the stage on 
 the road. It was a typical old corduroy road. If a man had a house a little bit beyond the 
 center of the town, distant from the railroad station, he thought it would be a good idea to 
 extend it out there, and he extended it out there. A mile or two beyond that was a cemetery 
 and lots of people wanted to go out to the cemetery, and they extended it out there. A little 
 beyond that was a water works plant and ultimately they extended it out there because a few 
 
90 Electric Railway Problem 
 
 people worked out there and they wanted to ride. In the meantime it had been developed 
 from the horse car to the trolley car. There was a beautiful hill a little further away with a 
 lot of chestnut trees on the side, and a lot of people wanted to go out there, and so they built 
 a line out there to accommodate the people who wanted to go out to gather the chestnuts. 
 We became responsible for that line. 
 
 "The Chairman: Were these extensions voluntary? 
 
 "Mr. Storrs: Some ot tliem were at the request of the community and some of them 
 were voluntary. Most of them were at the urgent request of the community. I am not sure 
 but what the Chairman of the Board of Selectmen had some interest in the chestnut grove 
 and wanted to get the people out there to see it. 
 
 "The result has been that during the last year that line with only one car, a single- 
 truck car, took in $2,000, and it cost $8,000 to operate the car, that is, out of pocket cost; 
 I do not mean to say the depreciation and fi.xed charges, but the actual dollars of outgo 
 to pay for the construction and the maintenance, to maintain that individual car, together 
 with the actual cost of the power, the power at that point being bought on the kilowatt basis. 
 
 "This was frequently the case throughout the communities, a gradual development of in- 
 consistent demands. Of course, it has been rather inconsistent or rather inconceivable that 
 the owners of the utility would seriously oppose the insistent demands of the community, 
 which itself gave the franchises essential to the life of the corporation, and where that became 
 a serious pressure frequently it was granted. 
 
 "Commissioner Meeker ; In the end do you think that such extension should be passed 
 upon by a state commission rather than by local authority? 
 
 "Mr. Storrs: Those in New England are passed upon so. .\nd in connection with that 
 there is now unanswered an order oi the Public Utilities Commission in one of the New 
 England states directing the electric railway to build an extension, in this case only about 
 four miles long, to serve a little community, that community having a double-track line 
 between the center and the large city adjacent, but the town hall happened to be in one part 
 of the community and a large part of the inhabitants in that village off from the main line 
 of transportation, and the people wanting to attend town meetings had to take the trolley 
 into the center some four miles and back out to the town hall some six miles. The people 
 in that community, rather important politically and otherwise, successfully pressed their case 
 before the commission and an order was issued directing the electric railroad to build a line 
 something between three and four miles as I recall, to connect that little portion of the 
 isolated community with the town hall; that is practically what it was, the larger portion 
 of the community having already a double-track line and practically two connecting with 
 the main civic center. There was a case in which the commission itself had ruled upon it, 
 and needless to say the corporation has not been able to obey the order of the commission. 
 
 "The Chairman: That is the street railway corporation? 
 
 "Mr. Storrs: The street railway corporation has not been able to do it. The authority 
 was issued two or three years ago and we came upon the rocks at about that time and have 
 not been able to finance orders of that sort, and the commission itself has not pressed its 
 demands to the court nor has the community pressed its demands to the court and through 
 mandamus forced the company into the construction of the line. 
 
 "Commissioner Wehle: Is that in Connecticut? 
 
 "Mr. Storrs : Yes, adjacent to New Haven. 
 
 "The Chairman : Have you taken any steps to abandon that track which cost $8,000 to 
 operate with $2,000 revenue? 
 
 "Mr. Storrs : We have now a little publicity going forward to an immediate cessation 
 of service on that line. 
 
 "The Chairman: So there is a remedy for the company? 
 
 "Mr. Storrs: Tliere is. What the local remedy is we do not know, but the practical 
 rcmedv must be that. 
 
 "Commissioner Wehle: What is the name of that point? 
 
 "Mr. Storrs : That is up to Westp<irt. from the railroad station below Saugatuck. You 
 will rerngnizc that going up above Westport and on up to the water works." 
 
 Mr. James D. Mortimer showed that in Wisconsin, a pioneer state in public 
 service repfulation, the police power of the state was invoked to reduce fares below 
 the ordinance rates. His testimony on this point is found at pages 765 and 766 
 of the Proceedings : 
 
 "\{t. Warren: There is commission regulation in Wisconsin, is there not. Mr Mortimer? 
 
 "Mr. Mortimer: There has licen commission regulation in Wisconsin since 1905. 
 
 "Mr. Warri-n: Your company has been subject to that regulation ever since it was 
 adopted ? 
 
 "Mr Mortimer: We have been the experimental ground for most of the regulation for 
 street railways in Wisconsin, and also the experimental ground for the most of the regulation 
 for street railways in the United States. 
 
Police Power and Improved Service 91 
 
 ''Mr. Warren: Will you give a brief sketch of the regulation and its effects as it related 
 to your company ? 
 
 "Mr. Mortimer; Regulation in Wisconsin first was attempted in 1896 by the Common 
 Council of the City of Milwaukee, acting under its police powers. It sought, following 
 a consolidation of seven detached lines making up the unified system, to substitute a com- 
 mutation fare of six tickets for twenty-five cents in lieu of the five-cent cash fare, with 
 universal transfers. 
 
 "That case went to the Federal District Court on the ground of confiscation, and the 
 Common Council resolution was declared to be confiscatory. No appeal was ever taken by 
 the municipality. It was one of the early cases of regulation where a Federal court held 
 that street railway utilities were entitled to a reasonable return, and any order of a govern- 
 mental body reducing such return below current ordinary interest rates was confiscatory, 
 and therefore in violation of the Constitution. 
 
 "In 1905, the Legislature passed the Railroad Commission Law. The Railroad Com- 
 mission Law was primarily designed to take care of steam railroads and telegraph companies. 
 It was not entirely clear from a reading of the statute that it covered street railways. 
 
 "Despite that fact, a case was brought by the City of Milwaukee in the following 
 January after the 3-cent fare in Cleveland, to have the railroad commission ordered to 
 discontinue the franchise rates of fare and install a fare of three cents. 
 
 ******** 
 
 "The 3-cent fare case was reinstitutcd again in 1907, following the enactment of an 
 amendment to the Railroad Commission Law, which clearly put the street railways under the 
 jurisdiction of the railroad commission. The case was finally decided by the railroad com- 
 mission in August, 1912. The details of the testimony, the conclusions, the analyses, and 
 related matters are clearly set forth in Mr. Doolittle's book on the cost of passenger trans- 
 portation service.i That book I am going to offer to the commission for the detailed informa- 
 tion. The book carries data dow-n to 1912. The commission's order required that the com- 
 pany discontinue the sale of twenty-five tickets for one dollar, and substitute in lieu thereof 
 the sale of thirteen tickets for fifty cents, retaining a five-cent cash fare and six tickets 
 for twenty-five cents. 
 
 "It also ordered the extension of the single fare limits, the city fare limits, the five-cent 
 limits, out a distance — outward from the center — of a mile to a mile and a half, thereby in- 
 creasing the length of the ride." 
 
 The exercise of the police power has undoubtedly gone far in neutralizing 
 the effect of the Dartmouth College case and in casting doubt upon the vested 
 rights of corporations based on that decision. Obviously, no transportation line 
 can be so advantageously located for profit as to be proof against the effects of 
 public regulation, calling continually for more service, better service and lower 
 rates. The power to regulate, like the power to tax, if unlimited, is the power 
 to destroy. The electric railways generally during recent years have professed 
 faith in the virtues of state regulation, but their advocacy of this policy appears 
 to have had its basis in the choice of what they have regarded as the lesser of 
 two evils. They have been glad to appeal from the local authorities to a state 
 commission supposed to be more free from the pressure of interested public 
 opinion and better equipped to render decisions based upon the ascertainment 
 and recognition of vested values. It is maintained by many electric railway 
 men and by most public service commissioners that state regulation has had a 
 steadying effect upon credit and has in fact been helpful to the companies. Still, 
 the discovery of a means by which the public obligations that are a corollary of 
 monopoly in the rendering of an essential public service can be enforced upon an 
 industry whose financial structure has been reared upon the assumption of pro- 
 tected privilege for exploitation could not do otherwise than have a disquieting 
 effect upon the holders of inflated securities. At any rate, the possibilities of 
 the police power give convincing proof that the best bulwark of street railway 
 credit is public good will and cooperation, not the guaranties of the franchise 
 and the mandates of the court. 
 
Chapter XVIII 
 PUBLIC REGULATION OF STOCK AND BOND ISSUES 
 
 The reckless tinancial policies pursued by the electric railways in matters af- 
 fecting capitalization were one of the important moving causes for the estab- 
 lishment of state regulatory commissions. It is one of the usual functions of 
 these commissions to exercise control over new security issues. This power of 
 control was undoubtedly given more for the protection of future investors than 
 for the preservation or resuscitation of street railway credit. It was the thought 
 that the companies had enjoyed too much credit, not too little, and by abusing it 
 had brought great losses upon the investing public. It was the theory that under 
 public service commission regulation new securities could not be issued except for 
 cash, and that the cash received from their sale would be put iiUo the property 
 for proper capital purposes. Thus the investor would be sure that the securities 
 he bought would represent something tangible. It was supposed that this assur- 
 ance, given by a responsible state commission, would make new security issues 
 attractive, and thus in fact improve their salability. This improvement in street 
 railway credit, however, was anticipated as a by-product of regulation, in large 
 measure incidental to the main purpose, namely, the protection of the investors. 
 
 The fact that the Massachusetts street railways were among the first to suffer 
 a general collapse of credit in the present era of distress, although they had 
 enjoyed the benefits of state regulation longer than the companies of other states, 
 raises the (jueslion as to what effect public regulation has had upon street rail- 
 way credit. In the emergency proceeding for increased fares instituted by the 
 Public Service Railway Company in 1918, Mr. Thomas X. McCarter. president 
 of the company and at that time chairman of the War Board of the American 
 Electric Railway Association, answered this question squarely. Upon cross- 
 examination by Marshall Van Winkle, Esq., counsel for the New Jersey State 
 League of Municipalities, on May 13, 1918, he made the following statement, 
 which is found at pages 1031 and 1032 of the transcript of the proceedings before 
 the New Jersey Board of Public Utility Commissioners: 
 
 "Q. The Mass.i(-lnis(tt!; Commission has been a pioneer, has it not, in granting in- 
 creased fares to street railway companies? 
 
 "A. It has iK-cn one of the earlier commissions to do it, yes. 
 
 "0 I^ci you know that the Massachusetts Commission has made an intensive study for 
 a number of years of these problems? 
 
 "A. I know they arc now. the Massachusetts Commission, and I think the Legislature 
 is studying the working out of a very serious situation they have in that state. 
 
 "Q. Wouldn't you agree that the conclusions of the Massachusetts Commission as to 
 the necessity of the business control under a commission like this, for instance, that we 
 are now liefore. going along with any increase of rates, which are violative of franchise con- 
 tracts and whicli are made necessary by the break-down of the service under existing private 
 management, are entitled to great weight, I mean, by this Commission, in any conclusions 
 on the questions involved in this proceeding? 
 
 92 
 
Public Regulation of Securities 93 
 
 "A. What is entitled to great weight? 
 
 "Q. The Massachusetts Commission's findings are entitled to great weight by this 
 Commission. 
 
 "A. I think the Massachusetts Commission is a strong, vigorous and honest Commis- 
 sion. I think the power of regulation, as administered in the State of Massachusetts in 
 the past 25 years, has brought these companies to the brink of insolvency. There hasn't 
 been a dollar of capital issued by a Massachusetts utility except with the direct approval 
 of the commission over 25 years, and the whole industry in the State of Massachusetts is in 
 practical insolvency. 
 
 "The principle of regulation in Massachusetts has practically brought the public utilities 
 in Massachusetts to the point where the policy of regulation as enforced by the Interstate 
 Commerce Commission has brought the railroad companies. We might as well look the 
 situation right in the face." 
 
 Mr. McCarter's views as to the effect of state regulation upon credit do not 
 seem to be shared by the Massachusetts witnesses who appeared before the 
 Commission. None of them had the hardihood to claim that conservatism in 
 capitalization was the real cause of the breakdown of credit in that state. Inter- 
 state Commerce Commissioner Eastman, who gave the Commission a most illum- 
 inating analysis of the Massachusetts situation, points out at page 2059 of the 
 Proceedings that "the chief source of strength has been the supervision over 
 capitalization." Nevertheless, Mr. McCarter's challenge raises a point that de- 
 mands serious consideration. It is claimed by the companies and admitted by 
 the public that the state commissions have in large measure failed. The present 
 condition of the electric railway industry undoubtedly puts a burden of explana- 
 tion upon the commissions. Is it a case of too much regulation or too little? 
 Mr. Harold L. Stuart, testifying from the point of view of an investment banker, 
 expresses the opinion at page 186 of the Proceedings that state commission con- 
 trol had a beneficial effect upon credit. In reply to questions by Mr. Warren, 
 he says : 
 
 "Mr. Warren: To what extent have the laws of any particular jurisdiction had an 
 effect upon the selling quality of the bonds issued by utilities in that jurisdiction? 
 
 "Mr. Stuart : They have quite a considerable influence. For example, when the public 
 service commissions throughout the countrv- began to be formed, a great interest was aroused 
 on the part of the investors, and I think that the very fact of those public utility commis- 
 sions being formed influenced a great many people to buy street railway and other public 
 utilities securities that theretofore were not interested. They believed that the public service 
 commission would be a disinterested party, in so far as any local situation was concerned, 
 whereas the local authorities would be very much interested, and the investor felt that he 
 would receive better and fairer treatment from the disinterested party than he would from 
 the interested party. 
 
 "Mr. Warren: If, for any reason, in any particular state or other jurisdiction, a system 
 exists, whether of law or franchise, which is antagonistic, or is not calculated to promote 
 the development and security of a public utility, what effect has that on the bonds? 
 
 "Mr. Stuart : It has the effect of keeping people out of the state entirely. There have 
 been such situations. For example, I recall a few years ago, in both Georgia and Texas, the 
 sentiment in those states \vzs such that it was very difficult, or impossible, to sell public 
 utility securities that came from those states. The investment bankers have no control over 
 what their client does with the money, and the great majority of clients are seekers after 
 information, and if they find that in any given community or state, or in any given industry, 
 conditions are not very favorable, their money will go elsewhere." 
 
 It cannot be doubted that the adoption of the policy of state regulation of 
 stock and bond issues did have an effect, at least initially, upon the credit of the 
 electric railways by stimulating the investor's appetite for a class of securities 
 which had theretofore come to be regarded as highly speculative. It cannot be 
 doubted, either, that state regulation of security issues did not have the effect 
 of putting the street railways upon a financial basis where they could withstand 
 
94 Electric Railway Problem 
 
 the other influences at work to undermine and destroy their credit. The ques- 
 tion here is whether the restrictions of state regulation actually lessened the 
 companies' power of self-help when the heavy strain came upon them. The 
 trouble with state regulation as ordinarily practiced appears, upon analysis, to be 
 this: it destroys the speculative possibilities of the investment, without giving it 
 the guaranties of a secured investment. The process of disposing of bond issues 
 can no longer be "lubricated" by a judicious distribution of bonus stock. If big 
 earnings in the future promise a high return upon the investment, regulation 
 holds out the counter-promise that the benefit will be taken away from the security 
 holders and given to the public, or at the least the investor will be required to 
 share the benefit with the public. On the other hand, regulation does not guar- 
 antee earning power: it merely promises, within certain limits, an opportunity 
 to try to earn. Moreover, the commissions generally have been given no 
 authority to compel financial reorganization and the reduction of existing capital- 
 ization. Under these circumstances, about all they can do is to make sure that 
 new bond and stock issues represent new money used for proper capital purposes. 
 If the bonds already out are in excess of the conservative value of the property 
 or constitute an undue percentage of such value, then the security of new bonds 
 will be inadequate although they represent 100 cents on the dollar of new cash 
 invested in useful and necessary street railway property. Under such conditions, 
 the company needs, not a public ser\'ice commission, but a receiver to give security 
 to the new investor. The situation is even more desperate where the new money 
 is to be brought into the enterprise by the sale of stock. Every new share, unless 
 an issue of preferred stock is put out, will have to lie in the same bed with the 
 shares already outstanding. Under these conditions, it is not strange that under 
 state regulation, except as affected by special guarantees under service-at-cost con- 
 tracts or by the good will and parental interest of holding companies, the issu- 
 ance of street railway stocks practically came to an end. That meant that new 
 money could be secured only by the sale of bonds, and that the proportion of 
 bonds outstanding to total capitalization would gradually increase. The result 
 of this would be the absorption of a larger share of the return on capital by the 
 fixed charges, and a gradual shrinkage in the "margin of safety" upon which 
 the banker depends as a guaranty warranting the purchase and distribution of 
 additional bonds. Of course, if the bonds already outstanding represent the 
 entire investment, and if the stock has never earned any dividends, the issuance 
 of additional bonds on account of new investment, without any corresponding 
 issuance of stock, will not make the bond holders' actual security any less, although 
 it will "look" less because of the smaller nominal amount of stock outstanding 
 representing the real or imaginary equity in the property. 
 
 The modern tra of regulation began in 1907 when the public utilities laws 
 of New York and Wisconsin were enacted. The special census report on street 
 anfl electric railways for that year showed a total of $2,097,708,856 capital stock 
 and $l,677.0r>3.240 funded debt. Ten years later the capital stock bad increased 
 17.9 per cent, while the funded debt had increased 81.9 per cent. Indeed, the 
 increase in common stock was only 1.V2 per cent, as compared with a 43.9 per 
 cent increase in preferred stock In 1<>07 the funded debt of the electric railwavs 
 
Public Regulation of Securities 95 
 
 of the country was $420,645,616 less than the capital stock; in 1917 it was 
 $577,332,621 more than the capital stock. 
 
 The defect in a scheme of public regulation that does nothing about the 
 securities already issued while attempting to control future issues was clearly 
 brought out by Mr. W. E. Creed, Counsel for the San Francisco-Oakland Ter- 
 minal Railways Company, at pages 891 and 892 of the Proceedings, where he says : 
 
 "Now there is just one other thing. You were speaking about the California Com- 
 mission, and I think this thing is true all over the country. We have had an inconsistent 
 situation in public regulation due to the fact that the commissions came into existence very 
 largely after 1907 and they found utilities, street railroads and others, had been issuing 
 securities on one theory, you see. and the commissions came in and took control of the 
 issuance of securities and they fixed rates with reference to companies which had securities 
 issued in large part on a different theory from theirs, on the theory on which the commis- 
 sions themselves issued securities, and 1 have always thought the only thing to do was to 
 treat rate-fixing as a financial question purely and simply and as an action by public authori- 
 ties to maintain credit and service and that if they were unwilling to support the securities 
 which were already out, in other words if they were unwilling to permit the credit of the 
 company to go on, the commissions might just as well frankly force reorganizations in those 
 securities and cut down the securities to where they could handle the thing as a whole. Now, 
 we have had that inconsistency in regulation which I think has been a very bad thing. I found 
 it in several other classes of utilities where we have had securities issued and put out in good 
 faith and our credit depended upon the maintenance of revenue to support those securities. 
 Now. if you fi.x rates upon an entirely dift'erent theory and do not kick out those securities, 
 you have an entirely different situation. 
 
 "The Chairman : The California Commission has sought to regulate the rates so as to 
 bring a fair return on the value of the property? 
 
 "Mr. Creed: Yes. 
 
 "The Chairman: And has proceeded to value the property in very many cases? 
 
 "Mr. Creed : Yes. 
 
 "The Chairman: Do you think that to be a proper basis? 
 
 "Mr. Creed : Yes, I approve of that, but I think it is merely producing a slow death 
 to go on without removing that inconsistency. 
 
 "Commissioner Meeker: Do you think the same authority should regulate the issuance 
 of securities that regulate rates ? 
 
 "Mr. Creed : Yes. sir. 
 
 "Commissioner Meeker: Will you explain w-hy? 
 
 "Mr. Creed: Well, because the credit of the company depends upon what it earns and 
 its management, and it requires its earnings to pay its operating expenses, take care of its 
 depreciation and pay the obligations on its securities, and I think there is an absolute close con- 
 nection between the securities out and the revenue, -^nd I would go even further than that. 
 I would give the state regulating authorities the power to control financial structiires of com- 
 panies and control reorganizations. If you are going to have regulation you might as well 
 have it one hundred per cent, because those three things are so intimately connected that 
 you have a constant struggle unless you have cooperation in the issuance of the securities, 
 approval of the securities already out and regulation of the revenue in harmony with those 
 securities." 
 
 It is apparent that public service cominission control has failed at least to 
 preserve and protect the credit of the electric railways, and it is by no means 
 clear that in certain respects commission control may not have impaired their 
 credit. The public has required the companies to pursue a sounder and more 
 conservative policy with respect to the issuance of new securities, but has left 
 them in most cases to stagger along under the capital burdens that were already 
 tied on their backs before the establishment of the state commissions. State 
 regulation of street railway securities has been incomplete and imperfect. Both 
 theoretically and practically it has taken away the new investor's chance to win, 
 but has left him with his chance to lose. Under these circumstances, if he 
 "breaks even," he is fortunate. This is hardly the way to "attract" new capital. 
 At the same time the old investors who went into the enterprise as a speculative 
 
96 Electric Railway Problem 
 
 venture have fared theoretically much better at the hands of the commissions, 
 some of which are inclined to let reproduction cost new throw its protecting 
 mantle over the inflated securities of the past and even to let superseded property, 
 early losses and conceived intangibles swell "fair present value" to a point where 
 all the risks of the early days will be cashed in by those who now hold the secur- 
 ities. The past investor, who took his chance and lost, is now clamoring at the 
 doors of the state commissions to get his money back. In the unrecognized con- 
 flict between the old investor and the new, many commissions are apt to side with 
 the old, since he is there to press his claim. In doing so, however, they are not 
 helping the credit of the industry. 
 
Chapter XIX 
 
 SHARE OF COMPANIES AND PUBLIC IN RESPONSIBILITY FOR 
 
 LOSS OF CREDIT 
 
 Many causes for the failure of the credit of the electric railways have been 
 elaborated in the preceding chapters of this report. The causes thus far dis- 
 cussed had their origin either in the unsound financial policies of the street rail- 
 ways themselves or in the restrictive policies adopted by the public with respect 
 to them. For the effects of these policies the companies and the public must 
 share responsibility. The public is not in a position to be too severe with the 
 companies so long as it maintains an attitude of unwillingness, unreadiness and 
 incapacity itself to initiate or carry through the measures required for the per- 
 formance of a public function so necessary as urban transportation. While state 
 and municipality stand around and say "Let George do it," they are not called 
 upon to abuse George for doing it according to his own lights, and moreover 
 they will have to tip George well if they expect him to be amenable to reason, 
 that is, to their reason. From the point of view of the electric railway companies, 
 the commissions have in large measure failed. The fact of their failure is 
 alleged and the reasons therefor outlined by Mr. Richard Schaddelee, a witness 
 for the Electric Railway Association. At to what the people expected in estab- 
 lishing the commissions and as to the responsibility of the commissions themselves 
 for their failure, Mr. Schaddelee says at page 861 of the Proceedings: 
 
 "Regulation of utilities was necessary, the people felt, not only for their own protection 
 but also for the protection of the utilities. 
 
 "The people were convinced that such regulation must be done by men possessing the 
 experience, education, judicial temperament, integrity of character and absolute fearlessness 
 necessary to intelligently and justly exercise such regulatory power. 
 
 "Therefore, the people established these state commissions with practically unlimited 
 power and authority over the utilities. 
 
 "I am sure that your committee is now convinced that these commissions as a whole have 
 wholly failed to live up to expectations and the intent of the people in establishing said 
 commissions. 
 
 "Inasmuch as the commissions were given unlimited authority, they must now assume full 
 responsibility for their failure. 
 
 "No man accepting authority can escape or deny responsibility. The one implies the 
 other." 
 
 After indicating that he would review in detail the reasons for the failure 
 of the commissions to attain the objects for which they were established, he con- 
 tinues on page 861 : 
 
 "Before doing so, allow me to emphasize that throughout my entire paper I have in 
 mind those companies that are well operated, economically managed and honestly financed. 
 It is not my intent to hold the commissions responsible for utility companies' ills that are 
 due to inefficient management or reckless financing. 
 
 "The results of these must be borne by the companies themselves, and it is the duty of 
 the commissions to see that the people are not made to suffer from them. If there are any 
 such companies, I am sure they are verj' few in number and need not be considered here." 
 
 97 
 
98 Electric Railway Problem 
 
 From the last sentence of the above quotation, one would infer that how- 
 ever up-to-date Mr. Schaddelee may be, he is not very well versed in street rail- 
 way history. However, he states a rule that should be of value in assessing the 
 blame for existing troubles. This is of great importance because any solution of 
 the general street railway problem must be based on equity if it is to lay a secure 
 foundation for the full development of local transportation as a public function 
 in the future. The most difficult immediate aspect of the problem is the deter- 
 mination of the amount of the private investment in any particular street railway 
 property which should be taken as a base for determining the allowed return upon 
 capital while private ownership continues, and which should be taken as the 
 purchase price in the event of the acquisition of the property for public owner- 
 ship and operation. It is necessary, therefore, to assess the blame for past policies 
 and results in order that present and future responsibility may be distributed in 
 the extremely practical form of a financial settlement. This problem is rendered 
 much more difficult by the changes that have taken place in economic conditions 
 for which neither the companies nor the governmental agencies representing the 
 public can be held responsible. The next step in our discussion will be an analysis 
 of these changes. 
 
Chapter XX 
 
 EFFECT OF AUTOMOBILE AND JITNEY COMPETITION 
 
 UPON CREDIT 
 
 Obviously, the ultimate basis of credit is earning power. Even the existence 
 of physical property which could not be reproduced for the amount of the in- 
 vested capital is of little importance in establishing or preserving credit unless it 
 is accompanied by earning power. The electric railway industry needs faith, 
 hope and earning power, but the greatest of these is earning power. Street rail- 
 way earning power is a composite result of volume of trafific, rates of fare and 
 cost of service. Anything that restricts traffic, reduces rates or increases cost, 
 in itself tends to destroy earning power. Street railways were in many com- 
 munities constructed on a competitive basis, but the conditions under which they 
 operate led almost universally to the theoretical and practical recognition that 
 monopoly is an essential characteristic of this service. Just as the public had 
 generally come to acquiesce in this fundamental fact, a new factor came into 
 existence that tended to reestablish in practice the competition that in theory had 
 been given up by general agreement. The advent of the automobile and the 
 jitney bus is shown by the experience of the electric railways of the country 
 during the past ten years to have been a momentous event from the point of 
 view of the agency already in the field rendering local transportation service. 
 It was shown by the testimony before the Commission that today there are 60 
 passenger automobiles in the country for every street car. This multiplication 
 of motor vehicles engaged in the transportation of people to and from their 
 work and to and from their pleasures is a fact of great importance to the street 
 railways. The operation of jitney buses as common carriers is much more re- 
 stricted than the operation of private automobiles, but the jitneys have a definite 
 and intense effect upon the street railway situation in particular communities, for 
 the reason that they engage in direct and in some respects fatal competition with 
 the street cars as public carriers. The experience of numerous communities, even 
 before the extraordinary conditions growing out of the war, made it clear that 
 unrestricted jitney operation, though more or less temporary and precarious in 
 character, means destruction to the street railway from the financial point of 
 view. It seems to be the general opinion of those who have given the subject 
 study that the two agencies of local transportation cannot exist side by side as 
 free competitors for urban traffic without destroying each other. 
 
 The effect of automobile competition has been felt from California to 
 Massachusetts. In a telegram from Los Angeles, dated July 29, 1919, Mr. Paul 
 Shoup, President of the Pacific Electric Railway Company, which operates an 
 interurban system with a trackage of more than 1000 miles in Southern Cali- 
 
 99 
 
100 Electric Railway Problem 
 
 fornia, refers to "the desperate situation of electric lines in California." He 
 says that "the jitneys and motor trucks competing with electric lines are not only 
 not taxed for maintenance of highways but are permitted to operate over the 
 very pavements which electric lines are required to build and maintain for all 
 space occupied by tracks and two feet outside thereof." He says that "in addi- 
 tion the state income tax on electric lines is in part used to maintain a system 
 of good roads generally so freely used by motor trucks and jitney competitors." 
 Mr. Shoup's telegram is found at pages 608 and 609 of the Proceedings. 
 
 Los Angeles was one of the earliest cities in which the jitney phenomenon 
 manifested itself. While the jitneys within the city limits were pretty well regu- 
 lated out of existence by an ordinance initiated on behalf of the street railway 
 interests, Mr. Chas. L. Henry, of Indianapolis, known as "the father of the 
 interurban railway," reported to the Commission at page 714 of the Proceedings 
 that "the Pacific Electric Company is losing $1,400 a day. $500,000 a year, from 
 jitney buses doing countrj- business. Now, you may call them interurban jitneys 
 if you want to. They are absolutely uncontrolled." 
 
 Interstate Commerce Commissioner Eastman, in pointing out what kind of 
 a report he would want to make if he had the task of the Federal Electric Rail- 
 ways Commission to do, at page 2066 of the Proceedings, said : 
 
 "I should want to point out. further, to the public ver>' clearly the inroads which have 
 been made by automobile competition. There is no doubt whatever that that has been a very 
 important factor in dccreasiuK the revenue of street railway companies all over the country-, 
 and particularly in the country districts, although it has also operated in the cities. No one 
 can see the number of automobiles which operate here in the city of Washington, for in- 
 stance, without realizing the cflfcct which that must have upon street railway revenues." 
 
 In connection with Mr. Eastman's testimony, Mr. Warren made the fol- 
 lowing statement as to the effects of jitney competition in Springfield, Massa- 
 chusetts, at page 2066 of the Proceedings : 
 
 "We had an estimate in Springfield as to how much the jitneys have taken from the 
 Springfield Street Railway, assuming that the jitney passengers would ride in the cars if they 
 did not ride in the jitneys. The estimates vary from $300,000 to $300,000 a year, because of 
 the varying numt)er of the jitneys. When the weather is had they do not run. and when the 
 weather is go<xl they do run; so that it is a little difficult to estiinate ; but from $500 to $1,000 
 a day is the estimate of the street railway officials." 
 
 The Special Street Railway Investigation Commission of the Massachusetts 
 Legislature, which reported on February 1, 1918, discussed "the growth of the 
 automobile business" at pages 24 to 26 of its report,* where it says: 
 
 "This subject should he treated under two heads: 
 
 "(1) The privately owned automobile which carries passengers, not for hire, some of 
 whom would otherwise ride on the street cars. 
 
 "(2) The so-called jitney; which enters into direct competition with the street railways. 
 
 "(1) Pritiilely owned .-tutos. — The advent of the automobile has been one of those 
 circunustances whidi no human mind could foresee. In this connection the following figures 
 are of interest : 
 
 "hi 1910, 31, .160 automobiles were registered in this State, including commercial trucks 
 and vehicles, but excluding dealers' cars. 
 
 In ,1912 the number was 50,132. 
 In 1915 the number was 102,63,1. 
 In 1916 the number was 1.%.809. 
 In 1917 the number was 174,274. 
 
 "Of this last number, 147,310 were mainly pas.senger cars, i.e., with trucks and com- 
 mercial vehicles excluded .Xssuming that each of these cars takes away from the revenue 
 of the street railways one round-trip ride per day, paying a 5-cent fare each way, the loss 
 
Automobile Competition 19I 
 
 in street car revenue in a year in this State would be about $5,000,000, or nearly $15,000 
 per day. It is estimated that a private auto would represent two fares per day, which would 
 otherwise be paid on the cars, .^ny one watching the stream of cars morning and night 
 through the streets of Boston which lead to the business center will probably agree that such 
 cars must represent a material loss of revenue to the Boston Elevated. The question of 
 just how many dollars are thus diverted from the treasury of the company is a matter im- 
 possible to estimate exactly. The above estimate of $5.0()0,00O per year appears reasonable. 
 In addition to the private autos there are about 10.000 motorcycles licensed in this State, 
 which also means a loss in revenue to the street railways. The large number of automobiles 
 also causes a material delay to traffic at important street intersections. 
 
 "(2) Jitneys. — The jitney represents a different phase of the automobile situation. In 
 the jitney the street railway has a direct competitor for fares. The jitney operates in the 
 same general territory as the street railway, picking off the cream of the traffic (such as the 
 short-haul business), operating in many cases only under favorable weather conditions, and 
 often without a bond sufficient to protect either the pedestrian or the passengers in the case 
 of accidents. The jitneys often pay licenses locally, but in many cases not proportionate to 
 their privileges. In this State the jitneys have not been declared common carriers, and are 
 therefore not subject to the regulation of the Public Service Commission. Certain cities and 
 towns have bonded the jitneys so that the public is reasonably protected. As a general rule, 
 however, it is not believed that these jitneys are so bonded. 
 
 "The street railway companies are thus subjected to a more or less unfair competition, 
 by which the jitneys can operate in general how, when and where they please, without having 
 any particular responsibility in return for their rights to engage in the transportation business. 
 The street railways, however, mu.st maintain their service, under all conditions of weather, 
 in a manner satisfactory to the general public, and under the supervision and regulation of 
 the Public Service Cornmission. Recently jitney competition has been so severe that the 
 Nahant & Lynn has threater.ed to cease operations unless the city will revise the conditions 
 under which jitneys are allowed to operate." 
 
 Mr. Luther S. Storrs, President of the Connecticut Company, at page 423 
 
 of the Proceedings, says: 
 
 "The rapid development of the automobile business has had a tremendous effect upon the 
 earnings of electric railroads throughout the country ; that, attendant with the ^ very great 
 development of the perfected highway and the permanent paving of city streets." 
 
 Mr. Storrs then points out, at page 424, that in the fifteen years from 1903 
 
 to 1918 the number of motor vehicles registered in Massachusetts grew from 
 
 3,241 to 193.497, and adds: 
 
 "During that period the history of the electric railroads in Massachusetts is one of 
 rapidly approaching insolvency. Two hundred and fifteen miles of electric railroad tracks 
 within that state have been abandoned." 
 
 Further on, at pages 425 and 426, he describes some of the specific effects 
 
 of cheap automobiles and jitneys upon the electric railway business. On this 
 
 point, he says : 
 
 "In parts of the Commonwealth of Massachusetts, and doubtless it is true in other parts 
 of the United States, electric lines were built through strictly summer resort territory, 
 such as the Berkshire Hills, which has been a very popular summer trip. Some years ago the 
 tourists came in and spent a week or a month in some favorite inn with an occasional trolley 
 trip through the hills. Now the tourist comes in in his automobile, and dependmg upon his 
 standing, a verv elaborate one or a very simple one, stays a day or two and passes on to 
 some other part of the country. That has had a most disastrous effect upon the revenue 
 of the electric lines in the territory, necessitating a very material decrease in the service 
 rendered, that decrease now running as high as two-thirds; that is, one-third only of the 
 service which was originally rendered on those lines which are still in operation as given. 
 Some lines were abandoned." some of them entirely junked, the tracks torn up and the wires 
 torn down, and on other lines the service discontinued entirely, and on other lines a measure of 
 local relief or aid given to the corporation for continued service of one or two cars to serve 
 the little villages and the small communities around. 
 
 "With the cheap automobile and the even cheaper second-hand car there has sprung up 
 a measure of competition with the electric railroad which, when not recognized as competition, 
 has been very serious upon the revenues of the transportation utility; that is, the jitney. And 
 there is the development of the small second-hand and jitney bus automobile carrying 20 
 passengers. In those communities where the es.sential need of transportation has been 
 thoroughly recognized and tlie responsibility of the transportation utility to the community 
 
idi ■ ■ ■ Electric Railway Problem 
 
 expressed in forms of statute, that is, tlie requiring of the jitney bus a regularity of service 
 during all periods of the day, a certainty of service over particular routes, a responsibility in 
 case of accident hazard and also a ineasure of tax to comix;nsate for the pavement and 
 other facilities offered by the city, that has placed that competitor upon what might be con- 
 sidered a legitimate basis. In other communities, however, as yet there has been no regulation 
 which has been effective from the standpoint of the community in giving essential means of 
 service, and in those parts of the country the jitney operates in casual service over certain 
 routes or as far as the individual may have passengers, turning back into the center and 
 picking up another load, and if by any chance a number of people arc waiting to go into 
 other portions of the city, going on other routes. They are irresponsible, the title to the 
 car remaining frequently in the hands of the manufacturer or in the name of the wife of 
 the driver ; and the only property which can be attached from the standpoint of those who 
 might be injured by accident l>eing that of the deteriorated automobile, of little or no value." 
 
 After referring to the great increase in the number of jitneys operating in 
 New Jersey "directly attendant upon an effort of the electric railway utility to 
 obtain increases in revenue through changes in its rates of fare." he discusses 
 the result of a careful analysis of transportation service in the city of Bridge- 
 port, which he describes as being more largely overrun with jitneys than any 
 other city in Connecticut.- The detailed figures for Bridgeport are given at 
 page 428 of the Proceedings, as follows: 
 
 "COMP.ARISOX OF NUMBER OF PASSENGERS CARRIED BY 
 
 STREET R.MLWAY AND IITNEYS: CLASSIFIED 
 
 BY LENGTH OF RIDK 
 
 On the Per Cent 
 
 In Both Directions Railway On the Jitney Total Taking Jitney 
 
 Riding within 1J4 miles radius 
 
 of center of city 5.432,947 5.561.451 10,994,398 50.58 
 
 Riding more than \'/i miles 
 
 but less than 2 miles from 
 
 center of city..... 4,805.761 10,620,347 15,426,108 68.85 
 
 Riding more than 2 miles but 
 
 less than 2V4 miles from 
 
 center of city 3.395.431 2.758,041 6.153,472 44.82 
 
 Riding more than Zy^ miles 
 
 but less than 3'/j miles 
 
 from center of city 239.724 239.724 
 
 Riding more than i'/j miles 
 
 hut less than 4% miles 
 
 from center of city 860,048 86 0,048 
 
 Total 1 4.733^11 1.<1939.S.19 33,673750 56.245" 
 
 And still the wonder grew. At page 429, Mr. Storrs tells how the motor 
 truck has produced passenger transportation as a by-product. It appears that in 
 Connecticut a man does not have to be a Yankee to appreciate a good thing in 
 the tran.sportation lino when he sees it. after having been accustomed to the Con- 
 necticut Company's service, as witnesseth Mr. Storrs: 
 
 "The deyrlopment of the motor truck has also had a serious effect upon the revenues 
 of the electric lines. That is now becoming more and more apparent as we see makeshift 
 scats placed u|xin the nmlDr trucks or trucks loaded to full carrying capacity in space, if not 
 in lonnago. of those Ixmnd out lor picnics or to other places of resort. 
 
 "A case in |><>inl that will l>e of interest is this : Some time ago in one of the New 
 England cities there sprinig np unexpectedly (to the transportation utility > a very large busi- 
 ness in shore lathing by the foreign clement entirely, Russian jews. Lithuanians, Italians and 
 Greeks, which required an immediate increase of transportation during the hotter summer 
 days and esjiecially Saturdays and Sundays, of .some twentv to thirty extra cars of full 
 carrying capacity, that is a carrying capacity of 75 to 100 passengers, depi-nding u|>on the 
 numlxT that might stand. That ran over a period of three or four years, and as there was 
 a great deal of ditTiiullv to gel the fares from all the mothers of the small foreigners, they 
 would not all of Ihrm acknowledge the individual children, the traction utility put in a pre- 
 payment enclosure through which they all had to pass and pay their fare going in That 
 was very effective in getting the electric railro.id fares but. unfortunately, the fathers in a 
 
Automobile Competition 103 
 
 great many cases were vegetable vendors or ice vendors or something of that kind, and 
 they all of them use their motor trucks which are normally used for their business, by 
 putting in extra seats and taking down all these hordes of people to the shore with the result 
 that today there is no demand whatever for transportation by the utility." 
 
 Mr. Homer Loring, Chairman of the Board of Public Trustees for the 
 operation of the Eastern Massachusetts Street Railway Company, was em- 
 phatic in his judgment that the only thing to do with the jitney, from the street 
 railway point of view, is to put it out of business. His testimony is replete 
 with interest. Beginning at page 1644 of the Proceedings, Mr. Loring outlines 
 the policy of the Board of Trustees, as follows : 
 
 "The broad powers we have had have enabled us to combat the jitney situation and, to 
 my mind, that is our greatest problem today. The jitneys are our greatest problem. 
 
 "We have made a count in all of our cities every month to determine the number of 
 jitneys and the passengers they are actually carrying, and the number of jitneys, from our 
 May count to our August count, more than doubled ; and the amount of money which they 
 are taking away from us increased during that 90 days from $18,000 to $41,000 a week, or 
 more than $2,000,000 a year. 
 
 "Commissioner Gadsden : It naturally would increase in summer, would it not, and 
 decrease in winter, Mr. Loring? 
 
 "Mr. Loring: I do not know, Mr. Gadsden. The jitneys that we are encountering, 
 although in some cities it is the Ford automobile, in others it is buses seating 40 people, 
 enclosed buses, which certainly have been built with the idea that they can operate 365 days 
 in the year. 
 
 "The Chairman: Have your higher fares stimulated that jitney development? 
 
 "Mr. Loring : There is no question that the higher fare has stimulated it. At the same 
 time, we have an interesting case over in Massachusetts, at New Bedford. New Bedford, 
 undoubtedly, has given for years the best service of any city in the State, and it has been 
 in a class by itself, and it is still running on a 5-cent fare, although they are about to try 
 to get a higher one. 
 
 "Up to the time that they compelled jitneys, about May 1st, to provide a surety company 
 bond, they had more jitneys in New Bedford with the S-cent fare and with better service 
 than any other city, than in any other city in the State ; they had 250 of them there. I use 
 that frequently when some one comes in and says: 'If you will reduce your fares the jitneys 
 will drop out.' We had jitneys with the S-cent fare. To be sure we did not have as many 
 as we have today ; but the men returning from the war have been quite an influence in their 
 increase. Then, of course, the automobile people are exploiting the jitney business to an 
 extent that I did not realize until a few days ago. The department stores are exploiting 
 them. One department store in Salem has loaned $29,000 to people to buy jitneys and bring 
 the people in to that particular store. The jitney question is a very large one. 
 
 "The Chairman: In that case of that department store, Mr. Loring, were the department 
 store's advertisements on the side of the jitney? 
 
 "Mr. Loring: No; but they ran to and parked in front of that store. They saw that 
 that was the center. 
 
 "We had an interesting case the other day. We notified the City of Quincy that on 
 what is called Howe's Neck Road, about four miles long, we would abandon the road and 
 discontinue service on the 1st of October unless they restricted jitneys. They said that 
 they would not do it. Finally, however, they put it to a popular vote of every property 
 owner, and the vote was 700 to 17 in favor of the street railway. That was the first real 
 encouragement we have had over in our territory. 
 
 "We take the position that the two cannot live in the same community, in the same city. 
 I do not think any half-way measure is going to help. Jitneys and the street railway cannot 
 live. It is wholly unfair and unreasonable competition. 
 
 "Commissioner Gadsden : Did you say that that vote was by property owners' vote or 
 citizens? 
 
 "Mr. Loring : Property owners. 
 
 ******** 
 
 "The Chairman: How was the question framed? 
 
 "Mr. Loring: They were simply asked to choose, and to cross out one or the other 
 line. One was: 'Do you prefer street railway service.' and the other was: 'Do you prefer 
 jitney service.' Then it said at the bottom: 'The street railway will not operate if the jitneys 
 operate. You must choose one or the other.' It was a perfectly fair test, however, and to 
 my mind was a very very important one. It has so encouraged the Mayor of Quincy that I feel 
 that there is a fair chance of getting jitneys out of the entire city. 
 ******** 
 
 "Of course, we have a great many cities that are interested in their jitney service and 
 
104 Electric Railway Problem 
 
 say that it ought to be continued. The competition is so luireasonable, however, that it cannot 
 continue. 
 
 "l'"or instance, \vc showed the City of Lynn the other day that we paid in taxes $30,000, 
 and we ran about 40 regular cars; that is $750 per car, figured in that way. The jitney bus 
 scats 20 or 30 and it pays an average of about $25. Now, of course, that is competition that 
 the street railway cannot meet ; and so far as 1 can see the only position that we are going 
 to take is that they cannot exist in the same city, and the people ultimately must choose 
 between them, because the way they increase where they are not severely restricted is 
 astonishing. 
 
 "So far as the restrictions are concerned, nothing amounts to anything except a rigid 
 bond. We have jitneys running in cities where, apparently, the regulations are stringent, 
 but they do not have to provide a surety bond and they can get some near relative, or the 
 City Treasurer is not very careful alK)Ut it, and it does not deter them at all. They do not 
 make money generally. They tell us that they do not make money. There is a constant 
 changing of ownership. However, it is pretty attractive. A man says, "If I run a jitney 
 I can be my own boss, and go home to lunch when I want to' and they would rather work 
 for less compensation, I think, under those conditions. I know they would work under those 
 conditions for far less than they would work for us to run a car. 
 
 "Mr. Warren: Does what you are saying api>ly to the jitney bus? When you say 'jitney' 
 do you mean these 20 or 30 seaters? 
 
 "Mr. Lx)ring : Yes; 1 mean anything from the Ford to those that we have that seat thirty. 
 
 "Commissioner Gadsden : Did your investigation lead you to think that these buses are 
 an economical success? Can they operate successfully commercially in your judgment? 
 
 "Mr. Loring : Mr. Gadsden, there is a grave question about it. The l-'ord jitney makes 
 high si)ced. Some of the mills told me that their help said that they could take the Fords 
 and load up with four or five of the help and run to the other side of the city with no stops 
 and they could get their lunch and return that way. Now, it was pretty hard to give any 
 good argument as to why they should not do that. We cannot do it with our street railway, 
 because the more people you carry the more stops you have to make and the slower your 
 running time. That is exactly what happens as the jitney buses increase in size. The time 
 slows down a great deal, particularly in the city. 
 
 "So I gravely doubt whether they have a broad economic u.'se in our cities. 
 
 "I think it is going to lie a serious matter in the future, anyway, Mr. Gadsden, handling 
 the public in our cities. Our streets are fixed in width, the traffic in them has increased 
 enormously in the last few years, and it stands to increase greatly in the next few years, 
 and I do not believe that there is any way found yet to transport people — I am talking about 
 city traffic — as well as street cars holding a good many people and occupying a certain place 
 in the street. 1 doubt it very much. However, of course, it remains to be seen." 
 
 .Mr. I\o<jcr W. Babson, President of Babson's Statistical Organization, and 
 a director in the Eastern Massachusetts .'street Railway Company, expressed the 
 opinion that in attacking the electric railway problem there are "three general 
 methods of pursuit": first, private ownership and public regulation, which has 
 already broken down; .second, municipal owncrshi]) and service-at-cost plans, 
 which arc good from the investor's standpoint, but arc likely to cause a "back 
 fire" some day ; and, based upon the recognition that the automobile is what is 
 the matter with the street railway, another method which he describes and ad- 
 vocates at pages 1054 and 1055 of the Proceedings, as follows: 
 
 "The third method would be for the communities to relieve the street railways of their 
 taxations and various other burdens and |KTmit them to charge what fares they wish to 
 charge, hut to protect the public by i)ermitting a proi)er competition in the line of judicious 
 jitney systems. 
 
 "I feel very strongly that in the end the street railways and the public would be better 
 oflf by opening the throttle and letting the street railways and the automobiles fight the thing 
 out on a service liasis, and each class charge what they need to do the business. In some 
 communities the street railway wouUl go out of business, and we would have a bus service 
 inste.-id. In other communities the buses would go out of .service, and we would have a 
 street railway service instead. Itut in all the communities we would have decent service, 
 which we are not having at the present lime. 
 
 "I think the stn'cl railway difliciillies l)egan in Massachusetts, for instance, when the 
 stale came in and practirally fathered the roads. The slate approved the issues of securities^ 
 and pnilectrt! the rojids against roiniiclition, and the roads became lazy and indifferent, the 
 service fell down, and that was the l)eKinning of the trouble. 
 
 "H the rcvads had l)cen obliged to fight for their existence from the first, h.id l)ccn free 
 
Automobile Competition 105 
 
 to charge what fares they wanted to charge, and had been dependent on service for holding 
 their business, 1 do not think we would have the trouble so acute as we have it at the 
 
 present time. 
 
 ******** 
 
 "The real difficulty with the street railway situation came with the automobile. It is not 
 the labor problem, as I see it. It is not the high cost of materials. Those are factors. But 
 labor has always gradually increased in price, the materials have gradually increased in price. 
 It was Henry Ford who hit the street railway system a blow between the eyes. If he had 
 only been bright enough to sell street railway securities short when he built his plant, he 
 would have been making double the money that he is making now. 
 
 "Take Massachusetts, for instance : There are less than 5000 street cars in Massachusetts, 
 and there are 186,000 automobiles. There are 186,000 automobiles and less than 5,000 street 
 cars. There is the fundamental difficulty, as I see it, with the street railway situation. 
 
 "Now we are in it, the question is, how are we going to get out of it. We cannot get 
 out of it, certainly, by having our hands tied. 
 
 "There are only two ways : Either to sell out to the communities, through municipal 
 ownership or service-at-cost plan, or else have a free reign to win out on the basis of service. 
 
 "There are some communities where the street railway companies cannot win out on the 
 basis of service, but there are other communities where I feci very strongly that the street 
 railways could win out if they were free to charge what the traffic would bear and were freed 
 from restrictions on such questions as paving, which is simply an inheritance from the old 
 street horse-car days ; the reason we have to pay for the paving between the tracks is that we 
 used to have horses that wore out the dirt between the tracks. And I further believe that 
 in Boston, for instance, where we have the 10-cent fare today, if the city and the state were 
 not holding the umbrella over the Boston Elevated Company, and the Boston Elevated 
 Company was free to charge any fare that it wanted to, but had to stand on its own basis, 
 the people of Boston would get better service, and lower fares than they have got today." 
 
 Mr. Babson made it perfectly clear that his reason for advocating the re- 
 moval of restrictions from the electric railways is that they are no longer mon- 
 opolies. At page 1056, he says : 
 
 "A monopoly should he regulated. I feel that very strongly. I think that before the 
 auto came the commission did right in regulating these street railways and controlling them; 
 but now that the auto has come into the field, it seems to me that a monopoly no longer 
 exists and there is no reason why the states and cities should shackle these roads, until they 
 again become a monopoly." 
 
 At pages 1056 and 1057 of the Proceedings, Mr. Babson discusses more 
 fully the subject of street railway monopoly and the absence of it. Upon this 
 point his testimony follows: 
 
 "The Chairman : There is a monopoly, in your judgment, where a street car company 
 has not the jitney competition? 
 
 "Mr. Babson : Yes. 
 
 "The Chairman : But the fact that there are hundreds of thousands of automobiles, 
 privately owned, carrying persons to and from business and otherwise, but not charging for it, 
 is competition, of course? 
 
 "Mr. Babson : Yes ; and that has been what has put the street railways on the blink — 
 the automobile. 
 
 "The Chairman: You do not expect to eliminate competition between that form of 
 convcvance and the street car company, do you? 
 
 "Mr. Babson: No; and that has removed the great cause of public regulation. That 
 has opened the door. When I was a boy, or even fifteen years ago, it was either a question 
 of taking a street car or a slower conveyance : the street car people had the service. That 
 is the real thing that counts in this world— service. The street car people had a monopoly, not 
 of the streets, but thev had a monopoly of serv-ice. They could get you there quicker than 
 anv other form of convevance. That is where their monopoly lay — not in the fact that they 
 had the streets, but in the fact that they had the quickest service. Now that monopoly has 
 gone." 
 
 Mr. Babson's views upon the failure of private ownership and public regu- 
 lation are found at page 1061 of the Proceedings, where he answers Chairman 
 Elmquist's questions as follows: 
 
 "The Chairman : Why do you say private ownership and regulation has broken down ? 
 "Mr. Babson: Because the roads, so many of them, are in bankruptcy. 
 
106 Electric Railway Problem 
 
 "The Chairman: Is that the result of pri\'ate owiiership and regulation, or is it the 
 result of the war, with its attendant high prices, high cost? 
 
 "Mr. Babson ; That is the result of the automobile. 
 
 "The Oiairman: The result of the automobile? 
 
 "Mr. Babson : The result of the automobile absolutely. It is the automobile that puts 
 the street railways where they are. We have less than 5.000 street cars in Massachusetts, 
 and we have 186.000 automobiles. There is the answer to the question. 
 
 "The Chairman : Do you feel that if the war had not come, your street car industry 
 in Boston would still be a broken down institution? 
 
 "Mr. Babson: Yes, I do. 
 
 "The Chairman: What was the condition before the war started? 
 
 "Mr. Babson : It was losing money." 
 
 The Railroad Commission of California, in the San Diego fare case de- 
 cided November 14, 1919,^ recognizes the changed status of the electric railway as 
 a result of automobile competition. 
 
 "The kind of transportation furnished by street railway companies is no longer a mon- 
 opoly," says Commissioner Devlin in the opinion in that ca,se. "The development of the 
 automobile has brought about a condition where the motor vehicle will automatically take the 
 place of the street railway if this kind of transportation can be rendered more economically 
 by automobile than it can by street car. This is especially true in California. I am not 
 convinced, however, that the time has arrived when our largest cities can dispense %vith their 
 street car systems. I am also satisfied that the electrically operated street car will have the 
 better of it when compared with the motor vehicle in regard to actual costs, and when all 
 items of cost are taken into consideration as they should be and if unfair and unequal burdens 
 are not placed on the street railways. This is especially apparent when modern street rail- 
 way equipment is taken into the comparison." 
 
 This is especiaily true in California, and we may add. in Massachusetts 
 and the intervening states. 
 
 The evidence against the automobile as a wrecker of street railway credit 
 appears to be overwhelming. Mr. William C. Bliss, Chairman of the Public 
 Service Commission of Rhode Island, after mentioning "the increased cost of 
 labor and material" and "the excessive franchise taxes and paving obligations" 
 as two of the "fundamental causes of the emergency situation that exists," goes 
 on to say at pages 1186 to 118<S of the Proceedings: 
 
 "The third cause is the competition of the priN-ately owned automobile. The privately 
 owned automobile has come to stay, we cannot interfere with that. That is going to remain, 
 and the only way we can do is to have hard times and force people to dispose of their auto- 
 mobiles aiul ride in the cars. W'c do not want that as a remedy of the situation. But the 
 tremendi>us increase in the numlicr of privately owned automobiles, the influence is just as 
 strong in l'!h<Kle Island as it is everywhere else. Every improvement of state highways tends 
 to increa.se the lunnlwr of these autmnobiles and the use of the roads. 
 
 "The estimates of the effect of jitney competition as shown by actual ridings taken by 
 the commission apiKar in the report, and if I may take that, 1 will refer you to the page 
 so you will have it in your record. It appears upon page 31 of the report of the commis- 
 sion.' where we have indicated that, according to the ridings that were at that time shown, 
 the loss in gross revenue to the Uhtnle Island Comiwny was probably not less than $300,000 a 
 year. With the application of each increase in fares the jitney competition becomes all the 
 more severe. The regulation as it exists in Rhode Island is left to each of the localities. 
 In the City of Providence and the City of Pawturket where the jilncAs are in principal use the 
 re<|nircmcnt is a $2.^ annual license fee, a $.^00 liond for eadi i)as.sengcr. up to the capacity 
 that is fixed for the car: five iwssengcrs is the conmion amount, and a $2,500 txjiid and 
 %2S license fee, and of course the ordinary registration motor vehicle fee to the .*state. 
 
 "The jitneys are under no other regulation. They are not required to operate over par- 
 ticular routes; thoy arc not required to operate upon particular schedules. I Ix-licve that 
 the jitney furnishes to many people a superior service to thai of the trolleys, and I believe 
 for thai reason that it will Ik- impossible to atxilish the jitneys. I believe they should be 
 placed under the strictest regulation. I think they should Ik- reijuired either to W placed 
 under the siipervisinn of the city authorities or inider the sum rvision of the commission and 
 requirc<l to run upon regular routes and with regular schedules and they should be required 
 to furnish statistical data if rc<|uircd. 
 
 "Commissioner Meeker : You spoke of putting them under the strictest regulations. 
 
Automobile Competition 107 
 
 You mean, do you not. the same regulations that apply to tlic street railway companies 
 practically; you would not make the regulations more severe for the jitneys? 
 
 "Mr. Bliss: No, but I mean for instance the safety features, if you could see some 
 of the jitneys that operate, which are regularly licensed, and some of the drivers, you would 
 think they ought to be directed to the Board of Health for fumigation, and some of the 
 machines sent to the car shop for repairs. 
 
 "Commissioner Meeker: And you think that the jitney would still survive as a severe 
 competitor to the street railways if it were subject to severe regulations, practically the 
 same regulations as street railroads ? 
 
 "Mr. Bliss: I think it would operate to hurt the street railways, but I think they would 
 be very greatly reduced in number. In the city of Providence our great difficulty is our 
 narrow streets and corners which make the operation of these large cars difficult. The con- 
 gestion of the streets with jitneys and with the other automobiles tends to very greatly delay 
 the movement of the cars through the center of the city. That is one reason why the 
 recommendation of the commission's engineers of rerouting these lines outside the center 
 of the city — which would immediately be objected to by the Department stores, who want 
 every car to go by their doors — such a rerouting would operate to tremendously increase the 
 speed of the cars, and we estimated that an average increased speed of 10'' would mean under 
 the operations of 1917. $150,000. The jitneys operate to delay the movement of cars. They 
 crowd in in front of cars and delay the movement of loading the passengers, and the jitneys 
 which are unregulated, pull right in between the white posts and the car and the passengers, 
 and all of that delays the movement of the cars, and I think that the public generally would 
 welcome proper regulation of the jitneys, but they would oppose the absolute suppression 
 of the jitney, because the jitney does render a superior service to the car. It gets you there 
 quicker. We have a large number operating between Providence and Pawtucket on a 15- 
 cent rate compared with the trolley car rate of 10 cents, and they do a tremendous and profit- 
 able business, and they are well conducted and proper cars and run on a business-like basis, 
 and I think the public are willing to pay for that service, even though it costs half as much 
 again as the trolley does. But to leave the jitneys unregulated and permit them to come 
 in direct competition with the cars is a very serious cause of the present situation." 
 
 Mr. Carl H. Mote, at that time Secretary of the Public Service Commission 
 of Indiana, explained the policy of that commission with respect to the protection 
 of old investments based on hopes that have been disappointed, and referred to 
 the automobile as one of the important factors in causing the disappointment. 
 At pages 1088 and 1089 of the Proceedings, he says : 
 
 "Indiana by no means has escaped the effects of speculation in the pioneer days of elec- 
 tric railway building and financing, else the reorganizations already consummated and now 
 in process and to be accomplished, would not have been and would not be necessary. I 
 believe it is the theory of our commission that we are not called upon to protect the return 
 on securities that represent no value and that were issued in pioneer days in anticipation of 
 future earning power that has not been realized. 
 
 "The truth is that the electric interurban railways have been a huge disappointment 
 to the hopes and judgment of their promoters. The advent of the automobile was not fore- 
 seen, and I do not think we have reached the peak of its efTect on interurban traffic, either 
 passenger or freight. The building of hard surface roads is bound to bring the motor- 
 driven truck into more active competition with the electric railway for the transportation 
 of short-haul freight, and the trouble with the jitney bus is already well recognized. I 
 look upon their future as anything but promising." 
 
 Mr. Gaylord C. Cummin, who, during his career, has been at different times 
 city engineer of Dayton, Ohio, city manager of Jackson, Michigan, and city 
 manager of Grand Rapids, Michigan, appeared before the Commission as a 
 representative of the Institute for Public Service. At page 31 of the Proceedings 
 he classifies street railways into two groups: one group "where it is possible 
 for them to stand on their own feet, by means of increased fares and decreased 
 expense of various kinds, decreased taxes, perhaps, and so on;" and another 
 group "where the earning capacity is not there," where "the rate of fare that 
 is fixed makes absolutely no difference," where the companies could not get a 
 sufficient revenue at any rate of fare that might be charged. Further on, Com- 
 missioner Gadsden asks him what is to be done with this second class of utilities. 
 
108 Electric Railway Problem 
 
 He replies that the choice lies between a partnership scheme with a public subsidy, 
 and public ownership. The witness then states that the automobile is what ails 
 this second group of street railway properties and that the automobile has come 
 to stay. The following colloquy is found at page Z7 of the Proceedings : 
 
 "Commissioner Gadsden: The public has to absorb the loss? 
 
 "Mr. Cummin: The public has to absorb the loss. They are necessary facilities. Un- 
 fortunately, they have nothing to look forward to, because the loss that they have suffered 
 now is a loss due to the automobile, ver\- largely, and the use of the automobile is going 
 to increase, and not decrease, and the probable passengers per unit of population served 
 will probably tend to decrease and not increase. 
 
 ******** 
 
 "Commissioner Gadsden : I want to bring out your idea of what is going to be that 
 essential service that could not pay its way. 
 
 "Mr. Cummin; The effect of the automobile now can be shown by comparing the figures 
 on gasless Sundays, and the Sundays that were not gasless. On a number of lines I found 
 that the gasless Sundays added from 20 to 40 per cent to the gross revenue, and they seemed 
 to average some place around ii 1/3 per cent. Now, if the street railroads had ii 1/3 per 
 cent more gross revenue than they have now, it would go a long way toward helping the 
 solution of the difficulty, even under present prices." 
 
 The discussion was carried further at page 54 of the Procedings, where 
 
 Commissioner Sweet asks the questions. Here Mr. Cummin testifies as follows: 
 
 "Commissioner Sweet : You said that the automobile was having a very material effect 
 in diminishing the travel upon street railways, and consequently diminshing their earning 
 capacity. Can you see any remedy for that from the street railway standpoint? 
 
 "Mr. Cummin : No, 1 do not know that I can. I think the use of the automobile is going 
 to increase rather than decrease, and the only thing I can see is ftir the street railroads to 
 try to work out some sclieme to make riding on street railroads more attractive than riding 
 in Fords. If they can do that, they can perhaps make inroads on these deficits. But there 
 is the situation : .\ man owns a car. and he goes tack and forth to work in it, and he used 
 to ride in a street car ; and he will probably seat two or three of his friends, or at least 
 one friend, probably an average of three or four a week ; he will take them out with him 
 as he passes them on the street. Those are all pt^tential street railroad fares, that would 
 be street railroad fares if it were not for that automobile; and you multiply that by thou- 
 sands and thousands of cases, and you make a very decided inroad on the earnings of the 
 street railway. 
 
 "Commissioner Sweet; Of the two kinds of street railroads you spoke of. those that 
 are almost hopeless, or practically so, and those that are not, which would be the more 
 affected by the automobile competition? 
 
 "Mr. Cummin: I do not .see that it would make any particular difference. 
 
 "Commissioner Sweet ; Don't you think that these street railroads that I think you, or 
 perhaps judge Taft said never ought to have been built, that there was no logical reason 
 for building, out into the suburbs, would be more afTected, in proportion, than those in the 
 center of the city? 
 
 "Mr. Cummin: Oh, yes. Take a line that is built info a high class residential dis- 
 trict, and it might lie pretty nearly put out of business by the automobile traffic. You take 
 lines in the City of New York, and they might be very little affected. I mean, the per- 
 centage is probably very much less than it would he in a smaller city, but that is taking the 
 extremes, of course. I liclieve if you take cities the size of Detroit and Cleveland and 
 cities of that general class, you will find that the automobile has cut very, verv' heavily into 
 the revenues of the street railway companies. It is easy enough to siitiply go out in the 
 street and coimt them up — what would lie street car fares if it were not for the automobiles. 
 
 "Commissioner Sweet: In the cases you have in mind is the jitney playing any part 
 in your estimate? 
 
 ".\Ir Cnmroin : Under certain circumstances and in certain cases tlie jitney may lie a 
 very .serious competitor; but taking the question and generalizing upon it, the serious thing 
 is the automobile as a whole — the privately owned automobile and the jitney and every 
 thing all together ; that is the thing that the street railroads must face, the competition 
 of the automobile. The jitney comiKtifion you can control. The priv'atc automobile com- 
 petition you cannot control. 
 
 "Commissioner Sweet; That is likely to grow worse, rather than better? 
 
 "Mr. Cummin; I would judge so. at least by the plans that the automobile manufac- 
 turers have." 
 
 The effect of jitney competition in Dallas, Texas, upon the revenues of the 
 
 street railway was shown by the testimony of Mr. \V. R. Head, Vice-President 
 
Automobile Competition 109 
 
 of the Dallas Railway Company. He describes the sliding-scale, service-at-cost 
 franchise under which his company is now operating at a five-cent fare and 
 getting a four per cent return on property value. Then, at pages 634 and 635 
 of the Proceedings, occurs the following: 
 
 "The Chairman: Has it not looked to you as if the city got everything in this contract, 
 and you got nothing? 
 
 "Mr. Head: Well, I quite agree with you, Mr. Commissioner, that they got the best of it. 
 
 "The Chairman: Well, what did you get out of it? 
 
 "Mr. Head: H conditions had continued as they were in 1913 and 1914, as to the cost 
 of materials and labor, I think that we would have been earning at this time about eight per 
 cent on the property value, and the people would have been riding at six tickets for a quarter. 
 Now, we did not have to support that, or, rather, some of us did feel that there might come 
 a time when the fare would have to be made above five cents as a straight fare, but at the 
 time the franchises were negotiated, we had the severe jitney competition, that is, the old 
 company management had jitney competition, and one of the agreements of the city was, 
 what you might term a side agreement, that they would pass an ordinance that would relieve 
 the railway company of this jitney competition. 
 
 "The Chairman : Has that been done ? 
 
 "Mr. Head: Yes, sir; but it took a good long time. It got into the courts, and we 
 have only been relieved of it in the month of May of this year. That was the first month 
 that we have had in which to make a comparison. 
 
 "Mr. Warren: What was the result of that comparison, Mr. Head? 
 
 "Mr. Head: It is interesting. The receipts jumped up in May of this year over May 
 of last year about SO per cent. We never knew how much they were taking. 
 
 "Mr. Warren: Fifty per cent? 
 
 "Mr. Head: Yes. 
 
 "The Chairman: Of course, you know, Dallas is still growing, and has been growing 
 some since last May. 
 
 "Mr. Warren: You think 30 per cent may have been the normal growth? 
 
 "Mr. Head : The June statement shows an increase in June this year over June of last 
 year, with no jitneys last year, of about 10 per cent. The increase in May this year over 
 May last year was 48.3 per cent. May, 1919, as compared with May, 1918, increased 48.3 
 per cent. 
 
 "Mr. Warren: And the next month it increased 10 per cent? 
 
 "Mr. Head : The next month it was 10 per cent. 
 
 "Mr. Warren : Because they had been cut ofT in June a year ago ? 
 
 "Mr. Head : Yes ; because they had been cut off in June a year ago." 
 
 In an earlier chapter of this report I quoted Mr. Henry G. Bradlee's letter 
 of October 1, 1919, in which he shows that street railway traffic is booming on 
 the Stone & Webster lines, and even intimates that perhaps the automobile has 
 done the electric railway a good turn after all by stimulating movement and cul- 
 tivating the riding habit. What we are chiefly concerned with in this chapter 
 is the effect of automobile coinpetition, marking as it does a change in economic 
 conditions, upon the credit of the electric railways. The evidence is clear and 
 cumulative that the automobile has raised a serious doubt in the public inind as 
 to the permanence of the electric railway as the chief means of local transpor- 
 tation. Doubt is the negation of credit. Yet the issue is of such vast impor- 
 tance that if somebody sees a silver lining on the dark clouds hanging over the 
 future course of the utility, it is comforting and may lead to a revival of drooping 
 spirits. The witnesses are nearly, if not quite unanimous, that the regulation of 
 jitneys so as to do away with their unequal and unfair competition is quite 
 within the bounds of public policy, but that the competition of private automo- 
 biles for traffic cannot well be regulated. The question is this, therefore : If 
 jitneys are abolished, or at least subjected to regulation and taxation equivalent 
 to the regulation and taxation that are applied to the electric railways, can the 
 latter survive or perhaps even profit by the competition of the automobile? Put 
 
110 Electric Railway Problem 
 
 in another way, is there anything in the remarkable recent development of motor 
 transportation to destroy street railway credit permanently? Mr. Richard Schad- 
 delee, looking out upon the electric railway world of the Middle West from his 
 headquarters in Grand Rapids, Michigan, sees nothing to fear in the automobile, 
 if the jitney can be made to keep its place. His testimony on this point is found 
 at pages 867 and 868 of the Proceedings, where he says: 
 
 "You have heard a lot about the jitney competition. Well, we have had jitney com- 
 petition in past years, too, and the only reason that we had that competition is because 
 the politicians and the public officials allowed those jitneys to compete with us on an uneven 
 and unfair basis. I am not afraid of jitney competition it you put on those jitneys the same 
 burdens you put on us, not a bit. 1 told one of our council wlien they had the jitney com- 
 petition up, 1 said, 'I will stop the street cars for a month if you say so, and let the jitneys 
 do all the business. Then we will stop the jitneys a month and we will do it all. You can 
 be your own judges as to which is the Ixjtter mode of transportation.' 
 
 "You know what we want is justice and fairness, and jitneys or any other mode of 
 locomotion is a revolutionar)- mode over our system of transportation. We cannot prevent 
 that going into effect. There is no private enten>rise that can oppose or retard to any extent 
 the working of an evolution in transportation. We might just as well lay down, but I do 
 not want to lay down imless the competition is fair. 
 
 "Mr. Warren: Is there any regulation of jitneys there? 
 
 "Mr. Schaddelee : Well, the court has regulated them out of business. 
 
 "Mr. Warren: The courts have? 
 
 "Mr. Schaddelee: Yes, and that is another thing where the commission failed to do its 
 plain duty under the law. The Illinois law says that nobody engaged in the transportation 
 of persons in Illinois can engage in that unless they first have a certificate of convenience. 
 
 "Mr. Warren: From the commission? 
 
 "Mr. Schaddelee: Yes, sir, and that is the duty of the commission to enforce that law. 
 They never made any effort to enforce it. Finally we got them, after long work, and after 
 keeping at it all the time, they finally issued an order telling them to desist. Do you suppose 
 they desisted? Not a bit. They increased. They did not care for it, they were nothing 
 but a lot of outlaws, and as long as they could operate as outlaws they could stay. The 
 minute they were compelled to abide by the law they could not live. Any outlaw can live 
 as long as nobody interferes with him. 
 
 "Mr. Warren: What did you do, go to the court and get an order to enforce the 
 commission's order? 
 
 "Mr. Schaddelee: Yes, we got a blanket order, I do not know if any court has ever 
 issued an order of that kind, but we got it, and there are no jitneys now and there won't 
 l>e any more down there. If they do come we will take care of them. 
 
 "The Chairman : Do you not think it was a good thing for the people to be fed on 
 jitneys for a while so as to have the full experience? 
 
 "Mr. Schaddelee : Well. I had no objection to their being fed, but we had objection to 
 the nourishment to feed them being withdrawn from us, that is what we objected to. Those 
 jitneys, you know, in the winter-time when the snow was on the ground — there would be 
 two feet of snow on the ground and the jitneys would not nm until we had cleared the 
 snow from the streets and then the jitneys would go right ahead of our street cars and 
 take all our business away from us, and llu-n they .say the street car company has a com- 
 petitor. That is a fine competitor, that is.'' 
 
 That the jitney has pointed the way to a radical improvement in electric 
 
 railway service through a revolution in operation methods, and has changed the 
 
 electric railway from a monopoly to a business, was the opinion of Mr. Walter 
 
 Jackson, a consulting expert on street railway fares and bus operation, who 
 
 until recently was on the staff of the Electric Railway Journal for manv years. 
 
 Mr. Jackson's testimony does not controvert the view that automobile competition 
 
 has been a leading factor in the collapse of street railway credit, but it strongly 
 
 maintains that the electric railways, to great extent, have their future in their 
 
 own hands. At pages 1590 to 1592 of the Proceedings, Mr. Jackson says: 
 
 "Perhaps the larger difficulty of the electric railway industn.' is not merely the greatly 
 increased cost of operation due to the war. or accelerated by the war. but the necessity of 
 changing its point of view from that of a monopoly, a monopolistic industn,-, to that of a 
 business. 
 
Automobile Competition HI 
 
 "When the electric railway was a monopoly it did not have the necessity to progress that 
 is common in any commercial undertaking. 
 
 "If, for example, an improvement in apparatus were brought before an electric rail- 
 way, the failure to adopt that improvement would not be as dire and show up in as bad a 
 light the operator as would be the case where a manufacturer rejected an improvement. 
 The rejection of an improvement by a competing manufacturer spells ruin. Rejection of, an 
 improvement by a monopoly does not spell ruin immediately, but spells lower income and 
 poorer service. There is not the same means for checking up whether that monopoly is 
 efficient. 
 
 "The electric railway had a double handicap as compared with other public utilities. 
 Monopoly, in itself, dulls the spirit of enteriirise ; but when you add to that the handicap 
 of being obliged to sell your product at a given price regardless of quantity or quality you 
 have a factor that well nigh makes it impossible for men to exhibit a spirit of enterprise 
 comparable with commercial life. 
 
 "We, therefore, find, in comparing various public utilities, that the electric light and 
 gas man shows a greater spirit of enterprise than the electric railway man — very often de- 
 partments in the same company. Apparently the gas and electric men act under the stimu- 
 lus of competition. Their respective fields overlap to a degree, and they also have the 
 advantage of having something tangible to sell. In addition to selling electricity or gas, 
 as the case may be, they sell utensils, appliances of one kind or another which promote the 
 increased use of the intangible article that they have; but the electric railway man, who 
 has just one intangible thing — transportation — has not the same incentive. 
 
 "The electric railways, particularly the larger ones, did not appreciate the necessity of 
 going to a different method of selling their product until the automobile jitney competitor 
 came along. 
 
 "The Chairman : Strictly speaking, can you call an electric railway company a monopoly, 
 in view of the automobile and other competition? 
 
 "Mr. Jackson : Not today, Mr. Chairman, that is the point I am trying to make — that 
 we are in a readjustment period. A monopoly is changing over into a business and busi- 
 ness implies competition. 
 
 "That feeling, that you could sell your product, did not impress itself upon the electric 
 railways until the coming of the automobile jitney competitor. This competitor chose to 
 sell only a certain quantity of transportation, leaving to the electric railway the long rider 
 at the same flat price. It took something of that kind to bring out the illogical system 
 of fares that had been built up in .-America. 
 
 "It stands to reason, of course, that the electric railways alone were not to blame for 
 that. You may say this was an .American policy and a municipal policy ; the flat fare was 
 very often the price paid for consolidation. Nevertheless, it was one of the factors that 
 kept the electric railway operator from developing into a business man. 
 
 "With the coming of the automobile competitor, the first effort of the railway operator 
 was to get him off the street on the plea of unfairness, that the competitor did not pay 
 the same taxes, share the same burdens, and so forth. In fact, it was declared to be a 
 breach of contract to permit him to operate on the streets at all. 
 
 "Be that as it may, no sooner had the public tasted a better mode of transportation, a 
 greater frequency of transportation, greater speed, greater convenience, than no condition 
 of unfairness at all will cause the permanent elimination of the competing form of trans- 
 portation. 
 
 "You cannot conceive, for example, that in a city where people are used to getting a 
 jitney every two or three minutes they will permit the return of a system where trolley cars 
 come at intervals of ten or fifteen minutes. That is inconceivable. They will not permit 
 that. The question of fairness, gentlemen, does not enter at all, because people are swayed 
 by motives of selfish convenience. 
 
 "I need only call to your attention this fact, that in England, where so many of the 
 tramways are owned by the municipalities, it has been impossible to secure a law that 
 would place the motor bus on the same basis as the street car. The street car, operated 
 by the city, pays taxes to the city far in excess of the motorbus operated by a private com- 
 pany. If the public of England would not permit the taxing of the motorbus to a degree 
 that would' make it impossible to compete with the tramway, even though the tramways 
 are owned so largely by the cities, what hope have we that the American public will oblige 
 the privately operated electric railway in that direction? 
 
 "Some other means must be found to eliminate that competition. That means, of course, 
 is good service, to which I shall refer later. 
 
 "I also believe that the American electric railway is not a 100 per cent modem electric 
 railway unless it includes any motorbus services that may be required in the community. 
 In other words, all the popular or mass transportation of a community ought to be under 
 one central direction. That is a lesson that we can study profitably from experiences 
 on the other side. 
 
 "If the electric railway could not produce mass transportation today cheaper than any 
 other form of locomotion, it would be on its way to Dodo Land ; but we do know that you 
 
112 Electric Railway Problem 
 
 can, today, still produce electric railway transportation cheaper and more satisfactorily than 
 any other kind. It therefore remains to ask what the electric railways of the country can 
 do to produce that transportation more cheaply and then, having produced it more cheaply, 
 sell it instead of ofTering it." 
 
 And SO, as Mr. Jackson views it, the jitney is a bright angel to the electric 
 railway industry after all. Yet his optimism cannot lead further than the hope 
 that obvious misfortune will prove to be a blessing in disguise. Walter Jackson 
 and Roger Babson unite in the opinion that competition is good for monopoly 
 because it destroys it. Here lies an issue that goes to the very root of the 
 electric railway problem. For the present, it is sufficient that street railway 
 credit is gone, and that automobile competition was one of the band of conspira- 
 tors that caused it to vanish from the sight of men. The private automobile 
 and the jitney bus came into serious competition with the electric railways just 
 as the latter were beginning to feel most keenly the effects of public policy that 
 found expression in special taxes and public demands for better service enforced 
 by regulatory commissions. The foundations of the hopes that had been capital- 
 ized were one by one being swept away, with the result that even prior to the 
 beginning of the World War the earning power of the electric railways was 
 already proven to be insufficient to support the financial structure which had 
 been erected on it as a base. 
 
Chapter XXI 
 INCREASING DEMANDS OF LABOR 
 
 Street railway profits in the early days were largely the product of low wages 
 and long hours of labor for the men engaged in street railway service. An 
 abundant supply of labor, and the fact that conductors and motormen required 
 very little technical training to prepare them for their jobs, made it comparatively 
 easy for street railway companies to resist the unionization of their employes 
 and to hold wages down. Before the coming of the automobiles in the enormous 
 numbers that characterize the present time, the suspension of street railway 
 service was an even greater disaster than it is today. If men were available 
 to run the cars, and the companies under their franchise obligations were re- 
 quired to give continuous service, they had a good claim upon the municipal 
 authorities to furnish the police protection that would enable them to break a 
 strike. Of course, the employes, if organized, had power to inflict great losses 
 upon the companies, especially if public opinion was on the side of the men, 
 but a high resolve to walk until the company gave in was not likely to appeal 
 to the general mass of the people, unless the company was clearly guilty of out- 
 rageous conduct in its relation to its employes. Nevertheless, taking the coun- 
 try as a whole, street railway employes were getting better and better organized 
 from year to year and were demanding and receiving higher wages and better 
 conditions of work, with the result that the labor cost, which is an element of 
 unusual importance in the electric railway business, gradually increased. 
 
 However, an analysis of the available statistics does not warrant the con- 
 clusion that labor has been getting as rapidly increasing a share of electric rail- 
 way revenues as might be supposed from a cursory inspection of the tables of 
 wage rate increases. The statistics of wages presented by Mr. James W. Welsh, 
 for the Electric Railway Association, indicate an increase of 31 per cent in train- 
 men's average hourly rate of pay from 1907 to 1917, and of course a big jump 
 in wages is shown from 1917 to 1918. A further increase would be shown for 
 1919 if the figures were available.^ Yet, as Mr. Welsh shows, wages have re- 
 mained a nearly constant factor in relation to operating expenses as a whole. It is 
 the relation of wages to revenues that offers the most important comparison in con- 
 nection with our present discussion. The following tabulation is based on the census 
 figures for 1902, 1907, 1912 and 1917, and on Mr. Welsh's estimates for 1918: 
 
 Salaries and 
 
 Railzvay Salaries UKiges to Railway 
 
 Year Operating Revenues and zvages Operating Revenues 
 
 1902 $247,.SS3,999 $ 88,2 10,1 6S 35.2% 
 
 1907 400,8%,034 150,991,099 2,7.7% 
 
 1912 535,996,122 200.890,939 37.5% 
 
 1917 650,149,806 267,240.362 41.1% 
 
 1918 691,131,682 313,748,577 45.4% 
 
 113 
 
114 Electric Railway Problem 
 
 It will be observed that in 1902 salaries and wages took 35.2 per cent of 
 railway operating revenues; in 1917, they took 41.1 per cent; and in 1918, if Mr. 
 Welsh's estimates are correct, 45.4 per cent. The census figures show that the 
 total railway operating revenues per employe steadily increased from period to 
 period as will be seen from the following: 
 
 Railway Operating 
 Total Number Revenue per 
 
 y'ear of Employes Employe 
 
 1902 140.769 $1,758.58 
 
 1907 221,429 1,802.36 
 
 1912 282,461 1,897.59 
 
 1917 294,826 2,205.20 
 
 These figures indicate an increase of 25.34 per cent from 1902 to 1917 in the 
 average earning capacity for the company of the men employed by it. This is 
 doubtless due mainly to the increasing size of cars and the increasing density of 
 traffic on the electric railway lines generally. It remains a fact, however, that 
 notwithstanding the increase in revenues per employe, salaries and wages in- 
 creased more rapidly so that in 1917 they absorbed about six cents more out of 
 every dollar of revenue than they did in 1902. It must not be overlooked that 
 the figures used do not relate to the conductors and motormen alone, or even 
 to all the wage earners taken together, but to all employes from the president 
 down to the car cleaner. Mr. Lauck in his brief for the Amalgamated Associa- 
 tion, shows that the total amount of wages paid to trainmen did not increase 
 in as great a proportion as the salary roll increased, or as the payroll of classes 
 of workmen other than conductors and motormen. He shows that in 1902, there 
 were 20,000 more conductors and motormen than all other employes, while in 
 1917 there were 20,000 fewer. No doubt the increase in maintenance and re- 
 habilitation accounts in part for the relative decline in the number of trainmen 
 employed. Also, the introduction of larger cars slowed down the rate of increase 
 in the number of trainmen. 
 
 While it seems to have been clearly shown that the trainmen were under- 
 paid before the war and that in most cases they are still underpaid, nevertheless, 
 the fact is that their share in the gross earnings increased, and that to this 
 extent the proportion of the total revenues left for the investor decreased. 
 
 At this point consideration must be given to the conclusions reached by 
 Mr. Lauck in his brief. At pages 29 and 30 of that document, he says: 
 
 "It may Ik statiil as a general conclusion that a review of the past history of street- 
 railway companies, in general, di.scloses the fact that the cxtraordiiian- gains in revenue, 
 which have arisen frum the grt)wth in the itopulation of cities, the granting of special fran- 
 chises, the devildpnuiit of trade and industry in and around urban centers, the adoption of 
 meclianical devices and improved operating methods, added capital, investment, or the in- 
 creasing work and efficiency of employes, have to a large extent been ahsorlied by fictitious 
 capitalization, or dissipated by irnpropcr or misguided financial mismanagement. 
 
 "The ccinclusion is irresistible that the present deplorable financial condition in which 
 the street-railway companies find themselves has not been due to an advance in operating cost 
 arising from increasing outlays to lab<ir, but has primarily arisen from past mismanagement 
 of the finances of these public utilities. Had these companies been properly managed and 
 their earnings consrr\T<l in the w:iy they should have lieen. they would find themselves in 
 a very prosperous condition at the present time. The operating revenues would be amply 
 sufficient on the basis of a 5-cent fare not only to pay liberal and attractive returns on the 
 capital actually invested, to provide for new financing and better roadbed and equipment. 
 
Demands of Labor 115 
 
 but even after all of these deductions from net operating returns, there would be a surplus 
 sufficient to yield a living wage to employes, and to furnish every facility for the safety 
 and convenience of the public. Payments to employes of the industry have not only had 
 no eflfect upon the present finances of the companies, but, as a matter of fact, the employes 
 have not had an equitable participation in the results of their own labors. Their past pro- 
 ductive efficiency has been absorbed by fictitious capitalization, and, if existing methods and 
 security issues were to be allowed to be continued into the future, the fruits of the labor 
 of employes as yet unborn would be absorbed by fictitious securities now outstanding. Un- 
 less the present basis of financial management and control is changed the future is without 
 hope to the employes of the street railway companies or to the public." 
 
 These conclusions are very important, if true. It seems clear from the tes- 
 timony and from our analysis of the data made available to the Commission, that 
 Mr. Lauck's general conclusion has an element of exaggeration in it. The im- 
 portance of past mismanagement as a factor in the destruction of credit is un- 
 doubtedly great, as I have clearly shown. It seems also to be quite true that 
 wage increases awarded to trainmen by the National W'ar Labor Board or as 
 a result of the Board's activities are not primarily and fundamentally responsible 
 for the loss of earning power that has caused credit to collapse. Yet, if we 
 note the fact that in 1917 when the five-cent fare was still generally in vogue 
 the total railway operating revenues amounted to $2,201.81 per employe, while 
 the trainmen claim $2000 as a proper minimum living wage under present con- 
 ditions, we are forced to the conclusion that in absorbing ten-elevenths of all the 
 street railway revenues, the employes would be crowding the other claimants 
 for a share in the nickel pretty hard. It is not certain that the nickel would be 
 enough to go around ! At least it might be necessary to cut down the number 
 of employes somewhat. 
 
 The economic changes which I have described in this and the preceding 
 chapter had begun to make themselves felt before the war. Automobiles and 
 labor problems were a menace to the hopes of the speculative investors in street 
 railway securities. The nickel, representing the inexhaustible source of street 
 railway prosperity, had been attacked from so many angles that the investor 
 as the residuary legatee of the 5-cent fare already saw his share of the estate 
 shrinking toward the vanishing point. 
 
 Thus stood the electric railway industry when the political and financial 
 structure of the entire world was brought into sudden danger by the attempt of 
 western civilization to commit hara-kiri. 
 
Chapter XXII 
 THE WAR AND THE DOLLAR 
 
 From the point of view of the American electric railways and of the Ameri- 
 can public, the World War was wholly unexpected, and, without question, it 
 brought about economic changes of overwhelming importance. The competition 
 of the automobile and the jitney, the gradual increase in the share of earnings 
 claimed by labor, the public policies relating to taxes, sen-ice and the issuance 
 of securities, the limitation of fares and the gradual extension of ticket conces- 
 sions and free transfers, the failure of the companies to make adequate provision 
 for depreciation, and the policy of overcapitalization, as factors in the develop- 
 ment of the electric railway problem and in the curtailment of electric railway 
 credit, all worked more or less slowly and by degrees, although quite relentlessly, 
 toward the final result. The war came suddenly and in its effects swallowed up 
 everything else. 
 
 Many of the witnesses appearing for the electric railways admitted that 
 the industry had never been on a sound financial basis, but they all maintained that 
 it was the war and the sudden economic changes resulting from it that justified 
 the industry in appealing to the National (iovemment for help. The increase 
 in prices of labor and materials entering into the construction, maintenance and 
 operation of electric railways during the war period has come along in the stream 
 of increases in the prices of general commodities and in the wages of labor in all 
 industries. To the electric railway man the problem appears relatively simple. 
 He alleges that the margin between operating expenses and gross revenue has 
 been rapiilly shrinking and that, as a consequence, the share of the revenues avail- 
 able for return upon capital is disa|)pearing; and that in some cases the revenues 
 are not even sufficient to pay the expenses of current operation. He sees that 
 more revenue is iu'e<led and points to the fact that the price of "everything else" 
 has doubled, or trebled, or quadrupled, and asks why, under those conditions, 
 the price of electric railway transportation should remain the same. He alleges 
 that the electric railways arc the victims of this unexpected revolution in economic 
 conditions brought on by the World War — a revolution that has been world-wide, 
 and the effects of which, so far as present indications go, are likelv to continue 
 for a long time. He takes the i)Osition that the 5-cent fare, or whatever fare 
 it was that was being charged on a particular railway during normal times prior 
 to the war, may be presumed to have been a reasonable charge, or, according 
 to his present lights, at least not an excessive one, and that therefore the relief 
 to which the electric railways are entitled in the emergency that has arisen is to 
 have their fares raised and their revenues increased in proportion to the increase 
 in the cost of the service rendered. 
 
 116 
 
The War and the Dollar 117 
 
 It has not been difficult at any time during the past two or three years for 
 an electric railway to demonstrate to a regulating authority that wages have in- 
 creased and that the prices of materials have gone up. Operating expenses are, 
 undoubtedly, much greater than they were,' and the cost of a given amount of 
 new construction and replacements is also much greater than it was before the 
 war. Upon the simple basis of the facts of experience in any given street rail- 
 way case, it can readily be proven that if the revenues derived from the public 
 for the service rendered under pre-war conditions were not excessive then the 
 revenues now derived at the same rates of fare for the same amount of service 
 are clearly insufficient. 
 
 There are several reasons why the problem is not as sin^ple as it seems : 
 
 1. Under the conditions that prevailed before the war, street railway rates 
 were generally fixed by contract. Very few electric railways had come under 
 the supervision of public service commissions to the extent of having their prop- 
 erties valued and their rates of fare established without reference to the limita- 
 tions prescribed by contract or custom. In many cases the public, over a long 
 period of years, had been demanding lower fares but had been met by the claim 
 that the contracts were inviolable, and that fares could not be reduced below 
 five cents. Thus, although the street railways had generally been brought tmder 
 public regulation to a greater or less extent with respect to service and new 
 capitalization, yet, as a whole, they had not reached a stable position as a regulated 
 industry with the police powers of the state ettectively used to fix just and reason- 
 able rates. For this reason, the public has been inclined to deny the validity of 
 the assumption urged by the electric railways that the rates in vogue before the 
 war were necessarily fair. 
 
 2. The cost of labor and materials entering into street railway construction 
 and operation, though affected by the same general causes which have affected 
 wages and the prices of commodities in general, may not have been affected 
 to the same extent. The fact that the cost of living, as measured in the usual 
 way by Dun's or Bradstreet's index or by the indices of the Department of Labor, 
 has doubled or trebled does not prove that the cost of labor and materials enter- 
 ing into street railway operation has doubled or trebled. The general increase 
 in the cost of living is merely a rough indication that the necessary cost of any 
 service, including street railway service, will probably be greater. 
 
 3. Taxes and other public burdens, while subject in some measure to the 
 changes which affect general commodity prices, are not likely to change in the 
 same proportion as ordinary operating expenses. 
 
 4. The cost of capital, which is a considerable but largely undetermined 
 element in the cost of street railway service, is not afifected by a change in the 
 general price level to the same extent, or necessarily in the same way, as operating 
 expenses are affected. More than half of the capitalization of the street rail- 
 ways, and perhaps nearly all of the actual investment in street railway facilities, 
 is in the form of long-term bonds, or shares of stock with dividends guaranteed 
 by long-term leases, so that the fixed charges which are a part of the cost of 
 electric railway service do not change; they are fixed by contract. Moreover, 
 the rate of interest necessary to attract new capital into the business may or may 
 
118 Electric Railway Problem 
 
 not change with the general price level. Interest rates are determined by other 
 considerations. 
 
 5. The alleged obligation of an electric railway to make use of a surplus 
 accumulated in years of prosperity to tide over an emergency period, when the 
 current margin of profit is diminished or wiped out by the increased cost of 
 service, comes in as a disturbing factor in the determination of the fares which 
 the electric railway is entitled to charge. 
 
 All these things go to prove that what the electric railway men often point 
 to as a perfectly simple proposition is extremely complex. Great confusion has 
 been brought into the discussion by the attempt sometimes made by the electric 
 railways to prove their case by evidence as to the purchasing power of the dollar 
 without depending entirely upon direct and detailed evidence of the increasing 
 cost of service measured in terms of dollars. In the presentation of a company's 
 claims for increased rates before a public service commission, doubt is often 
 raised as to whether the commission is being called upon to determine the cost 
 of railway service and to stabilize the rate of return upon the investment, or to 
 investigate the purchasing power of money and to stabilize the value of the dollar. 
 In the confusion, it seems to escape the attention of a great many people that 
 it is impracticable for ever}' national^ state or municipal regulating body to set 
 up as an authority for stabilizing the currency, and that an appeal on this basis 
 to particular regulating agencies without authority to deal with the problem as a 
 whole only makes confusion worse confounded. 
 
 It cannot be denied that a great economic change affecting the cost of living 
 and the purchasing power of money has a far-reaching effect upon particular 
 values and upon credit. Because of the existence of fixed capital, and con- 
 tractual relations which are the basis of credit, any radical change in the pur- 
 chasing power of money has the result of automatically transferring values from 
 one group of property owners to another. When general prices are rising, bond- 
 holders and all those who get fixed returns upon their investment, or fixed com- 
 pensation for their services, are losing money, while other classes are making corre- 
 s])onding gains. In a rough, general way the bondholder loses and the stockholder 
 gains when prices arc rising, and the stockholder loses and the bondholder gains 
 when prices are falling. These changes lake place; they do not wait for the edict 
 of some regulating body, and when such a body is called upon in a particular 
 case to restore values to those who have lost them, in reality it is being called 
 upon to take values out of somebody's pocket and i)Ut them in some other body's 
 pocket. If it attem])ts to do so. it not only increases the confusion, but is likely 
 to ()erpetrate new robberies in its effort to follow up and neutralize the effects 
 of economic law. For example, in the case of the electric railwavs there have 
 been two sets of contractual relations: the first, between the public and the 
 companies, and the second, between the operating stockholders on one side and 
 the bondholders and gtiaranteed stockholders on the other. With fixed fares 
 and standards of service, the public loses as prices go down, and the companies 
 lose as prices go up. If the fares and standards of service are not fixed and 
 inflexible, but arc adjusted from time to time, automatically or otherwise, to 
 changes in the cost of service, then the bondholders lose as prices go up and 
 
The War and the Dollar 119 
 
 the unguaranteed stockholders gain, and vice versa. If the contracts with the 
 public are broken in a period of rising prices, as is now demanded by the electric 
 railways generally, then the public loses the benefit of its contract, while the 
 stockholders not only save themselves from the loss that under their contracts 
 they were bound to incur, but also gain all that the bondholders lose by virtue 
 of the contracts by which the annual rate of interest and the amount of the 
 principal ultimately to be repaid are fixed in terms of dollars. While the com- 
 panies are eager to induce or compel the public to pay the cost of service in good 
 "American" dollars, they do not consider for a moment the readjustment of the 
 contracts as a result of which the "secured" investors get paid in "Mexican" 
 dollars. 
 
 Beyond doubt economic changes affecting the purchasing power of money 
 work enormous injustices and the stabilizing of the purchasing power of money 
 would help to make possible the establishment of security and orderly develop- 
 ment in the financial arrangements of the electric railways and other utilities. 
 But credit is based upon contract ; and contract is based upon the recognition of 
 values as measured by the monetary standard established in the country under 
 whose laws the contracts are made. There is the same reason for the enforce- 
 ment of contracts between municipalities and electric railway companies as 
 there is for the enforcement of contracts between individuals. If they can 
 be enforced, and are not, then the result is that a particular class of contractors 
 is picked out to receive community favors. All other special interests and the 
 interests of the community as a whole are made to pay the price of this favoritism. 
 Of course, the enforcement of a public contract, like the enforcement of a private 
 contract, is limited by the ability of the contractor to fulfill his obligations. "You 
 cannot get blood out of a turnip," and in the case of a necessary public service 
 such as local transportation, the public in an emergency resulting from economic 
 changes or any other cause must make any shift that may be necessary to 
 get the transportation. 
 
 Disclaiming any special knowledge of the electric railway problem, Profes- 
 sor Irving Fisher of Yale University appeared before the Commission at its 
 request to discuss the purchasing power of money, the reasons for its ups and 
 downs and the general effects of its fluctuations upon industry. His testimony 
 is illustrative and illuminating, though evidently not intended to be entirely exact 
 in the figures used. How certain classes of people lose and others gain by the 
 depreciation of the dollar in terms of its purchasing power, is shown by Professor 
 Fisher at pages 1330 and 1331 of the Proceedings, where he says: 
 
 "Some people would be inclined to say that the rise of prices is really simply the deprecia- 
 tion of money; if prices are now twice as high as they were before the war simply because 
 we have a 50-cent dollar, so to speak, then it ought to make no difference to anybody, because 
 if everybody has twice as much money and every price is double, nobody is better or worse off. 
 And in fact that is true if the premises were correct. The trouble is the premises are not correct. 
 
 "In this upheaval there are some things that cannot step lively as the other things do; 
 some things that lag behind. All those things that are fixed by contract ; if there is a 
 contract price, it must be kept, even though it would naturally be raised. If there is a law 
 or a franchise fixing a 5-cent fare it cannot be changed with the inflation which changes other 
 prices. If a government clerk has a salary of $2,000, it is not going to change as the prices 
 of wheat change in the market, it will stay unchanged for years at a time. If a wage earner 
 has a certain wage scale it will not be adjusted automatically to the change in the cost of 
 living. * * * 
 
120 Electric Railway Problem 
 
 "For instance, consider a saving bank depositor. Take a working girl who puts $100 in 
 the savings bank just before the war. Now she will liave about $12U, but when she comes to 
 spend that $120 she will get tor it only bO per cent ot what she could have gotten i£ she 
 had spent her $100 four years ago. So she has really been cheated out ol all her interest 
 and 4U per cent of the principal as well by the depreciation of the dollar. 
 
 "Now the fault is not in the grocerynian or the tradesman from whom she buys the high 
 priced goods ; it is not in the savings bank, but it is in the dollar in terrns of which her 
 account has been kept. There lias been a wrong yardstick used in measuring her accounts 
 and the accounts of the rest of us. 
 
 "In the same way a bondholder has not been getting any real income since 1896. That 
 is a startling statement to make, but it is absolutely true, and the fact that it is not appre- 
 ciated is simply due to the fact that people do not talk in terms of monetary depreciation 
 when they ought. 
 
 "But you take a widow who was left say a fortune of $100,000 in 1896. This is invested 
 in 4 per cent coupon bonds and she cuts her cou[)ons and gets $4,000 a year and lives on it 
 between that time and this. As a matter of fact she has been eating up her capital, and 
 that is all she has been doing, because while nominally she still has $100,000 of capital, that 
 today is only one-third of the capital with which she started, in actual purchasing power. 
 She has used up two-thirds of her actual purchasing power in this time." 
 
 Professor Fisher assigned great importance to "index numbers" in the mea- 
 surement of the purchasing power of money, and showed that with our present 
 unstable dollar, price levels are always changing. At page 1121 of the Pro- 
 ceedings, he says: 
 
 "Commissioner Meeker's index numbers arc carefully weighted, the wholesale index 
 numbers, on the basis of the volume of transactions, or the value of the volume of trans- 
 actions of the different commodities. The commodities which are sold in the markets in 
 large quantities have a greater importance in the average than tlie commodities which are 
 sold in small quantities. i>o that it is, 1 think, the most scientihc iiide.x. number that we have 
 had in the world. 
 
 "This instrument, the index number, is a very approximately accurate measure of changes 
 in the price level, as is shown by the fact that, whether your index number is scientific or 
 unscientific, it gives very much the same result. 
 
 "We find the index numljcr of prices has constantly changed. It is not a question 
 simply of a changed price level since tlie war. 
 
 "Some |K-ople stem to talk about reaching a new level of prices, as though we were 
 going to keep them up. We are not going to keep them up. \\ e never have kept a price 
 level for five years at a time. It constantly changes. \\ c were complaining about the high 
 cost of living before we entered the war. There had luen a rise of 50 per cent in the price 
 level between 1890 and 1914, when we entered the war, and there had been a great fall in 
 the price level prior to 1890. going back to 187J in the world in general, and to 1802-1865 in 
 the United States in particular. And before that the price level had changed." 
 
 For convenience in discussing the trend of general prices, it should be noted 
 that the Labor Department takes the prices of 1913 as 100, and that the 1913 
 index represented very nearly the average for the five years immediately pre- 
 ceding the rise in prices due to the war; also that the index number at the low 
 price level in 1896 was approximately 66, and that in December, 1919, the index 
 number had risen to 237. I refer to the Department of Labor's index number 
 based upon wholesale commodity prices. 
 
 At pages 1331 and 1332 of the Proceedings, Professor Fisher continues his tes- 
 timony with respect to the relative fortunes of bondholders and stockholders, under 
 shifting conditions with respect to the commodity value of the dollar, as follows: 
 
 "And .so it is that l><)iulholdcrs have not been making any money since 1896. They are 
 among the ones who have been losing money. On the other hand,' between 1873 and' 1896 
 It was the bondholder who was getting rich because of the appreciation of the dollar in terms 
 of which his IxjikIs were reckoned. 
 
 "C»n the other hand, the stockholder, excepting the stockholder in concerns like electric 
 railways, where the price of the prcKluct is the thing that does not change the stockholder 
 has iK-en winning what the Nrndholdcr has lost and losing what the bondholder has gained, 
 lictwccn 187J and 189b the stockholder was losing and the independent priKlucer generally 
 was losing, the fanner was losing, and that loss made a gricN-ance which culminated in the 
 
The War and the Dollar 121 
 
 Bryan campaign in 1896, wliich was largely a Populist and farmer discontent. The debtor 
 class was much mentioned there. People who had farms wliich were mortgaged could not 
 pay their mortgages because the mortgage was a mill-stone around their neck and getting 
 heavier and heavier while the price of wheat was going down. It w^ls really the appreciation 
 of money which was ruining the fanner, and that produced a form of discontent at that 
 time called Populism which died down as the price turned the other way, and you can not 
 find a Populist in Kansas today because the conditions which generated that condition have 
 disappeared. 
 
 "Now we have the opposite situation and we find the bondholder and the savmgs bank 
 depositor is losing, the salaried class is losing and the utilities corporations, like the electric 
 railways are losing, and the gain is being absorbed by the stockholder, and we are dubbing 
 him the profiteer; just as in 1896 we nick-named the bondholder 'the bloated bondholder' 
 and complained of him, so now we are nick-naming the man who gets the gain, the profiteer. 
 
 "Commissioner Meeker : You are not including the stockholders in the street railways 
 among the bloated profiteers, are you? 
 
 "Mr. Fisher: Not the street railroad companies, but I think the stockholders in general 
 are the so-called profiteers today. The profiteeering today which we hear so much of is one of 
 these consequences of this maladjustment, and not because of the price level. They are the 
 by-product and I lament the fact that the public eye is fixed so much on this today as to cause 
 a class hatred which is not justified, instead of a realization of an impersonal cause as the 
 true reason. I do not mean that there is not criminal profiteering. There is, or I suppose 
 there is, but it certainly is not responsible for this rise in prices. 
 
 "This has switched billions and hundreds of billions of dollars worth of wealth from 
 one class to another. You will find on Fifth Avenue, I understand, an entirely new class 
 of rich people today compared with what were there at the end of the long period of falling 
 prices. In 1896 there were the old Knickerbocker families with their property invested in bonds 
 who were having a comfortable home and living at the low prices very well, but they could 
 not stand the gafT when prices began to go up. They did not see that their money was de- 
 preciating and so they were losing all their income. They expressed it in terms of com- 
 modities but not of money, and they realized they were losing, and they sold out to the 
 stockholders, the profiteers." 
 
 That the normal result of the depreciation of money, as indicated by Profes- 
 sor Fisher's testimony just quoted, has not in fact been shown in a redistribution 
 of values as between the stockholders and the bondholders of the electric railways 
 is indicated by Mr. Babson's testimony with respect to the shrinkage in the value 
 of stocks and bonds during the war period. At page 1067 of the Proceedings, 
 appears the following: 
 
 "Commissioner Gadsden : I wish you would give us some information along the lines 
 from an investment standpoint of the shrinkage in values of street railway securities. You 
 have made a study of that problem, have you not? Just leave the question of fares and rates 
 out of it and let us discuss for a moment what the effect on the investment feature has been. 
 
 "Mr. Babson : Taking all the street railway bond issues of the country, the shrinkage 
 has been about 25 per cent and considering all stock issues of the country the shrinkage 
 has been about 75 per cent. 
 
 "Commissioner Gadsden: Can you approximate what that means in dollars and cents? 
 
 "Mr. Babson : It amounts to over a billion dollars ; it amounts to over a billion dollars 
 and of course a great deal of these securities are held by the banks and trust companies 
 and insurance companies and the mass of the people. 
 
 "Commissioner Gadsden : Is it not a fact that up to five or six years ago street railway 
 securities were considered rather a favorite security in the market? 
 
 "Mr. Babson : Well, the savings bank investment laws of Massachusetts are generally 
 considered as the strictest of any state in the country; that is to say, judges all over the 
 country when it comes to guardianship questions will state that the money may be invested 
 in anything legal for Massachusetts savings banks, as they are the most strict of any of the 
 laws. Now, the State of Massachusetts made street railways legal for Massachusetts savings 
 banks some ten years ago. 
 
 "Mr. Warren: Massachusetts street railway securities? 
 
 "Mr. Babson : Yes, Massachusetts street railway securities. And I was looking over 
 the accounts of a bank the other day in Massachusetts, a savings bank where they had bought 
 the first mortgage bonds of the Warren. Brookfield & Spencer Street Railway Company, 
 bonded for only $8,000 a mile, legal for Massachusetts savings banks, and where there was 
 an absolutely total loss. The stockholders not only lost all they put in, those bondholders 
 lost all they put in, and when the tracks were ripped up a few months ago and sold for junk 
 there was only enough to pay the lawyers and receivers' certificates. So I feel very strongly 
 on that point." 
 
122 Electric Railway Problem 
 
 The electric railway bondholders have lost 25 per cent and the stockholders 
 75 per cent according to Mr. Babson. The same tendency is shown in the case of 
 the securities of tiie trolley lines of Xew Jersey. In May, 1919, Mr. Thomas N. 
 McCarter, President of the Public Service Railway Company and also of the 
 Public Service Corporation of Xew Jersey, submitted to the Xew Jersey Board 
 of Public Utility Commissioners statements showing that from December 31, 1915, 
 to May 1, 1919, there had been a shrinkage in the market value of the bonds 
 and underlying guaranteed stocks of the Public Service Railway system from 
 $93,004,555 to $75,116,665, without any allowance for the intervening deprecia- 
 tion in the purchasing power of the dollar. During this same period the Public 
 Service Corporation's common stock, supported by an equity in the common stock 
 of the Public Service Railway Company and its affiliated companies in the gas 
 and electric fields, decreased in market value from $116 per share to $80 per 
 share, and by December 15, 1919, this stock had fallen to $65 bid. In the "Mem- 
 oranda and Data" submitted to officials of the Treasury Department, January- 8, 
 1918, by the special committee representing the gas, electric and street railway 
 interests, a table was presented showing that the market value of the common 
 capital stock of seventeen leading public utility companies, some of them holding 
 companies, and many of them interested in gas and electricity only, had shrunk 
 from the highest prices of the preceding five-year period to the then low level 
 no less than $352,652,976 in the aggregate or 53.1 per cent. All this goes to 
 show that public utilities in general and electric railways in particular are not in 
 the same class with ordinary industrials, and the reason for it undoubtedly is that 
 these utilities, even where their rates are not controlled by contract, are never- 
 theless in a position where their charges are restricted by the regulatory power of 
 the government. In effect, the electric railways and other utilities, in asking 
 that they be left free to adjust themselves to changing economic conditions the 
 same as other industries are asking the impossible; they are asking to be per- 
 mitted to surrender their charters as public utilities and to withdraw from the 
 field of public regulation altogether. They demand that an entirely new relation 
 between themselves and the community be established. They say that regula- 
 tion has broken down in an emergency ; and that they "cannot go on this way" 
 any longer. The issue seems to be this: shall the utilities be permitted to lapse 
 into the status of private industries, or shall they be transformed into full-fledged 
 public services for which the community, for better or for worse, accepts com- 
 plete responsibility ? 
 
 We must now turn from the fascinating discussion of depreciation in the 
 value of money, which leads only to confusion and bewilderment when applied 
 to the problem of electric railway credit, to the specific changes in the cost 
 of electric railway service that have grown out of the war. The real test of 
 the elTect of increasing prices in the electric railway field upon the credit of 
 the industrj- will be found in two questions: first, is the margin left for return 
 on investment after the payment of all prior charges less than it was before? 
 and, second, does the investment require an even larger return than it did before 
 when there was more for it? 
 
 The first question is answered by a study of operating ratios. As used 
 
The War and the Dollar 123 
 
 here, the operating ratio is the proportion of gross operating revenues that is 
 consumed by operating expenses exclusive of taxes. The special census reporte 
 show the general operating ratio for the street railways of the country to have 
 fluctuated as follows : /?„„„ ^f operating 
 
 Expenses to 
 Year Operating Revenues 
 
 1890 68.4 per cent 
 
 1902 57.5 per cent 
 
 1907 61.1 per cent 
 
 1912 58.7 per cent 
 
 1917 63.8 per cent 
 
 Mr. James W. Welsh, in his testimony on behalf of the American Electric 
 
 Railway Association, submitted figures in connection with Chart C-120 to show 
 
 that the operating ratio was 60.01 in 1916; 64.98 in 1917; 72.08 in 1918; and 76.43 
 
 for the first four months of 1919. These ratios were worked out on the basis 
 
 of car mile statistics submitted by a large number of companies to the Electric 
 
 Railway Association. It will be observed that Mr. Welsh's operating ratio for 
 
 1917 is 64.98 as compared with 63.8 derived from the census figures. In the 
 
 Electric Railway Journal, issue of September 6, 1919, appears a consolidated 
 
 income statement for 124 companies for the month of IMay, 1919, showing an 
 
 operating ratio of 72.62 per cent. In the issue of the Journal for February 14, 
 
 1920, a combined income statement of 81 companies for the month of October, 
 
 1919, shows an operating ratio of 76.7 per cent ; and in the issue of March 6, 1920, 
 
 appears a combined statement for 87 companies for the month of November, 
 
 1919, showing a ratio of 76.85 per cent. It is clear beyond a doubt that there 
 
 has been a considerable increase in the operating ratio on most electric railways 
 
 since 1917, and the census figures show an increase of five points from 1912 to 
 
 1917. However, from 1902 to 1912 the increase had been only 1.2 points, and 
 
 going back to 1890 when the process of electrification was only nicely begun, 
 
 we find a ratio of 68.4, which is 4.6 points higher than 1917. Of course, it must 
 
 not be overlooked that where rates have been increased, or where traffic shows 
 
 an extraordinary growth, the increase in revenues may keep pace with the increase 
 
 in operating expenses so as to hold the operating ratio steady. The figures for 
 
 all the electric railways operating in New York City during the past ten years 
 
 are significant, as they represent results obtained in a metropolitan community 
 
 where street railway fares have not been materially increased. The total street 
 
 railway operating revenues, the total operating expenses, and the operating ratio 
 
 for each year ended June 30, from 1910 to 1919. inclusive, were as follows: 
 
 STREET RAILWAYS OF NEW YORK CITY 
 
 Total Street 
 
 Raihvay Operating Total Operating Operating 
 
 Year Ended June 30 Revenues Expenses Ratio 
 
 1910 $79,420,911.33 $43,451,147.50 54.71 
 
 1911 84,424,435.17 46,613,435.73 55.21 
 
 1912 88.242,093.66 47,746,580.78 54.11 
 
 1913 92.140.054.06 48,661.244.41 52.81 
 
 1914 94.153.673.93 50.108,516.28 53.22 
 
 1915 93.644.428.41 50.322,473.15 53.74 
 
 1916 98.628.185.20 52,038,406.95 .5,3.77 
 
 1917 100,18.?,784.61 55,716,495.04 55.61 
 
 1918 103,5TO,189.17 60,606,538.43 58.55 
 
 1919 110,191,682.33 75,945,712.61 68.92 
 
124 Electric Railway Problem 
 
 The jump of 10 points in 1919 is significant. Any rise in the operating 
 ratio of an electric railway makes a direct attack upon its credit, as it means 
 a shrinkage in the margin of earnings left for taxes and capital charges. The 
 question remains: Is there enough left, even after the operating ratio has risen? 
 Upon this point, it is interesting and instructive to compare the operating 
 ratios given above with the operating ratio of the Cleveland Railway Company, 
 which has enjoyed a position of unique strength during the war period. The 
 Cleveland Railway operating ratio has fluctuated as follows: 
 
 Year Operating Ratio Year Operating Ratio 
 
 1913 75.26 1916 73.40 
 
 1914 77.56 1917 78.84 
 
 1915 70.14 1918 76.30 
 
 This was under the Tayler service-at-cost franchise ; the revenues were less than 
 the cost of service in the years 1913. 1914 and 1917, and more than the cost of 
 service in 1915, 1916 and 1918. Taxes in Cleveland absorbed 6.04 per cent of 
 the gross revenues during 1913, 1914 and 1916; 5.71 per cent in 1915; 6.27 per 
 cent in 1917 and 5.79 per cent in 1918. It will be seen, therefore, that the residue 
 left for surplus and return upon investment was 18.7 per cent in 1913; 16.4 per 
 cent in 1914; 24.15 per cent in 1915; 20.56 per cent in 1916; 14.89 per cent in 
 1917, and 17.91 per cent in 1918. It is significant that the Cleveland Railway 
 Company has been able to preserve its credit with an operating ratio which in 
 1918 was as high as 76.3 per cent, or 7.38 points higher than the operating ratio 
 in New York City for the year ended June 30, 1919. Taxes on New York City 
 systems absorbed 7.18 per cent of gross revenues, as compared with 5.79 per cent 
 in Oeveland during 1918. With operating expenses and taxes deducted from 
 gross revenue the Cleveland Railway Company, in 1918, had 5.99 cents less 
 per dollar of revenue for return upon capital than the electric railways of New 
 York City had during the year ended June 30, 1919. Yet the credit of the Cleve- 
 land Railway Company was the best in the country, while the New York City 
 lines were in bankruptcy or trembling on the verge of it. It cannot be doubted 
 that the difference was chiefly due to the differences in capitalization and public 
 relations. 
 
 We may now turn to an examination of the evidence submitted to the Com- 
 mission with respect to actual increases during the war period in the cost of 
 materials and labor entering into electric railway construction, maintenance and 
 operation. Mr. John G. Barry, sales manager of the General Electric Company, 
 testified for the American Electric Railway Association with respect to electrical 
 apparatus and supplies used by electric railways, and submitted, at page 388 of 
 the I'roccedings, the following figures of average cost for each year from 1912 
 to 1919, counting the price during 1914 as 100 per cent: 
 
 ■•AVERAGE COST OF ALL ELECTRIC.\L APPAR.ATUS AND SUPPLIES USED 
 
 BY ELECTRIC RAILWAYS 
 
 \l]i 104% 1916 130% 
 
 \l\l Ol^" '"'7 '75% 
 
 \l\i "9% 1918 204% 
 
 1^15 104% 1919 197%" 
 
The War and the Dollar 125 
 
 At pages 392 and 393 of the Proceedings, Mr. Barry discussed the present 
 condition of the electric railways, and the remedy therefor as follows : 
 
 "Commissioner Sweet : Have you any distinct idea now as to what is the matter with the 
 street railway companies and what would be the best remedy for it? 
 
 "Mr. Barry; Well, my notion is this — of course, the street railways are reduced to the 
 deplorable condition in which they are now due to the tremendous increases they have had to 
 pay for their materials, the tremendous increase they have had to pay for wages and taxes and — 
 
 "Commissioner Sweet: Without a proportionate increase in income? 
 
 "Mr. Barry : Without the income. Now while I do not know very much about the financial 
 or operating conditions of electric railways outside of unfortunately investing some of my 
 personal money in electric railways, my notion is that the electric railway companies must be 
 given immediate relief by an increase in fare or many more of them are going to the wall. 
 I think that if it were possible to give the electric railways an increase to 6 cents or 7 cents 
 or whatever is considered reasonable, that that is the only method of saving many electric 
 railway companies from bankruptcy." 
 
 Mr. Miles B. Lambert, assistant manager of the Railway Department of the 
 Westinghouse Electric Manufacturing Company, also testified upon the subject 
 of price increases. At pages 393 and 394 of the Proceedings, he says: 
 
 "The Westinghouse Company is engaged in the manufacture and sale of electric street 
 railways and railway motors and car equipment to electric street railways : controlling appa- 
 ratus, locomotives, rotary converters, transformers, switchboards, motor generator sets, tur- 
 bines and other electrical apparatus. 
 
 "Our pre-war average gross sales of this apparatus and equipment ran from seven million 
 to fifteen million dollars a year; it varies that way, within the United States, our customers 
 being generally throughout "the United States. During the past two years it has ranged from 
 30 to 40 per cent of this normal. 
 
 "Beginning with about the middle of the year 1915 there has been a steady and steadily 
 accelerating increase in the prices of the various equipment and apparatus until at the present 
 time as compared with the middle of the year 1915 the percentages are about as follows; 
 
 Railway motors and car equipment, appro.ximately 87 per cent increase. 
 
 Locomotives, approximately 87 per cent increase. 
 
 Rotary converters, approximately 75 per cent increase. 
 
 Transformers, approximately 70 per cent increase. 
 
 Switchboards, 100 per cent. 
 
 Motor generator sets, 95 per cent. 
 
 Turbines. 100 per cent. 
 
 "I have given some thought to the future conditions and prices, but can see nothing at 
 present which would indicate to me a substantial reduction in prices other than the slight 
 reduction that has taken place during the past two months. 
 
 "These increases in our prices as manufacturers and producers of electrical equipment 
 have been caused by our increased cost of raw material, manufacturing machinery and labor. 
 In comparing the present time with the latter part of the year 1914 and the first half of 1915, I 
 find that machine tools which we must purchase to manufacture our apparatus and equipment 
 show an increase of approximately 100 per cent. 
 
 ******** 
 
 ".\11 raw materials have shown great increases, as shown by the following tabulation ; 
 
 Pig iron, approximately 106 per cent. 
 
 Steel plates. 141 per cent. 
 
 Copper. 58 per cent 
 
 "That corrected as of today would go up a bit, because copper has gone up from the time 
 I had this tabulation made. 
 
 Steel castings, 220 per cent. 
 
 "I might digress here for a moment for the benefit of the Commissioner who is asking 
 about the discrepancy in the high cost of cars. The reason for the high cost of cars is because 
 of the steel castings which both companies get from the foundries and the Carnegie Steel 
 Comnanv : so the price of materials entering into cars has gone up 220 per cent. 
 
 "Spelter. 30 per cent; coke. 35 per cent; mica, 100 per cent; asbestos material, which we 
 use a great deal of, 560 per cent; other insulating materials, 125 per cent; magnetic sheet 
 steel, 280 per cent." 
 
 At page 395, Mr. Lambert touched upon labor costs as follows : 
 
 "In my iudgment the price of labor during the next year and perhaps the next two years 
 is going to increase unless, as a former witness said, the high cost of living comes down very 
 rapidly. 
 
126 Electric Railway Problem 
 
 "It might be well to mention there. Mr. Warren, that when you stop to consider it, and 
 segregating the price of materials and labor as two distinct and separate (actors, labor after 
 all is nearly the whole thing when you take everything from its source. Take the ore, for 
 instance ; you might say that the raw materials cost nothing, it is the cost of labor producing 
 them. They are in the earth. Therefore the content of labor enters into the whole thing 
 and therefore prices are not going down; in fact I think thy are going to increase moderately." 
 
 Mr. William H. Heulings, Jr., Vice-President of the J. G. Brill Company, 
 manufacturers of cars, gave interesting testimony with respect to the use of 
 car trust certificates as a means of facilitating the purchase of safety cars by 
 impecunious companies, and also with respect to the effect of standardizing equip- 
 ment upon price increases. At page 400 of the Proceedings, he says : 
 
 "The Chairman: Is the industry, speaking of it as a whole, having any difficulty in 
 financing its purchases with you? 
 
 "Mr. Heulings : Oh, yes. 
 
 "The Chairman : How do they do it ? 
 
 "Mr. Heulings: Well, they do it as Mr. Barry just referred to. We are jointly interested 
 with him in the car trust matter. That is how we are being able to finance quite a few of 
 the purchasers of these safety cars and to help the railroads make economies which they 
 will provide them with. 
 
 "Commissioner Gadsden : Are you requiring certificates on other types of cars than the 
 safety cars? 
 
 "Mr. Heulings: No. We cannot handle them. You see they are not a standard article. 
 Barring the safety cars we have never duplicated an order. Except in one instance have we 
 ever duplicated an order for e.xactly the same style as the other order. We built fifteen 
 hundred cars for Philadelphia in a period of four years and they are so nearly the same you 
 cannot tell the difference, but each particular set required a new set of drawings and speci- 
 fications. 
 
 "Commissioner Gadsden : Does not that suggest one of the economies that the railway 
 people could work out. in the standardization of equipment? 
 
 "Mr. Heulings : Unquestionably they could, and they could do us great good and economize. 
 
 "Commissioner Gadsden: If we could cc.me out of this hearing by standardizing the rail- 
 way equipment would not that help solve this problem? 
 
 "Mr. Heulings: You would take a great step in the right direction. 
 
 "Commissioner Sweet: How much difference do you think it .would make if the cars 
 were standardized instead of having different specifications for each car? 
 
 "Mr. Heulings: I might answer that by the experience of the safety car. The safety 
 car is practically standard. The total amount of advance in the safety car was al»ut fifty 
 per cent, and that was due to the fact it was standardized and we could run them through 
 in one hundred and two hundred car lots and sell them to the individual as he wanted them 
 and practically take them ofT the shelf. Now other cars have advanced over 100 per cent. 
 That is the best answer." 
 
 Mr. Francis H. Sisson, Vice-President of the Guaranty Trust Company, 
 discussed, from the banker's viewpoint, the effects of war prices upon credit. At 
 pages 321 and 322 of the Proceedings, in response to questions asked by Com- 
 missioner Sweet, he says : 
 
 "Commissioner Sweet : At the time when the ."i-cent fare was originally agreed upon, 
 apparently, between the cities and the public service corporations, in the granting of the fran- 
 chises, that was sufficient pay for all necessar>' expenses and a fair return upon the invest- 
 ment, was it not ? 
 
 "Mr. Sisson : It was. 
 
 "Commissioner Sweet : And, in some cases, I suppose, rather a large return ? 
 
 "Mr. Sisson: Yes. 
 
 "Comrnissidiicr Sweet : .^nd that naturally offered an inducement to investors? 
 
 "Mr. Sis.son : Yes. 
 
 "Commissioner Sweet : So that institutions like insurance companies and people in a 
 fiduciary relation representing an aggregation of comparatively poor people invested in them, 
 because they paid well, and were Uwked upon as exceedingly safe? 
 
 ".Mr. Sisson : Vcs. 
 
 "Commissioner Sweet: Is that a fact? 
 
 "Mr Sisson: It is so. The popular selling argument, and one very generally used in 
 those days, was that you could count upon the revemie-prodiicing power of utilities of our 
 great cities more definitely than you could upon any other class of securities. 
 
The War and the Dollar 127 
 
 "Commissioner Sweet: Up to about what time did that condition continue? 
 
 "Mr. Sisson : It existed until about the outbreal< of the war. I should say when the recent 
 rise in the cost of labor and materials overtook the revenues — perhaps beginning with 1915. 
 
 "Commissioner Sweet : Has the change been gradual ? 
 
 "Mr. Sisson: It was rather abrupt. I think it has been staccato, rather than gradual, in 
 many instances, but it has been constant for four years. 
 
 "Commissioner Sweet: Is it as great today as it was three or four months ago? 
 
 "Mr. Sisson : No, it is not, although there are still rising costs in labor and there are 
 rising costs in material that must be met in many instances, but the ratio of increase is smaller 
 today than it was before. 
 
 "Commissioner Sweet : How do you account for that ? 
 
 "Mr. Sisson ; Well, largely because the costs of labor and material, both, have almost 
 reached the breaking point, and it was not possible for them to increase ratably as much as 
 they had for the last three years, and still find a market. 
 
 "Commissioner Sweet: Do you mean to say, then, that there is an increase up to the 
 present time? 
 
 "Mr. Sisson : Yes. 
 
 "Commissioner Sweet : But that the rate of increase has been somewhat less in the last 
 two months? 
 
 "Mr. Sisson: Yes. 
 
 "Commissioner Sweet : But that the point reached at the present time is the high-water 
 mark ? 
 
 "Mr. Sisson : Yes. Up to this point, yes. 
 
 "Commissioner Sweet: In your judgment, what is the prospect for the future? 
 
 "Mr. Sisson : I think you will find still higher costs of material and higher cost of labor. 
 I think we will have to reckon with them for an indefinite period of time." 
 
 Yet, there is considerable testimony to the effect that before the war broke 
 upon the world, the causes which I have discussed in earlier chapters of this 
 report were at work. At pages 371 and 372 of the Proceedings, Mr. C. L. S. 
 Tingley, Vice-President of the American Railways Company, a holding concern 
 interested in many different utility properties, testified as follows: 
 
 "The Chairman: And the diiSculty which now confronts you is due wholly to war con- 
 ditions ? 
 
 "Mr. Tingley; Absolutely, sir, wholly. Well, I would not say to the war conditions, 
 but whollv due to the increase in wages and material, which, of course 
 
 "The' Chairman : Which, of course, would not have come without the European war? 
 
 "Mr. Tingley: Well, they were coming before the war came. sir. The war has simply 
 hastened it and aggraN-ated it. Wages were rising and rising steadily, and have for the last 
 twenty years." 
 
 Dr. Dugald C. Jackson, consulting engineer, head of the Department of Elec- 
 trical Engineering in the Massachusetts Institute of Technology and joint author 
 of the book "Street Railway Fares," ^ expressed the opinion that the fundamental 
 causes of the present street railway trouble antedate the war. At page 1416 
 of the Proceedings, he says : 
 
 "The present situation may be described as a state of public irritation over increasing 
 unit fares for travel accompanied by criticism of the service, and at the same time the railway 
 companies are drifting into bankruptcy caused by the condition of war wages and cost of 
 materials. The unfortunate status of local passenger transportation companies, however, is 
 not whollv war produced. Increased fares have, as a rule, only partially offset increased 
 wage and material costs during the war period, and the trend of the companies to the bad has, 
 therefore, been accelerated by the war. but the trend was unmistakably present before the 
 war, and therefore, it becomes a question of determining what were the causes and whose 
 were the faults." 
 
 Again, at page 1420 of the Proceedings, he says: 
 
 "The causes, then, which have brought this problem into your hands may be summed up 
 as inherent in the way in which this special business has been dealt with by both the cities 
 and the companies and the war has only exaggerated the troubles and brought more quickly 
 upon the traction companies a crisis which was creeping upon them. This complex, difficult 
 and special problem of local passenger transportation cannot be successfully dealt with without 
 consideration of its distinguishing conditions from ordinary commercial, mercantile and in- 
 dustrial businesses." 
 
128 Electric Railway Problem 
 
 L'pon this point, at least, Mr. Morris L. Cooke, of Philadelphia, agreed with 
 Dr. Jackson. The war precipitated the present street railway situation, but was 
 not the primary cause of it. Mr. Cooke makes a charge of inefficient manage- 
 ment against the electric railway industry. At page 1688 of the Proceedings, 
 he says : 
 
 "Our street railroads constitute, broadly speaking, the most completely discredited feature 
 in the administration of a city. The public, remembering not only past wrongs, but having 
 in mind present day inefficiencies, not only takes no interest in lightening the burdens of those 
 who arc responsible for the operation of these properties, but seems actually anxious to pre- 
 cipitate the final stages of what may easily develop into a national tragedy. 
 
 "In the widespread antipathy to the owners of these properties, and further in the con- 
 viction so generally entertained by the public that all adventure has gone out of the street rail- 
 road business operated as a private undertaking, this Commission, I Ijelieve. will find the 
 greatest obstacle to putting into effective oi>eration such constructive suggestion as it may 
 make. 
 
 "Continued adversity might possibly win over the most obdurate and old fogey director 
 to enlightened management and a square deal ; but without the hearty cooperation of the 
 public, almost nothing can be done. 
 
 "My own impression is that the diflferences between the public and private interests in- 
 volved have become irreconcilable. The operators of these properties, and especially their 
 promoters have erred so grievously against the public that, e.xccpt with isolated properties and 
 where conditions are exceptional no compromise is likely. In most situations with which I 
 am familiar, it would seem to me highly improper that a compromise should be reached on 
 any basis thus far suggested by the private interests involved." 
 
 Further on, at page 1689 of the Proceedings, he says: 
 
 "It is because those in charge have had their attention centered on financial, rather than 
 on operating considerations that past and present untoward tendencies have not been dis- 
 counted and offset more eflfectually." 
 
 Again, at page 1690 of the Proceedings, he sums up the situation as follows : 
 
 "The present deplorable state of our street railroads was not reached over night, and is not 
 due to any one single cause. If their managers had been on their jobs, these remedial meas- 
 ures which you are now discussing would have been inaugurated years ago. 
 
 "The point 1 want to make is that while the situation has doubtless I)een precipitated by the 
 war, conditions incident to the war had really vcr>- little to do with it. 
 
 "The attitude of the owners of these properties is such as to make it very difficult for the 
 public to get at the real facts. Propaganda supporting officially authorized theories of valua- 
 tion, methods of accounting, principles of management and so forth are carried on in every 
 direction." 
 
 And so we find that the war and the liij;li prices having given the electric 
 railway "house of cards" the push that precipitated its collapse, we are led on 
 to the fundamental question of future policies. Shall we take cognizance of the 
 past and put the electric railways of the country upon a new basis, or shall we 
 connive at the building of a new house of cards, a "more stately mansion" that 
 will shut the electric railway industry "from heaven with a dome more vast" 
 than the dome that is now falling about its ears? 
 
Chapter XXIII 
 HOW CAN CREDIT BE RESTORED? 
 
 We have seen that credit is necessary to the continued existence and normal 
 expansion of the electric railways as a public utility ; and that for divers good and 
 sufficient reasons electric railway credit has disappeared except in isolated spots. 
 We must now face the constructive problem of its restoration. 
 
 The issue, as seen by the Committee of One Hundred representing the 
 American Electric Railway Association, is put squarely and frankly by General 
 Guy E. Tripp in his statement at pages 68 and 69 of the Proceedings, where he 
 says: 
 
 "The present methods of regulation and control have failed. It requires no argument to 
 prove tliat. The fact that an industr\- scattered all over the United States and operating 
 under different local conditions — the mere fact that such an industry is as a whole on the 
 verge of bankruptcy at a time when unregulated industry is at the height of prosperity, 
 speaks for itself. 
 
 "The present system of regulation and control is entirely too inelastic to respond to the 
 stress of changing conditions, particularly such as now exist, and they do not permit of the 
 prompt adjustment of the price of the product or the cost of the product. And any method 
 of control or regulation which does not permit of the application of this simple rule will 
 always fail. I have no doubt that this is a fundamental truth which is recognized by every- 
 body, but in the case of electric railways a peculiar psychological factor has been introduced 
 which has hindered the adjustment of electric railway problems. 
 
 "The old system of contracts between a municipality and a railway under which the railway 
 agreed for a certain fixed fare to perform certain service raised a popular belief that the 
 performance of a railway service through the medium of private enterprise amounted to 
 giving away public privileges to private individuals out of which enormous profits have been 
 reaped. It has been impossible hitherto to eradicate that idea from the public mind. I do not 
 believe that the relations between municipalities and electric railways can be satisfactorily ad- 
 justed upon the basis of a simple contract such as might exist between two individuals or cor- 
 porations. I entirely subscribe to the theory of state regulation and control, and that theory 
 having been admitted, I believe it is impossible for the parties to stand in simple contractual 
 relations with each other, and the idea should, if possible, be entirely removed from the public 
 mind and a new conception of the functions of electric railways substituted. That concept 
 I believe to be that the electric railway is an agent of the public to furnish it service and for 
 that service it is entitled to a fair and just return upon capital honestly invested in the service 
 and upon conditions which will respond to changing conditions of operation and of finance. 
 
 "I think the electric railway industry is facing three alternatives and that the issue will 
 come immediately : 
 
 "First is municipal ownership; second, private ownership and operation under a sound 
 fundamental basis of regulation and control; third, complete disappearance of the service. 
 In some cases the service has already disappeared and the tracks have been taken up, but I 
 believe that alternative is unthinkable in large communities except perhaps in part. 
 
 "I believe our experience in the Governmental operation of those utilities which are 
 more or less complex in character has not been reassuring, and I further believe that a ma- 
 jority of the people believe in private operation under proper regulation and control." 
 
 Here we have the formulation and recognition of the agency theory, which 
 calls for continuous public regulation upon the basis that the agents of the public 
 — the electric railway companies — are entitled to "a fair and just return upon 
 capital honestly invested in the service." 
 
 We must not lose sight of the fact that General Tripp's testimony was in 
 
 129 
 
130 Electric Railway Problem 
 
 some respects inconsistent with itself. For instance, in his opening statement, 
 quoted above, Genera! Tripp gives his allegiance to state regulation and expressly 
 condemns the perpetuation of the simple contractual relationship between the 
 companies and the municipalities. By inference, also, he condemns the main- 
 tenance of a contractual relationship between the companies and the state. Near 
 the close of his testimony, however, he expressed the view, in reply to questions 
 asked by Chairman Elmquist, that the ideal service-at-cost plan would take the 
 form of a contract between the company and the municipality, with an automatic 
 or nearly automatic adjustment of fares to changes in the cost of service. His 
 testimony on this point is found at pages 181 and 182 of the Proceedings, as 
 follows : 
 
 "The Chairman : Vou spoke this morning about establishing a new relationship between 
 the utilities and the public and investors. Of course, that presumes a proper form of regu- 
 lation? 
 
 "Gen. Tripp : Yes, sir. 
 
 "The Chairman: \\hat should that be? 
 
 "Gen. Tripp: Do you ask whether it should be state regulation or local regulation? 
 
 "The Chairman : I am asking you what should be the proper form of regulation. 
 
 "Gen. Tripp: If the new contract between the municipality and the company were of 
 such a nature — and I think it should be — that it amounted to a practical guaranty of a fair 
 return upon a fair investment in the property, then it would seem safe to leave the regulation 
 of the local utility to the local authorities who have made the guaranty. 
 
 "The Chairman: In your judgment, will the service-at-cost plan result in excluding the 
 states from the regulation of these utilities? 
 
 "Gen. Tripp: It is difficult for me to say, without giving the matter much consideration, 
 what place the state commissions would have in such a relationship. 
 
 "The Chairman : Under a proper service-at-cost plan, tlie rates rise or fall automatically, 
 according to the earnings, do they not? 
 
 "Gen. Tripp: Yes, sir. 
 
 "The Giairman : Is there any rule for a regulating commission to exercise judgment in 
 determining the reasonableness of the rate under such plan? 
 
 "Gen. Tripp : No : I should think not. 
 
 "The Chairman : That being so, can you see a good reason for having the state commis- 
 sions given any control over the service of these utilities where the cost of service plan has 
 been adopted? 
 
 "Gen. Tripp : I cannot see any reason now. 
 
 "The Chairman: Do you see that they should exercise any control over extensions of the 
 properties? 
 
 "Gen. Trijip : I do not see any reason why they should. 
 
 "The Chairman : Or the capitalization ? 
 
 "Gen. Tripp: No; the capitalization in tliat case would be a matter of no moment to 
 anyone except the company. 
 
 "The Chairman : Do you believe that the highest quality of service and best form of 
 protection to the public, as vs'cll as to the utilities, would be .secured through local regulation 
 rather than state regulation? 
 
 "Gen. Tripp : Provided always that there is a relationship which imposes an obligation 
 upon the mimicipality, which amounts to a guaranty of a fair return on the fair investment, 
 I think a heller admini.stration of that relationship would probably lie in the hands of the 
 municii>alily. 
 
 "The Chairman : But it prc-supposes, does it not. the fact that the municipalitv has the 
 intelligence to properly examine the operating sheet of a railroad to .see that the accounts are 
 properly kept, and to clearly understand how to regulate such a utility? 
 
 "Gen. Trip : It prc-supposcs that, but the test comes in the cash in the cash-drawer to 
 pay this fair return. 
 
 "The Chairman : Well, from the experience you have had in this work, is it your opinion 
 that municipalilics, generally speaking, give close attention to the operation of these utilities 
 and the control of their securities and cxpcn.ses in such a wav that the public can safely 
 trust them with that responsibility ? 
 
 "Gen. Tripp: I should answer that by saying that my observation is that probably not, 
 under the form of contract, at least, which has been in common use. 
 
 "The Chainnan : If the service-at-cost plan is .ndopled. is it not possible that there will 
 be a RtKKl deal of irritation Iwtwcen the utilities and the public growing out of a shifting 
 charge for the ser\'ice? 
 
How TO Restore Credit 131 
 
 "Gen. Tripp : Yes, that might be possible. 
 "The Chairman: What will that lead to? 
 
 "Gen. Tripp : It will probably lead to municipal ownership if such an irritation did arise 
 that was severe enough." 
 
 Mr. Harlow C. Clark, editor of "Aera,"' the official organ of the American 
 Electric Railway Association, presented to the Commission a careful analysis of 
 the electric railway problem, and submitted suggestions for emergency relief and 
 for the formulation of a permanent plan. He recognizes clearly that local trans- 
 portation is a public function. At page 897 of the Proceedings, he says : 
 
 "The continued furnishing of efficient and sufficient urban and interurban transportation 
 is a recognized vital necessity of modern community life. 
 
 "It is recognized to be a function of the government of each state to provide that such 
 service shall be performed. 
 
 "Heretofore the custom, with few exceptions, has been that these necessary facilities 
 should be provided by private agencies, with the use of private capital, and subject to such 
 regulations by governmental agencies as would insure that the service should be continuous, 
 reasonable, sufficient and efficiently rendered. 
 
 "To provide a service of this character by private capital, it is necessary that the terms 
 and conditions prescribed by the authorities shall make such investments safe and enable them 
 to secure a return which will induce private capita! to select investment in the utility to such 
 an e.xtent as will provide the necessary funds for capital purposes. Such further return should 
 be allowed as would stimulate the operating utility to the greatest measure of economy, effi- 
 ciency and initiative and thus insure the development of the art and the maintenance of the 
 public service at the high standard demanded by the .American public ; otherwise, private 
 capital w-ill elect to seek other investments, the standard of service will be depreciated, and the 
 maintenance and improvement of these properties will have to be provided for from state 
 or municipal sources, and deficits in operation made up by taxation, or the service permitted 
 to deteriorate and finally terminate. As the last alternative is impossible in modern life, tlie 
 actual question is : 
 
 "Shall the service be provided by the use of private capita), or by the use of public 
 credit and resources ?" 
 
 Mr. Clark assumes that municipal ownership cannot be immediately adopted 
 as a general policy, and that therefore some plan must be adopted by which 
 private capital will continue to support the industry. At pages 897 and 898 of 
 the Proceedings, he outlines his plan as follows : 
 
 "As existing law'S and conditions in the different states do not make a general adoption of 
 the principle of municipal ownership or operation feasible at this time, the industry must be 
 conducted by the use of private capital, whatever final policy the public may adopt in this 
 respect. 
 
 "This is feasible if the following suggestions for emergency relief and for a permanent 
 plan are followed : 
 
 "Emergency relief. Such an immediate temporary increase in the charges for transpor- 
 tation (subject to revision by the subsequent permanent plan) as is necessary to meet the 
 present crisis and to prevent tliat financial disaster which is imminent to a large majority of 
 the industry. 
 
 "This would maintain the service during the development and formulation of the perma- 
 nent plan, by which also any suitable revision in such emergency increase could be made. 
 
 "Pennanetit [ilan. .\ plan for the permanent conduct of the business, under state or 
 municipal regulation, capable of automatically adjusting itself from time to time to varying 
 conditions. 
 
 "The machinery for such permanent plan should include : 
 
 (a) The ascertainment of the amount upon which the enterprise should, in fairness 
 and justice to both the investors and the public, be allowed to earn a return. 
 
 (b) The establishment by the authorities of a system of charges for service by which 
 rates will automatically increase or decrease above or below the initial rates named in the 
 permanent plan by a defined method and schedule .so as to yield at all times sufficient revenue 
 to meet all the payments contemplated by the plan, including such protective reserves as 
 should be established, and also sufficient opportunity for participation in benefits resulting 
 from economy, efficiency and initiative to induce the greatest eflforts by the utility. 
 
 (c) Power of regulation, either by state or municipal authorities, in respect to all matters 
 affecting conditions and character of service, including extensions, improvements and bet- 
 terments. 
 
132 Electric Railway Problem 
 
 (d) The utility to be conducted on the so-called indeterminate franchise principle and 
 to be subject to such regulation as may be prescribed by law in respect to accounts, to capital 
 investments, and other matters. 
 
 (e) The establishment of the right of the municipality or other governmental agency 
 to purchase, as shall be set forth in the plan, which shall in particular establish the price or 
 the method ol ascertaining the price. 
 
 (f) .Ml special ta.xcs and all special charges and assessments paid by the utility are 
 in fact paid by the car rider, being a part of the cost of transportation. Car riders as a class 
 should not be subjected to such indirect or special taxation and should, so far as the particular 
 circumstances in each community will permit, be relieved therefrom." 
 
 Mr. Henry J. Pierce, of Seattle, formerly President of the International 
 Railway Company, of Buffalo, testifying on behalf of the American Electric 
 Railway Association, was one of the few company witnesses who recommended 
 the continuation of the five-cent fare. His solution of the street railway problem 
 was outlined at pages S73 to 875 of the Proceedings, where he says : 
 
 "For over a quarter of a century the people who have ridden on street cars have been 
 accustomed to pay the five-cent fare and they have come to believe that five cents is the value 
 and the proper value of a street car ride. .\nd when attempts have been made to raise the 
 fare to si.x, seven, eight or nine cents the public have resented it, there is not any question 
 about that. I ride on the street cars myself and have ridden on the street cars in cities 
 where the fare has been rai.sed, and I know there is a lot of resentment on the part of the 
 public because they do not understand it. They have been educated along the lines of a five- 
 cent rate. Therefore, if it is a possible thing to keep the street car fare at five cents it shoukl 
 be done. I am inclined to think that it can be done through some readjustment of the relations 
 that now exist and wliich have existed between the municipalities and the street railroad cor- 
 porations, and it is along those lines that 1 wish to convey these suggestions to you. 
 
 "I would have the fare a straight five-cent cash fare, no tickets. I would abolish transfers 
 absolutely. I would have the municipalities remit all taxes and I would have the munici- 
 palities do the paving. If that is not enough — I think it would he enough in many cases to 
 settle these difficulties, these very serious difficulties which confront this industry — hut if 
 it were not sufficient then I would charge an extra five-cent fare outside of a central zone 
 three miles in diameter. 
 
 "I would then allow the street car company eight per cent upon its investment, and by 
 its investment I mean its cost in money that it has invested, not in any event to be greater 
 than reconstruction cost, and in that cost I would include as a matter of fairness what might 
 be termed the replacements of obsolescence in machinery and equipment which had been made 
 necessary through improvements of the art. 
 
 ******** 
 
 "Then I would have all money, all further surplus beyond that eight per cent go back into 
 the city treasury. 
 
 "I believe that in this way this difficulty would be solved. I believe that the street car 
 companies could finance and refinance their property. I think that they could deal with the 
 bankers. 1 think that the people's interests would be protected, the investors' interest would 
 be protected and everylxidy would be treated fairly. I do not think any other way 
 
 The Chairman : The general complaint here for the past ten days is that a five-cent 
 fare will not even pay operating costs. 
 
 "Mr. Pierce: Yes. 
 
 "The Chairman : How are you going to pay eight per cent on the capital and turn 
 something over to the others with a five-cent fare? 
 
 "Mr. Pierce: Through the abolition of transfers, through the abolition of taxes and 
 through the municipality paying for the paving, and if that is not enough, through tlie five- 
 cent extra fare outside of a three mile zone. Mr. Chairman. I do not think it is right, anyway, 
 for the street car company to pay for paving in the street, because these streets or roads canie 
 down to us from the olden times as the king's highway through which the people might 
 ride and walk. The street car is the poor man's vehicle and I suppose 90 per cent of the 
 people who ride on street cars are not well enough off to own horses and automobiles : there- 
 fore, they have to ride. But the man who has a horse or an automobile may go through 
 streets without paying taxes. I think it is only fair in any event that the paving should be 
 done by the city. 
 
 "Now the only alternative to this to my mind would he for the municipalities to take over 
 and operate the street railroads of the country. That I consider un-.\merican. That I should 
 very much dislike to sec. 
 
 "I think the function of government is to go\Tm and regulate, not to own or operate 
 public utilities. I have lived in all perhaps ten years of my life in Europe. T have ridden 
 on their railroads which were operated by government or bv municipalities, and I tell vou 
 
How TO Restore Credit 133 
 
 that I have met a good many czars and a good many kaisers on those cars. They do not 
 treat the people with the courtesy that our privately operated street railroads and railways 
 treat them here. It is un-American and I am totally opposed to it and hope we will never see 
 it in this country-." 
 
 Mr. T- K. Newman, of New Orleans, also testified as a witness for the 
 Electric Railway Association. He was particularly frank in his description of 
 the historical methods which brought the electric railways into public disrepute, 
 and undermined their credit. He was convinced that public opinion would not 
 support municipal ownership as a remedy, and that a service-at-cost plan, with 
 complete guaranties that the companies will not repeat the wrong-doings and 
 follies of their past, is the only solution. His views on the present financial dif- 
 ficulties of the electric railways and the impracticability of municipal ownership 
 as a remedy for their present troubles are set forth at pages 556 and 557 of 
 the Proceedings, as follows: 
 
 "Then, we find the roads breaking down under their old system of accounting. We find 
 that they cannot do any financing. We are finding this, too, that when they have to come out 
 from under their old system of financing, there must be established a complete new financial 
 set-up. a complete new process of financing. 
 
 "Now, what is going to happen? I have had to do with putting six properties in the hands 
 of receivers. The interest is being cut on all of the bonds. 
 
 "The Chairman: During the last year or so? 
 
 "Mr. Newman : During the past year, and we have a serious problem, a problem which is 
 far more serious than the public has any idea of, and I believe far more serious than the 
 members of this Commission believe. 
 
 "How are we going to get around it; how are we going to solve it? 
 
 "Let us talk municipal ownership for a minute. There is a constitutional prohibition in 
 the charters of all of the cities, that they cannot take over the street railways by any system 
 of guaranty, because it is not legally possible. 
 
 "The next thing is that they do not want to do it. There was a cry for municipal owner- 
 ship, but I do not know of a community today that would take over these properties. Why? 
 Because the politician lives on public favor, and the moment the politician attempts to raise 
 the street car fare, the public are against him, and he will lose out at the next election. 
 They do not want to enter into that; so, frankly, I have given up all hope of municipal owner- 
 ship. 
 
 "Mr. Warren: Before you leave that, Mr. Newman, have you any views on state owner- 
 ship as distinguished from municipal ownership? 
 
 "Mr. Newman : No ; I never thought of that proposition. 
 
 "Mr. Warren: Of course, that would be a possibility with which most of the constitu- 
 tions would not interfere. 
 
 "Mr. Newman : There you are separating the city and state, and I do not dream of that 
 as a possibilty. 
 
 "I do not believe the people themselves want to put street railways in municipal ownership. 
 They are dift'erent from any other kind of public service corporation, for this reason: they 
 have an enormous payroll — 40% — maybe 50%, of their operating expenses, and maybe a great 
 deal more than that the way wages are going. It means that motormen and conductors, who 
 have not had the advantages of an education, who are not carpenters or mechanics, and who 
 have to take this class of work — that means not the highest order of education, and they are 
 prey for politicians, and that puts a lot of strength into the hands of politicians. It puts 
 a great big payroll in the hands of the politicians. A water company, a gas company, and 
 a lighting company do not have the same proportion of employes. 
 
 "So I do not believe in municipal ownership. 
 
 "I would be glad to get relief if we had to lose money and got rid of some of the trouble. 
 Life is hardly worth living with the proposition as it is today, but I think the cities them- 
 selves do not want municipal ownership." 
 
 Mr. Newman's own plan for the solution of the problem is outlined at pages 
 557 to 559 of the Proceedings, where he says : 
 
 "The solution, in my judgment, is the service-at-cost plus a return on the investment — an 
 ascending fare, or a descending fare, but a fair return on the investment. 
 
 "If they choke off the chance of the street railway people and bankers from manipulating 
 the securities again ; I do not believe it matters much what the capitalization of the company 
 
134 Electric Railway Problem 
 
 is, whether it is high or low. That is not the point. If we got out to make securities, they 
 could be cut down. It can be dealt with by the process of law, but what the people want to 
 know is that an unfair return is not paid on the capital invested. 
 
 "When the public is educated to the fact that they are paying a fair return on the invest- 
 ment and not a return on watered securities, they are not going to object to an increase in 
 fares, no matter what it is, even if it should be 10 cents. 
 
 "Now, in this position, you have to take the public's point of view, because you cannot 
 look at it fairly if you just go below the surface of the street railway situation, and not 
 analyze the public point of view. 
 
 "Suppose we are operating a factory, and we were unwise enough to sell our product 
 at a fi.xed price for a term of 20 years. What would hajipen when the raw material went 
 up, so that we could not produce that article at cost? We would go into receivership, and 
 then bankruptcy. 
 
 "Now, would the purchaser of that material want to take the factory and run it, or would 
 he say, 'Here, you go on and manufacture your goods, and I want to see that you do not make 
 an abnormal profit out of it.' I think most business men would say, "You had better operate 
 your factory; I don't want to operate it, especially when you are only getting a meagre 
 return on your investment.' 
 
 ".\nd that is what the public is going to say when they are convinced that that is the 
 situation in the street railway business. They are fairly entitled to know that, after we have 
 had the cream of these franchises, and that when the day of reverses passes, we are not going 
 to continue to pay large dividends on the basis of securities. They will insist that we pay only 
 a fair return on the capital property value, and let the securities readjust themselves. 
 
 "There is another feature about the financial plan, the securities plan, that 1 would like 
 to sec the Commission adopt, if the Commission should favor the plan of service-at-cost plus 
 a fair return on the capital property value, and that is this, that there should \x a condition 
 attached to that sort of an arrangement, by which the securities would be readjusted so that 
 a new .system, a financial set-up will tie established in order to make it possible for the street 
 railways to go ahead and kee|) up with the times, to take care of this renewal and replacement 
 fund, which has not been accumulated by a majority of the roads, but which has been an 
 operating charge, just to the same extent as the niotormen's and conductors' salaries. It has 
 been taken care of in the past through this ascending prosperity, now blocked, because we 
 have reached the height of the industry or nearly so, and automobiles have come along and 
 have taken the cream off the top. So we are dealing today with this problem of a renewal 
 and replacement which must be inserted in the operating charge at a fixed charge. Now, 
 when you have done that, you have broken down your whole system of finance, because there 
 is not a banker who has played the game in New York or elsewhere who has not adopted the 
 standard of judging a bond by the ability of the company to earn twice its interest charge. 
 When you insert that renewal and replacement charge, notwithstanding all the properties are 
 face to face with that, and it is a much more material thing than we have been thinking of 
 in the past, you destroy its net earnings, and even if you had an open issue of bonds, you could 
 not sell them, unless you had two for one. and. of course. I do not know of one road in 
 ten that can make that sort of a statement tixlay, with a renewal and replacement fund. 
 
 "Now. if you do not put it in operating expenses, you have to capitali2e it, and you are 
 not allowed to do so by the cities as an oiwrating cxikmisc. When you put it into operating 
 expenses, and you want a return, an interest mi the fair valuation. 6 cents fades. There is 
 nothing to it. and 7 cents, in many instances, will fade, and will go up to a very much higher 
 standard, and there is no hoiw of that higher standard unless we have taken the public into our 
 confidence and say, 'Wc have stopped the juggling of securities; we have stopped consolidation 
 to get out more slock ; we have gotten down to an honest system of finance, by which the 
 public will pay a return on the investment, and nothing more, and what you pay you get. 
 if you want a low rate of fare, take the scats out of the cars, and let ever>hody stand up; 
 but if you pay enough, we will put on Pullman palace cars for you. You shall be the judge of 
 what you want, but whatever you pay you get, and you pay it only to give us a return on our 
 actual investment.' " 
 
 On the subject of puhlic ^i.irantics a.s a restorative for credit. Mr. Francis 
 H. Sisson testified as follows, at pages 329 and 330 of the Proceedings : 
 
 "Commissioner Sweet: Do you think a guaranty of five per cent on bonds would be 
 sufficiently attractive to investors to meet the needs of the companies at the present time? 
 
 "Mr. Sisson: Well, the guaranty— <io you mean by that to limit it to five per cent? 
 
 "Commissioner ."^wect : Yes. 
 
 "Mr Sisson: Tn assure them of five per cent? 
 
 "CiimmissionorSwret ■ To assure them of five per cent, and not more. 
 
 "Mr. Sis.son : Yes. I think 
 
 "Commissioner Swcel : On lionds. 
 
 "Mr. Sisson: I think the public guaranteo<l Imnd on a five per cent oflTering would be 
 attractive today. 
 
I 
 
 How TO Restore Credit 135 
 
 "Commissioner Sweet: Do you think such bonds could be floated at the present time? 
 
 "Mr. Sisson ; It would depend a good deal upon the nature of the guaranty, upon the 
 size of the community and the political character of the government. Money rates are higher 
 than that today. Five and a half per cent is the existing rate on money today, and my own 
 judgment is that money is going higher. The demand for capital is so great that it seems 
 to me inevitable that it will be forced up, and that while a guaranteed governmental obligation, 
 like our own United States obligation, can be sold at better than five, it would have to be of a 
 very sound character to be attractive at five, but it would be attractive on a sound guaranty. 
 If the City of New York or the State of New York guaranteed its corporations five per cent, 
 the securities could be sold, and they would be attractive to investors. ^ 
 
 "Commissioner Sweet : Do you see anything inconsistent with a guaranty, or what would 
 amount to a guaranty of that kind, in the cost of service plan? 
 
 "Mr. Sisson : No. 
 
 "Commissioner Sweet : Service-at-cost, I think it is called. 
 
 "Mr. Sisson : No, I do not. My own theory is that if we get into the guaranty field, 
 we are encroaching so closely upon the field of public ownership that sooner or later we will 
 step over the line into it, and with an assurance of a reasonable earning power to be dis- 
 tributed by the owners of the roads through fixed charges and labor charges and material 
 charges, in accordance with their own necessities and judgment, is a much more business- 
 like way to leave the situation than to provide for fixed guaranties. But perhaps that is not 
 possible. If it is not, I would approve the guaranty." 
 
 Mr. Samuel R. Bertron, of Bertron, Griscom & Company, investment bankers 
 of New York and Philadelphia, favored an immediate increase in fares to enable 
 the companies to keep out of receiverships, and then a fair valuation of their 
 property and a fair return upon that valuation. He was not averse to municipal 
 ownership as an alternative. His testimony on these points, at pages 539 and 
 540 of the Proceedings, is : 
 
 "You are not going to be able to raise money to operate these properties, unless, in the 
 public estimation, their credit is substantial and is going to continue so. A temporary ad- 
 justment is not going to help, because people are not going to buy any more securities of 
 street railways in such a temporary expedient. 
 
 "Mr. Warren: A temporary expedient might save the companies, while the permanent 
 one was being adopted? 
 
 "Mr. Bertron : It would be essential to increase fares generally, and that should be im- 
 mediate. Otherwise, most of the remaining ones would go into the hands of a receiver. 
 
 "Mr. Warren: It would be a post-mortem, otherwise? 
 
 "Mr. Bertron : Indeed so, but that should be recognized as a temporary expedient pend- 
 ing a valuation of the properties and the granting of a fair return on that valuation by some 
 elastic, easily adjustable, automatic system, and that is what I think should be striven for. 
 You will save many of these companies from receiverships, and enable them to pay at least 
 their bond interest by a 6-cent fare at the moment. That is not going to be enough generally, 
 I fear. Prices rise 
 
 "The Chairman: What fare is that? 
 
 "Mr. Bertron: Six cents. 
 
 "Then, the politicians have brought in this question of watered stocks, bonds, and so 
 forth. All of that has passed. It probably was done often in the old days, but everybody 
 should be satisfied with a fair, honest valuation of the property, and in many states rules 
 have been established for making such a valuation. There is a field that I hope you can en- 
 lighten the people with reference to, and when you have a fair valuation, let there be definitely 
 a fair return on that valuation, and when that is established the credit of the companies will be 
 reestablished and the service will be able to be maintained. 
 
 "Now. to my mind, there is only one alternative— two alternatives. The first is the busi- 
 ness going to pieces, and the people not be able to get the service? That means walking. The 
 other is municipal ownership. 
 
 "Now, personally, while I may not be in accord with many of my friends. I am not so 
 averse to municipal ownership, as some people are. of these properties. 
 
 "The objection to it is that these companies would be run for political purposes. I do not 
 think that that follows at all. A plan can be devised in each municipality, by which the mer- 
 chants' associations, the banks, the chambers of commerce could cooperate, and have a business 
 board, with labor represented, and they could handle this as a great economical problem and 
 not a political problem. , 
 
 "Many years ago water companies gradually became municipalized. .\ great many people 
 looked upon tliat with a great deal of hesitancy and dread. It has worked well, as a rule, and 
 I do not think, as a rule, there are any politics in it. It has one distinct advantage, and 
 that is that a municipally guaranteed security will be placed at a lower rate than any other, 
 
136 Electric Railway Problem 
 
 and therefore the money necessary to maintain these properties can be secured on the lowest 
 possible basis.- 
 
 "Mr. Warren: Mr. Bertron, might not that result be served, to a certain extent, if 
 privately owned securities were guaranteed, or substantially so? 
 
 "Mr. Bertron: I think (so), if the valuation were recognized by the public service 
 commission or the city, as the case may be, and approved, as increased expenditures occurred, 
 and a definite return on that capital were assured by the city through an automatic plan, in 
 which the fares would increase if the earnings were not sufficient to pay that, and decrease 
 if they were too high, and act speedily — the great trouble is that they do not act for six 
 months or a year, and then the company is busted, and to restore confidence, it has to be 
 something that moves at once." 
 
 Mr. Henry G. Bradlee, of Stone & Webster, in general terms states the 
 alternative methods of restoring street railway credit, as he sees them, at page 
 209 of the Proceedings, as follows: 
 
 "It is not the question of what money is in there so much as it is how are you going to 
 get additional money in order to reasonably serv'e the public. 
 
 "There are only two ways that I know of : One is to go to municipal ownership and have 
 the city or state rai.se the money on city or state bonds. The other is to establish some plan 
 under which the investor will feel that in the future he may count on a reasonable protection 
 of his invested capital and a reasonable insurance of an adequate return." 
 
 Mr. Richard T. Higgins, Chairman of the Connecticut Public Utilities Com- 
 mission, in suggesting remedies, emphasized the importance of avoiding public 
 ownership, but at the same time looked with favor upon the exemption of street 
 railway property from taxation. At pages 1108 and 1109 of the Proceedings, 
 he says : 
 
 "I think it is univcr.sally conceded that the situation which most all of the American 
 street railways are in today, is exceedingly serious, and unless some immediate and sub- 
 stantial relief is afforded, many of the companies will fail, street railway business will be 
 suspended, and the public will suffer the loss of a utility which affords a necessary means 
 of transportation. 
 
 "It is not so difficult to diagnose the ills as it is to prescribe the remedy. I presume 
 your honorable Commission has listened to many suggested remedies, and I cannot expect to 
 add any new thought, but to my mind the relief must come primarily from the states and 
 the municipalities where the different companies operate, and must be governed somewhat 
 by local conditions, but should involve a material increase in rates, a reduction or suspension 
 of taxes, substantial relief from state and municipal obligations pertaining to street pave- 
 ments, bridges, etc., a lilx.'ral policy of regulation, and a similar policy of public regulation 
 and taxation over competing transportation agencies such as public service automobiles or 
 jitneys. 
 
 "In the solution I would avoid if possible public or government ownership or control, or 
 any policy which takes away from the companies the initiative and incentive which have been 
 the great impelling factors in the wonderful growth and development of our country. 
 
 "Street railways afford the principal nudiuni of the industrial short -haiil traffu-. The 
 trolley car is the poor man's means of transportation, and its only revenues are provided by 
 the car riders, who ride as a matter of public necessity, not as a matter of personal pleasure. 
 I'ndir present conditions there is just as much if not more reason for relieving the trolley 
 companies from the burden of public taxation as there is. for example, to exempt from taxa- 
 tion large private and heavily endowed colleges and other institutions of learning." 
 
 Mr. Homer Loring, Chairman of the Board of Trustees for the public opera- 
 tion of the Eastern Massachusetts Street Railway Company, rather timidly sug- 
 gested that the Mass.-ichusetts trustee plan of continued private ownership and 
 pui)lic (ii)eration may furnish a satisfactory temporar>- solution. His apolog}' for 
 it is found at pages 1650 and 1651 of the Proceedings, where he says: 
 
 "Regarding the public control, I believe that it mav be a step in between the private 
 conlrc.l, as we have had in years gone bv, and public ownership which we may have to face 
 m the future. 
 
 •| think by Mate-ap|)ointcd trustees it offers the reasonable certaintv of careful economical 
 manaRcment, particularly if removed from politics, and I believe that the public trustees can, 
 in tmie. Ret the complete public confidence and I believe it has a great deal to favor it. Of 
 
How TO Restore Credit 137 
 
 course it has not been of long standing, and 1 appreciate it, as Mr. Gadsden said, that the 
 public was verj- much irritated in Boston over the ten-cent fares which they did not really 
 think possible, and there has been an inclination to blame the trustee plan for the ten-cent 
 fares. But they are not to blame in any way e.xccpt probably if it had not been for tlie 
 trustees, the Public Service Commission would have held the fares down and the company 
 would have gone into the hands of receivers. I think that probably would have been the 
 result ; because it had to be done and done very, very promptly." 
 
 Further on, at page 1653 of the Proceedings, Mr. Loring expresses his dis- 
 like for pubHc ownership as a present program, as follows : 
 
 "I should dislike to see public ownership tried at present. It presents a great many 
 difficulties. In the first place, is it going to be state ownership or is it going to be municipal 
 ownersliip? 
 
 "Our lines are a tangled net work of lines, and if the cities were allowed to own it, 
 very serious complications would ensue. 
 
 "I fully believe that the present plan that is being tried has all the advantages of public 
 ownership, with the possible exception of the fact of a lower interest rate that might be ob- 
 tained if they were all direct obligations of the state. Outside of that, however, I think it 
 has the advantages of public ownership. The state is justified in advancing money to make 
 improvements, and of course, it does assure, if the Commission is carefully selected, absolutely 
 non-partisan management. I should be very much afraid to see the cities own their lines, and 
 I should dislike to see the state own it at the present time." 
 
 On the other hand, Mr. Frederick J. McLeod, at that time Chairman of the 
 Massachusetts Public Service Commission, looked upon public ownership as the 
 probable ultimate solution of the problem, and was not at all dismayed by the 
 prospect. At page 1451 of the Proceedings, he says: 
 
 "It may well be that tlie ultimate solution of the street railway problem must be found 
 through public ownership. No other method offers any reasonable prospect for the restora- 
 tion of the companies' credit, which is necessary to provide needed capital. The figures pre- 
 senter to your Commission, indicating the decline in the street railway riding per capita, em- 
 phasize the fact that, with the growth of motor transportation, street railway service is no 
 longer a public necessity to the same degree as heretofore. The street railway is no longer 
 in undisputed possession of the field of urban transportation, and the possibilities of profit 
 are correspondingly curtailed. While no other agency of transportation yet devised can sup- 
 plant the street railway company, and the retention of street railway service is vital in public 
 interest, it is extremely doubtful if the street railway, under present economic conditions, can 
 he supported wholly by private investment ; as a matter of abstract theorv', private operation 
 may have many advantages over public operation, but where a public utility must be retained 
 in the interest of public service rather than as a possible source of profit and where private 
 capital continues to occupy the field only in the hope of salvaging the investment already 
 made, recourse must be had to public credit if adequate service is to be retained." 
 
 At page 1452 of the Proceedings, he refers to public operation in Massa- 
 chusetts under the trustee plan as follows: 
 
 "Massachusetts, as already pointed out, has already embarked upon the policy of public 
 operation for about half the street railway mileage of the state through the lease rather than 
 the purchase of street railway properties. While tliis experiment has, up to the present time, 
 not proved in all respects as successful as was hoped, there is, as far as I can judge, abso- 
 lutely no public sentiment whatever in favor of a reversion of the properties to the old 
 system and in so far as there is agitation for change, it is directed towards the outright pur- 
 chase of these properties." 
 
 Mr. John A. Beeler, transportation engineer, and formerly general manager , 
 of the Denver Tramway Company, was not averse to the service-at-cost plan 4 
 with private ownership or to public ownership under proper conditions. His 
 contention was that the electric railway problem is, in the main, a matter of 
 financing and management. At pages 1677 to 1679 of the Proceedings, he 
 testifies: 
 
 "The Chairman: You are familiar with the cost of service plan? 
 "Mr. Beeler: I am more or less familiar with the plan, yes. 
 
138 Electric Railway Problem 
 
 "The Chairman: Do you believe that affords a solution of the street car question? 
 
 "Mr. Beeler: I think as a whole it is a good plan. 
 
 "The Chairman: Does it afford a solution? 
 
 "Mr. Beeler: 1 think it may. 
 
 "The Chairman: Under what conditions? 
 
 "Mr. Beeler: I think it is largely a question of management. 
 
 "The Chairman : Has it been tried out long enough in this country to warrant the asser- 
 tion that it will solve the street car problem? 
 
 "Mr. Beeler: No. 1 could not say that it has been. I do not believe it has. 
 
 "I think that the whole street railway situation, whether it is municipal ownership or 
 private ownership or state ownership, as it seems to me, is right now a question of manage- 
 ment and financing. 
 
 "It municipal ownership will finance a line and will provide equally competent manage- 
 ment, then municipal ownership would be a good thing. 
 
 "On the other hand, if pri\-ate capital and private ownership can continue to finance 
 and manage the line that would be the proper thing. 
 
 "It seems to me that it is largely a question of management and cooperation with the 
 public. 
 
 "In order for any management to be successful, they have got to employ all of these oper- 
 ating economies and the principles of salesmanship, and recognize the fact that cars wear 
 out and that people will not ride in them — that they want a change. I think, regardless of 
 whether the state owns it or the municipality or the private company, that these fundamental 
 principles have got to be recognized and provided for. 
 
 "The Chairman : Have you reached any conclusion as to whether municipal ownership 
 will give a greater guaranty of good service and a larger facility to investment than private 
 ownership and operation? 
 
 "Mr. Beeler: I think that is simply a question of individual opinion. It might, under 
 certain circumstances. Municipal ownership or state ownership would have this ad\'antage : 
 The money for financing could be obtained at a lower rate of interest, and could be readily 
 obtained. To my mind that is the only advantage that I can see for municipal ownership 
 or state ownership. 
 
 "Commissioner Gadsden : Is not that the greatest question before the street railroads 
 today — getting new money? 
 
 "Mr. Beeler: It is; but I think the greatest question before us today is a question of 
 policy. If they are to continue to operate on the same policy that they have in the past, if 
 they get the new money, they will be in the same shape again in a few years ; and the 
 successful companies today are those that have been rehabilitated in the past few years. 
 They have had new plants, new equipment and are operating successfully, most of those 
 companies, on low fares — the five-cent fare. Some of those companies have provided for this; 
 they have provided for the new capital in different ways. However, in whatever manner 
 they have provided for it, tliey are operating more economically today than the companies 
 that have not been rehabilitated. 
 
 "So that it seems to me that a comprehensive plan providing for rehabilitation of the 
 properties, other than making of repairs must be adopted before the street railway industry 
 will be financially sound. 
 
 "The Chairman : .Assuming that the public can purchase capital more cheaply than the 
 private company, do you believe that the difference is substantial enough to really affect the 
 substantial operation of the industn,? 
 
 "Mr. Beeler: Given the same efficient management, the saving in interest would he 
 ven- substantial. With an average of four dollars invested per dollar of business— that is the 
 trouble with the street car business; it requires such a high investment to do business — the 
 average company, surface street car company, with four dollars invested must provide, at 
 six per cent, 2A cents out of every dollar to pay its interest at si.x per cent. Now if the 
 municipalitv could borrow that at four per rent, there would be 16 cents against 24 cents, a 
 saving of 8 cents on evePi- dollar, which would make a tremendous difference in the operating 
 ratio, but it would not take very long for an inefficient management, that was careless, or 
 that was favoring certain sections of the city, to throw away that eight cents on each dollar." 
 
 I have already referred to Mr. Roger W. Rabsoii's proposed remedy — the 
 removal of all rate reslriction.s. Mr. daylord C. Ciimniiii proposed public partner- 
 ship with a sliding scale of dividends afTected reciprocally by increasing or de- 
 creasing fares. Mr. Taft and others proposed a zone system of fares. Lieuten- 
 ant Colonel Charles \V. Kutz, Chairman of the District of Columbia Public 
 Utilities Commission, advocated public ownership of the tracks and roadbed 
 coupled with company ownership of the equipment. Mr. William C. Bliss, 
 
How TO Restore Credit 139 
 
 Chairman of the Rhode Island Public Utilities Commission, put his solution of 
 the problem in a few words, found at page 1 191 of the Proceedings : 
 
 "But the ultimate remedy," says he, "has got to come from relief from taxation, the 
 rates at the highest reasonable point you can put them, and the rest in the form of a subsidy 
 on the part of the municipalities served in proportion to the service rendered." 
 
 Several witnesses expressed the belief that public ownership would be in- 
 efficient and expensive ; a few used much stronger words ; one or two even raised 
 the bogey of Bolshevism. But no witness took the position that it would be 
 better for the people to walk than to be transported by municipal street cars. The 
 general consensus of opinion was expressed by Mr. Harold L. Stuart, the Chicago 
 investment banker, who said with admirable simplicity at page 195 of the Pro- 
 ceedings : 
 
 "I take it that the street railway corporation is a necessity, and if it is not operated under 
 private ownership, then it must be operated under public ownership." 
 
Chapter XXIV 
 THE PROS AND CONS OF PUBLIC OWNERSHIP 
 
 In the preceding chapter, in presenting the suggestions of various witnesses 
 for the restoration of credit, 1 necessarily quoted a good deal of discussion with 
 respect to the merits of public ownership. In particular, Mr. Henry J. Pierce 
 denounced it as "un-American"; Mr. J. K. Newman said it would put too much 
 "strength" into the hands of politicians; Mr. Samuel R. Bertron said that a 
 plan could be devised to handle it as "a great economical problem and not a 
 political problem," and Mr. Beeler pointed out that if the management was 
 equally efficient, public ownership would have a great advantage over private 
 ownership in the matter of the cost of capital. 
 
 We must now present more fully the widely divergent views of the witnesses 
 on the subject. Public ownership represents so radical a change in the status 
 of the electric railways, that we need to pause and look the proposition over 
 in its fundamental aspects before we discuss its effectiveness as a remedy for 
 the particular ills which we are here concemcd with. 
 
 Ex-President Taft, in his opening statement to the Commission, at page 4 
 
 of the Proceedings, says : 
 
 "I am personally much against government ownership, for the reason that I think it 
 reduces the economy of operation, and therefore greatly increases the cost of something that 
 is essential to the people." 
 
 And further on, at page 5 of the Proceedings, we find him saying this : 
 
 "You are met, of course, by the statement — and I do not wish to escape the force of the 
 argument — that these transportation facilities are in the nature of roads. The public spends a 
 great deal of money in keeping roads in condition, and those who do not have vehicles do 
 not use the roads. It is contended that these electric railways only fulfill a function of the 
 same kind, and that therefore the imlilic ought to meet the deficit by taxation; and if it 
 does, it will naturally take over the management, 
 
 "My feeling in respect to the general loss that is certain to be involved in public operation 
 still makes mc hope for some other solution than that of government ownership." 
 
 Mr. Francis H. Sisson sees political and economic tragedies ahead, if public 
 ownership of traii>portation lines proves to be inevitable. He agrees with Mr. 
 Bertron that municipal ownership of water supply has been "efficient and desir- 
 able," but does not draw from this fact the same conclusion, namely, that a way 
 could be found to make public ownership of street railways efficient, if the busi- 
 ness interests of the community, would put their heads together to that end. 
 Mr. Sisson is willing that the companies should be subject to strict public control, 
 and he is not (juitc sure that public ownership, as dangerous as he thinks it to be, 
 may not be inevitable. His testimony on these points is found at pages 336 to 
 3iS of the Proceedings, as follows : 
 
 "CommissionerMccker: Well, do you think that the regulating btxlv should have decision 
 as to when extensions should be made, when and where, and when and where new lines 
 should be built ? 
 
Pros and Cons of Public Ownership 141 
 
 "Mr. Sisson : I do, providing the arrangement is such as to furnish the credit by which 
 those extensions can be made. In other words, I feel that if the regulating bodies are going 
 to get on top of these utilities, they must get underneath them, too. If they are going to fi.x 
 their earnings, they must also establish credit. 
 
 "Commissioner Meeker: You spoke a moment ago about the desirability of having a 
 definite single authority. Does tliat squint towards public ownership? Is it possible to have 
 this public interest on top and underneath pri\-ate companies in the street railway business? 
 Is it possible to work out any scheme of cooperation there, or is it best to give up the attempt 
 and go back into public ownership? 
 
 "Mr. Sisson : Well, that is a verj' vital question. * * * It is my hope and belief 
 that it would be possible to work out a plan of regulation, which does not necessarily imply 
 public ow'nership, but I am not entirely sure that it is. I frankly say that. 
 
 "Commissioner Sweet: You think it ought to be tried first, anyway? 
 
 "Mr. Sisson : I think it should be the first attempt, that we ought to do everything possi- 
 ble, before we reach any conclusion that public ownership is inevitable, because in my mind 
 I believe that political and economic tragedies would follow public ownership in this country; 
 that would be very disastrous. 
 
 "Commissioner Meeker : With minimum and maximum earnings practically guaranteed, 
 what better would be private ownership under such a scheme than public ownership and 
 operation ? 
 
 "Mr. Sisson : Well, you would avoid the chief objection to public ownership and opera- 
 tion, which is political ownership and operation, which inevitably piles up cost and reduces 
 efficiency, and can show you a long record of inefficient operation and multiplying costs, which 
 would have to be borne by the public and would be disastrous to the public interests, as well 
 as to the private interest involved. 
 
 "Commissioner Meeker: You are speaking of publicly owned and operated lines now? 
 
 "Mr. Sisson : Yes. 
 
 "Commissioner Meeker : In what communities ? 
 
 "Mr. Sisson: Well, broadly speaking, in eighty-five or ninety per cent of the communi- 
 ties that have tried it. There are some exceptions, sir, but the whole record of public 
 ownership and operation of public utilities has been that of multiplying costs. 
 
 "Commissioner Meeker: You are speaking of public utilities in general now? 
 
 "Mr. Sisson : I am speaking of public utilities in general now, but it would apply in equal 
 degrees to the street railways, and perhaps in a greater degree to them than to some others. 
 
 "Commissioner Meeker: Why sliould it apply to the street railways in a greater degree? 
 
 "Mr. Sisson : Because of their close contact with the public. Water power does not 
 come in such close contact in the same way. 
 
 "Commissioner Meeker : It is easier to move water than it is to move an electric car. 
 
 "Mr. Sisson : Yes, and there are not all the causes of daily irritation and delay. 
 
 "Commissioner Meeker : It is nowhere nearly as complicated. 
 
 "Mr. Sisson : No. 
 
 "Commissioner Meeker : You were not speaking of the experiments abroad, were you ? 
 
 "Mr. Sisson : Well, I was. throughout the world. 
 
 "Commissioner Meeker: Throughout the world? 
 
 "Mr. Sisson : Yes. There are some exceptions abroad, but those exceptions are, for the 
 most part, marked by reasons that make them exceptions, that are very obvious. 
 
 "Commissioner Meeker: You expressed some doubt about the winning out of this co- 
 operating scale between the public and private corporations? 
 
 "Mr. Sisson : No ; I should not say a doubt — a mental reservation. I said I hoped and 
 believed it was possible, but I was not entirely sure. 
 
 "Commissioner Sweet : Let me ask one question or two there. Mr. Meeker. 
 
 "Have you found objection to municipal ownership of the water supply? 
 
 "Mr. Sisson: Not extensively; no. There have been instances of objection, and in- 
 stances of marked failure on the part of the municipality, but, on the whole, I think the 
 ownership, the municipal ownership, of water stations has been efficient and desirable. 
 
 "Commisioner Sweet : In addition to the points referred to, is it not true that the rela- 
 tionship between public health and the water supply is so direct that the city ought to have 
 control of the water supply? 
 
 "Mr. Sisson: I am inclined to think that that is true; yes. 
 
 "Commissioner Sweet : Is it not also true that the need of water in public parks and 
 cemeteries and for fire protection is a further reason for municipal ownership of the water 
 supply? 
 
 "Mr. Sisson : Yes. 
 
 "Commissioner Sweet: And those are arguments that would not apply to street railways? 
 
 "Mr. Sisson : Not at all. It is a different form of service entirely." 
 
 Mr. Frederick B. DeBerard, Director of Research for the Merchants Asso- 
 ciation of New York, and a member of the Public Utihties Committee of the 
 
142 Electric Railway Problem 
 
 United States Chamber of Commerce, was a witness on behalf of the American 
 Electric Railway Association. At page 876 of the Proceedings, in response to 
 a question by Mr. Warren, he says: 
 
 "I have given particular attention to the relative merits of private and commercial 
 operation of all classes of public utilities, the principles which govern them all being, sub- 
 stantially identical and conclusions that may be reached as to one will apply with practically 
 equal force to all the others." 
 
 Mr. DeBerard's conclusions and those of the Merchants Association were 
 
 embodied in two reports. The first was issued by the Association in November, 
 
 1916, and was entitled : 
 
 "I. Opposing Government Ownership and Operation of Public Utilities. 
 
 ■'II. Advocating E.\clusive Regulation of all Railroads by the Federal Government." 
 
 The other report was dated January 23, 1919, and was entitled "Report of Special 
 
 Comirtittee on Government Ownership and Operation of Public Utilities." Copies 
 
 of these reports were filed by Air. DeBerard with the Commission in connection 
 
 with his testimony. For the purposes of this analysis, it is sufficient to quote a 
 
 few paragraphs from the report of January 23, 1919, showing the conclusions 
 
 of the special committee, of which, it should be observed, Mr. Francis H. Sisson 
 
 was a member. At pages is and 9 the report says : 
 
 "Movements for state or municipal ownership and operation of local public utilities 
 are in progress in various quarters. These in general contemplate the ownership and opera- 
 tion by municipalities of street railways, electric light and power plants, gas plants and tele- 
 phone plants. 
 
 "Tlius it is proposed that private enten)rises be excluded from the fields of transportation, 
 communication, light, heat, and power, and that the functions belonging to those fields here- 
 after be performed by immediate governmental agencies. 
 
 "r^xcept under war conditions the sole plea that can be advanced to justify the operation 
 by governments of public utilities is that governments can provide better service at less cost 
 to the public than can iirivate o|)crators — that is to say, the assumption that government opera- 
 tion is more efficient and less costly than private operation. 
 
 "We do not l)clicve that this contention can be sustained. On the contrary we contend 
 that the operations of governments in the economic field — and particularly under American 
 conditions — are generally characterized by inefficient management and excessive cost ; so that 
 under government operation the public would get poorer service and pay more for it than 
 under private operation suitably regulated by public authority. 
 
 "The cause of inefficient management and excessive cost when governments undertake 
 economic activities is simple. All the activities of any government are necessarily carried on 
 by political machinery and that machinery is wholly unsuitcd to the economic field. 
 
 "The fields of politics and economics are dissimilar and separate. The field of politics 
 (meaning thereby the art of government ) is mainly the regulation of conduct and the pro- 
 tection of rights. The field of economics is the prcxluction and utilization of material things. 
 The principles, the methods and the machinery of political administration are wholly diflferent 
 from tho.se of economic activities and not adapted nor adaptable to the latter. The differences 
 arc fundamental and cannot Iw reconciled." 
 
 Again, at pages 30 and 31, the following .summary and conclusions are set 
 forth: 
 
 "The principle of political selection whose application is inevitable, produces an inferior 
 personnel, lackuig the exiK-riince and sound judgment necessary to the proper conduct of 
 business affairs, with resulting inefficiency, waste and excessive cost. 
 
 "The financing of economic undertakings can seldom be proiwrly provided for under gov- 
 ernment control for reasons staled alKive. By reason of inferior management and insufficient 
 financing, government pro|)erties are likely to be insufficiently maintained, be subject to ex- 
 cessive deterioration, and generally fall short of the standards essential to adequate service. 
 
 "While we are not unmindful of the defects that not infrequently characterize the opera- 
 tion by corporations, of public utilities, we do not believe that those defects can be cured by 
 suhstituting another mctlunl which in every respect of efficiency is much below the standards 
 that generally prevail under private management. In so far as the evils which are popularly 
 assumed to exist m pri\-ale management arc found to exist in fact, other remedies than the 
 substitution of methods aNmnding in greater evils should be found. 
 
Pros and Cons of Public Ownership 143 
 
 "We believe that the public can best be served by utilizing the efficiency, enterprise and 
 energy of private corporations for the continued operation of public utilities, under such public 
 control as shall protect the public in its right to efficient service and fair rates ; and at the 
 same time assure to private capital invested in public utilities a fair return upon such capital. 
 
 "We do not find aiiy chaiige of conditions resulting from the war which warrant or 
 require the previous position of the Association, in opposition to government ownership and 
 operation, to be modified. 
 
 "In our analysis of the question we have dealt mainly with principles which are of univer- 
 sal application and of continuing force ; those principles apply without qualification to all of 
 the \'aried classes of undertakings which it is proposed shall hereafter be operated by govern- 
 mental bodies, and to all of those undertakings the disabilities we have outlined apply. The 
 controlling consideration is that political control, operating through political methods, is de- 
 .structive of economic efficiency and therefore such political control should not be applied 
 to undertakings of an essentially business nature." 
 
 Notwithstanding his opposition to public ownership, Mr. DeBerard was will- 
 ing to admit the essential character of street railway service. His testimony on 
 this point is found at page 877 of the Proceedings, as follows : 
 
 "Mr. Warren: Have you given any attention to the subject of the importance of street 
 railways to the prosperity and development and health of communities? 
 
 "Mr. DeBerard: The Merchants Association has given attention to that subject but has 
 not made it the subject of specific study except in so far as it relates to the industrial pros- 
 perity of the city of New York, and it has examined into the question to some extent with 
 relation to other communities to supply instances for use in our study of that subject in New 
 York. The general situation developed as to that is along these lines : 
 
 "That fully efficient local transportation is essential to the welfare both social and in- 
 dustrial of any community. It is essential to the social welfare of the community that its 
 population be not extremely congested but that it be distributed over a reasonably wide 
 territory ; for several reasons, both for the sanitary and social well-being of the inhabitants, 
 and likewise for the industrial prosperity of the business enterprises that are located there, in 
 order that they may be located in the outskirts and at the same time have reasonably cheap 
 and regular and efficient transportation for their working people to reach their places of 
 
 employment. 
 
 ******** 
 
 "So our general conclusion on that subject, although as I have said it has not been the 
 subject of a special report — our general conclusion in connection with our study of general 
 conditions was that efficient and regular and cheap urban transportation is indispensable to 
 the welfare of any growing community." 
 
 Ex-Governor Eugene N. Foss, of Massachusetts, had appeared before the 
 Commission earlier on the same day when Mr. DeBerard appeared. Their tes- 
 timony was a good deal in the nature of a debate on the merits of public owner- 
 ship. Governor Foss was for it, strongly and without qualification. He testified 
 as an individual, but as one who had long been an extensive holder of street 
 railway securities. At page 791 of the Proceedings, he says : 
 
 "I have been and am still a large holder of street railroads and quasi-public corporation 
 stock. I have been a great believer in quasi-public corporations. I have been a director in 
 many street railroad corporations in Massachusetts and also in New York, in the two leadmg 
 systems of New York, the Brooklyn Rapid Transit and the Manhattan Elevated, and I have 
 been more or less acquainted with' this class of investment and have followed it for a good 
 manv years. . , . 
 
 "I have come to the conclusion, somewhat reluctantly I admit, that public ownership 
 is the only true solution of this railroad question, whether it be the railroads or the electric 
 railways Of course, private ownership is out of the question. Private ownership with 
 public "regulation has fallen down. There is nothing else left in my judgment except public 
 ownership and operation, or el.se public ownership with private operation. Private owiership 
 and public regulation is wrong in principle. You never can make it work successfully. The 
 man who owns these properties has got to run them. 
 
 "Now, I am interested in this proposition primarily because it means a better democracy, 
 and we have got to democratize our transportation system in this country. That is the 
 first thing we have got to do. And then we have got to democratize our industries to a 
 greater extent than thev have been; otherwise we are going to be in the condition that they 
 are abroad in some places. So I say primarily I am for this thing because it means a better 
 democracy." 
 
144 Electric Railway Problem 
 
 Mr. Foss comes strongly to the defense of public initiative and efficiency, 
 and. at page 792 of the Proceedings, cites the experience of Massachusetts, as 
 follows : 
 
 "Wc have had cases in Massachusetts, for instance our metropolitan water system, if 
 you please, created twenty-five years ago, in which a commission, a non-partisan commis- 
 sion, appointed by the Governor, has spent forty millions of dollars on a water system for 
 Boston, one of the best in the country. It gives us the cheapest water. That commission 
 paid off twenty millions of dollars indebtedness today, and we will have it all paid off, and 
 there has not been a word of scandal about the management, no graft or anything of that 
 sort. I had no trouble when I was Governor of Massachusetts for three terms to find the 
 best patriotic men in the state to take these government positions. It fell to my lot to 
 rebuild the court of Massachusetts, both branches, and I did not have any trouble about 
 getting the best men in the state at the very moderate salaries paid by the State of Massa- 
 chusetts to its judiciary, no trouble about it at all. 
 
 "It is a reflection upon our intelligence and upon our business capacity. I am not willing 
 to admit that the Post Office is not v.ell handled, eci-;;on-.ically and efficiently handled. I 
 know you can put a package in the mail in Boston and get it here to Washington quicker 
 than you can by express. I am not going to stand for that sort of thing. We can do just 
 as efficient work under government ownership as we can do any other way, no doubt about 
 it at all." 
 
 At pages 794 and 795, Mr. Foss takes up the question of politics in street 
 railway management. He says: 
 
 ''I know that I could work out a plan and I could find a Ixxiy of men in Massachusetts 
 or any other state in the Union honest and patriotic enough to conduct these street railroads 
 just as honestly and just as fairly and just as economically for the state as they could for the 
 Standard Oil Company or any other organization there is in the country. There is no 
 reason why our young men and boys should not work for the state and government just 
 as efficiently and just as honestly as they would for any other corporation. And it is a great 
 mistake not to admit it. I will not admit for a single moment but what when we get gov- 
 ernment ownership in this countr>- as we are going to get in my judgment, and we ought to 
 have it, as applying to all these railroads, you are going to see marked and wonderful econo- 
 mies in all respects. The public cannot get a square deal through a private corporation, 
 even if it is publicly regulated. It cannot do it, it is utterly impossible. And I do not see, as 
 I say, any other solution. 
 
 "The people say, 'Oh, we must keep these railroads out of politics.' Good heavens, 
 have they not been in politics? Are they not in politics? They have been in politics for 
 fifty years. What did I find on Beacon Hill in Boston? I found out that the greatest 
 lobby of the state was maintained by the quasi-public corporations. The king of the lobby, 
 who was employed by the Boston Elevated Railroad, received a salar>' of $25,000 a year. One 
 corporation paid that amount for one man, and he had a train of followers. .\nd it is the 
 quasi-public corporations who have done more than any other force in this countr>- to debauch 
 legislatures. They have made legislatures and unmade legislatures and unmade men. They 
 have created the legislatures. Now what we have to do is to take these street railroads over 
 and keep them out of politics. That is what we have to do. We have got to take them over 
 to keep them out. That is the proposition as I see it." 
 
 Mr. DcBerard closed his personal testimony at pages 880 and 881 with a 
 reply to Covcrnor Foss, insisting that politics would vitiate public management of 
 public utilities. He says: 
 
 "I do not think that Governor Foss' assumption that government ownership is going 
 to effect a cure for any evils whether real or imaginary, is correct. On the contrary, it is 
 going to create a new class of evils. Whether under government ownership or pri\-ate owner- 
 .ship, the operation of a street railway is a business undertaking as distinguished from a 
 political function, and whether under private or govcniment ownership, it must be subjected 
 to the same niles that prevail in well managed business undertakings. It must meet all 
 economic costs that arc involved. The public must pay those economic costs in one form or 
 another. So the question ti> be considered is whether those economic costs will be less under 
 government ownership than they will under private ownership; whether government owner- 
 ship will produce cc|ual or superior efficiency ; whether it will produce equal or superior 
 economy. .-Vnd the result of my study as to the application of the principles that govern 
 both cases is that government ownership will inevitably and imescapablv result in greatly 
 increasing the economic costs of operating the business propositions that are under con- 
 sideration. 
 
Pros and Cons of Public Ownership 145 
 
 "The Cliairman : Have you set forth your conclusions and the reasons upon which you 
 base them in this pamphlet of yours? 
 
 "Mr. DeBerard : Yes, I have analyzed the question with considerable fullness there 
 and have given such illustrations as are pertinent to the subject. There are other illustra- 
 tions, however, which could be adduced which will show the uniform inefficiency of govern- 
 ment agencies when they undertaUe to conduct economic undertakings, by reason of the fact 
 that the methods that are inherent in political government and whicli are perfectly sound 
 when applied to political government do not apply, are not adapted and cannot he adapted 
 to the necessities of economic undertakings. Waste and inefficiency to a high degree are 
 inseparable from government ownership, primarily by reason of the method of selecting the 
 personnel. And it comes down to a question of management, and under the methods of 
 political selection the personnel to which the management is entrusted is not and cannot be 
 as efficient as that of private management, the reason being that the motives that govern the 
 selection are different in the case of private management. Those motives result in the retention 
 of the highest capacity, of trained skill, of experience, of long, careful and constant contact 
 with the particular industrial problems that are concerned and the bringing to bear upon 
 those of the highest attainable degree of professional expert ability; whereas in the case of 
 government selections, other motives always enter into the selection. I venture to say that 
 Governor Foss would not apply to the management of his own private business the method 
 of selection that he applied to the selection of the Public Ser\'ice Commission of the State of 
 Massachusetts. If he did so apply it he would not be running a factory but he would be 
 seeking a job." 
 
 And yet the Public Service Commission of Massachusetts appointed by 
 Governor Foss was charged, not with the operation of transportation systems, but 
 with the regulation of the private companies, which everybody but Mr. Babson 
 regards as absolutely essential in case the system of private ownership and opera- 
 tion is continued. Mr. DeBerard did not explain how politicians can control 
 the private corporations any more successfully from the public point of view 
 than they could operate the utilities. 
 
 Interstate Commerce Commissioner Eastman approached the subject of 
 public ownership from a constructive point of view. He looks upon it as a policy 
 to be worked out. At page 2070, he says: 
 
 "I regret very much that the discussion of the question of public ownership has so 
 often been enshrouded in a veil of prejudice, prejudice on both sides. • ■ j 
 
 "It seems to me that too often one side regards public ownership as an unmitigated 
 evil and forerunner of Socialism, Bolshevism and various other evil things that may hap- 
 pen, and on the other side it is regarded as a cure-all, or panacea for all the ills of humanity. 
 Between two opposing points of view of that sort, of course, ve can have no sane dis- 
 cussion of the question, . u j ■ tu-, 
 
 "It seems to me that in the present instance the question ought to be approached m this 
 way Here is an industrv which is essential and vital to the development and Krowth ot 
 the communitv. It is performing a public function which has got to be performed Now, 
 if the industry has ceased to be a field for private investment, obviously the only alternative 
 that vou have is some form of public ownership; and instead of denouncing that possible 
 remedv and dismissing it as the breeder of all sorts of evils, you ought instead, to attempt to 
 analyze the dangers which may possibly inhere in it, and attempt to find some remedy tor 
 
 those dangers. ... ^ . , .- t !..»:«,. 
 
 "I am bv no means convinced that it is impossible to find such remedies. T am stating 
 that mildly. ' I am of the opinion that they can be found, and I am of that opinion because 
 of this saving factor : That street railway service is so important to every- element in the 
 community, not onlv to the general public but also to the business -nterests, it is essential 
 that it should be operated efficientlv and economically, even more essential to the community 
 at large than it is to the owners of securities in the private corporations, because they can 
 often get their return by increasing rates rather than by efficient and economical operation. 
 
 Further on, at page 2071, Mr. Eastman points out some of the possible 
 methods of overcoming the alleged difficulties of public operation. He says : 
 
 "Public ownership does not necessarily mean public operation if you do not want to 
 have public operation. Personally I do not fear it, but if you have public o;^;"««h;P '' 
 is entirely within your power to say that you will de egate your management »<? «^^'" ^ro^P'^ 
 of citizens who are not under the control of politics. You may say that the 'panagement 
 shall be in the hands of chambers of commerce or improvement associations or labor unions 
 
146 Electric Railway Problem 
 
 or various other representatives of the communit>-. There are all sorts of possibilities, in 
 other words, which ought to be considered, and given constructive thought, which bear upon 
 the possibility of avoiding the dangers which are lielieved to be inherent in some form of 
 public operation."' 
 
 Mr. Grenville S. MacFarland, of Boston, who, as the transportation adviser 
 of Mr. William R. Hearst and the Boston American, participated prominently 
 in the conferences that preceded the adoption of the Boston Elevated Railway 
 plan of public operation on a service-at-cost basis, gave the Conmiission his 
 views of the street railway problem. At page 1342 of the Proceedings, he says: 
 
 "It seems to me that this problem involves fundamentals, and not details, and that it is 
 going to be solved by the social and political prejudices that are involved in it rather than by 
 a scrutiny of the history of the companies, and of the financial transactions behind the com- 
 panies, except so far as a consideration of the history of those transactions has already 
 given us points of view. 
 
 "I think that it resolves itself into two fundamental and divergent plans of relief: one the 
 so-called cost of service, with government relief immediately by extension of credit and in- 
 directly by increase of fares; and the other by practically the same methods temporarily, but 
 with a fundamental change in operation and in the character of ownership; that is, public 
 ownership and operation." 
 
 A little farther on, at pages 1342 and 1343 of the Proceedings, he indicates 
 that in his opinion public ownership, even with some economic waste, would be 
 better than the continuation of private control. He says: 
 
 "Now, Professor Fisher gave us an educated guess as to what the condition of prices, 
 what the price level in this country w-as to be in the next few years, at least during the period 
 beyond which this discussion will not relate ; and he said that the prices will not go down. 
 That means, of course, that there is not any remedy which the railroads can perceive which 
 will help them that does not involve an increase in their revenue. I think that is to be ac- 
 cepted as a fundamental proiKDsition. They have got to have an increase in their revenue 
 in some way. The question is whether they are to have it under the old private management, 
 and with what I personally believe to be its vcr>-. very serious evils, evils that are not only 
 serious economically and financially, but still more serious politically. 
 
 "Personally I would rather see the community suffer some loss, some economic loss, on 
 the assumption that the opponents of public ownership and operation are right, that public 
 operation would involve some economic waste, some inefficiency. I would rather see that 
 loss occur than to see continued the old practices of the public utilities under private manage- 
 ment, which I think are inherent in the situation, as they are based upon human nature in its 
 operation upon the relations of men performing a public function for private profit. 
 
 "I do not think there is an example in the world, from the most ancient records in the 
 Old World and in the ancient times, down to the present day that does not show an abuse 
 which indicates the inherent difficulty in attempting to make a private property out of a 
 necessary public function." 
 
 Mayor James Couzens. of Detroit, took the view that local transportation 
 is primarily a social problem. This idea is quite fully developed at pages 1137 
 and 113S of the Proceedings, where he says: 
 
 "During the last street car strike the great pressure that was brought to bear upon the 
 local administration to settle the strike on some terms was by the men who never use the 
 cars at all. So you sec that they were not interested in the starting of the cars from the 
 standpoint of their personal convenience, but purely from the standpoint of their business. 
 Every one of these men used motor cars and had absolutely no use for the street cars as a 
 pcrsiitial service, but simply to bring the customers to their stores, or to take their workmen 
 to the shops. I l)olieve luiless this question is solved on the social basis, the time will arrive 
 when it will Ix- the duty of the m.-inufacturer to go and get his help and send it home, because 
 help cannot continue to put up with the congestion and the embarrassment and the inconven- 
 ience that they now have to put up with in urban transportation so far as it is applied to 
 Detroit. 
 
 "Now. men will say, and 1 think properly say, if the men who exertetl such a great 
 effort at the last strike to have it settled, if they display such a great interest in urban trans- 
 portation when they do not use the service themselves, the men will recognize, and I believe 
 you will recognize that it is, therefore, a social problem in which these men are most widely 
 interested who have nothing to do with riding on the cars themselves. 
 
Pros and Cons of Public Ownership 147 
 
 "So that that brings up the question as to whether or not the upkeep and maintenance 
 of a transportation system should at all times be borne entirely by the car rider. 
 
 "I am convinced that up to a certain point the car rider should pav for the service; but 
 beyond a reasonable point the community benefiting by it should make up any deficit. 
 
 "I believe there are many ways that these burdens above cost of the fares might be borne 
 m part, probably, by the suggestion ofTcred by Mr. Ingram as to the lines being paid for by the 
 property directly benefited, if it is in newly developed territon,'. But if it is for the service 
 of the manufacturer and the merchant downtown, or the big office building, then, it seems to 
 me that they should bear a part of the burden to get their employes to and from their place 
 of living in a comfortable and decent manner. 
 
 "We have long passed the point where our individual health is a question of our own 
 concern. The public has recognized all over, now, that your health and my health is a 
 matter of public concern; and whether we ever have diseases or not, we pay to reduce the 
 death rate. We pay to collect the garbage, we pay to protect the health of the community, 
 whether we have incinerators to burn our own garbage, or not. And it is as much a com- 
 munity problem to carry citizens in a comfortable and decent manner to and from the places 
 they want to go or have to go as it is to collect our garbage or clean our streets or furnish, 
 our schools or preserve our health; and if that is recognized, which I believe it will be soon, 
 if it has not reached that point yet, we will then recognize that is a service which the com- 
 munity must furnish for itself. 
 
 "I venture to predict here that there will be no other solution of the urban transportation 
 problem until it is put into the hands of the municipality itself, by purchase and operation." 
 
 Further on, Mr. Couzens discusses the problem with Commissioner .Sweet 
 from the standpoint of human nature, the selfishness of politicians and the com- 
 pelling power of contact. At pages 1154 and 1155 of the Proceedings, we find 
 the following: 
 
 "Commissioner Sweet : I am working on the theory that human nature is pretty nearly 
 the same the world over, and was away back in the time of Christ as it is today. 
 
 "Mr. Couzens: And there has been no improvement? 
 
 "Commissioner Sweet : Yes, there have been improvements, but at the same time there 
 are a great many selfish politicians who, when there is a conflict between their interests and 
 the interests of the public will decide every time for themselves, is not that true? 
 
 "Mr. Couzens: Yes, but when you consider that these employes of the transportation 
 companies come in contact with the citizens three hundred and fifty to four hundred million 
 times a year, do you suppose the citizenship — and we now have women and girls voting, 
 which will make it more incumbent upon us to give a more decent administration than ever 
 before — don't you think they are going to demand that they have that kind of men in office? 
 If they get bad service from the employes of the [niblic service company, who come in 
 contact with them three hundred and fifty or four hundred million times a year, which is the 
 number of people we carry in Detroit, don't you believe they arc going to require a better 
 type of officer, don't you believe they will take a greater interest in their municipal officials? 
 I may use an analagous case. You in your own home do not care who collects the garbage 
 or brings the ice or the groceries but you are very much interested in who waits on your table 
 or who the nurse is that takes care of your child. There is a personal contact there that is 
 absolutelv necessarv in my judgment for proper municipal ownership and operation or proper 
 municipal governrnent, aiid we do not get it because of the few employes you refer to in 
 the water works, who do not come in contact with the citizen. Every morning he gets up 
 and turns on the water and the water runs and his bath runs and the faucet runs and he does 
 not care anvthing about who is keeping the water there. Even,- day the sewage is carried 
 awav, he does not care anvthing about who the officials arc that provide all these facilities. 
 Every night he goes on the' street the lights are lit, he does not care who turns the lights on, 
 thev 'are lit. Municipal government mav be wrong in some places, but there is a lot that is 
 good, because there is a lot of it thev do not ever think about. The thing you make the fuss 
 about all the time is that which vou come in contact with all the time, and the thing you come 
 in contact with all the time will be the kind of street car service you get, the kind of employes 
 vou have, whether thev are polite and gentlemanly or insolent. That will lie the determining 
 factor in the control you will get, and you will never get that until the employes come in 
 contact with the citizens." 
 
 In my own testimony before the Commission, at pages 1233 and 12.^4, I dis- 
 cuss the fundamental question between private and public ownership and opera- 
 tion as follows: 
 
 "As to whether the street railwav business is to be conducted through public or private 
 agencies, I have reached the conclusion that there is no ultimate solution of the problem 
 
148 Electric Railwav Problem 
 
 unless we frankly undertake the local transportation function as a public function and perform 
 it through public agencies. 
 
 "Local transportation, in the first place, as I have said, is essentially a part of the city 
 plan. It is a public function. The street railways cannot exist except through the possession 
 and use of special franchises in the public streets. Convenient and cheap transit has come 
 to be an essential for the public convenience in large urban communities. 
 
 "The necessity for public control has been recognized to an increasing extent, until now 
 the street railway companies could not possibly be jicrmittcd the freedom of initiative requisite 
 to successful private business enterprises. Public regulation of service, maintenance, wages 
 and other operating expenses is more difficult and more expensive where undertaken indirectly 
 than where done directly. There is an irreconcilable conflict between the interests of the 
 public and those of any private company operating a street railway system for profit. The 
 result is distrust, hatred, poisoning of the political atmosphere in cities. Instinctively the 
 American people see that private operation of a public function for profit tends to be cor- 
 ruptive. The public will not stand lor the new privileges and exemptions that under present 
 conditions would be necessan,- to enable the street railways as a private business to prosper 
 and expand to meet the growing pul)lic needs. Chaos has been introduced into the field of 
 regulation by this conflict of policy between the state commissions and the local authorities, 
 to which I have already called attention, and regulation has in large measure broken down. 
 The condition of the companies, the condition of the industry at the time may be cited as 
 Exhibit A in the proof tliereof. Of cour.se, that does not prove — that is an assertion; it 
 docs not prove that public regulation could not be perfected and overcome mistakes that 
 have been made and the limitations that .have been made and \ie more successful in the future 
 than it has tx!en in the past. I think the difficulties are fundamental and that it is the hardest 
 way and that we arc Ixjund to come to the other conclusion l)Clore we reach any solution. 
 
 "The cost of new capital under private ownership under existing conditions is practically 
 prohibitive. Let us go back to what we were discussing a while ago. Take companies that 
 are overcapitalized and take companies that, being overcapitalized and not being able to earn 
 a fair return, by that veri,- reason demand a higher rate of return, 8 per cent In'ing demanded 
 now. The higher the rate of return, that is, the more the risk, the worse oflf the company is; 
 the greater the risk, the higher the rate of return, the higher the cost of capital, .^nd if we 
 were to allow, even after a substantial compromise, the companies' claims at the present time 
 as to valuation, and then allow them 8 per cent return upon it. we would be paying for our 
 capital charges for the street railway service I think at least double what capital would cost 
 under public ownership an<l operation on a conservative capital value to start with. Of course, 
 if a city in taking over the companies should take them over at a price which bankrupted 
 them, the cost of capital for the city would continue to be excessive, although the cost of addi- 
 tional capital would not Ik' great. 
 
 ".So far as T can see. really conser\'ative financial policies under private ownership are 
 now impracticable. .Ml schemes of private ownership and operation break down because 
 they are inconsistent with the degree of public control that is made necessary by the nature 
 of the business." 
 
Chapter XXV 
 PUBLIC COOPERATION AND A NEW DEAL REQUIRED 
 
 The problem presented by the present condition of the electric railways, and 
 particularly by the failure of their credit, suggests the need of temporary emer- 
 gency measures and of a permanent plan to prevent the recurrence of the trouble. 
 It is like the world problem of 1917: first, a couple of millions of American 
 soldiers in France, and second, a League of Nations to prevent our having to 
 send them again. The danger is that the difficulty of agreeing upon an ultimate 
 solution of the street railway problem and lack of proper public initiative will 
 cause the adoption of mere temporary expedients without any definite steps being 
 taken toward the adoption of a permanent plan, and that the temporary expedi- 
 ents adopted may be such as to make the final solution of the problem increasingly 
 difiicult. 
 
 Neither a temporary nor a permanent solution can be properly worked out 
 until clear answers have been found to certain fundamental, underlying questions. 
 In my own testimony, at page 1221 of the Proceedings, I outlined these ques- 
 tions as follows: 
 
 "The first is as to the character of the investment in street railways. Shall it be spec- 
 ulative or non-speculative? That means, shall it be a secured investment or an investment 
 in which the investors take risks. 
 
 "Second, shall the business be conducted primarily for profit, or shall it be conducted 
 primarily for service? I do not mean, in asking that question, that the two can be entirely 
 separated. I mean that the question of policy to be determined is as to whether at any given 
 time, in any given crisis, the motive of service or the motive of profit shall be the pre- 
 dominating one, and determine the policy. 
 
 "Third, shall continued service be guaranteed, and shall industrial disputes in the transit 
 business be settled without strikes? 
 
 "Fourth, shall the business be carried on through public agencies or through private 
 agencies ?" 
 
 With respect to the first of these questions, it hardly needs to be emphasized, 
 in view of the testimony already cited and in view of the general conditions of 
 which we may take "judicial notice," that heretofore the electric railway industry 
 as a whole has been on a speculative basis, and that only in isolated spots where 
 service-at-cost contracts, public guaranties or public ownership have been brought 
 about, have street railway investments become in any considerable measure non- 
 speculative. It follows that the answer to this first question may be a con- 
 demnation of the entire past status of the street railway industry. In fact the 
 answers given to the question by General Tripp, Mr. Harlow C. Clark and other 
 witnesses for the electric railways are such a condemnation. So is mine, which 
 I give at page 1229 of the Proceedings, as follows : 
 
 "In my opinion the investment should be non-speculative. In order to make it non- 
 speculative, certain things are necessary: First, the amount of the investment must be 
 
 149 
 
150 Electric Railway Problem 
 
 determined, fixed. Second, the rate of return to be allowed upon the investment must be 
 
 fixed. 
 
 ******** 
 
 "Some scheme must be provided for flexibility in revenues, to enable the investment to 
 receive its return at all times. Means must be provided to secure the permanent integrity 
 of the investment itself. That requires the physical upkeep of the property, so that the basis 
 of the investment shall not disappear. It requires the protection of the investment from 
 ruinous comi)etition. It requires that the investment shall have the right to continue in service 
 until it is taken care of, until the investors are paid. As a matter of additional safety it 
 involves, I think, the desirability of amortization of the capital account, at least in part, so 
 as to keep the capital account at all times well within the present physical value of the visible 
 property." 
 
 In an address before the Conference of American Mayors on Public Policies 
 as to Municipal Utilities, held in Philadelphia in November, 1914, before the 
 electric railways had begun to feel the strain of war prices, and before they had 
 started their "drive" for higher fares, except in Massachusetts, I propounded 
 this question : 
 
 "What shall lie the recognized character of public utility investments? Shall they be 
 regarded as speculative and held at the risk of the owners, or shall they be regarded as invest- 
 ments in aid of public credit and be given the same security as investments in municipal 
 bonds? If new investments are to be regarded as non-speculative, shall the cities make 
 good all past losses as well as assume all future risks?" 
 
 And, in the same address, published as a part of the proceedings of the 
 conference in a special volume of the Annals of the American Academy of 
 Political and Social Science,' I gave the following answer, which seems just as 
 appropriate now as it was in November, 1914: 
 
 "Public utility investments should be placed upon a non-speculative basis, and their 
 security should approximate that of municipal bonds. 
 
 "In the establishment of the non-six.'culative character of these investments, cities 
 should not undertake to make good past losses, unless they are compelled to do so by franchise 
 contracts. 
 
 "So far as future investments in the standard utilities are concerned, the cities should 
 assume the risks of loss due to unforeseen causes, and should substantially guarantee the 
 integrity of all investments made at the request or with the appro\-al of public authority. 
 
 "Public utility invcslments in the past, with some exceptions, have been highly speculative. 
 There has been a continual buzz of promoters around city councils and state legislatures for 
 the grant of special franchises and charters for public utilities. In most cases the sole 
 purpose of these promoters has been either to sell the franchise or charter outright, or to 
 construct the utility, heavily overcapitalize it and then sell its securities for a much larger 
 sum than the amount actually invested. 
 
 "Public utilities arc not always gold mines. A great deal of money has been lost in 
 premature investments, and a great deal more has gone to the scrap heap w^ith changes in 
 the arts. Kxpcrience shows that the public suffers along with the investors when utilities 
 find themsclvrs 'hard up.' Without money to make adequate extensions and improvements. 
 or even to keep their plants in proper repair, public utilities cannot render the service which 
 is projicrly demanded of them. 
 
 "Public utility service, as an essential public function, ought not to be dependent upon 
 a throw of the dice by the manipulators ot stocks and bonds. It ought not to furnish an 
 opportunity for any man or set of men to 'get rich." It ought to funiish to multitudes of 
 people of comparatively small means a safe and conservative investment for their .savings. 
 I am strongly of the conviction that it is disgraceful to a city to have its public service cor- 
 porations in receivers' hands— almost as disgraceful as it would be for the city to default on 
 its own Ixinds. 
 
 "The elimination of the speculator and the stock-jobber from the utility field and the 
 establishment of utility investments upon a safe, conservative, non-speculative basis, is to 
 my nnnd a fundamental coiidilinn precedent to go.xI service, permanentlv low rates and 
 adequate public control. If capital is made secure and is gnaraiiletd a steady return, it 
 dem.-inds nothing more than the ordinan,- interest rate. Under these circumstances, we should 
 not have to pay premiums to reward capital for a risk undertaken in emlarking upon public 
 utility enterprises There would be no risk. The onlv special reward offered would 
 naturally go to the men who actually operate the property; for when security and a sure 
 
Public Cooperation Essential 151 
 
 return have overcome the characteristic timidity of money, we have then only to seek a means 
 for enlisting the motive of men for efficiency and economy in the operation of the plant. 
 This cannot be done by lavishing unasked rewards upon capital as such.'' 
 
 The second fundamental question deals with the controlling motive — shall it 
 be profit, or shall it be service. The answer to this question also may involve 
 a radical condemnation of the past status of the electric railway industry, though 
 here there is more confusion and conflict of opinion. Many witnesses for the 
 electric railways point to the history of the industry and maintain that it shows a 
 continuous record of improvements in service even at the expense of profit, and 
 they all agree that the warrant for their appeal to the Federal government for 
 help or to the state and local governments for relief from the obligations of 
 rate contracts lies in the supreme importance of service. Yet they necessarily 
 assume that investors in public utilities are not primarily philanthropists, and 
 that they must be "attracted" by the rewards offered for capital. Of course, 
 service is the inducement held out, first by the promoters, and later on by the 
 companies themselves, as the price offered the public for the opportunity to 
 exploit the general transportation need. The relative position of "service" and 
 "profits" as actuating motives of the companies in the development of the electric 
 railways was brought out in the testimony of General Tripp, where he was dis- 
 cussing the proper treatment of superseded property. Commissioner Sweet and 
 Commissioner Meeker had brought up the illustration of a country merchant who 
 started in business with a small frame building, which as he prospered was super- 
 seded by a fine brick structure, and that by a granite building, and that ultimately 
 by a marble building. The question was whether according to General Tripp's 
 theory of valuation, the superseded buildings would still be included in the 
 capital account recognized as the basis for return upon the investment. An 
 extended colloquy took place in which four of the commissioners and General 
 Tripp joined. The discussion of the motives that actuated the companies in 
 developing their property was incidental to the discussion of an important prob- 
 lem of valuation, but it was no less illuminating on that account. General Tripp's 
 testimony with the questions and comments of the commissioners, w^ill be found 
 at pages 178 to 180 of the Proceedings, as follows: 
 
 "Commissioner Meeker: It is merely the marble building that is getting the return? 
 
 "Gen Tripp: Yes. In other words, a properly managed company when it comes to 
 renew its bonded obligations which are falling due only issues sufficient new- bonds to take 
 care of its then requirements. Its then requirements reflect, if its books have been kept 
 properlv, the effect of depreciation charges and charging ofl this obsolete property. 
 
 "Commissioner Gadsden: Can I ask a question right there, because I think there is 
 probably a liule misapprehension about it. You are discussing this on the basis of a com- 
 pany whose income has been sufficient to set up these reserves? 
 
 "Gen. Tripp : Yes. 
 
 "Commissioner Gadsden: That is true, is it not? 
 
 "Gen. Tripp : Yes. ... , , • , . i »i. 
 
 "Commissioner Gadsden : As a matter of fact m the history of the industry have these 
 ■companies set up these reserves to do that? , , , , j .u.. 
 
 "Gen Tripp- Some have and some have not and those that have not are today on me 
 verge of bankruptcy and you will have no difficulty in dealing with those. 
 
 "Commissioner Beall : Let me ask a question which I think will clarify it Is not the 
 general fact this : Take in New York, for instance, where the r..ads have changed trom 
 cable to electricity. They did not do it because the cable was no longer able to take care 
 of the traffic or because it was absolutely obsolete, because it was so old it was worn out. 
 They thought they had a better method, a more economical method to the pubhc, cheaper 
 service and better service and more carrying capacity 
 
152 Electric Railway Problem 
 
 "Gen. Tripp: Yes. 
 
 "Commissioner lieall : They made those changes from the cable roads and did the same 
 thing in Seattle and numerous other cities, when those cable roads still had a life of a good 
 many years. 
 
 "Gen. Tripp : Yes. 
 
 "Commissioner Beall : Some of them had only run for a few years. If they had run 
 for twenty years they could not have built up enough reserve to charge it off at once. The 
 method generally pursued 1 understand was this, they did not charge them off in one fell 
 swoop, but amortized it over a number of years. For instance, if the cliange cost three 
 million dollars and they lost three million dollars for the junk in the old cable, they amortized 
 that over twenty or thirty years, so much a year. Now the fares proved insufficient from 
 year to year on account of the depreciated purchasing power of the nickel and they were not 
 able to carry through that amortization and the result today is that the companies in the 
 great cities are carrying a big investment which they have not been able to amortize and 
 wipe out and that came about through their desire to give better service to the public and 
 they junked some things that were only five years old. Is not that true in a great many cases? 
 
 "Gen. Tripp : \\ ell 
 
 "Commissioner Bcall : Let me follow that up. I do not understand you to say, do I, 
 that until they have had an opportunity to properly take care of that amortization of past 
 investment that they junked in order to give better service — until they are able to get that 
 out of the way, ought not they be allowed to earn on it? 
 
 "Gen. Tripp : Certainly. 
 
 "Commissioner Beall : I do not think that was clear, from your statement. 
 
 "General Tripp : But generally speaking, my method of valuing securities would result 
 in that very thing. 
 
 "Commissioner Beall : I think it would, but I do not think the Commission quite got 
 that point, that nearly all these companies in the big cities are still carrying a great big 
 investment which represents things which they junked which still had a long useful life 
 before them, in order to give better service to the public. 
 
 "Commissioner Sweet : There is just one question. You do not mean to say. General, 
 that the change from the cable to electricity was done solely to render better service to the 
 public, do you ? 
 
 "Gen. Tripp : Not at all. 
 
 "Commissioner Sweet : Was not the element of greater economy and greater profit to 
 the companies a large element? 
 
 "Gen. Tripp : Oh, yes, the larger element, of course. 
 
 "Commissioner Bcall : It was a combination of both, they were able to give better and 
 faster service and carr>' more people. 
 
 "Commissioner Sweet : Yes. 
 
 "Commissioner Meeker: Then in answer to my qucstidn. the companies are in some 
 instances carrying stock issues or t)ond issues that represent the obsolete brick building. They 
 have not yet had time to amortize them? 
 
 "Gen. Tripp: I am glad you asked that question, because I had almost forgotten to add 
 to my reply to Commissioner Reall — all those companies that have come under my observation, 
 that have changed from cable to eleotricity have been through the hands of a receiver and 
 the whole thing has tx:en wiped out." 
 
 It is clear that profits and service can travel along the road together as 
 boon companions as long as "everjthing is lovely and the goose hangs high." but 
 when it is time for another feast and there is nothing left but a goose wing and 
 a few feathers there is sure to be a disagreement. In other words, financial dis- 
 tress brings out the fundamental antagonism between the profit motive and the 
 service motive and compels a "showdown" as to which comes first. My own 
 reason for giving service the precedence is set forth as follows, at pages 1230 and 
 1231 of the Proceedings: 
 
 "I think the business should be conducted for service and not profit; that is, that the 
 service should be the pri<loininant motive, the controlling motive at all times; and the reason 
 for that is that I Ik-IIcvc the service is an essential public service, so vital to our municipalities 
 that we c-iimot afford to permit the public policy with respect to transportation to be determined 
 by the exigencies of nrofit. 
 
 "TransiK>rtation facilities, in the first place, .should be developed and operated as a unit 
 for every urban community. It is a part of the city plan. R.xtcnsions should be built. I think, 
 as delerminid by public authority. That is a part of the city plan. Kates should Ix' fixed with 
 an eye to Ihcir effect on url>aii development. Take New York, for example. Here we have 
 
Public Cooperation Essential 153 
 
 the 5-cent fare, under the subway contract, which has htcn subsidized by the city, practically, 
 to the extent of two or three hundred million dollars. The city, whether rightly or mistakenly, 
 had the idea that the enormous congestion in Manhattan could be in part relieved by building 
 a transit system out in every direction, and providing a low uniform fare for everybody, 
 taking people out into the suburbs, if the city, as a part of its plan of development, determines 
 that that is a good policy to follow, that the tiat unilorni fare and the low tare has a beneficial 
 effect upon city development, those considerations should. 1 tliink, control in fixing the fare. 
 Of course, everything is subject to human limitations, and when 1 say that service should 
 control, and that profits should stand aside, I mean that service should control, being modified 
 by the necessity, where the necessity exists, of making the service pay ; but that the city 
 should consider that making up deficits out of taxes, if necessao'. is more important than 
 making the business self-sustaining, if the rates that would make it self-sustaining have a 
 deleterious effect upon municipal development." 
 
 Further on, at page 1232 of the Proceedings, I say : 
 
 "If the maximum service, if it is not wasteful, cannot be made self-sustaining, it should 
 be subsidized, and excess earnings should be put back into the business. Special taxes should 
 be removed when you have this scheme in operation." 
 
 The third fundamental question has to do with continuity of service. It 
 involves the whole matter of labor relations. Here again the answer to the 
 question propounded may involve the indictment of the past policies and status 
 of the electric railway industry. The companies fully realize and stoutly main- 
 tain that wages cannot be increased indefinitely by public authority unless pari 
 passu revenues are increased by public authority to provide for the wage increases. 
 They also recognize that wages cannot be increased indefinitely without increasing 
 the cost of service to a point where it may be impossible to make it self-sustain- 
 ing under any rate schedule that might be adopted. The public realizes, on the 
 other hand, that if it withdraws from participation in wage controversies and 
 refuses to assume any responsibility for their financial results, the whole problem 
 will be thrown back upon the companies and the men, to be settled according to 
 the old rules of warfare. Bankruptcy will fight starvation, and stan'ation will 
 fight bankruptcy, and while the ugly scrimmage is going on, the people will walk, 
 business will be more or less paralyzed and in certain contingencies the very 
 foundations of social order and freedom of life will be disturbed. Under these 
 conditions street railway investments will become more speculative than ever, 
 and the condition of street railway credit will be more precarious than it was 
 before the war. 
 
 My own answer to this question with respect to continuity of service is 
 found at pages 1232 and 1233 of the Proceedings, where I say: 
 
 "As to continuity of service, I believe that continuity of service should be assured, and 
 that the street railway strike should be made unnecessary and outlawed. 
 
 "I think that the employes should be encouraged to organize for their mutual benefit and 
 as a means for securing cooperation in discipline and management, and to provide an agency 
 for presenting their grievances in an authoritative way, and securing full publicity and prompt 
 attention to them. 
 
 ******** 
 
 "I think responsibility for fixing the wages, hours and conditions of labor should be 
 assumed as a public function to be performed through an appropriate public agency. That 
 is not going into much detail, but we have got to the point where we cannot leave the de- 
 termination of wages, hours and conditions of labor to the private companies without public 
 control. There are too many things involved. The welfare of the community — even, at times, 
 the very stability of our institutions— may depend upon the keeping of order and the main- 
 tenance of public utility services, transportation services. 
 
 "We certainly have reached the point where we cannot leave disputes as to wages, and 
 hours and conditions of labor, to be fought out between the private employer and the men, 
 
 ^ 
 
154 Electric Railway Problem 
 
 without the public, that has the primary and ultimate interest, being responsible for the final 
 settlement of the dispute. 
 
 "My third statement in this connection : I want to say frankly that I believe that the 
 strike, as a concerted effort to interrupt service in local transportation, should be prohibited 
 and effectively penalized. I put that last because I do not believe that such action should be 
 taken except after the basis for it has been laid by providing adequate means for the prompt 
 and effective settlement of disputes with justice to the employes through other measures than 
 the strike. But I cannot see how we can possibly tolerate the continuance of the 'right to 
 strike," by that meaning the right to engage in a concerted effort to stop service on a public 
 utility street railway system. 
 
 "That, of course, is a verv- difficult problem to work out in its details, but it is a vital one." 
 
 The answers which I have given to these three fundamental questions re- 
 lating to (1) the speculative or non-speculative character of the investment; 
 (2) the predominance of profit or service as the controlling motive in electric 
 railway construction and operation, and (3) the adoption of measures to in.sure 
 continuity of service lead inevitably, in my opinion, to the answer that I have 
 already given to the fourth question, namely, whether local transportation shall 
 be provided through private or through public agencies. 
 
 Regardless of the ultimate political and economic theories supporting private 
 or public ownership and operation, there was general agreement among the wit- 
 nesses before the Commission that cooperation between the electric railways and 
 the public is essential to the successful performance of the transportation function 
 by private companies, and that as a rule such cooperation has not been forth- 
 coming in the past. Some blame the companies for the failure; some blame 
 the public; and some blame the inherent inconsistency involved in the perform- 
 ance of a public function through private agencies organized for profit. Ex- 
 President Taft thinks that the public has more than paid off its score against 
 the companies. At page 4 of the Proceedings, he says: 
 
 "Then there has been, growing out of corruption, the watering of stock and the dealing 
 with councils and the feeling of hostility on the part of the people against the companies, 
 the development of a condition so that whatever ad\-antages the companies may have secured 
 by sinister means earlier have been more than offset by the injustices that the people have 
 done, or that their representatives have done growing out of that past histor)-, to these 
 enterprises.'' 
 
 Mr. Francis H. Sisson took much the saine view of the situation, as will 
 be seen from the following question and answer found at page 327 of the Pro- 
 ceedings : 
 
 "Commissioner Sweet: The present attitude of the public upon this subject is a sort of 
 inheritance, is it not? 
 
 "Mr. Sisson: Yes; it is in part justified, and in part blind, unreasoning ignorance of 
 self-intorest. It is justified in a measure, by some b.id practices — bad financial practices and 
 operating practices in the past, that have aroused resentment, and proper resentment, but from 
 which the public has reacted to a point of antagonism that is just as unfair and unwarranted 
 and unjustified as the actions which they themselves have criticized." 
 
 Mr. Morris T.. Cooke, in testimony already quoted, gives it as his impression 
 that the difTcrcnccs between the public and the private interests involved in the 
 electric railway business have become irreconcilable. 
 
 That the companies do not enjoy the full confidence and cooperation of their 
 own employes is clearly shown by the character of the Brief filed with the 
 Commission on behalf of the Amalgamated Association, and also by the testimony 
 of many witnesses. Dr. Thomas Conway, Professor of Finance in the Univer- 
 sity of Pennsylvania, testified for the Electric Railway Association. He expressed 
 
Public Cooperation Essential 155 
 
 great financial alarm about the labor situation, but confessed that he had not 
 been able to think out a practical solution of the problem. At page 950 of the 
 Proceedings, he said : 
 
 "You have got to the point where labor must feel that they are not dealing with an alien 
 enemy, and that is their attitude with most companies. They have no interest in common 
 with the company. They feel that everything they get is the fair spoils of war," 
 
 In his statement to the Commission introductory to the presentation of the 
 claims of the electric railway industry, Mr. John H. Pardee, at that time Presi- 
 dent of the American Electric Railway Association, expressed in unmistakable 
 tenns his conviction that old things must pass away and all things become new 
 in the matter of the public relations of the electric railway industry. At pages 
 64 and 65 of the Proceedings, he says: 
 
 "In my opinion, and I am confident that in this opinion I will be supported by the in- 
 dustry, there are two major phases of the situation which we now face. The first concerns 
 the absolutely uneconomic and unsatisfactorj- basis upon which the relations between the 
 electric railways and the public have rested since the enterprise was inaugurated; and by this 
 I mean that there has never been a proper conception either on the part of the owners of 
 these properties or on the part of the public as to the factors which should govern the service 
 to be rendered or the fares to be charged by electric railways. This is a situation which has 
 existed during the entire life of the industry and is responsible for much of the misunder- 
 standing between the companies and the public. It existed before the war, is entirely uncon- 
 nected with the changes wrought by the war, but is one of the fundamental reasons why the 
 war has helped to bring disaster upon us. 
 
 "The second phase was the direct result of the war. It first developed immediately after 
 the declaration of war in 1914, and was vastly accentuated by the entrance of the United 
 States into the war in 1917. The national war program, to which we, as railway men, all 
 subscribed, and to the fulfillment of which we lent our very best endeavors, involved the 
 electric railways and other public utilities to an extent immeasurably greater than that in 
 which any other national industry was involved. The Govemment took control of our labor, 
 it raised the wages of our employes in many cases as much as 100 per cent ; it took command 
 of our fuel supply, and fixed the prices which we were compelled to pay for coal ; it fixed the 
 price of every commodity that entered in the maintenance and operation of electric railways; 
 in a vast number of cases, it prescribed the service which we were to perform, and called 
 upon us companies for construction involving many millions of dollars. In fact, there was 
 not a phase of electric railway operation in which the Government did not interfere, with the 
 result that the cost of operating our roads was verj- greatly and materially increased. This 
 it did to add to our burdens — to assist us in bearing these burdens and to meet these obligations, 
 it did nothing. 
 
 "We are not here to claim that this action of the Government was not entirely necessary 
 and entirely proper, or that it exclusively affected our industry, but we do say that its effect 
 upon the railways of the countn,' was the more pronounced and the more disastrous because 
 alone of all the industries affected, the public utilities were unable to apply the obvious remedy, 
 an increase, on their own volition, in the price of their product to meet the increase in its 
 cost thus forced upon them. 
 
 "We believe that our problem, in the solution of which we claim your assistance, is a 
 problem of readjusting an essential industry to conditions that have materially changed, first, 
 because of the natural development of the business and the changing civic and social life 
 of the communities, and second, because the great war has wrought a great change in national 
 concepts of industrial and social relations. 
 
 "As I see it the elements that go to make up these changed conditions as they directly 
 affprt electric railways are : 
 
 "First, the higher price level upon which not only the United States but the entire world 
 has entered, which seems hound to obtain for an indefinite period of years. 
 
 "Second, the conditions surrounding the employment of labor, which is a larger part of 
 the cost of operation of electric railways than it is of any other industry with which I am 
 acquainted. In this connection I believe that it must be evident to any unbiased and un- 
 prejudiced student of present-day conditions that labor is demanding and w-ill receive a greater 
 share in the wealth that it produces than ever before in the history of the world. Every- 
 where industry is adjusting itself to meet these demands, and no lasting solution of the rail- 
 
156 Electric Railway Problem 
 
 way problem can be reached unless this industry is put in a financial position where it can 
 render the same meed of justice to its employes as is expected from industrj' generally. 
 
 "Third, the introduction of a new competitive factor, in the automobile, not only the 
 so-called 'jitney,' but more especially the priN-ately owned automobile and the motor truck. 
 
 "Fourth, the enlarged functions of street railway systems, which with the growth of the 
 communities they serve have ceased to be private enterprises, with the sole aim of adding 
 to the comfort and convenience of the public, and have become absolutely essential to the 
 community growth, development, health and welfare, * • * » with the result that it is no 
 longer possible to consider either service or rates from the standpoint of business principle 
 alone." 
 
 On everj- hand, we find expressions of opinion to the effect that the electric 
 
 railway industry cannot go on on its old basis; if its credit is to be restored, an 
 
 entirely new deal is necessary, and new relations with tlie public and with its 
 
 employes must be established. 
 
Chapter XXVI 
 INCREASE IN MARGIN AVAILABLE FOR CAPITAL 
 
 Mr. James W. Welsh, statistician for the American Electric Railway Asso- 
 ciation, introduced Chart C-103 and a table of figures showing the financial trend 
 of street railway operations as shown by the United States Census reports for 
 1902, 1907, 1912 and 1917, and by estimates for 1918 based upon returns from 
 the 345 company members of the Association. These figures indicate that the 
 amount of net income of all the electric railways of the country available for 
 dividends and surplus amounted to $40,340,286 in 1907; $68,139,889 in 1912; 
 $56,450,930 in 1917; and only $20,183,414 in 1918. The combined income ac- 
 count of the street railways of New York City for the year ended June 30, 1919, 
 showed a deficiency of $5,583,819 after payment of operating expenses, taxes, 
 interest, rents, and other compulsory deductions from income. This result was 
 $10,858,855 worse than the result for the preceding year. Nevertheless, the 
 amount available for return on investment in the form of interest, rentals and 
 other compulsory deductions from income was $30,583,649 on the New York 
 City lines for the year ended June 30, 1919. These figures prove nothing as to 
 what the real financial condition of the railways is on the basis of a sound capital- 
 ization, but they do indicate that the margin between the operatirrg companies 
 and bankruptcy is diminishing where it has not already disappeared. The figures 
 indicate that, if the companies' existing securities are to be maintained and their 
 existing managements protected, the revenues will have to be increased so as to 
 reestablish and maintain a surplus over operating expenses, taxes and fixed 
 charges. The sharp advances in operating ratios, to which I have referred in an 
 earlier chapter of this report, have the same general significance. 
 
 The first remedy for the credit situation proposed by the electric railway 
 companies is an increase in their net earning power. They propose that some- 
 thing be done to keep the expense curve and the revenue curve from coming so 
 close together. Either revenues must be forced up or expenses forced down. 
 Without a reorganization of their financial structures, the difference between 
 revenues and expenses must be kept at least large enough to pay all fixed charges, 
 and if the electric railways are to have credit suflficient to attract new capital, 
 there must be an additional "margin of safety" to give reasonable assurance 
 that fixed charges will be earned in lean years as well as fat ones. 
 
 Mr. Halford Erickson, formerly for many years a prominent member of the 
 Wisconsin Railroad Commission, and now a member of the consulting public 
 utility appraisal firm, Hagenah & Erickson, appeared before the Commission 
 for the Electric Railway Association to discuss, among other things, this matter 
 of the net earning power necessary for the restoration and preservation of street 
 
 157 
 
158 Electric Railway Problem 
 
 railway credit. Mr. Erickson testified that he had made a study of the cost of 
 capital on about 35 leading street railway systems. He found that from 1910 
 to 1915 the net earnings fell about 33 per cent. In 1915 the cost per passenger 
 per ride, without anything for depreciation or return on investment was 3.6 cents 
 on these roads. An 8 per cent return on the value of the property figured out 2.5 
 cents additional, making the total average cost per ride on this basis 6.1 cents. 
 Mr. Erickson found that in 1918 this total cost had increased to 7.3 cents, and 
 stated that in 1919 the cost would be still higher. The average fare collected 
 by these roads in 1915 was about 5 cents, and in 1919 "slightly more than 5 cents, 
 not a great deal more, but slightly more." His testimony on this point appears 
 at pages 969, 973 and 974 of the Proceedings. At page 973, he describes the 
 general course of street railway credit as follows : 
 
 "The financial situation of the street railways during the past twenty-five years has varied 
 from doubtful up to fair and down apain to doubtful or bad. 
 
 "During the first part of this transition period much property had to be destroyed or 
 discarded and replaced by new and different equipment. The investment grew faster than 
 the earnings. All this tended to keep investors away, .\bout 1900 this had changed somewhat 
 and for some years the earnings grew somewhat faster than the investment. This had a 
 strong tendency to draw capital into the street railway field. Many of the underlying bonds 
 even advanced into the investment class. 
 
 "About 1910. however, the condition again began to change in the opposite direction. 
 Since about that time the investment and the operating expenses have increased faster 
 than the earnings. .\t the outbreak of the war most roads were earning less than it was 
 necessary to earn to attract all the new capital that was needed." 
 
 At pages 975 and 976 of the Proceedings, Mr. Erickson summarizes the 
 conditions upon which capital can be had or securities sold, as follows : 
 
 "The property and earnings behind the investment must be sufficient to afford the 
 necessary protection against risks, and to also constitute adequate compensation for the use 
 of capital employed, and for the work and responsibilities assumed by the employer and 
 investor. 
 
 "Investments in bonds, in order to be safe, must have behind them much more property 
 than their par value, and much greater net earnings than the interest charges on the bonds. 
 
 "Stocks, in order to Ix- fairly safe or to come in the investment class, must have behind 
 them at least as much property as their par value, and much greater net earnings than the 
 ordinary 6 per cent or 7 per cent dividends that may be paid thereon. 
 
 "Without such margins of safety as these the securities are speculative rather than 
 investment propositions. 
 
 "The fact that investment securities must be protected by more property then their par 
 value and by much greater net earnings than the ordinary interest and dividend charges shows : 
 
 "1. That the cost of capital is represented by the amount of the net earnings that are re- 
 quired in order that the securities thus representing the capital may sell on the ordinary 
 investment or income basis, and 
 
 "Z. That the rales charged by a utility for the service it furnishes must in the long run 
 Ix? high enough to yii Id such net earnings. 
 
 "The investment conditions in these respects, which prevailed for several years prior to 
 the war, may lie further summarized as follows : 
 
 "Investors, in order to purchase S'/j per cent to 6% per cent Ixinds at par required among 
 other things : 
 
 "1. That such Ixmds should not amount to more than alKiut two-thirds of the value of 
 the assets behind them. 
 
 "2 Thai the net earnings of the issuing company should amount to not less than twice 
 as much as the interest charges on such bonds. 
 
 "3. That the past record and future prosi>ects of the utility should l>e good or at least 
 very fair. 
 
 "4. That in taking the securities on such income liases as those given, the investors would 
 not assume the cost of such discounts, commissions, and other .selling and issuing expenses 
 as had to bo met when Ihe securities were first put on the market. 
 
 "Such bonds as these represent for the most part the class of investment Ixjnds which 
 were available for new capital at the time. 
 
Margin for Capital 159 
 
 "The comparatively few available underlying issues which were better protected than 
 this were selling at somewhat higher prices and lower yields. 
 
 "The many junior issues bearing the same rates of interest but which were less well 
 protected than this were selling at lower prices, and higher yields or often much below par. 
 
 "Investors in order to purchase 6 per cent to 7 per cent stocks at about par at that time 
 required : 
 
 "1. That the par value of such stocks should not amount to more, or as much as, the 
 amount by which the value of the assets exceeded the par value of the bonds which come 
 ahead of such stocks. 
 
 "2. That the net earnings of the company which were available for returns or dividends 
 on such stocks should amount to from more than half again to fully twice as much as the 
 regular dividends. 
 
 "3. That in addition to this the amount by which the net earnings for the stock exceeded 
 the regular dividends be used for strengthening the equities behind the stock and for occasional 
 extra dividends thereon. 
 
 "4. That the future prospects of the company appear to be good or at least fair. 
 
 "In taking the stock on these bases the investor did not assume the cost of discounts, 
 commissions or other selling expenses. 
 
 "Less well protected stocks than this bearing the same rates of dividends sold at lower 
 prices and higher yields or below par. Better protected stocks with similar dividend rates 
 sold at higher prices and lower yields, or sometimes above par." 
 
 After describing in some detail the terms on which the various classes of 
 securities issued by the roads included in his study were sold during the pre- 
 war period, he continued at page 978 of the Proceedings : 
 
 "All of these facts clearly show that for several years up to the earlier years of the war 
 the utilities, as has been stated, could not obtain all the capital they needed on normal terms 
 and conditions unless the net earnings for returns on the investment amounted to at least 
 8 per cent on the fair value of the plant and the business. 
 
 "These facts show further that during the same years the net earnings for returns did 
 not on the average amount to much more than about half of this or to only about 4 per cent. 
 
 "It is further disclosed that the unsatisfactory conditions in which the street railways 
 found themselves at the beginning of the w-ar have steadily grown worse since then. During 
 the past two years they have earned but little more than enough to cover the operating 
 expenses." 
 
 All this emphasizes the need of net earning power as a support for credit. 
 Many of the witnesses for the companies recognized tlie importance of a valua- 
 tion of the properties and of the ultimate security for '.he investment which may 
 be brought about through a service-at-cost contract, but were of the opinion 
 that the thing urgently needed without delay is more net income. 
 
 It cannot be doubted that in many cases greater revenues or smaller expenses 
 are needed to save the companies. Whether saving the companies is a condition 
 of saving the industry is not so clear. Where it is shown that the margin left 
 after payment of operating expenses and taxes is insufficient to meet the cost 
 of capital on a really conservative basis — such a basis as we find in Cleveland, 
 for example — then, of course, the margin must be increased. And then the 
 question is: Greater revenues or smaller expenses, which shall it be? 
 
A 
 
 Chapter XXVII 
 DOUBLE PURPOSE OF UNIT FARE INCREASES 
 
 Most of the witnesses for the electric railways did not hesitate to vote for 
 larger revenues and to propose fare increases as the only feasible method of 
 getting them promptly. Moreover, they were pretty well agreed that immediate 
 fare increases should take the form of an increase in unit fares. While many 
 favored the zone system, they thought that zoning in any particular case requires 
 study, and that the emergency confronting the electric railways would not per- 
 mit of the delay which such a study would necessitate. A policy calling for an 
 increase in fares above five cents was favored for two reasons. In the first place, 
 the change, particularly if effected by state commissions through the abrogation 
 of municipal franchise limitations, would enable the industry to break away 
 from the old rule of a fi.xed fare based upon contract. This would get the 
 electric railways out of the rut in which they have been nuniing from the be- 
 ginning and would open the way for a flexible fare adjustable to fluctuations in 
 the cost of service. This change would be, in every sense, a momentous one 
 for the industry. It would break the five-cent habit ; it would break the five-cent 
 contracts; in most cases it would break the power of the municipalities to impose 
 binding limitations upon rates as a condition of franchise grants. In the second 
 place, it would bring in the additional reveinies immediately needed for the relief 
 of the companies' financial distress. 
 
 As a matter of fact, the abrogation of the five-cent fare and of the contracts 
 on which it was based was already, in large measure, an accomplished fact when 
 the Commission's hearings were begim. The American Electric Railway Asso- 
 ciation filed with the Commission a tabulation revised to August 9, 1919, entitled 
 "A Summ.iry of the Cities in which Fares have been Increased, showing Name 
 of City, Population, Company Operating, Date of Increase, Present and Former 
 Fare." In February. 1920. the Illinois Committee on Public Utility Information 
 issued a special bulletin entitled '"( )tTicial ."Statistics of Nation's Electric Railway 
 Fare Situation," and the ".\era" for February. 1920. contains a review of fare 
 increases by Mr. Harlow C. Clark showing "conditions in all cities having a 
 population of more than 23.0(X) as they now exist." These three statements 
 show that only a comparatively few cities still retain the five-cent fare.' The 
 most important of these are New York, Philadeli)hia. Detroit. Cleveland. Rnflfalo, 
 San Francisco, I.os .Angeles, Minneapolis, St. Paul, Indianapolis. Rochester, 
 Louisville. Columbus, C\., Dayton. Richmond, Va., Dallas, Houston, Fort Worth. 
 Nashville. New Mcdiord, Dcs Moines, Yonkers. Oklahoma City. Duluth. .\kron. 
 Jacksonville. Fort W.ayne and Kvansville. l-'ven in many of these, fares have 
 been increased during the past two years by the abolition of low fare tickets and 
 in one or two cases by the establishment of a charge for transfers. 
 
 IrW) 
 
Purposes of Fare Increases 161 
 
 The Special Bulletin of the Illinois "Committee" enumerates 424 cities with 
 an aggregate estimated population of 24,675,579 where the unit fare has been 
 increased to more than five cents. These cities are classified as follows : 
 
 Aggregate 
 
 Present Fare Number of Cities Population 
 
 Ten cents 59 3,076,251 
 
 Nine cents 1 64,720 
 
 Eight cents 21 4,122.322 
 
 Seven cents, with one cent charge for transfer 26 1,742,586 
 
 Seven cents in central zone and five-cent zones outside 1 56,503 
 
 Seven-cent zones 3 1 57.387 
 
 Seven cents 118 5,105,273 
 
 Six-cent zones, with two cents transfer charge 10 485,810 
 
 Six cents for two zones, with two cents per zone 
 
 thereafter 13 685,041 
 
 Six cents for each of two zones 4 245,175 
 
 Six cents (with two cents transfer charge in some cases) 158 8,934,511 
 
 Total 424 24,675,579 
 
 The cities where the 10-cent fare prevails include Boston, Fall River, Lowell, 
 Cambridge, Lynn, Lawrence and other cities in eastern Massachusetts, Pittsburgh 
 and a number of smaller cities in Pennsylvania, and a few cities in other states. 
 The 9-cent fare is in Portland, Maine, where a zone system is in use. For a 
 ride not exceeding three zones, the cash fare is nine cents, but the ticket fare 
 seven cents and about 95 per cent of the passengers use tickets. The 8-cent fare 
 prevails in St. Louis and Kansas City, Missouri; on the elevated lines of Chicago; 
 in Youngstown, Ohio ; in Manchester, New Hampshire ; in Wilkes-Barre, Penn- 
 sylvania, and in a number of smaller cities in difterent parts of the country. The 
 7-cent fare, with a charge of one cent for an initial transfer, applies over the 
 entire Public Service Railway system in New Jersey, serving Newark, Jersey 
 City, Paterson, Camden, Elizabeth, Hoboken, Passaic, Bayonne and all the other 
 principal cities of the state except Atlantic City and Trenton. Holyoke, Massa- 
 chusetts, has a 7-cent central zone and 5-cent zones outside, and Springfield and 
 two other places in Massachusetts have straight 7-cent zones. Seven cents with- 
 out a transfer charge is the unit fare in Baltimore, Milwaukee, Cincinnati, Omaha, 
 Scranton, Tacoma, Reading, Wilmington (Delaware), St. Joseph (Missouri), 
 Erie and more than one hundred other cities scattered throughout the country. 
 In Washington, D. C, where two street railway systems operate, the fare is 
 seven cents on each system with a 2-cent charge for inter-company transfers. In 
 New Haven, Bridgeport, Hartford, Waterbury and most of the other cities of 
 Connecticut, a zone system is in effect in which the minimum fare is six cents 
 for a ride through two zones, with an additional charge of two cents per zone 
 outside the city limits. Worcester, Massachusets, has two zones in each of which 
 a 6-cent fare is charged. The same system applies to three smaller Massachu- 
 setts cities. The straight 6-cent fare is in vogue on the surface lines of Chicago, 
 and in New Orleans, Portland (Oregon), Denver, Oakland, Atlanta, Birming- 
 ham, Spokane, Syracuse, Memphis, Grand Rapids (Michigan). Salt Lake City, 
 Schenectady, Albany, Utica, and a great many other cities in all parts of the 
 country. In Toledo, Norfolk and a few other places the 6-cent fare is accom- 
 panied by a transfer charge of two cents.- 
 
162 Electric Railway Problem 
 
 The statistics contained in the Special Bulletin were not accurate in every 
 respect. For example, Buffalo was listed among the 7-cent fare cities in spite 
 of the fact that it still had the 5-cent fare. Undoubtedly, the explanation of this 
 error lies in the fact that the Public Service Commission for the Second District 
 of New York, some time previously, had authorized the International Railway 
 Company in Buffalo to charge a 7-cent fare, but the company had thus far pre- 
 ferred to slick to five cents. Also, Kansas City, Kansas, is listed among the 
 6-cent fare cities, although it now has an 8-cent fare. Wilmington, Delaware, is 
 included in both the 7-cent fare list and the 6-cent fare list. 
 
 In its introductory summary the Bulletin states that the total population of 
 the cities affected by fare increases is 31,217,837. It will be noted that this figure 
 is 6,542,258 in excess of the figure given above for the aggregate population of 
 cities where the unit fare is more than five cents. This discrepancy is more than 
 accounted for by the population of New York City, Cleveland and certain other 
 places where a charge is made for transfers, and by the population of Detroit, 
 Indianapolis, Richmond (Virginia), Dayton, New Bedford. Des Moines and a 
 considerable number of other cities where reduced rates have been abolished and 
 a straight 5-cent fare is now being charged. The Special Bulletin does not 
 explain the basis for its estimates of population and does not give the detailed 
 figures for the different cities. It is impossible, therefore, to check the statistics 
 in such a way as to eliminate all discrepancies. The Bulletin may contain many 
 errors in addition to those which I have pointed out. but probably its statements 
 of fact are sufficiently accurate for the purpose for which they are here quoted, 
 namely, to show in general the extent to which the 5-cent fare has been aban- 
 doned on street railway lines throughout the country. 
 
 In his article in the February, 1920, "Acra." Mr. Harlow C. Qark says: 
 
 "Increased fares in one form or another arc now effective in all but 56 of the 273 cities 
 in the United States havinR a population of 25,0(K) or more. The cash fare in 196 of them is 
 more than five cents, in 118 of them more than six cents, in 64 of them mort than seven cents, 
 and in 34 of them more than eight cents. 
 
 "In all hut 15 of the 68 cities, with more than 100,00(1 population, the cash rate is more 
 than five cents ; in 40 of the 62 cities between .SO.CKKI and 100.0(tO. it is more than five cents, 
 and ill 103 of the 142 cities having less than 50.000 it is more than five cents. 
 
 "In Colorado. Connecticut, Delaware, the District of Columbia, Illinois. Maine. Mary- 
 land. Massachusetts, Missouri, New Hampshire, New Jersey, North Carolina. Oregon, South 
 Carolina, Rhode Island and \'ir(;inia, the fares in evcr\- city of mi>re than 25,000 have been 
 increased. In Michigan and Pennsylvania, the fares in all but one city have been increased, 
 while of New York's 22 cities having more than 25,000, but two remain without some form of 
 increase." 
 
 It will be noted that, according to Mr. Clark's statement, only two of the 
 twenty-two cities in the State of New York "remain without some form of in- 
 crease." Later in his article he explains that New York City is counted as one 
 of the cities having an increase although no increase in the base fare has been 
 granted. His reason for including it appears to be that a transfer charge has 
 been established by the Public Service Commission at certain points in the Bor- 
 oughs of Manhattan and Brooklyn. Mr. Clark states that "in 150 of the 217 
 cities in which fares have been increased, the increase has been the result of the 
 action of state commissions, in 44 of municipal authorities, in two of courts and 
 in 21 of automatic regulation under service-at-cost plans." He also says: 
 
Purposes of Fare Increases 163 
 
 "In connection with the rates of fare now prevailing in American cities, it must be 
 remembered that all of these roads are operating upon a starvation basis. The cost of the 
 service as reflected in fares now in effect, and the application for increases which are pending, 
 represent in rnany cases sen-ice and facilities reduced to the minimum. New capital is not 
 available and improvements and extensions are awaiting the restored credit of the companies. 
 * » * * One of the reasons for the high rate of fare in Boston is that a large sum has 
 been spent in rehabilitation. 
 
 "This question of rehabilitation has a marked bearing upon the entire fare situation. 
 Deferred maintenance is piling up on most of these properties. The longer it is delayed, the 
 greater the cost when it is finally undertaken, and the higher the cost of operation during 
 the period in which track, equipment and overhead are neglected. -\ small increase of fare 
 made immediately at the time that it is needed is worth more than a large increase that comes 
 after a long delay." 
 
 Mr. Clark in his article also compares his statistics of fare increases with 
 those published in the "Aera" for April, 1919. In his opinion these statistics "indi- 
 cate that the process of readjusting street railway revenue to the situation caused 
 by the depreciated dollar is proceeding all over the country, and that the six-cent 
 car fare is fast following into oblivion the five-cent fare as insufficient to meet 
 the still rising costs of operation." He states that in April, 1919, the cash fare 
 in 156 cities was more than five cents, while today it is more than five cents in 
 196 cities; that in April, 1919, it was more than six cents in 53 cities, while today 
 it is more than six cents in 118 cities; that in April, 1919, it was more than 
 seven cents in 24 cities, while today it is more than seven cents in 64 cities ; that 
 in April, 1919, it was more than eight cents in 13 cities, while today it is more 
 than eight cents in 34 cities. It must be remembered that Mr. Clark's statistics 
 relate only to the 273 cities of the country having an estimated population of 
 25,000 or more, while the cities listed in the Special Bulletin of the Illinois Com- 
 mittee on Public Utility Information include siualler places. Mr. Clark states 
 that "Cleveland, operating under a service-at-cost plan. Chicago and Galveston 
 operating under what are practically service-at-cost plans are the only cities in 
 which fares have been reduced from the top limits put into effect during the 
 war," but a little further on in his article he calls attention to the fact that the 
 fare in Scranton was reduced in 1919 from eight cents to seven cents; and still 
 further on, in his special paragraph relating to Scranton, it appears that the re- 
 duction of fare effective in 1919 was not from eight cents to a straight seven-cent 
 fare but to seven cents cash fare and tickets at the rate of 4 for 25 cents. 
 
 Mr. Clark's statement that the Chicago lines are being operated under what 
 is practically a service-at-cost plan is quite inaccurate, as the Chicago settlement 
 ordinances of 1907 did not incorporate the fundamental principle of service-at- 
 cost, and, furthermore, at the present time the fares are fixed by the state public 
 utilities commission. 
 
 It is worth while, however, to observe the effect of the genuine service-at-cost 
 plans upon rates where the fixed S-cent fare has been abrogated and the cost of 
 service is levied against the car rider. This is important because it is only under 
 service-at-cost arrangements that the electric railway companies get the full bene- 
 fit of the abrogation of the fixed 5-cent fare, and enjoy a measurable assurance 
 that fare increases will in fact give them the immediate increase in revenue which 
 they desire and reestablish their credit. In Cleveland the fare advanced in 
 August, 1918, to five cents cash with a 1-cent charge for a transfer. This was 
 
164 Electric Railway Problem 
 
 the maximum fare reached during the war period. There have since been two 
 decreases. The first was eflfective July 7, 1919, when, in addition to the 5-cent 
 cash fare, tickets were put on sale at the rate of 11 for 50 cents. The second 
 decrease was effective in December, 1919, when the ticket rate was reduced to 
 6 for 25 cents. In Massachusetts, on the Boston Elevated system and the old 
 Bay State lines, fares have gone up to ten cents under the service-at-cost statutes, 
 and this accounts for 28 of the i7 ten-cent fare cities listed in the Illinois Com- 
 mittee's Special Bulletin. In Cincinnati, where a service-at-cost plan has been 
 operating since October 1, 1918, the fare went up from a straight five cents prior 
 to January 1, 1919. through several gradations until it reached a straight seven 
 cents in October, 1919. In Youngstown. Ohio, another service-at-cost city, the 
 fare prior to January, 1919, was five cents with 6 tickets for 25 cents and 25 
 tickets for $1.00. It went up through several gradations until January-, 1920, 
 when it reached eight cents cash, with 7 tickets for 50 cents and a one-cent transfer 
 charge. So far as I know these are the only cities in the United States where 
 the service-at-cost plan has been in effect to the extent of permitting an auto- 
 matic readjustment of fares up to the full cost of service under war conditions. 
 Cleveland had a low maximum fare limitation, but under the stress of war ex- 
 penses this maximum was raised to six cents and the cost of service has never 
 gone as high as that. In 1917, Dallas adopted a modified service-at-cost franchise 
 with a five-cent minimum fare, and thus far. although the Dallas Railway Com- 
 pany has not earned the full rate of return upon the recognized value of its 
 property since the new franchise went into effect, the maximum fare limit has 
 not been raised.' 
 
 It is obvious from the statistics of fare increases which I have cited that 
 the electric railways of the countn,' have made a great deal of headway against 
 the old five-cent fare limitation. \\'hilc their struggle is still going on in New 
 York City and certain other communities, a sufficient amount of actual experience 
 with fare increases has been accumulated in various parts of the country to fur- 
 nish some basis for an analysis of the effect of fare increases u]ion the financial 
 well-being of the companies. From Mr. Harlow C. Clark's statement in his 
 review of the fare situation in the February "Aera," it can hardly be said that 
 electric railway companies generally have as yet achieved a restoration of their 
 credit either through fare increases or otherwise. 
 
Chapter XXVIII 
 EFFECT OF FARE INCREASES UPON TRAFFIC AND REVENUES 
 
 The fundamental conflict of interests between the electric railway companies 
 as purveyors of local transportation and the general urban public as consumers 
 of transportation service has been accentuated by the financial straits in which 
 the companies have found themselves during the war period. Like a snag in the 
 river brought to light by low water, the underlying cause of the antagonism has 
 been revealed, not created, by the extraordinary conditions of the present time. 
 
 Until the present period of street railway demoralization set in, the philosophy 
 of street railroading held that a company's prospects of prosperity are in direct 
 ratio to the prospective increase in its traffic ; but since the companies began to 
 be hard hit by war conditions, and since the shrinkage of their net incomes under 
 the fixed rates of fare prescribed by statute, contract or custom has resulted in 
 the destruction of their borrowing power, they have felt so depressed financially 
 that they have almost lost interest in traffic increases. What they are now in- 
 terested in is the net income — how big are the figures, and are they black or 
 are they red? 
 
 In April, 1919, I was in a New England city one day and took occasion to 
 visit the offices of the local street railway company to inquire into the new zone 
 system of fares which it had installed a few weeks before. I wanted to ascertain 
 what the efifect of recent fare increases upon the amoimt of street railway traffic 
 had been, but I was told by the manager that since the installation of the zoning 
 plan the companv no longer counted its passengers. "Of what use would the 
 traffic figures be?" he asked. "What we are concerned about is the revenue. If 
 an increase of fare or a change in the method of fare collection brings in more 
 money, that is all we care to know." In making this statement the street railway 
 manager did not show any spirit of arrogance or any contempt for the public 
 welfare. He merely thought that it would be difficult or inconvenient to keep 
 track of the number of revenue passengers under the new system of fare collec- 
 tion installed on his lines, and he had become so accustomed to the point of view 
 that the one thing necessary is to save the street railway companies from bank- 
 ruptcy that, apparently without much consideration, he dismissed as of little or 
 no importance any figures the only purpose of which would be to show the amount 
 of service rendered or the extent of the public use of the transportation lines. So 
 long as an increase in revenue had been realized, he had no curiosity as to the 
 number of riders who were supplying that revenue. The street railway com- 
 panies are interested in results, and to them at the present time results are mea- 
 sured in terms of gross revenue and net income. The public is also interested in 
 results, but its test question is : "How much service is rendered — how many 
 
 165 
 
166 Electric Railway Problem 
 
 people actually find it convenient to use the street cars, and under what conditions 
 are they permitted to use them?" 
 
 Passenger fares are the primary and almost the exclusive source of revenue 
 of urban electric railways. All parties agree that the full cost of an essential 
 service such as local transportation must be paid by or on behalf of those who 
 use it, if the service is to be continued. While private ownership and operation 
 lasts, the companies, especially in their present mood, are not much concerned as 
 to hoiv this cost is paid so long as it is paid in some way or other. 
 
 The most obvious method of increasing revenues where the cost of produc- 
 tion has increased is to increase the price of the product. In the absence of 
 restrictions limiting the price, this course is the easiest one to follow, especially 
 in a business where the service rendered is an essential one and in a large measure 
 free from competition. The street railway man's instinct, when the cost of 
 materials and the rate of wages went up, was to increase the fare to meet the 
 increased costs of operation. In attempting to follow this instinct, he ran head-on 
 into obstacles which differentiated his business from every other kind of busi- 
 ness, much to his discomfiture. It made him "sore" to see his business ground 
 between the upper and the nether millstones, when other lines of business, which 
 in the past had been regarded as much less favored than street railroading, were 
 free to adjust themselves to war conditions and to share in the extraordinary 
 profits resulting from the era of high prices and intense industrial activity. Since 
 the crisis came on, the street railway men have been busy trying to show that 
 their business should be treated like any other, and that in fact it is being 
 discriminated against through the restrictions of public regulation. Their pro- 
 gram of relief has been focussed in an effort to throw off the restrictions here- 
 tofore imposed upon the electric railways because of their character as public 
 utilities and because of the special privileges they enjoy in the use of the public 
 streets. 
 
 It cannot be denied that we have reached a crisis in the relations between 
 urban comnumities and the street railway companies, and that policies adopted 
 now to relieve the financial emergency in which the companies find themselves 
 will have a fundanjental and far-reaching effect upon the future of those relations. 
 The full cost of service, no matter how great it is, must be paid, or the service 
 will have to be discontinued. To the extent that the increased expenses due to 
 the present era of high prices cannot be offset by operating economies or by the 
 elimination of non-essential service, it is quite natural to turn to the car-riders 
 for increased revenues. From the point of view of ultimate public policy the 
 question to be answered in this connection is: "H'ill an increase in fares result 
 in such a tliminutioii of the nsefiiliiess of th^ electric raihcays as to deprive them 
 of their essential character as a public utility dcsiijneil to render cheap and 
 general transportation sen-ice for urban com'enience?" This is the question 
 from the public point of view. I'roni the point of view of the transportation 
 companies themselves it may also be urged that, although their chief and almost 
 their only interest at the present moment is in securing additional net income, 
 nevertheless their ultimate financial welfare is dependent upon the continuation 
 of the old [xilicy of increasing tr.iftic, as there is gre.it danger that the electric 
 
Effects of Fare Increases 167 
 
 railway business will not be able to sustain itself in the future at any rate of 
 fare unless it continues to be the chief agency of local transportation. 
 
 It is obvious that public bodies in exercising their jurisdiction over street 
 railway companies in the present emergency of the local transportation industry 
 ought not to take a short-sighted view, and ought not to permit the adoption 
 of policies with respect to fares and service that will result immediately in serious 
 injury to the public, and that may result ultimately in fundamental and final 
 disaster to the electric railways as a business. With these points in view it seemed 
 to me that an essential part of the Commission's inquiry would be to find out as 
 nearly as possible the definite effects of fare increases upon both traffic and 
 revenues. This is not an easy task. During the war period there have been 
 great shiftings and adjustments of population and industry, with the result that 
 street railway conditions have been unsettled. The removal of great numbers 
 of young men from every urban community of the country for military training 
 and service could not but have a marked eft'ect upon street railway traffic in the 
 communities from which they were drawn. On the other hand, traffic was stimu- 
 lated in certain communities by unwonted industrial activity in connection with 
 ship-building and the manufacture of munitions; also, by the proximity of army 
 training camps. During the last three or four months of 1918 traffic conditions 
 were seriously affected throughout the country, though in varying degrees, by the 
 unprecedented epidemic of Spanish influenza. Also, fare increases were put 
 into effect at different times in different communities and without much relation 
 to statistical convenience. In many communities fares have been increased several 
 times at irregular intervals. In some cases the system of charging for street 
 railway service and the methods of collecting fares have been radically changed 
 so that the significance of the traffic figures for comparative purposes is destroyed, 
 or the count of revenue passengers has been lost entirely. 
 
 The testimony at the hearings before the Commission with respect to the 
 effect of fare increases on traffic and revenues was conflicting. Many of the 
 witnesses were clearly of the opinion that fare increases should be granted, be- 
 lieving that such increases would result in a substantial and permanent increase 
 of revenues. While admitting that fare increases often cause an immediate fall- 
 ing off of traffic, they were of the opinion that this traffic would gradually come 
 back after the people become reconciled to the higher rates of fare. Others 
 expressed the opinion that fares on certain systems had already been increased 
 to or beyond the point where they produce the maximum revenue, and that any 
 further increases might result in actual loss to the companies. Others thought 
 that fare increases generally are of little or no benefit to the companies, and it 
 was even suggested that in the long run such increases may only make more 
 certain the financial ruin that has been threatening the street railway industry 
 during the present crisis. Still others, viewing the problem more from the 
 point of view of the general public welfare, pointed out the deleterious effects 
 upon the community of higher fares and diminished use of local transportation 
 facilities. It was the opinion of a number that the old rates of fare could be 
 increased moderately, say from five cents to six cents, or possibly to seven cents, 
 without having any serious permanent effect upon the riding habit, and, therefore, 
 
168 Electric Railway Pkoblem 
 
 without materially curtailing the usefulness of the street railways to the com- 
 munity. 
 
 It will be useful to review the testimony of a number of important witnesses 
 on these points. At the very first public hearing given by the Commission, 
 Ex-President Taft, speaking from his acquaintance with the electric railway in- 
 dustry recently acquired through his service as one of the joint-chairmen of the 
 National War Labor Board, described the unhappy condition of the electric 
 railways and their need for additional revenue, and advocated an increase in 
 street railway fares as a necessary remedy. But he clearly recognized the limi- 
 tations of this remedy, as shown by the following statement taken from page 5 
 of the Proceedings: 
 
 "If you keep the fares at 5 cents, where they always have been — and even in some 
 cities they have been 3 cents and 4 cents; in Detroit, notably, and in Oeveland — if you keep 
 it there, the red lialance is as inevitable as the rising of the sun tomorrow morning. It is 
 inescapable. Then you are confronted with the limitation that if you raise the rate of fare 
 you are likely to reduce the revenues by a falling off in your patronage. I think perhaps the 
 advancing to 6 cents docs not do that, and in some cases the advance to 7 cents ; but anything 
 beyond that is certain to reduce revenues by a loss of business." 
 
 General Tripp, on behalf of the Committee of One Hundred, of the American 
 Electric Railway Association, especially stressed the importance of getting away 
 from an inflexible fare limitation ; yet he did not think that a mere raising of 
 fares would solve the problem, as will be seen from the following testimony found 
 at page 153 of the Proceedings: 
 
 "Mr. Warren: And any remedy ought to involve the elimination of the fixed maximum? 
 
 "Gen. Tripp: No other solutioix, in my opinion, would he adequate, even if cities should 
 remit all taxes, and relieve the street railway companies of the burdens of paving, and all 
 charges of that character. It would not affect the real situation. In the first place, the 
 amount involved is not sufficient to make up the difference, and. in the next place, it is 
 attacking the symptoms. Even permission to increase the fare on the basis of the present 
 relationship is entirely inadequate. That does not solve the problem. The problem is one 
 which rc(|uires a sound basis upon which to rest, but which permits of difTcrent solutions in 
 different localities. Some communities may require a street railway service that the population 
 in itself would not warrant, and perhaps it would be impossible to as.scss a fare high enough 
 to produce sufficient net. In those particular localities, if they desire such service, the remedy 
 is through taxation to support it, or some other methods. Zone .systems may be desirable in 
 some cases ; and so, I think, the basis must be fixed upon which these various solutions may 
 rest. 
 
 "Mr. Warren : So it is not only a matter of possibly higher fares, but a matter of 
 relations between the company and the car-riding public that it serves? 
 
 "Gen. Tripp : I think a new scheme of relationship must first be devised." 
 
 Mr. Henry G. Bradlee, President of the Stone & Webster Corporation, ex- 
 pressed a more sanguine view of the results of fare increases, as will appear from 
 his statement at pages 216 and 217 of the Proceedings, from which I quote as 
 follows : 
 
 "I believe that the increase in fare in the urban systems, even in the small cities, will 
 bring al>out a solution of the problem, and I believe that even though the first effect of that 
 increase in fare is to cut do\ni earnings so that there is no immediate increase in gross, I 
 believe the ultimate effect will l>e to work out the situation. 
 
 "As a inattcr of fact, in such of the small cities as I have had experience, and as I have 
 seen of other properties, the increase in receipts when the fare is changed from ."> to 6 cents 
 is about one-half of the ihcorctical increase. In other words, from .S to 6 cents is 20% increase, 
 and you actually get about If^'r increase. It d(K-s not apply to all cases, but in general it nins 
 about that way. Then gradually the falling off in riding returns: people get a little tired of 
 walking or else the growth of the city brings new riders into the community, and after a 
 time the riding is right where it was before with the full increase of 20%." 
 
Effects of Fare Increases 169 
 
 In his letter addressed to Chairman Elmquist, under date of October 1, 1919, 
 Mr. Bradlee commented upon the statistics submitted by him to show the growth 
 of traffic and revenues on the street railway lines operated by Stone and Webster, 
 and gave utterance to the following conclusions : 
 
 "Take this group of properties of ours ; they are on the average doing more business 
 per mile of track, more business per car mile and more business per capita than they were 
 10 years ago. The public needs the service, demands it in greater volume than ever before; 
 is calling on us constantly for extensions of track and increased operation of cars and with 
 all these conditions which in ordinary times would make for abnormal prosperity the com- 
 panies are without credit and are unable to borrow money or sell securities to reasonably 
 meet the public demand. The one sole trouble is increased costs of labor and material and 
 inability to promptly readjust the rate of fare. With an increased rate of fare commensurate 
 with the increased cost of labor and materials, the entire situation would in my judgment be 
 cured. I recognize fully the fact that riding will decrease temporarily with an increased rate 
 of fare, but I have been studying the effect of fare increases for several years and during 
 the past year have followed the results of such increases very closely. The more information 
 I obtain the more strongly am I satisfied that the decrease in riding is a purely temporary 
 effect which will last only for a limited period in most cases. There are a few street railways, 
 usually suburban or interurban lines, which have been built in territory having insufficient 
 population to support the service. Such roads should have never been built and the diffi- 
 culties cannot be cured through an increase in fare but these represent only a very limited 
 number of cases out of the total. In most cases there would appear to be a constantly in- 
 creasing demand for street railway ser%'ice and the only thing needed to enable the roads to 
 meet this demand is an increased fare commensurate with increased cost of labor and 
 materials." 
 
 Mr. Francis H. Sisson, Vice-President of the Guaranty Trust Company 
 of New York, expressed his faith in fare increases as revenue producers in the 
 following testimony at pages 350 and 351 of the Proceedings: 
 
 "Mr. Warren : You said that undoubtedly in some cases an increase of rate involved a 
 loss of traffic. Did you mean by that to imply that in some cases an increase in rate involved 
 such a loss of traffic as to yield no increase in revenue? 
 
 "Mr. Sisson: There have been such instances, but I do not believe that would be true 
 generally. 
 
 "Mr. Warren: They are very exceptional, are they not? 
 
 "Mr. Sisson : They are very exceptional, yes, sir. 
 
 "Mr. Warren: In other words, has not this been the usual situation, that when the 
 increased rate first went into effect there would be some loss of traffic, meaning by that 
 counting the number of pasengers? 
 
 "Mr. Sisson : Yes. 
 
 "Mr. Warren: But there was almost in every case an immediate and substantial increase 
 in revenue? 
 
 "Mr. Sisson : Yes." 
 
 Mr. C. L. S. Tingley, Vice-President of the American Railways Company, 
 after enumerating the company's eleven traction properties located in Pennsyl- 
 vania, New Jersey, Delaware, Virginia, Ohio and Illinois, said at page 365 of 
 the Proceedings : 
 
 "We have increased rates on practically all of those companies. The increases and the 
 effect have been materiallv controlled by the industrial conditions. In communities which 
 had a large war business, and where there had been a great influx of population, the increases 
 did not have to be so much, and the effect was greater than it was in other communities." 
 
 Mr. Henry L. Doherty, speaking from his experience with the Toledo Rail- 
 way and Light Company, the Manhattan and Queens Traction Corporation, and 
 eight or ten smaller street railway properties, expressed confidence that fare in- 
 creases will generally produce increased revenue. The following is taken from 
 his testimony at pages 403 and 404 of the Proceedings: 
 
 "Mr. Doherty: A raise of fare eventually results always in a raise in revenue, but if I 
 were trying to state the effect of it, I would prefer to make a fundamental analysis of it 
 
170 
 
 Electric Railway Problem 
 
 432 
 anfl 
 433 
 
 rather than to take the specific figures from some certain town and assume that that would 
 apply elsewhere. Now you can divide your riding into two classes, necessity riding and 
 non-necessity riding. If you are in a city where practically all your riding is necessity 
 riding, where the rider has to ride, of course a raise in fares will not bring any greatly 
 diminished amount of riding. But if you are in a city where the distances are short it will 
 bring a diminished amount of riding, at least for the time being, and I think that depends 
 largely on the temper of the people towards the road, whether they believe the rate is justified 
 or not. What I e.xpect to see is this, that a raise in rates will always cause momentarily a 
 falling oflf in the number of passengers, but eventually I believe, except in the smaller cities, 
 the same number of people will ride. 
 
 "Mr. Warren : .And even immediately on the change there is some increase in revenue, 
 is there not, unless it is an exceptional case? 
 
 "Mr. Doherty : Unless it is an exceptional case there is immediately an increase in 
 revenue. 
 
 "Mr. Warren: So that it is a real means of relief to the companies needing additional 
 revenue ? 
 
 "Mr. Doherty : Yes, sir." 
 
 Mr. Lucius S. Storrs, President of the Connecticut Company, was more 
 doubtful of the saving power of fare increases for the street railway companies, 
 as shown by the following extracts from his testimony (pages 432 and 433, 448 
 and 449, 451 and 461 of the Proceedings) : 
 
 "Mr. Storrs : In Connecticut we are on a six-cent basis, having been taking six 
 cents since October. 1917. The first twelve months period after that was the time 
 during which we were in war and all industries throughout Connecticut were most 
 intensely engaged in the production of the essentials of war. With the taking out 
 of the population, the younger men for serious war duties on this side and also 
 abroad and also the young women for loyal work, who did not need the income, to 
 relieve men for other more serious places in the industries and offices, the result was 
 a very great dropping oflF in the use of the electric railway car. The additional carr\-- 
 ing of operatives to and from the plants in which they were engaged did not nearly 
 compensate for the loss of riding during the normal hours of the day and during 
 the pleasure riding hours of the day, the evening. The result was that for the 
 first year after the installation of the si.x-cent fare our revenue was practically 
 identical, that is there was an increase of .9 of one per cent in the gross revenue. 
 That could not of course t)e entirely attributed to the incrca.se in the rate of fare 
 and it would Ix; impossible to determine what portion of that loss in passenger 
 riding should tx; attributed to the increase of rate of fare." 
 
 "Mr. Warren: So. from your experience have you any doubt about the efficacy 
 of ratts to priHluce an incrca.se in revenue? 
 
 "Mr. Storrs: 1 have a very grave doubt as to any ability on the part of the 
 utility to estimate within any kind of reason what the result of an increase in rate 
 might be upon the gross revenue. .\nd of course, there is a point with the increase 
 above six cents at which you will have a declining gross revenue. An increase to 
 seven, eight or ten cents would result in a declining gross. 
 
 "Mr. Warren: On .some lines. 
 
 "Mr. Storrs: Oi\ some lii\es, at least. There is a very great uncertainty." 
 
 "Commissioner Sweet : Now. the question that I would like to have you answer, 
 if you foci disposed to do so, and can, is to tell the Cominission what temporarj' 
 measures, in your judgment, ought to be adopted, pending a general readjustment 
 in regard to the whole subject. 
 
 "Mr. Storrs: Without any question, relief from the imposts that are made upon 
 the public utility, the rceulation of competition to the point that we know what that 
 compi-tilion may amount to, the granting of the right to discontinue, either tempo- 
 rarily or for a long time, the essentially unprofitable lines, the giving to the utilities 
 by the public of a subsidy to enable them to continue operation of those unprofitable 
 lines, thereby hridgiiiR over the i>criod of reconstruction, and a recognition, always, 
 of course, going with that, by the public of the essential need of the change, and a 
 willingness to pay the increased rates of fare — an increased rate of return, relief 
 from imposts, regulation of competition, and the privilege of discontinuing service 
 that is so unprofitable as to be really a non-essential service. 
 
 "Commissioner Sweet: If 1 understand you correctly, the mere increasing of 
 rates at the present time would not lie even a temporary remedy. 
 
 "Mr. Storrs: In my npinion. no. 
 
 "Commissioner Sweet: In that respect, you differ from some other witnesses 
 who have appeared In-fore this Commission. 
 
 Pnge 
 433 
 
 Pnnp."! 
 44!) 
 nnil 
 449 
 
Effects of Fare Increases 171 
 
 "Mr. Storrs : VV'ell, the effect of an increase in rates in various communities 
 is different. It differs all over the country. It so happens that in parts of Con- 
 necticut, doubtless by reason of the fact that the distances are so relatively short, 
 there is a greater falling off in traffic than there would be at other points where 
 the ride is, of necessity, longer and the need for the service more acute; but that 
 has been our experience in parts at least of the New England territory." 
 Pa?e "Commissioner Sweet : Now, suppose further increases were made, would that 
 
 451 materially increase the gross income of the company? 
 
 "Mr. Storrs: I had felt in our company that it would not have a material effect 
 upon our gross revenue. 
 
 "Commissioner Sweet : That is because your distances are not as great, and 
 you think the people would walk or find some other means of transportation? 
 
 "Mr. Storrs : Yes. You see. the perfected highway has been developed to a 
 very great degree throughout that portion of New England. 
 
 "Commissioner Sweet : It is your thought that any further increase of rates 
 would stimulate and bring about a greater use of the jitneys? 
 
 "Mr. Storrs : Yes ; decidedly." 
 
 "Commissioner Gadsden : Does not your own experience in Connecticut tend 
 ^'fif^ to prove the fact that if you will stick out long enough you are going to get the 
 money ? 
 
 "Mr. Storrs : That is true. 
 
 "Commissioner Gadsden : You put in a 6-cent fare, and for a year you could 
 get no result, but at the end of eighteen months you got 14%. Now\ don't you think 
 that that is true, as a general proposition, if we stay by the fare? 
 
 "Mr. Storrs : That may be true. 
 
 "Commissioner Gadsden : That we will sell the transportation at a higher price. 
 
 "Mr. Storrs : That is probably true. 
 
 "Commissioner Gadsden: It has been true in connection with your property? 
 
 "Mr. Storrs : It has been true in our property, certainly." 
 
 Mr. Storrs' testimony before the Commission was given in July, 1919. In 
 a letter dated December 6. 1919, transmitting to the Commission detailed informa- 
 tion as to the traffic and revenues of the Connecticut Company during the period 
 of fare increases, he said: 
 
 "The reason for the lack of effective result upon gross revenues of an increase in rate 
 of fare is due not at all to the fact of the increase in the rate, but to the fact that it was 
 established during the period in which every industrj- in Connecticut was working to the 
 very maximum of utility of the individual employe in turning out the essentials of war. 
 
 "Ev^ry man was engaged in some useful occupation and most of them working in overtime 
 employment, the result being that they were so tired that there was none of the usual pleasure 
 riding from which this company obtains great revenues during the summer months serving, 
 as we do, the entire shore communities of Connecticut. 
 
 "Every woman was engaged in occupation, those who had a sufficient income to relieve 
 them from the necessity feeling it their duty to take employment which could release men 
 to more essential needs. Of course, the fact that the great number of the young men went 
 into war service, mostly on the battle front, took away the incentive for pleasure ridmg and 
 due to this one fact alone the revenue did not show any increase." 
 
 Mr. J. K. Newman, of New Orleans, was quite certain that time would 
 
 justify fare increases. This is shown by his testimony at pages 560 and 561 
 
 of the Proceedings, which is as follows: 
 
 "Now about the increased fare, when we get it. The mathematical percentage of a 
 6-cent fare is 20 per cent. It is practically impossible to say from the past experience what 
 that is vielding because when vou get vour receipts, showing as Mr. Bertron has said in some 
 cases 30 per cent increase and in other cases only 5 per cent increase, that is mixed up with 
 the prosperity or the lack of prosperity in a given community. In New Orleans, where 
 we are getting about 30 per cent increase with a 20 per cent increase in fare, it is very largely 
 due to an enormous prosperity brought on bv war conditions and it is very hard to say which 
 is which. Rut if you can just get the public mind convinced that they are getting a square 
 deal now, that there will be no more pyramiding of securities and no more compounding and 
 excessive flotations and excessive profits to the bankers, and convince them that they arc 
 paying only for what they get plus return on invested capital, I think there wil be no phjec- 
 tion at all to the increased fare nor will that mean eventually a material reduction in the 
 riding. So I do look for considerable relief from the increased fare and I believe it will 
 measure up very closely as time goes on to the mathematical proportion. 
 
172 Electric Railway Problem 
 
 Mr. James D. Mortimer, President of the North American Company, struck 
 a somewhat different note and pointed out the dangers to the electric railway 
 business inherent in a shrinkage of traffic. His point of view may be seen from 
 the following quotation from his testimony at page 809 of the Proceedings: 
 
 "Any business that is of a shrinking nature, where the volume of its market is decreasing, 
 is necessarily not attractive to private investors, and the changes in fare agreements that 
 have been generally made throughout the United States have, of course, produced a very 
 great reaction upon the riding habit. 
 
 "There has been, in every case, after the lapse of a short period of time, an increase in 
 revenues as the result of an increase in flat rates of fare. That is true. The increase has not 
 in all cases been equal to the estimated increase resulting from the application of the new 
 fare to the previous number of passengers. 
 
 ".Ml important industrial centers are growing at a rapid rate. The riding habit ought to 
 increase likewise at a rapid rate, but the increase in riding habit has been somewhat influenced 
 by the increases in the flat rate of fare. 
 
 "Now, what the railway business needs is more business rather than less. If you liken 
 the railway business to a manufacturing institution, with a relatively large overhead, the 
 analysis of the manufacturer would be along the following lines: I have a large overhead. 
 That overhead, distributed over my present volume of output, is too high per unit to permit 
 me to sell in competition with other commodities of like use. 
 
 "The electric railway operator is faced with the proposal of increasing his selling price 
 so high that competition from walking becomes most severe. Tlie principal competitor of 
 the electric railway business is walking. The number of cars to be operated by an electric 
 railway in any given time should, in point of fact, be determined more nearly by the move- 
 ment of people that are on the street, rather than by the number of people that are on the 
 cars.'' 
 
 Further on, however, at page 816, in answer to questions by Commissioner 
 Sweet, Mr. Mortimer expressed the opinion that increases in rates are necessary 
 and that they will produce increased revenues : 
 
 "Commissioner Sweet : I do not know whether you have expressed the opinion that your 
 maximum revenue would be reached by an increase of fare; in other words, whether the 
 patronage would fall off as your fares advanced, so that you could not get much more revenue 
 than you arc getting now. 
 
 "Mr. Mortimer: I feel almost sure that almost any change in rate of fare upward 
 would increasic revenues. I am confident of that. 
 
 "Commissioner Sweet: The falling off in riders would not equalize the gain in fare? 
 
 "Mr. Mortimer: No; I am ven,' sure of that. 
 
 "Commissioner Sweet : You think the increase in fares would be, at present, at least, 
 very helpful to the companies throughout the country? 
 
 "Mr. Mortimer: There can be no doubt about it." 
 
 Dr. Tiiomas Conway, who has made a considerable study of the effect of 
 fare increases on traffic and revenues, described the results obtained on the Public 
 Service Railway system, and on the lines of the Connecticut Company, and ex- 
 pressed grave doubts as to the ultimate success of the policy of fare increases 
 in meeting the additional labor costs which, in his opinion, are sure to come in 
 the immediate future as a result of the top-notch awards made during the summer 
 of 1919 on some of the lines. .\t page 952 of the Proceedings, he savs: 
 
 "These 10-cent fares are_to my mind the serious question. We have heretofore talked 
 in terms of 6-cent fares and 7-cent fares. an<l latterly 8-ccnt fares, but these new wages mean 
 10-cent fares if you arc going to stick to the straight cash fare. 
 
 "Now a 6-C(nt fare was a comparalivelv easy matter, tint when you get to 10-cent fares, 
 you are getting into deep water, and if the large cities must charge 10 cents, the rate of fare 
 in the small towns is Ixiund to lie one which is practically prohibitive. In fact, the whole 
 matter, 1 am afraid, would iKTomr impracticable on the basis of getting the full cost of 
 operation, under present conditions, out of the car rider." 
 
Effects of Fare Increases 173 
 
 Further on, Doctor Conway referred to the effects of jitney competition in 
 connection with fare increases in New Jersey and Connecticut, and at page 959 
 of the Proceedings described the situation in Bridgeport, with respect to which I 
 have already quoted from Mr. Storrs. The witness says: 
 
 "In the City of Bridgeport, you have the most hopeless condition I have ever seen with 
 reference to the jitneys. The jitneys, in Bridgeport, in April of this year, when we made a 
 ver>- careful check of the matter, were handling just a little under two-thirds of the total 
 people riding, either on trolleys or jitneys, in the city. They have a 6-ccnt fare there. The 
 jitneys are charging 5 cents. With the jitneys, you have a large amount of short -distance 
 travel in the city. 
 
 "The figures on Waterburj-, Hartford and New Haven, where the average journey is 
 greater, show a much more healthy condition ; but my point is that, with a one-cent differential 
 throwing more than half of the total business of the city to the jitneys, it is idle to talk 
 about 7, 8. 9, or 10-cent fares. It is just an exercise in arithmetic. You might as well close 
 up shop and stop operating, and let the jitneys haul all the business." 
 
 Still further on, at pages 960 and 961 of the Proceedings, he continues : 
 
 "The point I want to make is this : You have various factors that have to be considered, 
 which I want to lay before you as controlling elements, I think, in helping to work out a 
 solution of this question. 
 
 "In the first place, there is a large amount of the street railway business which is what 
 I call convenience riding. It is not necessity riding. I refer to the man whose journey is 
 less than a mile. He can w-alk, and he will walk, when you get to a certain point with your 
 fare. 
 
 "In some cities, taking the country as a whole, I think you now get better results from 
 the 6 cents than you did two years ago. People are used to it ; they expect it, and they think 
 it is fair. There is not any of that spite walking, as I sometimes call it — walking to spite 
 the company. Six cents does not mean as much. Men will pay 6, 7, 8, 9, or 10 cents for 
 cigars and everything else, and they are used to it. 
 
 "The City of Schenectady, for example, showed a theoretical increase of 20% when 
 they put the 6-cent fare in, while some cities very similar to that, in New York State, did 
 not show anything like that when they put the 6-cent fare in. But I am not talking, in most 
 cases, for the immediate future, about 6-cent fares. They are almost as out of date as S-cent 
 fares are. The thought that I want to leave in your minds is what is going to be the effect 
 of the 10-cent fares and the 9-cent fares. That is where the fare equation is being carried by 
 this labor development that is here and ahead of us. What is that going to do with the 
 companies in the little towns, where everj-body lives within 15 minutes of his work, and 
 walking is easy, and what is going to be the effect of it on the amount of riding in the big 
 cities ? 
 
 "I have some interesing figures, which I got just before I left Philadelphia, from Boston, 
 concerning the effect of various raises there. Their lines, in the first few days of 10-cent 
 fares, showed approximately 60% increase over the 5-cent revenue. Eight-cent fares, which 
 were in effect in December. 1918. to June, 1919, showed from 36 to 46% increase over the 
 S-cent revenues. The 7-cent averages ran from — well, I will leave out October, when they 
 had the influenza epidemic — from 12 to 21% increase over the S-cent fares. 
 
 "Now, Boston, from my knowledge of the property, and from general knowledge of 
 other cities, ou.ght to show much better results with these high fares than any city I know 
 of, because of the fact that there is very little riding in the shopping district of Boston, the 
 cars are all run underground, a large part of the surface tracks are pulled up in the center 
 of town, and yet there they do not get a theoretical increase. 
 
 "Mr. \\"arren : There is no jitney competition there? 
 
 "Mr. Conway: There is no jitney competition there. The long distance riders are flock- 
 ing to the railroad trains, to a point where they are embarrassing the railroads, taking ad- 
 vantage of the commutation rates, and a great deal of walking has developed. 
 
 "Now. these are facts which we cannot ignore. The increase in fares drives a con- 
 tinually larger number of people away, and I think it would be unfortunate if the impression 
 grew up in your minds that it is a matter of an arithmetical average, that by dividing the 
 operating expenses by the number of people and getting a result, and saying that all you have 
 to do is to put the fare up to that level, you solve the problem. It is ven,- far from being 
 that, with the high costs of the immediate future, as I see it. 
 
 "Now. on the other hand, if I am correct in my belief that the companies should be 
 allowed to quickly readjust their fares to take care of these increasing expenses, the halter 
 should be taken off. and thev should he told to go ahead and tr>' to work this out. put in any 
 change in rates, and allow the commissions to revise and correct any inequalities later on. 
 
 "I do not mean to infer that the companies should not increase their rates by increasing 
 
174 Electric Railway Problem 
 
 the flat unit of fare. There are only two ways to get this. One is a flat increase in the unit 
 of fare, and the other is some sort of a zone system. 
 
 "Now, speaking generally, if you are to face that emergency, you will have to have a 
 simple remedy, and a simple remedy is to increase your flat unit of fare, and that, I think, is 
 what the industo' will have to do. 
 
 "Now. whether tliat will solve the question is a far more serious matter. Whether 10-cent 
 fares, with loss of riding that it occasions, is the answer, is, in my opinion, a far less settled 
 question, but this much I am certain about : A zone system, applied under conditions of heavy 
 urban traffic, such as you have in our large cities, is in this country still in an experimental 
 stage." 
 
 The Cumberland County Power & Light Company, of Portland, Maine, 
 has put into effect a zone fare system with a minimum charge of nine cents, if 
 paid in cash for any ride up to three zones, and a ticket tare of seven cents. The 
 fare for each additional zone is three cents if paid in cash or 2V^ cents by 
 ticket. Mr. A. H. Ford, Vice-President and General Manager of the company, 
 testified that all but about five per cent of the riders provide themselves with 
 tickets. He described the methods used by the company in putting its claim 
 for increased fares before the public, and stated that the company had secured 
 a good degree of cooperation in putting the higher rates into effect. However, 
 he was not by any means sure that the company was out of the woods yet, as 
 will appear from the following testimony found at page 362 of the Proceedings: 
 
 "Commissioner Sweet : And you feel that you have solved the problem, or don't you ? 
 
 "Mr. Ford: I would not like to say that. I hope we have. I believe that we have 
 gotten a rate that the people are going to support, and that gradually we shall work out 
 of our difficulties. It is going to take time, but I believe that a rate can be put to such a 
 point that you will spoil your whole proposition and raise it too high." 
 
 The ideas expressed by Mr. Mortimer in the first extract from his testimony 
 quoted above were closely seconded by Ciiairnian \\'. D. ?>. .\incy, of the Penn- 
 sylvania Public Service Commission, who laid special emphasis on the fact that 
 the electric railways have something to sell, namely, car rides. His views are 
 set forth at pages 1397 and 1398 of the Proceedings, in the following statement : 
 
 "In two recent addresses I have discussed at some length the influence of the rate of fare 
 on the riding habit and have sought to emphasize the fact that the street railway companies 
 might profit by the merchant's experience and methods. Having car rides to sell, why should 
 not the companies adopt adequate methods for selling the rides? • ♦ • • Increased rates have 
 in many instances been followed by a flattened curve in the number of car riders. It has 
 been pointed out, of cour.sc, that that flattenini; of the ciir\f has at times Ix-en caused by un- 
 usual conditions, for instance, the winter of 1917-18, the draft and by the later epidemic, and 
 undoubti-dly these had very material influence upon the riding habit at particular times. 
 
 ".\nd it lias also been noted that the jitney and priN-ate automobile have taken away a 
 considerable number of patrons. Nevertheless there remains a verj' appreciable number who 
 have been influenced by the rate of fare, and of course, no business house would be content 
 to lose such a large percentage of its customers without making a stupendous effort to retain 
 them. Many of tliese lost patrons would not be casual ones but permanent ones. Is it worthy 
 of suggestion to the railways that in some localities monthly commutation tickets at a lower 
 rate might be established, as the railways have done? 
 
 "This matter must l>e measure<l not only in the terms of the revenue of the company 
 but by the potential good will that is reflected in local political sentiment and otherwise. I 
 look iipon the loss of car riders as being a serious menace to the well-being of any company, 
 and it is not an answer which should satisfy the companies that increased fares give them a 
 revenue sufficient to meet tlieir needs if if has to he secured from selected patrons at the loss 
 and consequent cost of a considerable number of their former patrons." 
 
 Mr. John A. Beeler, consulting transportation engineer, and formerly for 
 many years in charge of the Denver Tramway system, expressed the opinion 
 that economics should be tried first, and then, if an increase of fare proved to 
 be necessary, it should take such a form as not to drive away traffic, especially 
 
Effects of Fare Increases 175 
 
 the profitable short-haul riders. His position was set forth at page 167.i of the 
 Proceedings, in the following manner : 
 
 "If after everything has been done to increase business, effect operating economies, and 
 lower taxes to a normal basis a deficit still remains after providing for the necessary and 
 proper fixed charges, a raise in the rates of fare should be granted. There are a number of 
 ways to do this, as follows : 
 
 (1) A charge for transfers; 
 
 (2) An increase in the ffat rate; 
 
 (o) Zone fares, or fares based on distance. 
 
 "A one-cent charge for transfers will usually yield from three to five per cent additional 
 revenue, .^n increase in the flat rate of fare can scarcely be called a success as yet. An 
 increase of one cent usually leads to two or three, and as the flat rate goes up the number of 
 riders decreases correspondingly. A number of cities have gone to ten cents with disappoint- 
 ing results financially. High fares encourage walking, and the short-haul patron disappears. 
 He is the only profitable customer the street railway has had in years. Lose him and the 
 entire burden falls on the shoulders of the long-haul patron, who must thereafter produce 
 the entire revenue. One who lives beyond the walking limits suffers most, for he must ride 
 w-hile the others can walk. 
 
 "As patronage diminishes the company naturally operates fewer cars and the space 
 between them becomes greater. The service consequently deteriorates and the whole city 
 suffers, but no one suffers as much as those w-ho live far out. As the patronage falls off 
 the e-xpenses must be shared by fewer and the rates of fares keep going higher. Outside 
 property values will undoubtedly feel the most disastrous effects. 
 
 "Provided the fare has to be raised it should be done so as to retain and encourage the 
 short-haul rider, develop community riding and increase the receipts. E.xperience has shown 
 that a high flat rate does not accomplish this. The successful merchant gives an apt illus- 
 tration when with rising costs he reduces the contents of the package and keeps the price 
 the same or even lowers it." 
 
 Mr. Frederick J. MacLeod, at that time Chairman of the Massachusetts 
 Public Service Commission, stated at page 1439 of the Proceedings : 
 
 "Recent fare increases in Massachusetts have been greater, both in number, variety and 
 extent, than in any other state, and the effects of such increases upon traffic and revenue are 
 deserving of careful consideration by street railway officials and public authorities in other 
 states. I am submitting herewith a tabular statement showing the various fare increases 
 allowed in the case of eleven principal street railway companies since 1914, with the com- 
 parative revenue results under successive fare schedules." 
 
 He then referred to the fluctuations in revenue due to weather conditions, 
 the influenza epidemic, increases or decreases in service and car miles, the 
 development of jitney competition, the increased use of private automobiles, and 
 the disturbance of ordinary economic and social conditions during the war period, 
 and continued : 
 
 "Making every allowance, however, for the influence of these conditions, if the revenue 
 results of the companies which increased their fares are compared from year to year with 
 those of other companies which made no fare increase during the same period, there is little 
 evidence to indicate that an increase of rates offers a panacea for the present ills of our street 
 railway companies. In some years the companies increasing their rates have shown a smaller 
 gain iri revenue than those which retained the former five-cent fares, and if the revenues for 
 the year ended June 30. 1919, are compared with the revenues for the year ended June 30, 
 1914] in order to show the cumulative effect of all increases allowed, it appears that the ten 
 companies which increased their rates during this period show an average increase in pas- 
 senger revenue of 31.92 per cent, while the remaining company which retained its_ former 
 five-cent fares, showed an increase of 24.16 per cent during the same five-year period. If, 
 in order to afford a fairer basis of comparison, the Boston Elevated Railway is excluded, it 
 appears that the normal increase of traffic on the Union Street Railway under the old S-cent 
 fare yielded a greater increase in revenue than was received on the average by the other nine 
 companies as the result of their successive fare increases." 
 
 The Massachusetts Public Service Commission's conclusions as to the rela- 
 tive merits of further fare increases on the one hand, and public subsidies from 
 
176 Electric Railway Problem 
 
 taxation on the other, were clearly set forth by Mr. MacLeod at pages 1450 and 
 1451 of the Proceedings, as follows: 
 
 "In our judgment street railway service should be supported through the fares paid by 
 the car riders in so far as this can reasonably be done without unduly interfering with the 
 freedom of traffic which is essential for the business prosperity of the communities served. 
 IJut when fares have been raised to a point where a further increase is likely to prevent the 
 pulilic from availing themselves with reasonable freedom of the service and facilities fur- 
 nished, and where the burden upon the car riders is likely to be wholly disproportionate to 
 any revenue benefits received by the company, any additional revenue needed to maintain 
 the service should, we believe, be contributed by the communities served out of the general 
 tax levy. I believe that where rides of substantial length are furnished, there would be little 
 public protest and little diminution of riding if fares were established on the basis of 6 cents, 
 or possibly higher. If that is so. and the fact can only be determined in the light of ex- 
 perience in each particular case, there is no convincing reason, on account of historic reasons 
 or a mere accident of coinage, for preserving lares at the old 5-cent level. There are. how- 
 ever, manifest advantages as a matter of convenience as well as a matter of psychology-, in 
 retaining the 5-cent unit of fare and that may prove to be the wisest policy. The present 
 policy of constant raises in fares, resulting in large traffic losses and little or no advantages 
 to the company, is not only a grave menace to the prosperity and welfare of the whole com- 
 munity, but is wasteful in the extreme. As the burden of the increased cost of operation is 
 surely heavy enough in itself the existing economic scheme which in effect doubles or trebles 
 that burden for the car rider should no longer be tolerated. .'\ny excess revenue required 
 above that which can t>e obtained under a reasonable system of fares should be directly 
 contributed out of public taxation. 
 
 "What I mean by that is the fact that if you start with the theory that the public have 
 got to supiwrt the cost of the service, and the car rider has got to reach into hjs pockets and 
 pay out $20 in fares, in order to get anywhere from $2 to $10 into the treasur>' of the com- 
 pany, you are simply creating a condition where, instead of the car rider meeting the legit- 
 imate advances in the cost of operation and reflected in his car fare, he is obliged to pay for 
 them three or four times over; and that is something for which nobody gets any benefit, 
 and the whole community suffers ; and the car rider, as I believe, as the individual, is the 
 least sufferer. 
 
 "The community itself, where the freedom of traffic, the mobility of labor and all that 
 sort of thing is adversely aflFccted, is by far the more serious sufferer, more so even than 
 the individual car rider who may have to pay, through increased fares, three or four times 
 as much as the increased cost of living and the increase of prices would seem to warrant. 
 
 "Under that plan the financial drain upon the communities served would be enormously 
 less, and the advantages resulting from the free movement of traffic would inure mainly to 
 the benefit of the merchant, the manufacturer and the real estate owner, and would thus 
 more than off.sct any amount i>aid through increased taxation. .\ny payments so made, it is 
 true, are likely to be passed on to the ultimate consumer through increased rents and higher 
 prices paid to the local merchant, or, broadly speaking, to the same class of persons who 
 constitute the present txKly of car riders, but the economic waste under the existing system 
 will be eliminated." 
 
 Mr. Homer Loring, Chairman of the Board of Public Trustees for the oper- 
 ation of the lines of the Eastern Massachusetts Street Railway Company (the 
 Bay State System), testified that in the process of raising fares and changing 
 from the flat fare system to the zone system of fare collection the Bay State 
 company stopped counting the number of revenue fare.^ collected or revenue pas- 
 sengers carried, with the result that no e.xact statistics are now available to show 
 what effect the radical fare increases have had upon the traffic of that system. 
 On the Bay State lines the old 5-cent fare was discontinued on all zones outside 
 of the cities in October, 1916, and a 6-cent fare substituted therefor. In October, 
 1917, the 6-cent fare was installed in the city zones, but with the provision that 
 20-ride tickets should be sold for a dollar. In June, 1918, a new zone system 
 was inaugurated. Tiie 6-cent fare was continued in the city zones, but they 
 were reduced in size, and the outside territory was divided into inile zones and 
 the equivalent of a mileage rate was established with a minimum fare of six 
 cents. In January, 1919, this zone system was modified by the expansion of the 
 
Effects of Fare Increases 177 
 
 size of the city zones and by the practical doubling of the length of the interurban 
 zones, with a cash fare of ten cents in the cities, and of five cents per zone in 
 the country with a minimum of ten cents ; but 7-cent tickets were sold in strips 
 of five. On July 1, 1919, these tickets were withdrawn. This left the cash fare 
 at ten cents in the cities and five cents per zone on the country lines with a mini- 
 mum of ten cents. 
 
 Commenting on the results of these fare changes and increases, Mr. Loring 
 stated in his testimony that in April and May, 1919, with a 10-cent cash fare and 
 7-cent tickets in effect in the city zones, the company's earnings showed an in- 
 crease of 36 or }>7 per cent over two years before when the city fare was five 
 cents and the country fare six cents. He stated that during July, 1919, with a 
 straight 10-cent fare in effect, the revenues were only 18 per cent greater than 
 two years before when the 5-cent fare was still in effect in the city zones, and 
 in August, 1919, the gain over two years before was only 25 per cent. The Board 
 of Trustees, he said, had drawn the conclusion that somewhere between seven and 
 ten ceints the Eastern Massachusetts Street Railway Company had "passed the 
 economic point for getting the largest amount of earnings out of our population." 
 Commenting upon the fact that the principal communities served by the Bay State 
 lines are industrial cities in which the average ride is probably not more than a 
 mile and a quarter, he made the following statement at page 1643 of the Pro- 
 ceedings : 
 
 "We have come to the conclusion that that is responsible, to a very great extent. All 
 )-ou have to do is to go in the hours of the morning and see the people walking, to fully 
 appreciate that the right to fix fares on our road, and to raise them, is not a very valuable 
 right. We have passed the point and must reduce. We have gone beyond it for all time." 
 
 He Stated that the Board of Trustees were experimenting with different rates of 
 
 fare in different communities with the idea of discovering what fare would bring 
 
 the maximum amount of revenue. With respect to the falling off of traffic he 
 
 said: 
 
 "We installed fare boxes a year ago, which count the money instead of counting the 
 passengers, and the result is that at that time we entirely lost count. We have made some 
 very close estimates in certain cities. We are taking the cities and studying them one at 
 a time, and we find that, taking July and August, with the 10-cent fare and two years prior 
 with the 5-cent fare, we have lost in many cases as much as forty per cent of the traffic — 
 forty per cent of the passengers are actually walking or finding some other means of con- 
 veyance, less than two years ago." , 
 
 Mr. Loring in his testimony called attention to the much more favorable 
 
 results that have been obtained from the 10-cent fare on the Boston Elevated 
 
 Railway Company than on the Bay State lines. In this connection, at page 1644 
 
 of the Proceedings, he said : 
 
 "Take the Boston Elevated Railroad with an average haul supposed to be over four miles, 
 and the results which they have obtained from the 10-cent fare have been. I consider, ex- 
 ceedingly satisfactoo'. They made a 31 per cent gain in August with a 10-cent fare, as coin- 
 pared with 7 last year. There is 31 per cent from a theoretical 45. They told me that m 
 September they were making a much larger gain, part of which they attributed to the in- 
 fluenza last year; but if there is anything we can conclude from their experience and ours in 
 the same general territory, it is that the successful results from raising fares are very much 
 in accordance with your average haul. Is it easy fpr the people to walk? If so, they will. 
 If the distance is longer you will get better results." 
 
178 Electric Railway Problem 
 
 And again, at page 1649 of the Proceedings, he said: 
 
 "I feel that the Boston plan is working as well as those who studied it beforehand and 
 who really formed their expectations by careful study anticipated." 
 
 The American Electric Railway Association submitted to the Commission a 
 Compilation, dated August 9, 1919, purporting to show the "effect of increased 
 rates of fare on passenger revenues" in the cases of 125 companies.' In this 
 tabulation the dates and nature of fare increases were given in the case of each 
 company. Then a statement was made for each month subsequent to the first 
 fare increase showing the percentage increase or decrease in passenger revenues 
 as compared with the corresponding month of the preceding year. In many cases 
 this was compared with the theoretical increase in the rates of fare. Among the 
 numerous cases described in this tabulation, instances can be found tending to 
 prove almost anything with respect to the efTect of fare increases upon revenues, 
 even to support the theory inadvertently advanced in certain instances that an 
 increase in fare has stimulated traffic. The tabulation shows a good many 
 instances where revenues have increased by a larger percentage than the fares 
 charged, and a good many other instances where an increase in fares was followed 
 by an actual falling off in revenues for the time being. Still, the general trend 
 unquestionably indicates that fare increases are usually followed by an increase 
 in revenues, and that after the lapse of considerable time traffic is likely to 
 get up to its old level. The difficulty with the Association's compilation is that 
 each case is set down by itself without anything to indicate its relative importance, 
 and the comparisons in most cases begin with the late months of 1918, when 
 traffic was low, and continued to May or June, 1919, when traffic was high, thus 
 giving the impression that the car riders who had been driven away at first by the 
 fare increases gradually came back. 
 
 This inconclusiveness is illustrated by the figures cited for the Milwaukee 
 Electric Railway & Light Company, at page 18 of the compilation. In this case 
 the theoretical increase in fare that went into effect June 1, 1918, was 17.65 per 
 cent. The "actual per cent increase'' in passenger revenues is given for each 
 month from June, 1918, to June, 1919, inclusive, with the qualifying note attached : 
 "Normal increase in riding accounted for." This seems to indicate that per- 
 centages have been adjusted to show what the company or the compiler thought 
 was the actual increase in revenues due to the fare increases entirely aside from the 
 effect of the nonnal growth of traffic, although for each month from Januar}- to 
 May, 1919, the increase in revenues was shown to be at a higher percentage than 
 the increase in fare. But the last month given is June, 1919. which compared 
 with June, 1918. shows on the tabulation an increase of 14.85 per cent. As the 
 fare increase was efTective June 1, 1918, the increase from June, 1918, to June, 
 1919, must have resulted from the normal growth of traffic, except to the extent 
 (hat traffic driven away at first by the fare increase had come back. A com- 
 parison of several months with the corresponding months of the preceding year, 
 and without any adjustment for the "normal increase in riding" shows the fol- 
 lowing results: 
 
Effects of Fare Increases 179 
 
 Theoretical increase Actual increase 
 
 based on increase in in passenger 
 
 Month rate of fare revenues 
 
 (1919) 
 
 March 17.65% 24.40% 
 
 April 17.65% 26.997o 
 
 Mav 17.65% 24.97% 
 
 June 15.78% 
 
 July 13.72% 
 
 August 14.55% 
 
 September 13.98% 
 
 If these figures indicate anything, it is that not more than 10 per cent or 12 per 
 cent of the increase in revenue was due to the increase in fares, and that the 
 balance was due to the extraordinary traffic development that characterized the 
 year 1919 throughout the country. 
 
 In the case of the Hornell Traction Company, of Hornell. N. Y., the com- 
 parisons given extend over a period of more than twelve months under the higher 
 fare without a second increase. This is shown at page 25 of the tabulation. The 
 Hornell increase was from 5 cents cash and 4Vi6-cent tickets to a straight cash 
 or ticket 6-cent fare, which would probably give an increase of about 33% per 
 cent in the average fare paid. The raise came in December, 1917. Assuming 
 that the percentages shown in the tabulation are correct, the comparison for the 
 first six months of 1919 should be as follows : 
 
 Theoretical increase Actual increase 
 
 based on increase in in passenger 
 
 Month rate of fare revenues 
 (1919) 
 
 January 14.70% 
 
 February 6.64% 
 
 March 9.08% 
 
 April 12 36% 
 
 Mav 12.52% 
 
 June 32.17% 
 
 The increases in revenue indicated are apparently the result of traffic develop- 
 ment, as the fare was exactly the same during the months with which the com- 
 parisons are made. 
 
 It is interesting to compare these increases under the six-cent fare with the 
 increases shown at page 26 of the compilation in the case of the Cumberland 
 County Power & Light Company, of Portland, Maine. In Portland, the revenues 
 under the higher fares are compared with those of the corresponding months 
 of the preceding year under a 5-cent fare in the city and a 6-cent fare on the 
 suburban lines. The figures show the following: 
 
 Theoretical increase Actual increase 
 
 on acccnmt of increase in in passenger 
 
 Month rate of fare revenues 
 
 (1919) 
 
 January 20% 13.7% 
 
 February 20% 19.6% 
 
 March 207o 14.3% 
 
 April 20% 20.7% 
 
 May 20% 16.5% 
 
 June 40% 25.6% 
 
180 Electric Railway Problem 
 
 Here we see a 25.6 per cent increase of revenue in June, witli a 40 per cent 
 increase in fare over the preceding June, while in Uomell, N. Y., there was an 
 increase of 32.17 per cent in revenue and in Milwaukee an increase of 15.78 per 
 cent in revenue without any intervening change in the fares. 
 
 Still another case included in the tabulation where the period of comparison 
 extended over more than twelve months is that of the Ft. Wayne & Northern 
 Indiana Traction Company. In Ft. Wayne the 6-for-a-quarter tickets were 
 aboli.shed and the straight 5-cent fare instituted March 9, 1918. This is described 
 as a 20 per cent increase in the rate, although this would not be true except on 
 the assumption that before the increase all the car riders used tickets. However 
 that may be, it is evident that when we get to April and May, 1919, the theoretical 
 increase in revenue over the corresponding months of the preceding year would 
 be zero, not 20 per cent as stated, and it would seem that the actual increase in 
 revenues of 31.6 per cent in April, and 24.6 per cent in May, 1919, was not due 
 primarily to the fare increase in March, 1918, but to other causes. 
 
 The figures I have cited do not prove affirmatively and conclusively that 
 fare increases decrease traffic or that they do not increase revenues, but they 
 suggest that the figures submitted on behalf of the American Electric Railway 
 Association need to be closely scrutinized before they are accepted as proving 
 that traffic lost on account of fare increases "comes back." 
 
 In view of the great divergence of opinion expressed by the different wit- 
 nesses coming from different parts of the country and representing different 
 interests, and in view of the inconclusive character of the comparisons submitted 
 by the American Electric Railway Association, it was evident that no clear and 
 certain conclusion could be drawn as to the effect of fare increases upon traffic 
 and revenues from the testimony and the exhibits presented at the hearings. At 
 the same time, it seemed to me that the Commission could not afford to bring 
 out its report and make its recommendations for the solution of the electric rail- 
 way problem without first ascertaining as definitely as possible the facts with 
 respect to the actual effect of fare increases during the past two or three years 
 so far as those facts are available. For this reason, the Executive Secretary, at 
 my suggestion, sent out at the beginning of December, 1919, a special letter 
 addressed to about fifty of the principal cities and street railway systems of the 
 country stating that the Conmiission was in need of "more detailed data with 
 respect tn the development of trattic under varying conditions during the past 
 two or three years in order to be able to reach an intelligent conclusion as to 
 the effect of fare increa.ses upon the future of the electric railway as a public 
 utility," and that it desired "to make comparisons between cities and street rail- 
 way systems where fares have not been increased, and cities and systems where 
 tlicy have been increased." I'or these reasons the following specific information 
 was requested : 
 
 1. The total iuiiiil>cr of rovcmic i>asseiigcrs carried, by months from January 1, 1917, 
 to dale. 
 
 2. The gro.ss |>asscnKer caminRs. by months from January 1. 1917. to date. 
 
 .V The cx.ict dales when any chauRes in fare went into eflfect. and the exact nature of 
 .such rhannes. 
 
 4. llie exact dales and duration of any strikes of conductors and raotonnen that may 
 
Effects of Fare Increases 181 
 
 have occurred subsequent to January 1, 1917, and the extent to which traffic was interrupted 
 by such strikes. 
 
 5. Any other important factors peculiar to the local situation which had a marked effect 
 upon traffic either to increase it or to decrease it at any time subsequent to January 1, 1917. 
 
 In response to these special letters sent out at the beginning of December, 
 and to similar letters subsequently addressed to a number of additional com- 
 panies, the information requested was received for electric railway systems which 
 in 1917 carried approximately 75 per cent of the total electric railway traffic 
 reported for that year by the Bureau of the Census. The traffic and revenue 
 statistics have been tabulated and analyzed so as to show for each city or system 
 the nuinber of revenue passengers carried, and the amount of gross passenger 
 revenues collected during the first nine months of 1917, the first nine months of 
 1918, and the first nine months of 1919. The average fare paid during each of 
 these three periods has been determined by dividing the number of revenue pas- 
 sengers into the gross passenger revenue. Fare increases are shown in the form 
 of the percentage of increase in the average fare paid during the first nine months 
 of 1919 as compared with the first nine months of 1917. In like manner, increases 
 or decreases in traffic, and increases or decreases in passenger earnings between 
 these two periods have been figured out on a percentage basis. 
 
 The figures show that 1918 was generally a low traffic year. Many of the 
 big electric railway systems of the country showed an actual decrease in the 
 number of revenue passengers carried in 191S as compared with 1917. This was 
 true even where the comparison was limited to the first nine months. The shrink- 
 age of traffic in 1918 was even more pronounced during October and November 
 on account of the widespread effect of the influenza epidemic. Among the im- 
 portant cities or systems that showed an actual decrease in traffic during the 
 first nine months of 1918 as compared with 1917 were New York, with a decrease 
 of .87 per cent ; Chicago, with a decrease of nearly 2 per cent ; Boston, with a 
 decrease of a little more than 5 per cent; Detroit, with a decrease of about 13 per 
 cent; Cleveland, with a decrease of more than 4 per cent; Pittsburgh, with a de- 
 crease of about 12 per cent; St. Louis, with a decrease of 5 per cent; Minneapolis 
 and St. Paul, with a decrease of 6 per cent; the Connecticut railway lines serving 
 New Haven, Hartford, Bridgeport and other cities, with a decrease of more than 
 16 per cent ; the Kansas Cities, v^'ith a decrease of about 2 per cent ; Buffalo, with 
 a decrease of nearly 9 per cent; the New York State Railways system serving 
 Rochester, Syracuse, Utica and other cities, with a decrease of over 2 per cent; 
 and Cincinnati, with a decrease of more than 3 per cent. 
 
 On the other hand, certain cities and systems showed a considerable increase 
 in traffic during the first nine months of 1918 as compared with the first nine 
 months of 1917, notwithstanding the adverse conditions that affected street rail- 
 way traffic generally. These particular increases were undoubtedly due in most 
 cases to the local development of war industries or the presence of military 
 training camps in the vicinity. Notable among the cities and systems that showed 
 an actual increase in traffic were Philadelphia, with an increase of about 8 per 
 cent; the Public Service Railway system of New Jersey, serving Newark, Jersey 
 City, Elizabeth, Paterson, Bayonne, Camden and other cities and towns, with 
 an increase of not quite 2 per cent; Baltimore, with an increase of over 8 per 
 
182 Electric Railway Problem 
 
 cent; Los Angeles, with an increase of more than 10 per cent; San Francisco, 
 with an increase of 16 per cent ; Washington, D. C, with an increase of 33 per 
 cent ; Milwaukee, with an increase of less than 1 per cent ; New Orleans, with 
 an increase of 5 per cent; the San Francisco-Oakland Terminal Railways, serving 
 Oakland. Berkeley, Alameda and other East Bay cities and towns, with an increase 
 of 10 per cent ; the V'irginia Railway & Power Company, serving Richtnond, 
 Norfolk and other V'irginia cities, with an increase of about 22 per cent; Seattle, 
 with an increase of nearly 32 per cent ; and Portland, Oregon, with an increase 
 of 18 per cent. 
 
 Taking all of the cities and systems together, for which the detailed figures 
 were obtained, the aggregate traffic during the first nine months of 1918 was 
 practically the same as for the corresponding period of 1917. For the first nine 
 months of 1919, however, traffic came back with a bound almost everywhere 
 except in cities or upon systems where heavy increases in fare had been put 
 into effect in the meantime. For the entire group of cities and systems for which 
 the detailed figures were obtained, the traffic during the first nine months of 1919 
 showed an increase of about 7 per cent over the traffic for the corresponding 
 period two years earlier. This increase for the two-year period, averaging 
 3^ per cent per annum, is only slightly less than the ordinary average growth 
 of street railway traffic over the period of ten years preceding 1917. On the face 
 of the figures, it would appear that, taking the country as a whole, the fare in- 
 creases that were in etf ect during the first nine months of 1919 were not sufficient 
 to prevent a substantially normal development of traffic. But there are mdi- 
 cations in many parts of the country that without the increased fares the develop- 
 ment of traffic in 1919 would have been abnormally large. It is only by a com- 
 parison of the results in particular cities or on particular systems where fares 
 were not increased, with the results in other cities or on other systems where 
 fares were increased in varying amounts, that we may hope to get anything 
 like a clear or decisive answer to the main question raised by this inquiry. The 
 comparative figures with respect to traffic in relation to fare increases for each 
 of the important cities and systems for which the detailed figures are available 
 is shown on Table I entitled "Analysis of Traffic on Principal Street Railway 
 Systems of the United States showing relation of Revenue Passengers to Fare 
 Increases, based on data collected by the Federal Electric Railways Commission." 
 
 Similar figures with respect to gross passenger earnings in relation to fare 
 increases are shown on Table II entitled "Analysis of Gross Passenger Revenue 
 on Principal Street Railway Systems of the United States showing relation of 
 Passenger Revenue to Fare Increases, based on data collected by the Federal 
 Electric Railways Commission." 
 
 It will he observed that an effort has been made to show on Table I and 
 Table II the traffic and revenue figures complete for each of the principal urban 
 communities or districts of the countrj'. For example. New York City has been 
 treated as a unit, although in point of fact about forty individual companies are 
 rendering street railway service within the limits of Greater New York. In most 
 of the cities a single company has a complete or nearly complete monopoly of 
 street railway transportation service, and in many cases two or more cities are 
 
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Effects of Fare Increases 195 
 
 grouped together in a transportation area served by a single company. Boston 
 and Philadelphia are particularly noteworthy because in the case of each of these 
 cities the elevated, subway and surface lines are operated as a unit by a single 
 company. In Chicago the surface lines are operated as a unit and the elevated 
 lines as a separate unit, with a certain amount of competition between the two 
 systems. Detroit gives an example of a unified city transportation system that 
 is combined in a single operating system with a vast net-work of interurban lines.^ 
 Washington, D. C, is a notable illustraton of a city where two rival street railway 
 companies of nearly equal importance still survive. Dayton, Ohio, still enjoys 
 the competition of four companies. San Francisco has its Municipal Railway 
 and also its United Railroads system. Seattle for a number of years had muni- 
 cipal railway lines in competition with the lines of the Puget Sound Traction 
 Light & Power Company, but on April 1, 1919, the Puget Sound lines were ac- 
 quired by the City and merged with the Municipal Railway. This gave the City 
 a complete monopoly of local street railway service with the exception of the 
 Seattle and Rainier Valley Railway line. In Los Angeles the major portion of 
 the local service is furnished by the Los Angeles Railway Corporation, but the 
 Pacific Electric Railway Company furnishes some local service and a vast amount 
 of interurban service reaching out in every direction from Los Angeles as a 
 center. The Twin City Rapid Transit Company combines in a single transpor- 
 tation unit the cities of Minneapolis and St. Paul. The San Francisco-Oakland 
 Terminal Railways Company serves Oakland, Berkeley, Alameda and other com- 
 munities on the east side of San Francisco Bay, and competes with the Southern 
 Pacific Railroad Company in rendering trans-bay service to San Francisco. 
 Omaha, Nebraska and Council Bluffs, Iowa, are served as a unit by a single com- 
 pany. The same is true of Kansas City, Missouri and Kansas City, Kansas. 
 
 In the eastern section of the country are a number of street railway systems 
 that are almost state-wide in extent. Notable among these is the Public Service 
 Railway system, of New Jersey, which has a monopoly of street railway opera- 
 tion in all the principal cities of the state except Trenton and Atlantic City, and 
 includes in its area of service the sections of northern New Jersey that are tribu- 
 tary to Greater New York, and the section of southern New Jersey that is tribu- 
 tary to Philadelphia. The Connecticut Company, operating in New Haven, 
 Hartford, Bridgeport and other Connecticut cities and towns ; the Rhode Island 
 Company, operating in Providence, Pawtucket, Woonsocket and practically 
 throughout the state of Rhode Island ; the Eastern Massachusetts Street Railway 
 Company, formerly known as the Bay State System, operating in Lowell, Fall 
 River, Lawrence, Lynn and most of the other cities of eastern Massachusetts 
 north and south of Boston; the New York State Railways Company, serving 
 Rochester, Syracuse, Utica and other cities and towns of central New York ; the 
 Northern Ohio Traction & Light Company, serving Akron, Canton and numerous 
 other communities in northeastern Ohio; the Virginia Railway & Power Com- 
 pany, serving Richmond, Petersburg, Norfolk, Portsmouth and other cities and 
 towns in Virginia; and the Michigan Railway Company, operating in Jackson, 
 Lansing, Battle Creek and Kalamazoo, are other notable examples of street rail- 
 way systems which have combined in a single transportation unit different muni- 
 
196 Electric Railway Problem 
 
 cipalitics of relatively equal importance, and constituting geographically inde- 
 pendent urban communities. 
 
 The illustrations which I have cited indicate some of the contrasts in operat- 
 ing conditions which must, to a certain extent, affect the significance of compara- 
 tive statistics of street railway traffic and revenue. Still another complication 
 is present in certain cases where widely separated street railway systems, though 
 physically operated as separate and distinct units, are controlled by a common 
 holding company that dominates the policies of the different systems with respect 
 to fares and methods of operation. In certain cases these holding company re- 
 lationships have a certain significance in connection with the traffic and revenue 
 statistics with which we are here concerned. For example, the policy of one- 
 man car operation with frequent service, adopted for the double purpose of 
 reducing operating expenses and stimulating traffic and revenues, is a policy that 
 has been stressed particularly by Stone & Webster, and when examining the 
 traffic figures of Stone & Webster properties it is important to know to what 
 extent traffic increases are due to the use of one-man cars. Obviously, the time 
 and resources at our disposal in this investigation do not permit a close enough 
 study of the conditions and policies peculiar to all of the individual street rail- 
 way systems for which we have gathered statistics to enable us to measure with 
 nicety the relative significance of all the different factors entering into the de- 
 velopment of traffic and revenues in each particular case. 
 
 Boston's sad experience with higher fares was frequently referred to in the 
 testimony, but the Commission's hearings were closed at too early a date to permit 
 the definite results of the 10-cent fare in Boston to be put in the record. As a 
 matter of fact, the financial statement issued by the Board of Public Trustees 
 of the Boston Elevated Railway Company for the three months ended September 
 30, 1919, still showed a deficiency in earnings below the cost of service as defined 
 by the act under which the trustees were appointed. It is noteworthv. however, 
 that the financial statements for the months subsequent to September, 1919, all 
 indicate that the Boston system, with its 10-cent fare, has finally "turned the 
 corner" and is now earning a surplus in excess of the full cost of service.' It is 
 unfortunate that the Bay State system stopped counting its passengers just at the 
 point where, from the public point of view, reliable traffic statistics would begin 
 to be of the greatest importance. A similar reflection is due in the case of the 
 Cumberland County Power & Light Company which operates the street railway 
 lines in a group of communities centering in Portland, Maine. Here, also, upon 
 the installation of a new zoning .system, the company stopped counting its pas- 
 sengers. In the case of the Rhode Island Company, operating in Providence and 
 most of the other urban communities of Rhode Island, nominal statistics of 
 revenue passengers are still kept, but the figures are practically worthless for 
 comparative purposes, because the ba.sis upon which the number of passengers 
 or passenger fares is counted has twice been changed during the past two years. 
 As a result of the introduction of a new zoning system and the shortening of the 
 zones, a great many passengers who were formerly counted only once are now 
 counted two or three times. The consequence is. that although the Rhode Island 
 Company has raised its fares two or three times in the last three years, with 
 
Effects of Fare Increases 197 
 
 only slight decreases en certain suburban lines, in an effort to get back the traffic 
 that had been driven away, the statistics of passenger revenues furnished by the 
 company for the first nine months of 1919 indicate a considerable decrease in the 
 average fare paid as compared with the first nine months of 1917. If these three 
 important New England systems centering in Providence, Portland, and the in- 
 dustrial cities of eastern Massachusetts could have furnished us definite statistics 
 showing the traffic developments that have accompanied fare increases and changes 
 from the flat fare system to a zone system, it would have been of material help 
 in this study. 
 
 If it be conceded as proven that the 10-cent fare in Boston has begun to 
 succeed in producing a sufficient amount of revenue to cover the entire cost of 
 service, while at the same time the 10-cent fare on the Bay State lines has over- 
 shot the mark and will not produce enough revenue to cover the cost of service^ 
 or even as much revenue as some lower fare would produce, we still have to 
 determine, from a study of the results on these and other systems, whether the 
 financial success now being achieved in Boston, and the financial failure still 
 being achieved on the Bay State lines are worth while from the public point of 
 view. This brings us back to the detailed comparison of traffic development in 
 cities where street railway fares have not been raised, with traffic development 
 during the same period in cities like Boston where fares have been radically in- 
 creased. There are only three communities in the country where elevated rail- 
 roads, subways and surface lines have all been developed as means of local trans- 
 portation. These cities are New York, Boston and Philadelphia. Chicago also 
 has an extensive system of elevated railroads, but as yet has no subways. 
 
 In certain respects a comparison of the traffic figures for a small group of the 
 largest cities and street railway systems is somewhat simplified if we take the six 
 months period instead of the nine months period. For example, the establish- 
 ment of a transfer charge at most intersections on the surface lines of New 
 York took place August 1, 1919, and the partial disintegration of the New York 
 Railways system of surface lines began at that time, resulting later on in a num- 
 ber of double fares. The Chicago surface lines continued on the 5-cent fare 
 until August. 1919. The Boston Elevated Railway did not put in the 10-cent 
 fare until July 10, 1919. The Public Service Railway of New Jersey did not 
 experiment with a zoning plan until September, 1919. I have, therefore, pre- 
 pared an abbreviated table showing the number of revenue passengers carried 
 during the first six months of 1917, 1918 and 1919, on a few of the principal street 
 railway systems of the country. I have treated all the elevated, subway and 
 surface lines of New York City as a single system, and have taken the traffic 
 and revenue figures published by the Public Service Commission for the First 
 District in its quarterly summaries. Because of the existence of a differential 
 fare between the elevated lines and the surface lines of Chicago, I have shown 
 the figures for the two Chicago systems separately. With New York and Chicago 
 I have taken Philadelphia, Boston, the cities served by the Public Service Rail- 
 way system of New Jersey, Detroit, Cleveland and Pittsburgh. These consti- 
 tute the eight leading street railway transportation areas of the countr}'. Because 
 of the special significance of jitney competition in connection with street railway 
 
198 Electric Railway Problem 
 
 fare increases in New Jersey, I have also included the records of jitney traffic 
 for the city of Newark, in which the Public Service Railway system is centered. 
 
 The figures shown on Table III are extremely interesting. For example, 
 if we contrast Philadelphia and Boston, in each of which the elevated, subway and 
 surface lines are operated as a single system, we find that for the first six months 
 of 1917 the Philadelphia Rapid Transit Company carried about 101.700.0CX) more 
 revenue passengers than the Boston Elevated Railway, while for the first nine 
 months of 1919 the Philadelphia figures were approximately 180.200.000 in excess 
 of the Boston figures. Throughout this period the Philadelphia fare was five 
 cents cash for the initial ride, with an additional charge of three cents for an 
 exchange ticket at certain transfer points. In the figures given the passengers 
 using exchange tickets are counted as revenue passengers. Upon this basis the 
 average fare paid per revenue passenger in 1917 was approximately 4.85 cents. 
 If the exchange ticket users were counted as transfer passengers and not included 
 among revenue pas.sengers, the average fare in 1917 would be 5.16 cents. The 
 averages for 1919 were 4.84 cents with the exchange ticket passengers included, 
 and 5.21 cents with them excluded. In Boston, on the other hand, the 5-cent 
 fare in effect during 1917 and a portion of 191S was changed to seven cents on 
 August 1, 1918. and to eight cents on December 1, 1918, so that during the entire 
 first half of 1919 the fare was eight cents as compared with five cents for the 
 corresponding period two years earlier. The 10-cent fare in Boston was put into 
 effect July 10, 1919, so that it does not affect the six months comparison. 
 
 With these facts in mind, namely, that the Philadelphia fare remained sta- 
 tionary at about five cents, while the Boston fare was increased from five cents to 
 eight cents, it is significant that in Philadelphia there was an increase of 56,650.352 
 passengers, or 19.4 per cent, for the 1919 half year as compared with the 1917 
 half year; while in Boston there was a decrease of 21.867,685 passengers, or 11.49 
 per cent. Assuming that other conditions affecting traffic growth in the two com- 
 munities were substantially the same, these figures would indicate that if Boston 
 had retained the 5-cent fare it would have carried during the first half of 1919 
 about 58.500,000 more passengers, or 35 per cent more than it actually did carry. 
 It is possible, however, that other conditions affecting traffic were different in the 
 two comnutnities. Philadelphia had the benefit of the traffic developed by the 
 Hog Island shipyards and other war activities in the vicinity, and, as we have 
 already seen, showed an actual increase in traffic in 1918, a low year, over 1917. 
 
 IVrhaps it would be fairer to compare the traffic figures of the Boston Ele- 
 vated Railway Company with the combined traffic figures of all the elevated, sub- 
 way and surface lines operating in Creater New York. It will be seen from the 
 table that the New York lines showed an actual, though a comparatively slight 
 decrease in passenger traffic during the first half of 1918. For the first six months 
 of 1919, however, there was an increase of 101,308.437 revenue passengers, or 
 10.23 per cent, over the corresponding period of 1917. The regular fare charged 
 on the street railway lines of New York City remained during this entire period 
 at five cents, with certain slight variations on a few lines which made the average 
 fare paid per revenue passenger 4.93 cents in 1917 and 1918, and 4.% cents in 
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200 Electric Railway Problem 
 
 If we assume that conditions affecting traffic, aside from the fare increases, 
 were the same in Boston as in New York, and if we assume that an increase from 
 five cents to eight cents in New York would have had the same effect upon traffic 
 that this increase had in Boston, we reach the result that during the first half of 
 1919 the New Y'ork transit lines, on an 8-cent fare, would have carried about 
 876,000,000 instead of 1,091,000,000, a decrease of 215,000,000, or at the rate of 
 430,000,000 per annum. New York City in 1913, in conjunction with the local 
 rapid transit companies, undertook a program of subway and elevated railroad 
 construction designed to meet the increasing traffic needs of the city. The cost 
 of these new rapid transit facilities was estimated at the time at about $325,000,000, 
 but the increases in wages and in the prices of materials which caught the sub- 
 way builders midway in the period of construction, have swelled the total cost 
 to more than $400,000,000. The indicated effect of an 8-cent fare, judged by the 
 results in Boston, would have been to set back the growth of street railway traffic 
 in New York City seven years. The significance of such a result in the deter- 
 mination of the City's policy with respect to rapid transit construction cannot 
 be escaped. 
 
 Another interesting comparison is between the traffic growth in the Public 
 Service Railway territory including the large cities of northern New Jersey, which 
 are a part of the New York metropolitan district, as well as Camden and the 
 neighboring communities of south Jersey, which are a part of the Philadelphia 
 metropolitan district. The Public Service Railway system includes no rapid 
 transit lines. It spreads out over an immense area, serving no less than 141 
 separate municipalities ranging from a population of a few hundred up to nearly 
 half a million. From the point of view of revenue passengers carried, this trans- 
 portation area stands number five in the entire country. On the New Jersey lines 
 a 5-cent fare, supplemented by a 3-cent fare for school children, was charged 
 through 1917 and up to August 1, 1918, when a charge of one cent for each initial 
 transfer was added. On October 15, 1918, the initial fare went up to seven 
 cents. This was continued until April 1. 1919, when the initial fare was reduced 
 to six cents and continued at that figure until May 4th, when it again became 
 seven cents, the 1-cent initial transfer charge and the school children's 3-cent fare 
 being retained throughout this period. No further changes took place on the 
 Jersey lines until after July 1. 1919. The comparison of the first six months of 
 1917 with the first six months of 1919 is, therefore, substantially a comparison 
 of a 5-cent fare period with a 7-cent fare period. 
 
 The territory served by the Public Service Railway lines was dotted with 
 war industries, and in 1918 the Public Service Railway Company, besides having 
 to increase its facilities in the Camden territory, was compelled to build an ex- 
 tension of its lines to Port Newark to take care of this new traffic. The effect 
 of the war industries, even before these additional facilities were available, is 
 shown by the fact that the traffic for the first six months of 1918 showed a slight 
 increase over the traffic for the corresponding period of 1917. PVr the first half 
 of 1919. however, with the higher fares in eflfect, the traffic showed a decrease of 
 16.783.651 revenue passengers, or 8.45 per cent, as compared with the corre- 
 sponding period two years earlier. 
 
Effects of Fare Increases 201 
 
 Thus, we see that where the fares had not been raised there was an increase 
 of 10.23 per cent in traffic in New York Citj- on one side and of 19.4 per cent 
 in Philadelphia on the other side; while in the intervening territory' in New 
 Jersey, served by the Public Service Railway Company, with an increase of about 
 40 per cent in the rate of fare, there was an actual decrease of 8.45 per cent 
 in traffic. It is especially noteworthy that in the city of Newark, which is the 
 center of the Public Service Railway system, there was an increase in jitney 
 traffic from 4,466,377 for the first half of 1917, to 16,249.008 for the first half 
 of 1919, or 263.8 per cent. The regular jitney fare remained at five cents during 
 this period. 
 
 The effect upon traffic of an increase in the rate of fare can be seen very 
 clearly by a comparison of the traffic figures for the elevated lines and the surface 
 lines in Chicago. During the first half of 1917 and the first half of 1918 the 
 5-cent fare was retained on all the Chicago lines. The figures show that from the 
 first half of 1917 to the first half of 1918, the latter being a low traffic year, the 
 number of passengers carried by the Chicago elevated lines increased 4.918.013, 
 or slightly more than 5 per cent ; while during the same period the number of 
 revenue passengers carried by the Chicago surface lines decreased 17,628,717, or 
 5 per cent. This contrast seems to show the normal tendency of traffic in a large 
 city to gravitate toward the rapid transit lines so long as fare conditions remain 
 the same. In November, 1918, the fare on the elevated lines was raised to six 
 cents, while the surface lines continued to charge five cents until early in the 
 second half of 1919. The figures for the first half of 1919 reflect, therefore, the 
 effect of the 6-cent fare on the elevated lines as compared with the 5-cent fare 
 on the surface lines. On the elevated lines, where the fare increase took place, the 
 former tendency to traffic growth was reversed, so that during the first half of 
 1919, 7,020.354, or 6.87 per cent, fewer passengers were carried than during the 
 corresponding period of 1918. In fact the gain made in 1918 over 1917 was more 
 than lost, so that the 1919 figures show a decrease of 2.16 per cent as compared 
 with 1917. On the other hand, the surface lines, where the fare had not been in- 
 creased, showed a gain of 45.202,782 passengers, or 13.75 per cent, over the cor- 
 responding period of 1918. This contrasts with a decrease of 6.87 per cent 
 between the same periods in the traffic on the elevated lines where the fare had 
 been increased to six cents, indicating that without the increase in fare the elevated 
 lines would have carried during the first half of 1919 at least 22 per cent more 
 passengers than thev did. and upon this basis would have collected a greater 
 total revenue at five cents than they actually collected at six cents. Indeed, if the 
 tendency shown from 1917 to 1918 for the elevated lines to increase their traffic 
 in the face of adverse conditions, while the traffic on the surface lines fell off, 
 had been continued from 1918 to 1919, the elevated lines would have carried, at a 
 5-cent fare, an even greater excess of passengers over the number which they 
 actually carried than is indicated by this percentage. 
 
 It is significant that Detroit and Cleveland, both of which are low fare cities, 
 show an actual falling off of traffic from the first half of 1917 to the first half 
 of 1919. In Detroit the average fare charged in the first half of 1919 was 4.66 
 cents, but this represented an increase of 28.7 per cent over the average fare 
 
202 Electric Railway Problem 
 
 charged during the first half of 1917. In Cleveland the increase was from 3.40 
 cents in 1917 to 5.29 cents in 1919, or nearly 56 per cent. The only other city 
 shown on Table III is Pittsburgh. Here there was a striking decrease in traffic 
 from 1917 to 1918, and a partial recovery in 1919, with the result that the figure 
 for the first half of 1919 was 9,469,644 below the figure for 1917. In the case 
 of Pittsburgh, there had been in the meantime a sharp increase in the rate of 
 fare. Instead of the 5-cent fare which, with certain minor variations, prevailed 
 throughout the year 1917, the fare system in ctTect during the first half of 1919 
 was based on a division of the urban territory into two areas. In the inner area 
 the fare was five cents, and in the outer area seven cents, with eight tickets for 
 55 cents. On August 1, 1919, the zones were abolished and a cash fare of ten 
 cents, with tickets at the rate of four for thirty cents, were introduced, but this 
 last increase in the rate does not affect the traffic figures for the periods covered 
 by Table III. 
 
 It seems to be clearly shown from comparisons based on the figures given 
 in Table III that considerable fare increases, even where they start from a low 
 base as in Cleveland and Detroit, have adversely affected the development of traffic 
 on the great metropolitan street railway systems of the country. It seems clear, 
 also, from these comparisons that where there have been no fare increases the 
 traffic during the first half of 1919 showed a remarkable development. Phila- 
 delphia's striking increase of 19.4 per cent contrasts with the general average 
 of about 7 per cent for the entire group of big systems for which the figures 
 are given on Table I and Table II ; while Boston's decrease of 11.49 per cent was 
 even more striking at the other end of the scale. 
 
 Passing on from the great metropolitan communities to cities farther down 
 in the scale of population and traffic, we find that the figures are more or less 
 "spotted," and that the general results of fare increases upon traffic and revenues 
 are not so clear. We find, for example, that San Francisco, without an increase 
 in fare, shows an increase of nearly 32 per cent in traffic for the first 9 months of 
 1919 as compared with the corresi)onding period of 1917, a part of which is ac- 
 counted for by the fact that the 1917 figures were reduced considerably by a 
 strike on the United Railroads. At the san»e time Washington, D. C, with an 
 increase of about 20 per cent in the average fare paid, nevertheless shows an 
 increase of more than 46 per cent in traffic. It is reasonably clear that, because 
 of the extraordinary increase of population and governmental military activities 
 in and about Washington during the war, the Washington figures have little or 
 no significance. The two Kansas Cities show quite an opposite result. There, 
 also, the average fare was increased about 20 per cent, and traffic fell off 1.S.08 
 per cent. The combined Seattle lines, with only a slight increase in fare, showed 
 an increase of nearly 42 per cent in'traffic, and at the other end of the continent 
 the X'irginia Railway & Power lines, al.-^o with a slight increase in fare, showed 
 an increase of about 34;^ per cent in traffic. A number of cities, notably New 
 Orleans, (Xikland, Indianapolis, Portland, Ore., and Atlanta, showed marked 
 increases in Iratlic along with considerable fare increases. On the other hand, 
 Worcester, Mass., with an increase of 30 per cent in the fare, shows a falling off 
 
Effects of Fare Increases 203 
 
 of 11.7 per cent in traffic, and Scranton, Pa., with an increase of 42 per cent 
 in the fare, shows a falling off of 14 per cent in traffic. 
 
 The effect of fare increases upon revenues is determined by their effect upoa^___-^ 
 traffic. An increase from a straight 5-cent fare to a straight 6-cent fare without / 
 any resulting diminution in traffic would produce an increase of 20 per cent in 
 revenues. In like manner an increase from 5 cents to 7 cents would produce a 
 40 per cent increase in revenues ; an increase from 5 cents to 8 cents would pro- 
 duce a 60 per cent increase, and an increase from 5 cents to 10 cents would double 
 the revenues. While it was shown by the evidence presented to the Commission 
 that in certain cases an increase in fare has been followed by an immediate decrease 
 in revenues, the general consensus of opinion expressed by witnesses represent- 
 ing the Electric Railway Association was that in practically every case an increase 
 in fares will be followed, if not immediately, at least within a comparatively 
 short time, by an increase in revenues. This contention is clearly borne out so 
 far as the large street railway systems are concerned by the analysis of the 
 traffic and revenue figures given on Table I and Table II. For convenience in 
 determining the effect upon gross revenues of traffic decreases accompanying 
 higher fares, the following is an easy formula: 
 
 (100 minus 16%) times 6=100 times 5 
 
 (100 minus 284^) times 7=100 times 5 
 
 (100 minus 37ii>) times 8=100 times 5 
 
 (100 minus 44%) times 9=100 times 5 
 
 (100 minus SO) times 10=100 times 5 
 
 This shows that a falling off of 16% per cent in traffic is required to obliterate 
 the effect of the 6-cent fare upon revenues where the change is made from a 
 straight 5-cent fare; if the fare is "jumped" from 5 cents to 7 cents, the result 
 will be neutralized if the traffic falls off 28% per cent; an increase from 5 cents 
 to 8 cents will be overcome by a drop of yjy'< per cent in traffic, and an increase 
 from 5 cents to 9 cents by a drop of 44% per cent in traffic. Obviously, where 
 the fare is doubled the revenues will be increased unless traffic is reduced at least 
 one half. A consideration of these percentages and of the figures given on Table 
 I show the average increase in the rate of fare and the average increase or de- 
 crease in the traffic makes it almost unnecessary to look at Table II for the effects 
 upon revenues. 
 
 In view of the fact that so many variant conditions have been found during 
 the past three years in different sections of the country entirely aside from the 
 fare increases, it is clear that in order to reach an entirely trustworthy conclusion 
 it will be necessary to summarize the results found on a large number of different 
 systems classified according to the amount of increase in the average fares paid. 
 For this purpose I have divided the cities and systems for which the detailed 
 figures were received into four classes. Class "A" includes those where there 
 was no increase in the average far? paid, or an increase of less than 3 per cent ; 
 Class "B" those where the increase in the average fare paid was between 3 per 
 cent and 10 per cent ; Class "C" those where the increase was from 10 per cent 
 to 25 per cent, and Class "D" those where the increase was more than 25 per cent. 
 
 The figures on Table II show that in most transportation areas there was 
 some fluctuation in the average fare paid even where the rates had not been 
 
204 Electric Railway Problem 
 
 changed. This is due to the fact that ahhough prior to the present era of fare 
 increases 5 cents was the general cash fare unit, a great many systems sold reduced 
 fare tickets or gave special concessions to school children or other children, or had 
 special fares on particular lines, so that the average fare paid by all the revenue 
 passengers taken together was in most cases either more or less, but usually less, 
 than 5 cents. For example, in New York City there was, even in 1917, a slight 
 variation from the 5-cent fare. This was due in part to the fact that on several 
 short lines, including local service on the East River bridges, fares below 5 cents 
 were charged; also in part to the fact that on some of the Brooklyn Rapid Transit 
 lines a 3-cent fare for children was charged under an old franchise requirement; 
 also to the fact that on the uptown branch of the Hudson & Manhattan Railroad 
 the fare was 7 cents. 
 
 It is noteworthy that the average fare before the era of fare increases in the 
 five chief transportation areas of the country was very close to 5 cents. On the 
 table, Philadelphia shows an average fare of 4.85 cents, but this is because the 
 exchange ticket passengers are included in the Philadelphia statistics along with 
 the initial 5-cent fare passengers. If we treat the exchange ticket riders as trans- 
 fer passengers, the Philadelphia average fare would be 5.16 cents, which is some- 
 what higher than the average in 1917 for any of the other principal transportation 
 districts of the country not affected by interurban fares. It is noteworthy that 
 in Detroit the average fare on the city lines in 1917 was only 3.63 cents; in Cleve- 
 land, 3.4 cents; in Washington, 4.3 cents; in Milwaukee, 4.25 cents; in Indian- 
 apolis, 4.26 cents; in Columbus, Ohio, 3.24 cents; in Toledo. 4.31 cents; in Dayton, 
 Ohio, 4.29 cents (Peoples Railway lines), and in Trenton, N. J., 4.28 cents. 
 These were the principal low fare cities at that time. During the first 9 months of 
 1919 the average Detroit fare had advanced to 4.78 cents ; the Cleveland fare to 
 5.2 cents; the Washington fare to 5.14 cents; the Milwaukee fare to a straight 5 
 cents; the Indianapolis fare also to a straight 5 cents; the Toledo fare to 5.63 
 cents : the Dayton fare to 4.78 cents, and the Trenton fare to 6 cents. The only 
 one of these low fare cities which showed no material increase was Columbus, 
 Ohio, where the average fare for 1919 was still only 3.31 cents, an advance of 
 .07 of a cent over 1917. It will be noticed that some of the low fare cities had 
 a striking increase on the percentage basis, even though after the increases had 
 become effective the fares were still relatively low, approximately the same as 
 the average fares on all the systems in 1917. For example, the increase on the 
 Detroit city lines was 31.68 per cent but still not sufficient to bring the fare up 
 to 5 cents; the increase on the Cleveland lines was 54.12 per cent and made the 
 average fare only slightly more than 5 cents. Curiously enough, the classifica- 
 tion of cities on the basis of jjcrccntages of increase in the average fare paid per 
 revenue passenger puts Cleveland and Detroit in the same class with Boston, 
 Pittsburgh and the Public -Service Railway of New Jersey. 
 
 Table 1\' presented herewith shows a comparative summary of the traffic 
 data with relation to fare increases upon the principal street railway svstems of 
 the country here under discussion, separated into the four classes above described. 
 I able \ shows a comparative summary of passenger revenue in relation to fare 
 increases on the same systems. 
 
Effects of Fare Increases 
 
 ?05 
 
 TABLE IV— PAGE 1. 
 
 Comparative Summary of Traffic Data in Relation to Fare Increases Upon the Principal 
 
 Street Railway Systems of the United States, as Reported to the Federal 
 
 Electric Railways Commission, for the First Nine Months of 
 
 1917 and the First Nine Months of 1919 
 
 The cities and systems for which traffic and fare statistics are sho7i.ii on Table I are here 
 distributed into four classes according to the percentage increase in the average fare paid 
 per rci'cnue passenger during the first nine months of 1919 as compared with the first nine 
 
 months of 1917. 
 
 CLASS A— CITIES OR SYSTEMS WHERE THERE WAS NO INCREASE IN THE 
 
 AVERAGE FARE PAID, OR WHERE THE INCREASE WAS 
 
 LESS THAN 3 PER CENT. 
 
 % Increase % In- % De- 
 
 In Averace crease In crease In 
 
 Fare — 1919 Revenue Revenue 
 
 Revenue Passengers Revenue PassenEers over 1917 Passengers Passengerf 
 
 First 9 Months First 9 Months {'Indicates — 1919 — 1919 
 
 City or System of 1917 of 1919 Decrease) over 1917 over 1917 
 
 New York— All Lines 1,489,962,657 1,667,426,486 061 1L91 
 
 Philadelphia— All Lines 436.909,768 526,535,845 0.21* 20.51 
 
 Detroit— Interurban Lines 20,928,614 27,561.729 0.99 31.69 
 
 Minneapolis and St. Paul 145,162,419 153,576,078 0.00 5.79 
 
 Los Angeles— Citv Lines 89.534,769 106.261.432 1.62 18.68 
 
 San Francisco— All Lines 126,478.799 166,715,177 0.40* 31.81 
 
 Columbus, Ohio 50.406.073 52,682.219 2.16 4.51 
 
 Birmingham 29.846.954 34.273,258 2.84 14.83 
 
 Kalamazoo, Mich 4.497,554 5,118,566 1.12 13.81 
 
 Nashville 22.012.483 28.032.224 2.59 27.35 
 
 For Worth— aty Lines 16,124,648 24,496,694 0.40 51.92 
 
 San Antonio 16.867,713 24,347,314 0.41 44.34 
 
 New Bedford 16,707.643 20,211,655 2.69 20.97 
 
 TOTALS 2,465.440.094 2.837.238.677 0.41 15.08 
 
 CLASS B— CITIES OR SYSTEMS WHERE THE INCREASE IN THE AVERAGE 
 FARE PAID WAS BETWEEN 3 PER CENT AND 10 PER CENT. 
 
 Chicago— Surface Lines 523,370,743 551,381,266 7.61 5.35 
 
 Buffalo, Niagara Falls, etc.... 113.609.101 119.740.900 6.47 5.39 
 
 Kansas City, Kansas 16,406,749 13,965.368 5.22 14.88 
 
 Richmond, Norfolk, etc 54,630,318 73.463.000 4.84 34.47 
 
 Seattle— All Lines(l) 53,504,761 75,960,360 5.51 41.97 
 
 Omaha and Council Bluffs 45,688.544 52.511.447 3.52 14.93 
 
 Memphis 31,185,675 34,991,207 8.02 12.52 
 
 Dallas— .-Ml Lines 24,970.223 33.855,986 5.29 35.59 
 
 Des Moines 23.445.067 26.371,094 7.25 12.48 
 
 Schenectady— City Lines 13,957.763 14.396,780 8.85 3.15 
 
 Terre Haute-City Lines 7,742.211 9,349,623 4.89 20.76 
 
 TOTALS 908,511,155 1.005.987,031 6.63 10.73 
 
 (1) Not including the Seattle and Rainier Valley Railway Line. 
 
206 
 
 Electric Railway Problem 
 
 TABLE IV— PAGE 2. 
 
 Comparative Summary of Traffic Data in Relation to Fare Increases Upon the Principal 
 
 Street Railway Systems of the United States, as Reported to the Federal 
 
 Electric Railways Commission, for the First Nine Months of 
 
 1917 and the First Nine Months of 1919 
 
 The cities and systems for which traffic and fare statistics arc shotvn on Table J are here 
 distributed into four classes according to the fercentatje increase in the averaye fare paid 
 per revenue passenger during the first nine months of 1919 as compared with the first nine 
 
 months of 1917. 
 
 CLASS C— CITIES OR SYSTEMS WHERE THE INCREASE IN THE AVERAGE 
 FARE PAID WAS BETWEEN 10 PER CENT AND 25 PER CENT. 
 
 ReTcnuff P«ii!wni;rrf RrTrnue Piisscnirrr* 
 
 First 9 Months Ftrst '.> Months 
 
 CIW or Sjslcm of I !i 1 7 of 1 9 1 !l 
 
 St. Louis 196.739,976 195.211.572 
 
 Baltimore 159.028.504 181,651.331 
 
 New Haven, Hartford, Bridge- 
 
 p(,rt, etc 141,555,122 128,522.107 
 
 Los Angeles— Interurban Lines 48.724.644 51,588.152 
 
 Rochester. Syracuse. Utica, etc. 109.721,679 107,784,111 
 
 Kansas City, Mo 83,932,965 68232,548 
 
 Washington, D. C— All Lines. 90.291,052 132.152,869 
 
 Milwaukee 85,449.596 93,986.497 
 
 Cincinnati 82,631,009 81,059.828 
 
 New Orleans 69,260.548 79.032,169 
 
 Oakland. Berkeley, etc 57.8aS,617 64.877.797 
 
 Indianapolis 55.031.522 60.750.611 
 
 Akron, Canton, etc 49,467.059 56.977,359 
 
 Denver 45.3.W.077 47,816,757 
 
 Portland, Ore.— City Lines 43.893..';82 55,352.547 
 
 Atlanta and Vicinity 42.171.415 56,427,064 
 
 Youngstown and Vicinity .V ,888.8^1 .%.698.212 
 
 Springticld. Mass., and Vicinity 35,644,600 36,274,159 
 
 AlWntown, Bethlehem, etc 34,769,663 35,563,277 
 
 Davton 
 
 ' People's Railwav Lines . . . 9,028,145 10,164.616 
 
 Oakwood Street Ry. Lines. 2.926.512 3.488.281 
 
 Lansing. Mich 5.008.727 5.614.226 
 
 Battle Creek, Mich 4,386.400 4.299,505 
 
 Michigan Railway, Interurban 
 
 Lines 5.809.005 5.687,565 
 
 Salt Lake City and Vicinity... 25.510,649 24.605..W7 
 
 Wilmington, Del 20289.998 20.M<M75 
 
 Grand Rapids 19,498,885 19,568.259 
 
 Fort Worth, Interurban Lines. 1,448.016 2.310,680 
 
 Harristnirg 17„109.396 19,504.823 
 
 Schenectady, Interurban Lines. 3,234,606 3,233,863 
 
 TOTALS 1,583,795,790 1,689,085,597 
 
 % IncrMM 
 In AT«rmse 
 Fare — 1919 
 Offr 1917 
 
 creaie In 
 R^Tcnue 
 PaasenKtri 
 — 1919 
 0T« 1917 
 
 creue In 
 Rrreoue 
 
 TmMatngtn 
 —1919 
 
 OTU 19ir 
 
 20.00 
 
 
 0.77 
 
 2123 
 
 14.22 
 
 
 20.44 
 
 
 927 
 
 13.37 
 
 5.87 
 
 
 11.07 
 
 1.76 
 
 
 23.29 
 
 
 23.01 
 
 19.53 
 
 46.36 
 
 
 17.64 
 
 9.08 
 
 
 21.12 
 
 
 1.90 
 
 23.45 
 
 14.11 
 
 
 17.01 
 
 12.23 
 
 
 17.37 
 
 10.39 
 
 
 11.65 
 
 15.18 
 
 
 19.00 
 
 5.46 
 
 
 20.86 
 
 26.16 
 
 
 11.80 
 
 33.80 
 
 
 17.19 
 
 
 3.14 
 
 18.58 
 
 1.77 
 
 
 19.01 
 
 228 
 
 
 11.42 
 
 12.58 
 
 
 11.48 
 
 19.20 
 
 
 17.66 
 
 12.09 
 
 
 24.83 
 
 
 1,98 
 
 15.70 
 
 
 2.09 
 
 18.57 
 
 
 3.55 
 
 23.61 
 
 1.77 
 
 
 16.83 
 
 0.36 
 
 
 16.61 
 
 59.57 
 
 
 22.45 
 
 12.68 
 
 
 10.79 
 
 10.85 
 
 
 17.80 
 
 6.65 
 
Effects of Fake Increases 
 
 207 
 
 TABLE IV— PAGE 3. 
 
 Comparative Summary of Traffic Data in Relation to Fare Increases Upon the Principal 
 
 Street Railway Systems of the United States, as Reported to the Federal 
 
 Electric Railways Commission, for the First Nine Months of 
 
 1917 and the First Nine Months of 1919 
 
 The cities and systems for which traffic and fare statistics are shozmi on Tabic I arc here 
 distributed into four classes according to the percentage increase in the average fare paid 
 per revenue passenger during the first nine months of 1919 as compared with the first nine 
 
 months of 1917. 
 
 CLASS D— CITIES OR SYSTEMS WHERE THE INCREASE IN THE AVERAGE 
 FARE PAID WAS MORE THAN 25 PER CENT. 
 
 
 
 
 % In- 
 
 % De- 
 
 
 
 
 crease In 
 
 crease In 
 
 
 
 
 % Increase Revenue 
 In Average Passengers 
 
 
 
 Revenue Passeneers 
 
 Revenue PaesenKers 
 
 Passeneers 
 
 
 First 9 Months 
 
 First 9 Months 
 
 Fare — 1919 — 1919 
 
 —1919 
 
 City or System 
 
 of 1917 
 
 of V.'Vi 
 
 over 1917 over 1917 
 
 over 1917 
 
 Chicago— Elevated Lines 143,741.130 136,839,Z25 
 
 Boston 283.538,270 239,677,336 
 
 Newark, Jersey City, etc 268,384,308 242,182,829 
 
 Detroit— One Fare Zone 233,966,707 238,296,671 
 
 Cleveland 218,108,253 212,581,057 
 
 Pittsburgh 199,799,054 174,3.52,989 
 
 Worcester and Vicinity 49,049,904 43,309,315 
 
 Toledo 43,173,868 41,453,499 
 
 Jackson, Mich 5,850,851 5,434,806 
 
 Owosso-Corunna, Mich 243,892 263,985 
 
 Scranton and Vicinity 21,484,778 18,468.199 
 
 Erie and Vicinity 19,336,629 18,641,243 
 
 Trenton 15,304,987 13,598,832 
 
 Terre Haute— Interurban Lines 6,599,696 6,180,906 
 
 Tacoma— City Lines (1) 13,132,660 15,706,196 
 
 TOTALS 1,521,714,987 1,406,987,088 
 
 (1) Not including Tide Flats municipal line. 
 
 SUMMARY — CITIES AND 
 SYSTEMS OF ALL 
 
 CLASSES COMBINED.. 6,479,462,026 6,939,298,393 
 
 26.89 
 
 
 5.04 
 
 70.36 
 
 
 15.47 
 
 40.28 
 
 
 9.69 
 
 31.68 
 
 1.85 
 
 
 54.12 
 
 
 2.53 
 
 29.98 
 
 
 12.73 
 
 30.16 
 
 
 11.70 
 
 30.65 
 
 
 4.00 
 
 27.53 
 
 
 7.11 
 
 31.00 
 
 8.24 
 
 
 42.32 
 
 
 14.04 
 
 30.73 
 
 
 3.60 
 
 40.19 
 
 
 11.15 
 
 42.27 
 
 
 6.35 
 
 44.09 
 
 1929 
 
 
 41.77 
 
 13.97 
 
 7.54 
 
 7.10 
 
208 
 
 Electric Railway Problem 
 
 TABLE V— PAGE 1. 
 
 Comparative Summary of Passenger Revenues in Relation to Fare Increases Upon the 
 
 Principal Street Railway Systems of the United States, as Reported to 
 
 the Federal Electric Railways Commission, for the First Nine 
 
 Months of 1917 and the First Nine Months of 1919 
 
 The cities and systems for which revenue and fare statistics are shown on Table II are here 
 distributed into four classes according to the percentage increase in the average fare paid 
 per reiciiuc passenger during the first nine months of 1919 as compared uith the first 
 
 nine months of 1917. 
 
 CLASS A— CITIES OR SYSTEMS WHERE THERE WAS \0 LVCREASE 1\ THE 
 
 AVERAGE FARE PAID. OR WHERE THE LXCREASE 
 
 WAS LESS THAN 3 PER CENT. 
 
 ^r Increase 
 
 <?n Iiwreaae In Pasat-n- 
 
 iD ATerace cer Earn- 
 
 Fare — 1919 Inia. 1919 
 
 Passt'nRer Revenue Pawenger Revenue Over I.M" Over 1H17 
 
 First 9 M(HlUu First 9 Monttu ( Mn.Ucates ( 'Indicates 
 
 City or System of 1917 of 1919 Decrease) Decrease) 
 
 New York— All Lines $73,795,447.83 $82,965,981.94 061 1241 
 
 Philadelphia— AH Lines 21,168,746.48 25,466,994.58 0.21* 20.30 
 
 Detroit— Interurban Lines 1,686.946.41 2.244,182.87 0.99 33.03 
 
 Minneapolis and St. Paul 7,261,120.95 7,678,803.90 0.00 5.75 
 
 Los Angeles— City Lines 4.415,738.45 5,322.772.40 1.62 20.54 
 
 San Francisco— All Lines 6,312,923.52 8,277,085.01 0.40* 31.11 
 
 Columbus, Ohio 1,633.315.93 1.743.702.95- 2.16 6.72 
 
 Birmingham 1,470.755.51 1,738.017,88 2.84 18.17 
 
 Kalamazoo, Mich 200.984J4 231.153.92 1.12 15.01 
 
 Nashville 1,129262.19 1,441,907.83 2.59 27.69 
 
 Fort Worth— City Lines 782,719.78 1,194.239.50 0.40 52.57 
 
 San Antonio 816,563.46 1,184,542.05 0.41 45.64 
 
 New Bedford 808,269.98 1,005,393.25 2.69 24.39 
 
 TOTALS $121,482,794.73 $140,494,778.06 0.41 15.65 
 
 CLASS B— CITIES OR SYSTEMS WHERE THE INCREASE IN THE AVERAGE 
 FARE PAID WAS BETWEEN 3 PER CENT AND 10 PER CENT. 
 
 Chicago— Surface Lines $26,112,648.00 $29,604,964.00 7.61 13.37 
 
 Buflfalo, Niagara Falls, etc 5.961,979.21 6,694.808.71 6.47 12.29 
 
 Kansas City, Kansas 816,816.52 731.353.54 5.22 10.46* 
 
 Richmond, Norfolk, etc 2.596,097.93 3,835,808.13 4.84 47.75 
 
 Seattle— All Lines(l) 2,526.797.01 3,785.423.89 5.51 49.81 
 
 Omaha and Council Bluffs .... 2,.«!;.883.34 2,777.497.29 3.52 18.96 
 
 Memphis 1.554.872.00 1.887.285.00 8.02 21.38 
 
 Dallas— All Lines 1.1.^4,571.84 1.018,382.74 5.29 Al.tA 
 
 Dcs Moines 1.067,809.01 1,288.188.77 725 20.64 
 
 Schenectady— City Lines 693,835.74 778228.02 8.85 12.16 
 
 Tcrre Haute— City Lines 363,661.17 461.358.06 4.89 26.86 
 
 TOTALS $45,264,972.37 $53,463,298.15 6.63 18.11 
 
 (1) Not including the Seattle and Rainier Valley Railway Line. 
 
Effects of Fare Increases 209 
 
 TABLE V— PAGE 2. 
 
 Comparative Summary of Passenger Revenues in Relation to Fare Increases Upon the 
 
 Principal Street Railway Systems of the United States, as Reported to 
 
 the Federal Electric Railways Commission, for the First Nine 
 
 Months of 1917 and the First Nine Months of 1919 
 
 The citii-s and systems for ivhich revenue and fare statistics are shown on Table II are here 
 distributed into four classes according to the percentage increase in the average fare paid 
 per revenue passenger during the first nine months of 1919 as compared 'with the first 
 
 nine months of 1917. 
 
 CLASS C— CITIES OR SYSTEMS WHERE THE INCREASE IN THE AVERAGE 
 FARE PAID WAS BETWEEN 10 PER CENT AND 25 PER CENT. 
 
 % Increase 
 
 % Increase In Passen- 
 
 Passengcr Revenue Passenger Revenue In Average ger Sam- 
 
 Plrst 9 Months First ;i Months Fare — 1919 Ings. 1919 
 
 City or System of 1917 ofl'llS over I91T orec 1917 
 
 St. Louis $9,744,453.05 $11,590,590.69 
 
 Baltimore 7.716,89.100 10,674,467.00 
 
 New Haven, Hartford, Bridge- 
 port, etc 7.580,645.83 8.190,332.14 
 
 Los Angeles— Interurban Lines 5,099,802.08 6,125,505.58 
 
 Rochester. Syracuse, Utica, etc. 6,041.478.00 6,598,948.00 
 
 Kansas City, Missouri 4,177,160.00 4.187,178.00 
 
 Washington, D. C— All Lines.. 3,881,249.29 6.798,510.61 
 
 Milwaukee 3.629.035.81 4,699,107.75 
 
 Cincinnati 4,108,444.12 4.876,694.85 
 
 New Orleans 3.363.028.00 4,741,899.00 
 
 Oakland, Berkeley, etc 3,399,317.01 4461,580.63 
 
 Indianapolis 2,.34S,502.94 3,037,028.79 
 
 Akron, Canton, etc 3,223,893.29 4.145.482.86 
 
 Denver 2,276,950.63 2,847,201.52 
 
 Portland, Ore.— Citv Lines 2,229,217.46 3.396,980.37 
 
 Atlanta and Vicinity 2.108,570.60 3,151,463.62 
 
 Youngstown and Vicinity 1.941,740.39 2,200,387.51 
 
 Springfield. Mass.. and Vicinity 1.764,761.19 2,128,089.17 
 
 Allontown. Bethlehem, etc 1.610,531.14 1,958,414.64 
 
 Dayton 
 
 People's Railway Lines 386,764.53 485,967.28 
 
 Oakwood Street Ry. Lines. 124,847.93 166,383.20 
 
 Lansing. Mich 235,163.07 310,550.36 
 
 Battle Creek, Mich 194,174.90 2i7.S7Q.i7 
 
 Michigan Railway — Interurban 
 
 Lines 1.553,980.55 1,760,501.13 
 
 Salt Lake City and Vicinity .. 1,182,066.00 1.350,028.00 
 
 Wilmington. Del 987,926.58 1,242,961.96 
 
 Grand Rapids 973,785.48 1,141,113.56 
 
 Fort Worth— Interurban Lines. 503,925.35 937,993.85 
 
 Harrisburg 847,714.00 1,174,108.00 
 
 Schenectady— Interurban Lines. 335,633.38 372,043.47 
 
 TOTALS $83,568,655,60 $104,989,083.91 17.80 25.63 
 
 20.00 
 
 18.9S 
 
 21.23 
 
 38.33 
 
 20.44 
 
 8.04 
 
 13.37 
 
 20.11 
 
 11.07 
 
 9.23 
 
 23.29 
 
 0.24 
 
 19.53 
 
 75.19 
 
 17.64 
 
 29.49 
 
 21.12 
 
 18.70 
 
 23.45 
 
 41.01 
 
 17.01 
 
 31.25 
 
 17.37 
 
 29.48 
 
 11.65 
 
 28.59 
 
 19.00 
 
 25.04 
 
 20.86 
 
 52.38 
 
 11.80 
 
 49.46 
 
 17.19 
 
 13.32 
 
 18.58 
 
 20.59 
 
 19.01 
 
 21.60 
 
 11.42 
 
 25.65 
 
 11.48 
 
 33.27 
 
 17.66 
 
 32.06 
 
 24.83 
 
 22.35 
 
 15.70 
 
 13.29 
 
 18.57 
 
 14.22 
 
 23.61 
 
 25.81 
 
 16.83 
 
 17.18 
 
 16.61 
 
 86.13 
 
 22.45 
 
 38.50 
 
 10.79 
 
 10.85 
 
210 
 
 Electric Railway Problem 
 
 TABLE V— PAGE 3. 
 
 Comparative Summary of Passenger Revenues in Relation to Fare Increases Upon the 
 
 Principal Street Railway Systems of the United States, as Reported to 
 
 the Federal Electric Railways Commission, for the First Nine 
 
 Months of 1917 and the First Nine Months of 1919 
 
 The cities and systems for which revenue and fare statistics are shown on Table II are here 
 distributed into four classes according to the percentage increase in the average fare paid 
 per revenue passenger during the first nine months of 1919 as compared zcith the first 
 
 nine months of 1917. 
 
 CLASS D— CITIES OR SYSTEMS WHERE THE INCREASE IN THE AVERAGE 
 FARE PAID WAS MORE THAN 25 PER CENT. 
 
 PaMenppr R^rpnue 
 
 ' FInt 9 Monlht 
 
 CUj or Bjltrm nt 1917 
 
 Chicago— Elevated Lines $7,424,740.27 
 
 Boston 14.162.362.,% 
 
 Newark, Jersey City, etc 13..179.4«8.46 
 
 Detroit— One Fare Zone 8,495.9S4.00 
 
 Cleveland 7,425.361.9.3 
 
 Pittslnirgh 9.934.592.00 
 
 Worcester and Vicinity 2.422,516.39 
 
 Toledo 1,860.350.00 
 
 Jackson. Mich 271.992.73 
 
 Owosso-Corunna, Mich 12.191.85 
 
 Scranton and Vicinity 1.09(U91.15 
 
 Erie and Vicinity 1.164,382.75 
 
 Trenton 6.54.978.58 
 
 Terrc Haute — Interurban Lines. 1.417.701.86 
 
 Tacoma— City Lincs(l) 622.277.31 
 
 TOTALS 170,339.311.64 
 
 (1) Not including Tide Flats Municipal Line. 
 
 SU.MMAKY — CITIES AND 
 SYSTEMS OF ALL 
 
 CLASSES COMBINED... $320,655,734.34 
 
 PasMneer Revenue 
 
 Flr>l » Months 
 
 of 1919 
 
 % IncreftM 
 In ATermne 
 
 Flire — 1919 
 oter 1917 
 
 inPUMB- 
 Ker Earn- 
 Inn. I81( 
 srarltir 
 
 $8,981,192.54 
 
 26.89 
 
 20.96 
 
 20,369,190.05 
 
 70.36 
 
 43.83 
 
 16,942.840.32 
 
 40.28 
 
 26.63 
 
 11,399.518.02 
 
 31.68 
 
 34.18 
 
 11.136.974.15 
 
 54.12 
 
 49.98 
 
 11.269,485.00 
 
 29.98 
 
 13.44 
 
 2,773276.99 
 
 30.16 
 
 14.48 
 
 2,333,540.81' 
 
 30.65 
 
 25.44 
 
 321,990.14 
 
 27.53 
 
 18.38 
 
 17.282.98 
 
 31.00 
 
 41.76 
 
 1,334.628.11 
 
 42.32 
 
 22.40 
 
 1,467,308.95 
 
 30.73 
 
 26.01 
 
 816.230.74 
 
 40.19 
 
 24.62 
 
 1,888.599.95 
 
 42.27 
 
 33.15 
 
 1.073.284.98 
 
 44.09 
 41.77 
 
 72.48 
 
 $92,125,343.73 
 
 30.97 
 
 $391,072,503.87 
 
 13.97 
 
 21.96 
 
Effects of Fake Increases 211 
 
 In order still further to summarize and visualize the results of fare increases 
 upon traffic and revenues as shown by the figures in the particular transporta- 
 tion areas and groups of areas on Table I, Table II, Table IV and Table V, I have 
 prepared Table VI (page 212), which gives the number of cities or systems in each 
 of the four classes, the total number of revenue passengers carried during the first 
 9 months of 1917, the first 9 months of 1918 and the first 9 months of 1919 on each 
 group of systems, the per cent of the total electric railway traffic of the country 
 carried by each group in 1917, and the average fare per revenue passenger on 
 each group during the first 9 months of 1917 and the first 9 months of 1919. It 
 will be observed that the four groups of cities included in this analysis carried 
 76.63 per cent of all the electric railway traffic of the country. The first group, 
 where fares were not appreciably increased, carried a little over 29 per cent ; the 
 second group, where fares were increased between 3 per cent and 10 per cent, 
 carried nearly 1 1 per cent of the traffic ; the third group, where fares were in- 
 creased from 10 per cent to 25 per cent, carried about 18'}4 per cent of the total 
 traffic, and the fourth group, where fares were increased more than 25 per cent, 
 carried 18 per cent of the total traffic. 
 
 The significant figures in which the results of the analysis of the effects of 
 fare increases upon traffic and revenues are summarized are those contained in 
 the last three columns of Table VI. It will be seen that the first of these columns 
 shows for each group and for all groups together the per cent increase in the 
 average rate of fare paid in 1919 as compared with 1917; the second shows the 
 per cent increase or decrease in the traffic over the same period, and the last 
 column shows the per cent increase in passenger revenues. These columns tell 
 the story. For the four classes the increases in the average fare paid are 0.41 
 per cent, 6.63 per cent, 17.80 per cent and 41.77 per cent respectively. The traffic 
 changes for the same groups are 15.08 per cent increase, 10.73 per cent increase, 
 6.65 per cent increase and 7.54 per cent decrease, respectively. As the per cent 
 increase in fares goes up the per cent increase in traffic goes down, and in the 
 fourth class is changed into an actual decrease. The per cent increases in pas- 
 senger revenues are 15.65 per cent, 18.11 per cent, 25.63 per cent and 30.97 per 
 cent, respectively, showing a steady upward trend. 
 
 If we compare the first group of communities, where as a result of the normal 
 growth of traffic and without any appreciable increase in the rate of fare, revenues 
 for the first 9 months of 1919 increased more than 15 per cent over the cor- 
 responding period of 1917, with the fourth group, where with an actual decrease 
 of 7.54 per cent in traffic the revenue showed an increase of 30.97 per cent as a 
 result of fare increases averaging 41.77 per cent, we are able to draw the con- 
 clusion with considerable definiteness that the difference between an increase of 
 15.65 per cent in revenues and an increase of 30.97 per cent in revenues is the 
 real measure of the increase in revenues due to an average increase of over 40 
 per cent in fare. In other words, the conclusion seems to be reasonably clear 
 that an increase of 40 per cent in fare may be expected to produce only about 
 15 per cent increase in revenue. Dr. Thomas Conway, testifying on behalf of 
 the American Electric Railway Association, stated as a result of his rather exten- 
 sive studies, that a 40 per cent increase in fare could be expected to produce an 
 
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Effects of Fare Increases 213 
 
 increase of from 15 per cent to 25 per cent in revenues. Our analysis tends to 
 substantiate his minimum figure. 
 
 There is still one possible element of doubt as to the soundness of the con- 
 clusions drawn from this analysis of the efTect of fare increases upon traffic and 
 revenues. The point may be raised that possibly the decrease in traffic in certain 
 communities has been the cause, rather than the result, of fare increases. Unques- 
 tionably, the general tendency for a slowing down or a complete cessation of traffic 
 development during the early part of 1918, and even more markedly during the 
 later months of the year, when war and influenza combined to restrict traffic 
 growth, accentuated the financial difficulties in which many street railway com- 
 panies found themselves, and stimulated the general movement for fare increases. 
 It is not possible, from a general survey of the statistics, to check with certainty 
 and complete accuracy the relative position of traffic decreases as the cause 
 or elYect of fare increases in particular communities. Yet, some light will be 
 thrown upon this matter by an examination of the traffic tendencies in the dif- 
 ferent communities prior to the dates when fares were increased. For example, 
 it may be seen from Table I that both New York and Boston showed an actual 
 traffic decrease in 1918 as compared with 1917, although the decrease in Boston 
 was more marked than in New York. The 1919 figures show this tendency 
 sharply reversed in New York, where fares remained unchanged, and sharply 
 accentuated in Boston, where fares were radically increased. Taking the Phila- 
 delphia and New Jersey systems, we see that traffic in 1918 showed an increase 
 on both systems as compared with 1917. although the increase was much less on 
 the New Jersey lines than on the Philadelphia lines. The 1919 figures show 
 that in Philadelphia, with no increase in fare, this tendency of traffic to increase 
 was sharply accentuated, while in New Jersey, with a radical increase in fares, 
 the tendency was reversed. In Detroit, Cleveland, Pittsburgh and St. Louis, 
 where marked fare increases were in effect in 1918, the falling ofT in traffic was 
 much more noticeable than in New York where the fares remained the same. 
 In Detroit and Pittsburgh where the greatest increases in fare took place between 
 1917 and 1918, the falling off in traffic in 1918 was much more marked than in 
 the other two cities, and indeed was more marked than in Boston where the 
 average fare paid showed a considerable increase as a result of the 7-cent fare 
 charged during the last two months of the 9 months period. These comparisons 
 tend to substantiate the final results obtained by the general analysis summarized 
 on Table VI. At the same time they do not quite prove that decreases in traffic 
 may not be a contributory cause as well as a principal effect of fare increases 
 in certain communities. 
 
 A number of witnesses laid great stress upon another point, namely, their 
 conviction that even though traffic may fall off as the immediate result of fare 
 increases it will gradually come back. An important distinction is to be made 
 here. If fare increases mean merely the setting back of traffic growth for a 
 period of seven years, as I have suggested in my comparison of the Boston and 
 New York figures, and if under the higher rates, after this setback, traffic will 
 start on again developing normally at the same rate as it develops in cities where 
 lower fares are charged, then it may be urged that although the results of fare 
 
214 Electric Railway Problem 
 
 increases are more or less painful and temporarily disadvantageous to the com- 
 munity, the ultimate results are not very serious; that the street railways will 
 gradually redevelop the riding habit under the new fare conditions and "tag 
 along" in the procession, with the only difference that they will be a few years 
 behind other cities, where fare increases are not put into eflfect. On the other 
 hand, if a radical increase in fares not only sets back the development of traffic 
 but has the effect of stimulating competitive methods of transportation and of 
 alienating the public so as to make it impossible for the street railways to get the 
 full degree of cooperation that is necessary if they are to go on and prosper, then 
 the results will be more serious. 
 
 We even have to consider in this connection the question as to whether or 
 not the development of the riding habit beyond the point of necessity is con- 
 ducive to public welfare, and, therefore, something that from the public point of 
 view we should demand of the street railways. It is noteworthy that almost all 
 authorities on health consider the walking habit as one of the most advantageous 
 habits that can be formed. It may be that a close study of traffic conditions and 
 of the social effects of transportation service would place a limit upon the demand 
 for mere convenience riding. If so, the usefulness of the street railways cannot 
 be accurately measured by the luunber of passengers they carry, and we cannot 
 draw the firm conclusion that a diminution in the number of passengers carried 
 means a corresponding diminution in the usefulness of the street railway as a 
 public utility. It would be a mistake to become mawkish or sentimental in our 
 advocacy of the riding habit and in our demand that financial considerations in 
 the operation of street railways shall be subordinated to mere considerations of 
 public convenience ratiier than public necessity. It always seems simpler and 
 easier to deal with such a problem as local transportation as a distinct and separate 
 problem without giving full consideration to its bearing upon other social and 
 governmental problems, and perhaps it is safer in approaching the transportation 
 problem to assume that the riding habit formed as a result of convenient service 
 is entirely beneficial to the community. 
 
 From the point of view of the street railways there can he no doubt that 
 the falling off of traffic as a result of fare increases, or the halt in the develop- 
 ment of the riding habit from this or any other cause is an evil. Under certain 
 conditions it may be the lesser of two evils, but it is nevertheless an evil. It is 
 reasonably clear that the decrease in convenience or short-haul riding, whatever 
 the cause of the decrease may be, tends to increase the average cost of the service 
 rendered. It is a generally recognized fact that the high peaks of traftic at the 
 rush hours constitute one of the greatest, if not the greatest, financial problem of 
 the street railways. It is much more expensive to give the same character of 
 service during the rush hours than at other times. If a company were compelled 
 to furnish seats to all passengers during the rush hours, the cost in many cases 
 would be prohibitive at present rates of fare. It is pretty clear that the rush 
 hour traffic is. for the most ])art, a relatively long-haul, necessity traffic. The 
 short-haul, convenience tratVic is. for the most part, picked up during the day at 
 oflT-pcak hours. It can hardly he doubted that the result of fare increases is 
 to accentuate the peak of the load by depressing the traffic valleys during the 
 
Effects of Fare Increases 215 
 
 non-rush hours and thus increase the practical difficulties and the financial diffi- 
 culties of street railway transportation. 
 
 If a street railway is not receiving sufficient revenues to cover the full cost 
 of service, and if it is impossible to make both ends meet by a decrease in expenses 
 or by an increase in traffic, or by the development of other sources of revenue, 
 then it is unquestionably necessary and proper that fares should be increased to 
 the point where the car rider will pay the full cost of service even though the 
 number who pay the cost is considerably reduced. This is merely a statement of 
 obvious necessity. In other words, so long as the pul)lic depends upon private 
 agencies to render transportation service, and so long as it insists that the service 
 is necessary and must be rendered while at the same time it is unwilling to as- 
 sume any public initiative in the matter or make any contribution to the cost of 
 the service from the public treasury or otherwise, the agencies that perform the 
 service must be pemiitted to collect from the users of the service all that the 
 service costs if it is possible to do so, and if it is not possible, then the only limit 
 upon the charges to be made for service will be the economic limit represented 
 by the expression "all that the traffic will bear." The social consequences of 
 higher fares may be, and in many cases doubtless are very serious, but this fact 
 does not warrant or enable a community to secure through private agencies a 
 continuous and necessary service for less than its necessary cost. 
 
 It is significant that the average fare paid per revenue passenger on those 
 electric railways carrying three-fourths of the traffic for the entire country was 
 4.95 cents during the first nine months of 1917 and 5.64 cents, an increase of 13.97 
 per cent, two years later. During this period traffic increased 7.1 per cent and 
 passenger revenues 21.96 per cent. On those systems where there was no ap- 
 preciable increase in fares, traffic and passenger revenues increased 15.08 per cent 
 and 15.65 per cent respectively. At the other end of the scale, where fares in- 
 creased an average of 41.77 per cent, traffic fell oflf 7.54 per cent and revenues 
 increased 30.97 per cent. 
 
 The Executive Secretary did not address special inquiries with respect to 
 fare increases and their effect upon traffic and revenues to cities or street railway 
 systems outside of the United States except in the case of the two principal 
 Canadian cities, Montreal and Toronto. It was thought that the figures for 
 Montreal might be quite important, as the Montreal Tramways Company two 
 years ago entered into a new contract with the City of Montreal in which a 
 service-at-cost plan without any maximum limitation on fares was incorporated. 
 Under this contract the fares in Montreal, which were relatively low under the 
 old franchise, have been increased on two occasions. The new service-at-cost con- 
 tract was executed January 28, 1918, but it was not until October 3, 1918, that 
 a new schedule of rates went into effect. A new rate schedule was fixed by the 
 Montreal Tramways Commission, acting under the terms of the contract, in the 
 summer of 1918, but an appeal was taken to the Quebec Public Utilities Com- 
 mission, and the schedule proposed by the Tramways Commission was revised 
 before being put into efifect in October. These new rates proved insufficient to 
 meet the entire cost of service as defined by the contract, and in 1919 again it 
 became necessary to increase the fares. For the second time an appeal was taken 
 
216 Electric Railway Problem 
 
 from the schedule proposed by the Montreal Tramways Commission, and the 
 decision of the Quebec Public Utilities Commission increasing the rates did not 
 go into effect until October 26, 1919. In view of the particular interest attaching 
 to the Montreal service-at-cost experiment, it is worth while to make a some- 
 what detailed comparison of the changes that have taken place in the Montreal 
 fare schedules. Prior to October 3, 191S. the day schedule, extending from five 
 o'clock in the morning until midnight, included a 5-cent cash fare, six tickets for 
 25 cents or twenty-five tickets for $1.00, good at all times and for all persons, 
 ten tickets for 25 cents for school children, good at all times, and eight tickets 
 for 25 cents, good for all persons between five o'clock and eight o'clock in the 
 moniing and between five o'clock and seven o'clock in the afternoon. Between 
 midnight and five o'clock in the morning the cash fare was 10 cents. Transfers 
 were free throughout the tweny-four hours. Under this schedule the average 
 fare paid per revenue passenger during the first nine months of 1917 was 4.09 
 cents, and during the first nine months of 191S, 4.08 cents. 
 
 The first new schedule of fares installed in accordance with the terms of the 
 service-at-cost contract was in effect from October 3, 1918 to October 25, 1919. 
 The day rate under this schedule included a 6-cent cash fare, with five tickets for 
 25 cents, good lor all persons and at all times, six tickets for 25 cents, good for all 
 persons between six o'clock and eight o'clock in the morning and between five 
 o'clock and seven o'clock in the afternoon on weekdays, and seven tickets for 25 
 cents for school children, good between eight o'clock in the morning and six o'clock 
 in the afternoon on weekdays. For the "Owl" service, between midnight and five 
 o'clock in the morning, the fare was 15 cents, whether by cash or tickets. Free 
 transfers were continued under this schedule. The average fare paid per revenue 
 passenger during the first nine months of 1919 was 4.79 cents. 
 
 The ])resent schedule of rates has been in effect since October 26, 1919. The 
 day rale includes a 7-cenl cash fare, with book tickets at the rate of forty-four 
 for $2.50, or strip tickets at the rate of five for 30 cents, good fur all persons 
 and at all times, and tickets at the rate of seven for 25 cents, good for school 
 children between eight o'clock in the morning and six o'clock in the afternoon on 
 weekdays. The 15-cent "Owl" service rate and the free transfers are continued. 
 The average fare paid during the month of November, 1919, with the present 
 schedule in effect during the entire month was 5.84 cents per revenue passenger. 
 
 Comparing the traffic and revenue figures for the first nine months of 1919 
 with the first nine months of 1917, wc find an increase of 17.11 per cent in the 
 average fare paid; an increase of 4.61 per cent in the number of revenue pas- 
 sengers carried, and an increase of 22.55 per cent in the gross passenger revenue. 
 Comparing the month of November, 1919, under the present schedule, with the 
 month of November, 1917, which was before the service-at-cost contract went 
 into effect, we find an increase of 43.84 per cent in the average fare paid; an 
 increase of 1.92 i>er cent in the number of revenue passengers carried, and an 
 increase of 46.83 per cent in the gross passenger revenue.* 
 
 It was also thought that the Toronto data would be of considerable interest 
 because of the fact that both the Toronto Railway Companv and the City of 
 Toronto operate street railway lines. The Civic Lines were constructed by the 
 
Effects of Fare Increases 217 
 
 City in the suburban districts outside of the old municipal boundaries. The City 
 undertook the construction of these lines because of the refusal of the Toronto 
 Railway Company to build extensions into these suburban districts under the 
 terms of its franchise contract. The Civic Lines have been operated for quite a 
 number of years at a very low fare, and the losses from operation have been borne 
 by the tax payers. Both the City of Toronto and the Toronto Railway Company 
 furnished the data requested, but the Toronto Railway Company asked that the 
 detailed figures be not published. The average fare paid on the Toronto Railway 
 lines during the first nine months of 1919 was 3.9 cents. There had been no 
 increase in fare, and consequently the average for 1917 and 1918 was approxi- 
 mately the same. On the Civic Lines the average fare for all three years was 
 I73 cents. Traffic on the Civic Lines showed an increase of 56.8 per cent for 
 the first nine months of 1919 as compared with the first nine months of 1917. 
 On the Toronto Railway lines the increase in traffic over the same period was 
 13.91 per cent. The combined figures for the two systems showed an average 
 fare of 3.72 cents for 1917, 3.66 cents for 1918 and 3.62 cents for 1919, the gradual 
 decrease being due to the increasing proportion of the total traffic carried by the 
 Civic Lines. The increase in the number of revenue passengers on the combined 
 systems was 17.91 per cent for the first nine months of 1919 as compared with 
 the corresponding period two years earlier, but owing to the slight decrease in 
 the average rate of fare paid, the total passenger earnings increased only 16.5 
 per cent over this period. 
 
 A comparison of the combined Toronto figures with the latest figures from 
 Montreal is quite illuminating, as shown by the following data :^ 
 
 Toronto Railway Co. & 
 
 Montreal Toronto Civic Lines 
 
 Tramivays Company combined 
 
 Average fare, November, 1917 4.06c. 3.68c. 
 
 Average fare, November, 1919 5.84c. 3.61c. 
 
 Increase in average fare, Nov., 1919 over Nov., 
 
 1917 43.84% 1.90% (Decrease) 
 
 Increase in number of revenue passengers, Nov., 
 
 1919 over Nov., 1917 1.92% 22.60% 
 
 Increase in gross passenger revenues, Nov., 1919 
 
 over Nov., 1917 46.83% 19.91% 
 
 The figures I have given prove beyond question that fare increases have not 
 been great enough as yet on any important group of street railway systems in 
 this country to result in a curtailment of revenues, bat they have been great 
 enough to cause a substantial curtailment of the usefulness of the street railway 
 in certain communities. There is very little evidence that fare increases alone 
 would put the electric railway business on its feet financially and enable it to 
 function properly under private management for an indefinite period. On the 
 other hand, there is a great deal of evidence to show that the public welfare would 
 be sacrificed in important respects by the adoption of unlimited fare increases 
 as the only remedy for the present financial difficulties of the industry. 
 
Chapter XXIX 
 THE ZONE FARE OR DISTANCE TARIFF 
 
 The uniform flat fare has been a characteristic of American street railway 
 poUcy from the beginning. Indeed, it may be said that, if the municipalities of 
 this country have had any distinctive policy with respect to street railway de- 
 velopment and street railway fares, it has been the policy suggested by the 'one- 
 city, one-fare" slogan. In the early days, when separate horse railroad companies 
 were organized to operate individual lines, the ride given was comparatively 
 short, but when the horse roads were consolidated and electricity was introduced 
 a great expansion of the uniform fare area took place. The "one-city, one-fare" 
 policy involved not merely a uniform flat fare for all initial rides, but also the 
 necessity for free transfers. As the consolidated street railway systems expanded 
 beyond the limits of the municipality and, in certain cases, reached out so as to 
 combine the service of a group of municipalities covering an entire section of a 
 state, it was obviously impossible to extend the uniform flat fare to cover 
 the entire area of service. What happened was that the uniform fare, usually 
 5 cents cash with or without a reduced rate ticket, was made to apply in most 
 cases within the limits of a given municipality and its immediate suburbs; and 
 upon lines extending far into the country or to other urban centers zones were 
 established, sometimes corresponding to town boundaries and sometimes on some 
 sort of a mileage basis. Usually the fare in each of these outlying or interurban 
 zones was the same uniform sum which applied within the one-fare city zone. 
 In populous cities, especially in those covering large areas, the tendency of the 
 "one-city, one-fare" policy was greatly to extend the maximum length of ride that 
 could be taken for a single fare, until, in New York for example, on the rapid 
 transit lines it is now possible to ride as much as twenty miles for a single fare 
 of 5 cents, and this maximum ride for the unit fare will be increased to about 
 27 miles when the "Dual" rapid transit system is completed. 
 
 A great deal has been said about these magnificent distances covered by the 
 5-cent fare, and about the increase in the average length of haul on account of 
 the extension of electric railway systems in great urban communities. With a 
 uniform flat fare system in use it is difficult to get any accurate data showing 
 the average length of ride per passenger, except as estimates are made through 
 special traffic investigations and surveys. The hope of the uniform flat fare as 
 a revenue producer lies in the expectation that as the street railway system ex- 
 pands and the number of long-distance riders increases there will be a correspond- 
 ing or even greater increase in the number of short-haul riders. It is expected 
 that the loss incurred in carrying long-distance passengers at less than the cost 
 
 218 
 
The Zone Fare 219 
 
 of the service will be offset by the gain in carrying the short-distance riders at 
 more than the cost of the service. 
 
 In Great Britain and European countries a quite different system of street 
 railway fares is in use. The lines are divided into comparatively short zones, 
 and passengers pay according to the distances they ride. This foreign system is 
 referred to as a "zone fare" or "distance tariff'." The theory of this system is 
 that everybody who rides on the street railways should pay according to the length 
 of his ride, upon the assumption that a payment based upon distance will come 
 nearest to representing the cost of the service. It is also the theory of the zone 
 fare or distance tariff that it will cultivate short-haul traffic by giving cheap rates 
 for short rides. From the American point of view the "one-city, one-fare" policy, 
 as opposed to the zone fare or distance tariff', has been supposed to be better 
 adapted to social purposes on account of its alleged effectiveness in spreading 
 out population and promoting suburban development. 
 
 It has long been a source of wonderment to British tramway managers that 
 the American street railway systems could survive on the basis of the uniform flat 
 fare. The increase in the cost of street railway service resulting from the eco- 
 nomic changes that have grown out of the war has brought this problem of the 
 uniform flat fare on American street railway systems to a head. Even though 
 people in this country were generally accustomed to the payment of a nickel a ride 
 for street railway service, it was shown before the war that in Cleveland and else- 
 where the reduction of the unit fare below 5 cents was accompanied by a con- 
 siderable increase in the riding habit. It has also been shown during the past two 
 or three years that straight fare increases always or nearly always have the im- 
 mediate effect of diminishing traffic, and the weight of the evidence presented 
 to the Commission indicates that the greater the increase in the unit fares, the 
 more will the traffic be reduced by the higher fares. Moreover, the riders who 
 are driven away by the high unit fares are principally the short-haul riders, who 
 prefer to walk or take a jitney rather than pay what they consider an excessive 
 or unnecessarily high street car fare. It is generally agreed that the loss of the 
 short-haul riders means the loss of the most profitable part of the street railway 
 traffic. It is also believed that the loss of short-haul and convenience riders means 
 the relative accentuation of the peak loads of traffic, which are already the greatest 
 source of physical and financial difficulty for the street railway companies. It 
 appears, therefore, that in a period of rising costs, increasing flat fares tend to 
 neutralize their own effect as revenue producers by iricreasing the expense per 
 passenger of the traffic that remains with the street railway companies. 
 
 The discrimination in the case of the uniform flat fare system between the per- 
 son who rides only a few blocks and the person who rides 4, 5 or 6 miles, is 
 obvious, even though the unit fare is as low or lower than 5 cents ; but, of course, 
 the lower the fare the less the short-haul rider resents the discrimination. How- 
 ever, when fares are being increased to 6, 7, 8 or 10 cents, the discrimination 
 between the short-distance rider and the long-distance rider, who pay the same 
 rate, is accentuated and brought to consciousness. There seems to be general 
 agreement that street railway rates on the uniform flat fare basis may be increased 
 to a point where the system will break down as far as the production of revenues 
 
220 Electric Railway Problem 
 
 is concerned; the short riders will feel the discrimination against them so keenly 
 that they will cease to use the cars, and the cost of service per passenger will fol- 
 low closely upon the increased rate, and ultimately overtake and pass it. Clearly 
 the present emergency in the electric railway business has subjected our historical 
 American fare policy to a critical test. The issue between uniform fiat fares 
 and a zoning system is upon us and must be decided. It may be that a proper 
 zoning plan, by its retention and development of the short-haul traffic, as well as 
 by its increase in the rates paid by the long-haul riders, will be able to solve 
 the financial problem of many a street railway company that could not, under 
 present conditions, survive without substantial public assistance upon the old fiat- 
 fare system. 
 
 The importance of some of the issues involved was clearly set forth by the 
 New Jersey Board of Public Utility Commissioners in its report of December 2, 
 1919, when it reluctantly permitted the abandonment of the zone fare experiment 
 on the Public Service lines. The Board says: 
 
 "It has been consistently insisted and maintained by the Board that any rates fixed with 
 a flat charsc alike to all riders upon street railways as presently developed, are inequitable 
 and discriminatory against the short-haul rider. In normal times and in the evolution of the 
 development of street railways the flat five-cent charge for a ride, regardless of the distance 
 permitted, was accepted by the public generally without a great deal of objection. With the 
 advent of the highly increased costs of operation, due to increases in the costs of materials 
 and labor, street railways throughout the country have been confronted with serious difficulties. 
 To raise the additional revenue required, in localities where the flat-rate method of charging 
 existed, the railways generally resorted to the plan most available of increasing the charge 
 to the extent necessary to meet the requirements. This generally was resented by the patrons, 
 particularly the most lucrative class thereof, viz.. the short-haul riders. Many of these 
 abandoned the use of the cars, and cither walked or used other means of transportation. The 
 jitney competition flourished, and the loss in patrons largely ofl^.sct the calculated revenues 
 which the increased rates were estimated to yield. In many instances companies have sought 
 successive increases in excess of the previously existing five-cent rate, in some cases reaching 
 the limit of ten cents. The history of the experiences of the various street railways employ- 
 ing this method to meet the difficulty indicate clearly that it threatens catastrophe to street 
 railway transportation." 
 
 The issues involved in the abandonment of our characteristic American fare 
 policy and the substitution therefor of some form of distance tariff arc of the 
 utmost importance to the electric railways, both from the point of view of their 
 owners and from the point of view of the general public. So far as the owners 
 are concerned, some adaptation of the distance tariff may prove to be their finan- 
 cial salvation under present operating conditions. On the other hand, the adoption 
 of a distance tariff may have an adverse effect upon social conditions and bring 
 results that the American public has always been anxious to avoid. From the 
 point of view of the companies the difficulties involved in the adoption of the 
 distance tariff are chicffy difficulties in the collection of fares and in accounting 
 for them. These diflicullies would not be .serious except for the American habit 
 of overcrowding the cars. It is admitted on all sides that where street cars 
 during the rush hour are loaded so that there are twice as many people standing 
 as people who liave seats, the collection of zone fares presents a very difficult 
 problem. Also, it is to be observed that the inauguration of a general zoning plan 
 would add considerably to the difficulties in the use of one-man cars, as it is 
 admitted that the motornian-conductor cannot be expected to handle collections 
 expeditiously unless the fare system is a simple one. He can hardly be expected 
 
The Zone Fare 221 
 
 to stop his car every little way to go through it and collect additional fares from 
 the passengers. Another serious difficulty for the companies in the inauguration 
 of a distance tariff may be found in the public disapproval that sometimes ex- 
 presses itself with considerable violence where a long-cherished institution like 
 the uniform street car fare is set aside. 
 
 The fact that the British municipalities operating municipal tramways have 
 weathered the prolonged crisis of the World War in much better financial con- 
 dition than the American street railway companies is undoubtedly due in part 
 to the more conservative financial policies pursued by the British cities, but it 
 may also be due in part to the fact that the British tramways have established 
 their charges for service on the zone plan, and have, therefore, been able to 
 readjust their charges to meet the increased costs of the war period much more 
 readily than can be done by the American street railway companies using the 
 flat fare system, even where they have the full cooperation of public regulating 
 authorities in raising their rates. The zone plan as used on British systems is 
 unquestionably much more flexible and adaptable to changes in economic condi- 
 tions than is the American uniform flat fare system. 
 
 From the point of view of the pubHc the introduction of the zone plan or 
 distance tariff presents difficulties not only with respect to the distribution of 
 population as such, but also with respect to the unsettlement of suburban and 
 other realty values which have developed on the basis of uniform flat rates for 
 electric railway service. But the main theoretical controversy with respect to the 
 adoption of the zoning plan in this country rages about the problem of congestion 
 of population. Those who favor the retention of the flat fare maintain that the 
 old American policy is a good one ; that it tends to spread out population and 
 encourage suburban development, and that its consequences are so beneficial and 
 so essential to the welfare of urban communities as to make a fundamental change 
 in our fare policy undesirable. Those who favor the adoption of the zone plan 
 contend, on the other hand, that the uniform flat fare system has had very little 
 to do with the spreading out of population, and that the zone fare in vogue in 
 Great Britain is not to any appreciable extent responsible for congestion of popu- 
 lation in British cities. The issue is a momentous one, and it cannot be said that 
 the evidence produced before the Commission is such as to enable us to answer 
 with complete assurance the questions raised by it. 
 
 The American Electric Railway Association at its convention held at Atlantic 
 City in October, 1919, received a report from the Committee on Zone Systems. 
 Included in the membership of this committee were three men who had appeared 
 before the Commission as witnesses for the Association. These were Dr. Thomas 
 Conway, who had been connected with the zoning study conducted by the Public 
 Service Railway Company of New Jersey, Mr. C. L. S. Tingley, Vice-President 
 of the American Railways Company of Philadelphia, and Mr. Lucius S. Storrs, 
 President of the Connecticut Company. This committee points out in its report 
 that the higher net revenue required by the electric railways of the country can be 
 secured only in one or more of three different ways: (1) by operating economies, 
 (2) by a substantial increase in revenue per passenger, and (3) by a substantial 
 increase in the number of passengers carried at a profit. The committee stated 
 
222 Electric Railway Problem 
 
 its belief that "a zone system, where it can be properly applied, should tend to 
 encourage riding in practically every case." It submitted the following funda- 
 mental definitions of terms : 
 
 "A Zone System of Fares is one in which the fare varies with the distance traveled, and 
 might properly have been called a "distance system.' 
 
 "A Zone M one of the relatively short subdivisions of more or less uniform length, into 
 which a route is divided for the purpose of fare determination. 
 
 "There are four general forms of the zone system which have been considered by this 
 Committee and are defined below. 
 
 "L'uiform Rale Zone System is one in which the fare is directly proportional to the 
 number of zones traveled in or through, that is, one in which the fare per zone is the same 
 in each zone, including the first. 
 
 'Initial Charge Zone System is one in which the fare for the initial zone of any ride is 
 greater than that for the succeeding zones. 
 
 "fixed Minimum Zone System is one in which a certain rate per zone is charged, with a 
 definite fixed minimum fare, which minimum disappears when the sum of the zone charges 
 exceeds it. 
 
 "Central Area Zone System is one in which a flat fare or uniform charge, regardless of 
 length of ride, within an established central area, is combined with zone charges on routes 
 which extend beyond such central area. 
 
 "The Uniform Rate Zone System is a form which has been in use in England and other 
 foreign countries for many years, and has there apparently encouraged short haul riding and 
 improved the service load factor. It is, however, most discriminatory in favor of the short- 
 haul rider, because cost of service is admittedly not directly proportional to the distance 
 traveled." 
 
 With respect to some of the principal dangers and difficulties inherent in the 
 adoption of a zone plan in this country-, the committee said : 
 
 "In many localities there is a distinct danger that the uniform rate zone system would 
 result in lower gross and net revenue on account of the large percentage of passengers which 
 may be carried below actual cost. Short-haul riding and all riding must be encouraged, this 
 being one of the principal objectives of any zone system, but great care must be taken that 
 the short-haul rider is not too unduly or unfairly favored. It might he noted at this point that 
 in general the English systems are municipally owned; discrimination is flagrantly practiced, 
 and the rate of fare and length of zone are very largely based on what the traffic will bear, 
 rather than upon what is fair and equitable to all classes of passengers. Furthermore, this 
 form involves the maximum of fare collection difliculties. although it should not be con- 
 demned on that account. 
 
 "It has been widely claimed that zone systems produce congestion of population. If this 
 were true, this congestion would lie more highly developed with this form than with any 
 other, but the facts are that foreign cities using this form are not really congested to any 
 greater degree than many of our flat rate .-Xmcncan cities. The tendency, however, in Euro- 
 pean cities is towards a more even spreading of the occupied territory, rather than to the un- 
 economical, haphazard and spotted development so frequently found surrounding our cities; 
 if is probable that the zone system, in contrast to the flat fare, has something to do with this, 
 thus changing the sociological argument to favor the zone system." 
 
 Near the end of its report, the committee gave voice to the following special 
 warning: 
 
 "It is the thought of this Committee that where and when any zone system is contem- 
 plated the fact that the purchasing power of the dollar has decreased should he fully taken 
 mto account to the end that the minimum charge per passenger be not set too low." 
 
 Within the past six years modifications of the foreign zone plan have been 
 introduced on several street railway systems of this country with var>-ing degrees 
 of success. The first noteworthy experiment of this kind in the United States 
 was commenced in 1914 in Milwaukee. Wisconsin. There a central zone, extend- 
 ing roughly to the bountiaries of the municipality, was established, and in this 
 central zone the old uniform 5-ccnt flat fare was retained. Outside of this central 
 zone the suburban and intenirban lines were divided into zones of approximately 
 one mile in length, with a luiit fare of 2 cents per zone, and a minimum charge 
 
The Zone Fare 223 
 
 of 5 cents good for two zones. Besides these cash fares there were reduced rate 
 ticket fares both in the central and in the suburban zones. On June 1, 1918, after 
 the cost of service had increased, the ticket fares were abolished, and since the 
 hearings before the Federal Electric Railways Commission were closed the Mil- 
 waukee fares have been further increased. A 7-cent cash fare with six tickets for 
 35 cents or eighteen for $1.00 in the city zone became effective in November, 1919. 
 At the same time the fare in the outer zones was raised to 3 cents per zone, with 
 twenty-five tickets for 50 cents. ^ 
 
 Another zone fare experiment has been tried in Pittsburgh. It went into 
 effect on June 20, 1918, and was continued until July 30, 1919, when the flat fare 
 system in the urban district was restored. Under the experimental zone plan 
 the urban territory was divided into two areas, referred to as the Inner Area and 
 the Outer Area, with a flat fare of 5 cents in the Inner Area and a flat fare of 7 
 cents in the Outer Area and for rides from one area into the other. Tickets were 
 sold in the Outer Area at the rate of eight for 55 cents. The Inner Area was 
 defined by a radius of about 2i^ miles from the downtown center of the city. 
 A free transfer was given where necessary for the completion of the ride within 
 the area to which the cash fare applied. The revenues derived by the Pittsburgh 
 Railways under the zone fare system proved to be insufficient, in the opinion of 
 the receivers, and on August 1, 1919, the zones were abolished, and the uniform 
 flat fare plan reestablished, but this time the rate was 10 cents in cash or 7i/2 cents 
 by metal tokens, the latter being sold at the rate of four for 30 cents. Mr. Charles 
 A. Fagan, one of the receivers for the Pittsburgh Railways Company, explains 
 at page 617 of the Proceedings the reasons which led to the abandonment of the 
 zoning experiment in Pittsburgh, where he says: 
 
 "Mr. Warren: I judge from the method you are adopting of increasing the fare this 
 time a flat increase to seven and a half cents for tickets and ten cents for cash that you have 
 reached the conclusion that in Pittsburgh a flat increase is more desirable than dividing the 
 city into two or more zones. 
 
 "Mr. Fagan : We thought so, because when the city was divided into zones, we got no 
 credit from the people who lived in the cheaper zone, and it gave an argument to the people 
 who lived in the higher zone against the inequity of the proposition." 
 
 A zone plan was introduced on the lines of the Rhode Island Company in 
 Providence and the surrounding communities on May 5, 1918. Under this system 
 5-cent zones having a radius of 2i/< miles were established about the traffic centers 
 of Providence, Pawtucket and Woonsocket, beyond which 2-cent zones about 1 
 mile in length were marked off. On the outlying lines a minimum fare of 5 
 cents, good for a ride through two zones, was established. This plan remained 
 in effect until October 23, 1918, when the fare system was again changed. The 
 inner zones were contracted to a radius of approximately 2 miles, outside of which 
 were established a series of zones, the first about l^i miles in length and the 
 second and succeeding zones about \^ miles in length. The 5-cent fare with a 
 charge of 1 cent for a transfer was made applicable uniformly to all the zones, 
 both city and suburban. On May 1, 1919, fares were reduced slightly on some 
 of the suburban lines by a reduction in the number of zones. This change was 
 made in an effort to recover some of the long-haul traffic which had been driven 
 away by the excessive charges under the zone plan. On September 28, 1919, 
 
224 Electric Railway Problem 
 
 the unit fare was increased to 6 cents per zone, and the transfer charge was in- 
 creased to 2 cents, with no change in zone boundaries.- Mr. William C. Bliss. 
 Chairman of the Public Service Commission of Rhode Island, describes the finan- 
 cial effects of the zoning experiments on the Rhode Island lines at pages 11S2 
 and 1183 of the Proceedings, as follows: 
 
 "The effect upon revenues of the two-cent zone plan which remained in operation from 
 May 5th until October 23rd, 1918, produced additional revenue, as nearly as it could be figured 
 amounting to $,!05,0()0 a year, compared with estimates of $540,000. It produced that revenue 
 in spite of the following factors: 
 
 "During the months of May and June it produced well up to the estimates and during the 
 months of July and August, the street railway companies of New England all reflected a 
 tremendous loss of travel. People were busily engaged in manufactures ; the ordinary out- 
 ings were given up. the dance halls that were operated six nights a week were open only 
 on three nights a week; and there was a distinct falling off in travel reflected on all of the 
 street railway lines, which was suffered by this company as well as the others. 
 
 "In the latter part of SepteiTil)er and during October the influenza epidemic practically 
 depleted it, so that under the increased rates of fare this company showed less gross revenue 
 than it showed the year before. 
 
 "But even operating under all those unfortunate conditions the two-cent zone plan with 
 the contracted five-cent center operated in Rhode Island to hold the traffic on the cars. There 
 was very little if any loss of traffic on the part of the company, and it was believed by the 
 commission that for that reason this easy gradation from five to seven to nine cents would 
 hold the traffic, and the result of the operation of the plan showed it did hold the traffic and 
 it did not work any undue hardship or any injurious economic or social results. 
 
 "The five-cent zone plan, that is, with the still further contracted central five-cent zone 
 and with the fivc-oent units outside, with respect to a large part of our population which 
 prior to May 5, 1918 paid S cents to get back and forth to the centers, made them pay 10 
 cents and was estimated to pnxluce $1,250,000 revenue. In practical operation for the 
 period from October 2.?rd until the present time that has operated to produce onlv about 
 $350,000 out of the $1,262,000 that was estimated. In other words, it fell short $912,000 of 
 producing the revenue that was estimated for it. There was a distinct loss of travel during 
 the early months from Octotwr 23rd until .\pril 1st, when we modified the interurban rate. 
 Since that time the showing has Iwen distinctly better, and if this increase had been based 
 upon the showing of the months from April 1st down to the present time, the shortage would 
 not have been nearly as great. 
 
 "In connection with the 5-cent zone plan it is to be noted that provision was made for 
 the application of a one-cent charge for transfers. The one-cent charge for transfers was 
 estimated to produce $172,000 and has actually produced $150,000 a year, which has operated 
 to reduce the use of transfers alxiut 15 per cent. It seems to have been received by the 
 people without any complaint whatever, and possibly one of the reasons ii>r that is that we 
 have retained the central 5-ccnt unit, and I think many of the people living within that area 
 feel as if they ought to pay more for their carfares, little realizing that the principle involved 
 in retaining the 5-ccnt central unit is that the average of the short-haul travel really makes 
 the short-haul traveler pay far more than he should |)ay for his transportation. 
 
 "The 5-cent zone plan as modified I have explained to you. It was modified simply in 
 the interests of the company and the public to try to get more revenue out of the people, 
 for in the final analysis the rate plus the traffic represents your gross revenue. You can put 
 your rate up and drive your traffic unit so low that you are worse off. So that the company 
 and the commission — and the results have proved the wisdom of it — have shown that the 
 modification of this rate somewhat has operated to increase the traffic to such an extent that 
 the company is U-ttcr off with the lower rate than with the higher" 
 
 Mr. Rliss then goes on to explain the economic effects of the second zone 
 plan by which the rates of fare to the outlying sections of Providence and to the 
 surrounding towns were radically increased. His testimony on this point is 
 unusually significant, as it indicates the tendency of such a plan to decentralize 
 business. At pages 1 1S3 and 1184 of the Proceedings, he says: 
 
 "Just a moment now to refer to the social and economic effects that we have n.ited with 
 reference to the contraction of the 5-rent limit and creating ID-cent limits within the city of 
 Providence. These outlying sections of the city of I'rovidence pay 10 cents to get into the 
 center of the city, and of course the outlying communities formerly in the 5-cent limits out 
 of Providence arc now paying 10 cents. 
 
The Zone Fare 225 
 
 "The most marked effect has been in the case of Pawtucket and Providence, Pawtucket 
 being a city which is north of Providence and borders on Providence, a thickly built up section 
 all the way between the cities, so that from a social point of view they are all part of one 
 community. The rate between Providence and Pawtucket, originally 5 cents, later 7 cents 
 and now 10 cents, has operated to tremendously stimulate the business activities of the center 
 of Pawtucket and to the same extent to take away the business from the center of Providence. 
 
 "The operation of the strike which limited the methods of transportation also operated 
 to very greatly stimulate the business industries of Pawtucket. 
 
 "Olneyville, which is a business center to the northwest of Providence and a natural 
 center of the car lines with a big mill population located around that center, has shown a 
 tremendous increase in its business activities. The people come in and trade in Olneyville 
 rather than to pay the other S cents to get on to Providence. 
 
 "The same thing is true in East Providence, where an overlap e.xists. The people save 
 the 5 cents in and out of Providence and trade locally. 
 
 "In other words, the effect of this is to decentralize business. The merchants in the center 
 of the city, the big department stores, are tlie losers by it, and I believe that the men who are 
 the owners of the centralized business enteq'rises can well aft'ord to not only pay the in- 
 creased tax rate which would be involved in giving up their franchise taxes and paving 
 obligations on the part of the company, but also could go out there and subsidize these roads 
 to retain a low rate of fare to the center. 
 
 "Commissioner Gadsden: From the social standpoint why is not that a good result? 
 Why should not the towns trade with themselves instead of going to some other towns, from 
 the social standpoint ? 
 
 "Mr. Bliss : Well. I assume that centralized business operations can be carried on with 
 the greatest economy and I presume there is greater economy, I think it is shown there in 
 the case of the big public markets in Providence, w-hich are carried on on a cash basis ; 
 I think the prices reflect the ability of these companies to do business in a large way and 
 deal with a large number of people. In other words, one set of overheads is applied to larger 
 business while the separate overheads applied to smaller markets would operate to greatly 
 increase cost." 
 
 The question was raised as to whether this effect of the zone fares upon 
 the decentralization of business might not be temporary rather than permanent. 
 This question evidently involves a consideration of popular psychology which all 
 the evidence before the Commission shows to be a matter of prime importance 
 in any possible solution of the street railway problem. At pages 1184 and 1185 
 of the Proceedings, the following questions and answers throw light upon this 
 point : 
 
 "Commissioner Meeker: If the department stores can conduct business so much more 
 economically than the smaller stores in outlying communities, will the people not eventually 
 learn that and trade in the central districts of Providence as thev did before? 
 
 "Mr. Bliss: Well, if 
 
 "Commissioner Meeker: If the economy of centralized business is sufficient, then the 
 people of Paw-tucket and the outlying districts could well afford to pay the extra street 
 railway fare ? 
 
 "Mr. Bliss : Well, I think that is largely a question of psychology on the part of the 
 housewife. When the housewife figures the actual 10 cents that she has got to pay or 20 
 cents to go in and out of Providence now from the suburbs, and the question of going down 
 to the corner grocery and the 20 cents that she can see plainly, that she would save perhaps 
 by the lower priced goods, that she perhaps cannot see that so plainly. But I am simply point- 
 ing out to you the actual effect of the application of these increased rates so far as the 
 decentralization of business is concerned. 
 
 "Commissioner Meeker: Yes, we have to recognize that man is far from being a rational 
 animal. He does not act as the economic man is alleged to act. For example, when the price 
 of milk increased 1 cent in Boston the amount of milk consumed was cut in half, although 
 at that increased price milk was still the cheapest food product. 
 
 "Mr. Bliss : Well, the same thing is true with regard to transportation. There never 
 has been on the part of those in public positions or on the part of the press any disposition 
 to prevent the facts of the problem clearly being presented to the public, and the public have 
 shown an animus and with the application of these increased fares they walk down to the 
 5-cent points, and everybody was talking against the company, and the public, acting in the 
 same irrational manner that you have referred to. were simply hurting themselves, because 
 every bit of revenue that they took away from this company so much the sooner forced a 
 still further fare increase." 
 
226 Electric Railway Problem 
 
 The chief argument against the zone plan, from the public point of view, has 
 been that this plan tends to congestion of population. The experience of Provi- 
 dence, where the observed effect of the zone plan has been to encourage decen- 
 tralization in business, seems to weigh against the congestion argument. In fact, 
 under the conditions prevailing in that community, Mr. Bliss observed no ten- 
 dency to congestion of population as a result of the increased fares from the 
 central area to the outlying zones. On this point, at page 1185 of the Proceedings, 
 he says : 
 
 "The social effects have not been so marked. That is, you would naturally expect under 
 a substantially increased fare that we have applied that you would have the centralization of 
 residence on the part of the people; they would all crowd within this 5-cent area. The lack 
 of housiuK accommodation has operated in such a way as to show but very little eflfcct upon 
 the people socially. There seems to \ye no less a demand for tenements outside the 5-cent 
 limits than within. .\nd while that tendency I think would be very marked with the resumption 
 of normal conditions and the resumption of building, I think under the present emergency 
 conditions there has been no serious effect from that." 
 
 Still another important experiment with the zone system is being carried 
 on by the Eastern Massachusetts Street Railway Company on the Bay State 
 system, which includes over 900 miles of track serving most of the cities of eastern 
 Massachusetts. The zone fare was inaugtirated on this system on June 24, 1918, 
 when a series of central city zones were established with a 6-cent fare, and the 
 lines outside of the.ie city zones were divided into suburban or country zones 
 approximately 1 mile in length. On most of these outlying zones the fare was 2 
 cents per zone, but on certain light lines the fare was 2j^ cents per zone, and in 
 some cases 3 cents per zone. In all cases, however, the mininuim fare collected 
 was 6 cents. This system continued in effect until January 8. 1919, when it was 
 modified by the expansion of the size of the city zones and by the consolidation 
 of approximately every two of the country mile zones. .At this time the fare 
 in the city zones was increased to 10 cents cash or 7 cents by tickets, which were 
 sold in strips of five. On the country zones the cash fare was 5 cents per zone, 
 with a 10-ccnt minimum. The 7-cent tickets were also good on the country zones. 
 Finally, on July 1, 1919, the 7-cent tickets on the Bay State system were with- 
 drawn, leaving the cash fare 10 cents in the city zones and 5 cents per zone in 
 the country, with a miiiinniin of 10 cents. Since then, the zone system has been 
 retained, but the Board of Public Trustees operating the Eastern Massachusetts 
 Street Railway Company has been conducting a series of experiments with dif- 
 ferential ticket fares in a number of cities.' 
 
 Zone jilans have also been tried on certain other electric railway systems 
 in Massachusetts, notably those centering in Springfield and Holyoke. The 
 Springfield zone plan, approved by the Massachusetts Public Service Commission 
 on March 30, 191S, was quite complicated. The original 5-cent fare area, slightly 
 enlarged, was divided into an inner zone and an outer zone, with a 5-cent fare 
 in each. Tickets were sold at the rate of six for 40 cents, good for rides from 
 any point in (lie inner zone to any point in the outer zone not more than five 
 miles distant by the car track from the traffic center. Tickets at the rate of six 
 for 50 cents were sold, good for a ride from any poiiu in the inner zone to any 
 point ill the outer zone, without limitation. Beyond the limits of the second zone. 
 
The Zone Fare 227 
 
 additional zones of about 1 mile in length were established, with a zone rate of 
 2 cents per mile and a minimum fare of 6 cents, good for a ride through three 
 zones. This system went into efifect May 1, 1918, but it was found necessary a 
 few months later to increase the rates of fare under the zone plan. On Septem- 
 ber 16, 1918, the cash fare in either the inner or the outer zone was raised to 6 
 cents, and the zone rate outside of the city area was increased to 2i/2 cents per 
 mile. The ticket rates were also increased from six for 40 cents to six for 45 
 cents, and from six for 50 cents to seven for 65 cents. On October 19, 1919, 
 the fares were again increased. The cash fare on the Springfield zones and on 
 certain other divisions was increased to 7 cents, and the rate on certain of the 
 outlying lines was increased to 3 cents per mile. The ticket rates were increased 
 from six for 45 cents to eleven for $1.00, and from seven for 65 cents to nine 
 for $1.00.* 
 
 On the Holyoke street railway system a central zone with a radius of about 
 four miles was established in December, 1918, with a 7-cent fare. Beyond the 
 limits of the central zone the lines were divided into zones about two miles in 
 length, and a fare of 5 cents per zone was charged. In December, 1919, a uni- 
 form fare of 6 cents per zone was established on the Holyoke system. 
 
 Interstate Commerce Commissioner Eastman, who was a member of the 
 Massachusetts Public Service Commission for several years during the period 
 when the street railway problem in that state was most acute, expressed the 
 opinion that the zone fare plan is still in the experimental stage in this country. 
 His testimony on this point is found at pages 2074 and 2075 of the Proceedings, 
 as follows : 
 
 "The Chairman : You have had quite a little experience with the zone system, and your 
 testimony shows that your zones have been narrowed and extended and expanded and in some 
 cases abandoned, I believe. Generally speaking, do you believe that a zone system is a 
 proper system? 
 
 "Commissioner Eastman : Well, that is a ver>' difficult question. As I say, I at first 
 was very much attracted by the theory of the zone system. It seemed to me it made the 
 rider pay in proportion to what he got and it also enabled the company to attract the short 
 distance rider. And, if you had originally started on that basis I think in all probability it 
 would he a proper system to adopt in this country just as they have done in Great Britain, 
 for example. 
 
 "But when a community has grown up on the other basis, it undoubtedly causes a serious 
 dislocation, in many cases, by suddenly changing the system from a flat fare system to a zone 
 system, so that some people will still retain their five-cent fare and others will have to pay 
 a much higher fare. And it was my experience that the introduction of the zone system 
 caused more irritation on the whole than a flat increase in fare. 
 
 "The Chairman: Did that irritation continue for a long time? 
 
 "Commissioner Eastman : Well, of course, a good many of the things, relatively speak- 
 ing, have not been in operation very long. 
 
 "The Chairman : Has the system been in operation long enough to enable you to form 
 a judgment as to whether it tends to decentralize a community or scatter industries over 
 larger areas? 
 
 "Commissioner Eastman : No, I do not think that I have any very positive information 
 on that subject. I suggested to the Commission of Massachusetts which is now investigating 
 the street railway situation that they should endeavor to collect all the direct and positive 
 information that they could in regard to the effect of the higher fares. I saw in one of the 
 Boston papers the other day that the ten-cent fare there is causing a great demand for 
 tenements and lodgings within walking distance of the central districts, and that the demand 
 is much greater than the supply. I was told in some of the cases of the Bay State cities, 
 and I think it was Lynn, that an investigation was made after the establishment of the zone 
 system, and it was found that houses and apartments could be easily secured outside the 
 central district, but that within the central district the demand was much greater than the 
 supply there, showing the tendency of population to move inward. 
 
228 Electric Railway Problem 
 
 "Mr. Warren: Where was that? 
 
 "Commissioner Eastman : Lynn. But I do not think the experience has been sufficient at 
 the present time to do anything more than to raise the possibility of danger in that respect. 
 In other words, it is no positive proof. 
 
 "The Chairman : Do you regard a zone fare as still in the experimental stage in this 
 country ? 
 
 "Commissioner Eastman : I should say so." 
 
 I have already called attention to the fact that with the inauguration of the 
 zone plan on the Bay State lines the company stopped counting the passengers, 
 so that it is impossible to get accurate and detailed figures with respect to the 
 effect of zone fares on traffic on that system. The same is true of the zone system 
 established on the lines of the Cumberland County Power and Light Company 
 in Portland, Maine, and vicinity, as I have also pointed out. In Portland the 
 zone system was originally put into effect in October, 1918, but was considerably 
 modified in March, 1919, and the fares were increased in June, 1919. Under 
 the present Portland plan the city area is divided into three zones, and the lines 
 outside of the city limits are divided into zones approximately one mile in length. 
 The company has adopted a plan to induce the car riders to use tickets instead 
 of paying cash. Within the city area the minimum cash fare is 9 cents, which 
 is good for a ride through three zones, but tickets are sold by which the fare 
 is reduced to 7 cents. On the outlying zones the cash fare is 3 cents per zone, 
 with a minimum charge of 9 cents, good for three zones, and the ticket fare is 
 2y3 cents per zone, with a minimum charge of 7 cents. The system is explained 
 by Mr. A. H. Ford, Vice-President and General Manager of the Cumberland 
 County Power & Light Company, at page 355 of the Proceedings, where he says : 
 
 "We have 106 miles of track, and the system was divided up into practically mile zones 
 and a charge is made of so much for each zone. Our rate at tlie present tiitie is 3|i cents 
 for a zone, the city proper tjeing divided up into three zones, making a 7-cent fare. 
 
 "The Chairman : Do you mean by that that there is a rate of less than 3 cents within 
 one zone ? 
 
 "Mr. Ford: Yes, sir; that is, you can ride on an initial ride of three zones for 7 cents, 
 and then 
 
 "Mr. Warren: That is the minimum initial fare? 
 
 "Mr. I'ord : Yes. 
 
 "The Chairman: For the shortest ride? 
 
 "Mr. I'ord : Yes, the initial ride of three zones. 
 
 "Mr. Warren: Or less. If you ride one mile you pay 7 cents, or three zones. 
 
 "Commissioner Sweet: How about one block? 
 
 "Mr. l'\)rd : Seven cents. 
 
 "Mr. Warren: That 7 cents, however, is good, if you want to go so far, for three of 
 your zones ? 
 
 "Mr. l'"ord: Y'es. 
 
 "Con\missioner Sweet : That would Ix; in a continuous journey ? 
 
 "Mr. h'ortl: Yes, but if you \yant to ride four zones yon pay 9'<i cents, but it is handled 
 by a system of tickets. \ zone ride ticket, which is the popular ticket used, costs .15 cents. 
 Then we have what wc call a 15-zone ticket that costs .^.S cents. So that the passenger supplies 
 himself with two kinds of tickets, tlie 7-cint ticket, tive rides, and the l?-zone ticket, and 
 if he wants to make four zones the conductor punches one ticket out for the 7-ccnt ride or the 
 3-zonc ride and then he punches one of these IS-zone coupons out for the extra one that 
 he rides. 
 
 "Mr. Warren: How many zones arc there in the city limits? 
 
 "Mr. 1-nrd: Three. 
 
 "Mr. Warren: Then am I right in thinking that the net effect of that system in the 
 city limits is a 7-ccnt fare? 
 
 "Mr. Ford : Yes, sir. 
 
 "Mr. Warren: Jnst the same as if you had a flat 7-cent fare in the city of Portland? 
 
 "Mr. I'..r.| I'x.ullv" 
 
The Zone Fare 229 
 
 Mr. Ford states that so far as he has obser\-ed, the Portland zone fare plan 
 has not tended to create congestion of population. His testimony upon this 
 point is found at page 360 of the Proceedings, as follows: 
 
 "Commissioner Meeker: You think the institution of the zone system will not have any 
 appreciable effect upon the growth of the community, centering the population rather than 
 spreading it out as in times past, so as to diminish the rate of increase? 
 
 "Mr. Ford: I think not. The zone system is in my judgment the fairest way to fix a 
 rate for the reason that people pay for what they get. 
 
 "Commissioner Sweet: When did you establish the zone system? 
 
 "Mr. Ford : That was established October 2nd last year. 
 
 "Commissioner Sweet: 1918? 
 
 "Mr. Ford : Yes, sir. 
 
 "Commissioner Sweet : Since that has been in operation have you noticed any tendency 
 to greater congestion in the center of your city? 
 
 "Mr. Ford : No, sir." 
 
 Obviously, a zone system within the old 5-cent fare area of the .city of 
 Portland that is in effect the same as a 7-cent flat fare could not be expected to 
 affect congestion in the way that a distance tariff is expected to affect it.^ 
 
 The two most important experiments with the zone fare plan thus far made 
 in this countr}' are undoubtedly those made by the Public Service Railway Com- 
 pany of New Jersey and by the Connecticut Company. The New Jersey experi- 
 ment was made at the instance of the Board of Public Utility Commissioners. In 
 March, 1918, the Public Service Railway Company applied for emergency relief 
 in the form of an increase of its uniform unit fare froiri 5 cents to 7 cents, to- 
 gether with a charge of 2 cents for each initial transfer and 1 cent additional for 
 a second transfer. The New Jersey Commission, in a decision rendered July 10, 
 1918, dismissed the company's application for a 7-cent fare, but authorized it to 
 institute a charge of 1 cent for each initial transfer. Prior to this time the Public 
 Service Railway lines had been divided into broad zones, in each of which the 
 uniform flat 5-cent fare had been charged, as required in many cases by ordinance 
 contracts with the several municipalities served. Early in 1918, however, the 
 New Jersey courts had decided that the state commission was vested with author- 
 ity to increase a street railway company's rates beyond the limits fixed by its 
 local franchises. In its order of July 10, 1918, the New Jersey commission dis- 
 cussed the question of readjustment of fares as follows: 
 
 "Numerous witnesses produced by the petitioner clearly indicated as their opinion that the 
 flat rate fare system was an inheritance from horse-car days and was in no sense a scientific 
 or proper charge for the service rendered. While the Board's power to increase railway 
 fares despite the existence of a municipal ordinance specifying the maximum fare to be 
 charged has been sustained, an important question would arise as to whether we would 
 countenance a horizontal raise of the uniform five-cent rate without an investigation of the 
 nature and extent of the service rendered for the fare charged and all the elements involved 
 therein. The charge for the service does not bear any fixed relation to the service. Under 
 the present existing five-cent uniform rate, some passengers are permitted to be carried a 
 considerably greater distance for the same rate than other passengers. This may unduly 
 discriminate against the short-haul passenger or short-rider, and any horizontal increase in the 
 flat rate would further exaggerate this discrimination. 
 
 "The witnesses for the company further testified that in the event of a horizontal increase 
 in fares it was reasonably certain that the traffic would diminish by from fifteen to twenty 
 per cent, and that this loss of traffic would be the short-haul traffic, for the reason that most 
 of the short-riders in cities would walk rather than use the cars at the increased fares. 
 
 "If the intimations of the president of the company are correctly interpreted, we can 
 expect with the advent of normal times after tlie war an application by the company for a 
 readjustment of fares on its lines, and the matter as to the method of raising revenue and 
 adjusting rates having been so fully discussed in the present application, we are of the 
 
230 Electric Railway Problem 
 
 opinion that it would not be remiss for us to suggest that the company make a comprehensive 
 study of the question for future use. It is important to the public as well as to the company 
 that the short-haul traffic business should be retained. Such business may be the determining 
 feature which will make possible a general reduction of fares, inasmuch as the best method 
 of developing is clearly to retain a low minimum fare. Admitting the necessity for modifica- 
 tion of the fares charged, some method can certainly be devi.sed by a proper study of the 
 company's system. While the system is extensive, covering nearly a thousand miles of track, 
 it is separated and operated in si.\ divisions and is capable of a practical zoning system." 
 
 The commission therefore directed the company to file or submit before 
 January 1, 1919 "a plan whereby the method of charging at present in force 
 may be revised by an equitable zoning system over its entire territory, proper 
 consideration being given to all of the elements to more properly relate the cost 
 of service with the length of haul and value of service." Subsequently, on ac- 
 count of certaiti wage increases awarded by the National War Labor Board, the 
 company was permitted to put in the 7-cent fare pending the proposed investi- 
 gation of zoning. Acting under the direction of the commission, the company 
 made an elaborate study of the problems involved in a change from the uniform 
 flat fare to a zone system, and submitted a voluminous report upon this subject 
 in March, 1919. In this report the company proposed a division of its entire 
 system of more than KOO miles of track into nearly unifonn mile zones, and 
 suggested the establishment of a minimum charge of 5 cents for a ride in one 
 zone, and a further charge of 1 cent per zone mile for any distance ridden beyond 
 the first zone. The company also suggested a charge of 1 cent for a transfer, 
 with an additional charge of 1 cent per zone mile for any distance ridden on the 
 transfer. This scheme rejected entirely the central zone idea which had char- 
 acterized the zone plans previously tried in this country. .At the same time, the 
 New Jersey plan did not go the full length of adopting the distance tariff upon 
 which British zone plans are based. Instead, the authors of the plan attempted a 
 detailed analysis of the cost of service upon the theory that just and reasonable 
 rates should be worked out not strictly according to the length of the rides 
 taken, but on the basis of a combination of two factors, referred to as "standby" 
 and "movement" costs. Their idea was that the amount paid for a particular 
 ride should be made up of two elements: (1) a "readiness-to-serve" charge 
 which would be the same for every car rider, and (2) a "movement" charge 
 which would vary according to the distarice traveled. As a result of its analysis 
 of costs the company arrived at 3.3S4 cents as the average "stand-by" cost per 
 passenger under the conditions prevailing at the time its zone report was filed 
 in March, 1919. It arrived at '"Hoo of a cent per mile as the average "move- 
 ment" cost per passenger. A strict application of the theory upon which its 
 analysis was based would have required it to ignore transfers and to treat a 
 passenger using a second car on any given trip as if he were taking two entirely 
 separate and independent rides. The company realized, however, that such a 
 result of its analysis would not be acceptable to the riding public, which had long 
 been accustomed to free transfer privileges. Therefore, in the schedule of rates 
 proposed, it eflfected r. compromise by which the transfer passenger would be let 
 off with a "st.ind-by" charge of 1 cent only, while the "stand-by" charge for the 
 initial ride would be increased from the theoretical ,5,^X4 cents to an even 4 cents. 
 
The Zone Fare 231 
 
 This proposed schedule of zone fares was subjected to considerable criticism 
 by the Associated Municipalities of New Jersey, on the ground that it was too 
 inflexible and that the company's analysis of standby and movement costs was of 
 - little or no significance in the establishment of either a scientific or a practicable 
 street railway rate schedule. The charge of inflexibility was proven by the fact 
 that while the hearings before the New Jersey Commission were still going on the 
 company found itself confronted with additional expenses on account of a new 
 wage increase awarded by the National War Labor Board, and was unable to 
 suggest a modification of its zone fare schedule to produce the additional revenue 
 required without getting away from some of the fundamental principles of its 
 plan. As a result of evidence produced by the municipalities to the effect that 
 low fares for short rides have been effective in other jurisdictions, particularly 
 in Great Britain, in stimulating short-haul traffic, the Public Service Railway 
 Company submitted to the New Jersey Commission a new proposal under which 
 the mile zone system would be retained, but the initial fare for a ride through 
 a single zone would be reduced to 3 cents, and the charge for each additional 
 zone would be increased from 1 cent to 2 cents, all transfers and transfer charges 
 being done away with. The commission, in a report dated July 30, 1919, author- 
 ized the company to put this new plan into effect. Accordingly, on September 
 14, 1919, the much heralded zone experiment was inaugurated on all the Public 
 Service Railway lines. The results were little short of disastrous. In Camden 
 and vicinity public disorders and riots ensued, and the people established a boy- 
 cott against the street car service. General dissatisfaction prevailed throughout 
 the state of New Jersey. The abolition of transfer privileges, the rapid piling up 
 of the charges against the long-distance riders, and the slowing down of operating 
 schedules on account of delays in the collection of fares, all combined to make 
 the new system unpopular. From its point of view, the company found that the 
 new rates produced much less revenue than had been produced by the uniform 
 7-cent fare with a 1-cent transfer charge. After a very short time, therefore, 
 the company applied to the commission for permission to abandon the zone plan 
 and go back to a flat fare schedule. The commission was loath to grant this 
 request, because it felt that a fundamental principle to which it had given its 
 adherence was at stake, and that the zone plan had not yet received a fair trial. 
 The commission, in a report dated October 23, 1919, refused the company's 
 request to abandon the zone plan, and recommended instead that the plan should 
 be modified so as to meet some of the most serious objections thus far developed 
 in connection with its practical application. The 3-cent fare for the initial zone 
 had apparently failed to accomplish much in the way of developing short-haul 
 traffic. The commission suggested therefore, that the 5-cent minimum rate be 
 restored, but that it be made to cover a ride of two zones instead of one, and that 
 beyond the two zones the additional charge should be 1 cent per zone mile. It 
 also recommended that the transfer system be reestablished, with a transfer 
 charge of 1 cent. The company at first refused to accept this recommendation, 
 but finally did accept it, and the new rates were put into effect November 16, 1919. 
 The results from the company's standpoint were even more disastrous under this 
 plan than they had been before, and the commission was finally persuaded to 
 
232 Electric Railway Problem 
 
 permit the company to restore the 7-cent fare. In its report of December 2, 1919, 
 the commission says : 
 
 "We are of the opinion that neither a sufficient nor a fair trial of the plan under the 
 existing rates has been had or under present conditions is practicable. The trial, however, 
 has alike been costly to the company as well as to the principle involved. By its calculations 
 the company shows that under the present plan, with the present rates, at the end of the 
 present year it will have an actual operating loss of $750,000 after the payment of fixed 
 charges and ta.xes, exclusive of any sum whatsoever for depreciation reserve. A careful 
 analysis of these figures is not necessar\-, as it is evident that neither rate under the zone 
 pjan has yielded as much as the flat rate of seven cents would have yielded had it been con- 
 tinued in effect. Neither is it necessary to determine whether the flat rate of seven cents, with 
 one cent for a transfer, will yield the amount of revenue which the company estimates it will 
 yield. The company's officials lielieve that it can "pull through' until the pending proceedings 
 are finally determined, and are satisfied to be permitted to make such a change. 
 
 "On December 1. 1919, interest on outstanding bonds of the company to the amount of 
 approximately $750,000 became due. Other large amounts of interest on outstanding bonds 
 will Income due on January 1st ne.xt. The company was without sufficient funds to meet it, 
 and was re(|uired to borrow it. Bankers were unwilling to loan the necessary funds to it if 
 the zone system were continued in effect, and would make the necessary advances if the fiat 
 fare of seven cents and one cent for a transfer is restored. It was alleged that in the event 
 of default on the txmd interest insolvency would result, terminating in a receivership. 
 
 "It is evident that the company's receipts under the zone plan are not sufficient for it to 
 remain solvent. The Irankruptcy of an important public utility is always accompanied by 
 adverse conditions which affect not only investors in its securities, but the public served by it. 
 That a public utility may remain solvent is not controlling in fixing its charges, but the Board 
 cannot, with the knowledge that bankruptcy would likely result, insist upon a rate unless it 
 clearly appears that the rate is just and reasonable and should be imposed without regard to 
 its effect upon the securities of the company. As has been stated heretofore, the Board is 
 now conducting a proceeding which will result ultimately in the fixing of a rate just and 
 reasonable to the public and which will afford a fair return to the company upon the value 
 of its property used and useful in the .service of the public. The Board does not have sufficient 
 evidence to justify it in determining that the existing rate is one which can be ordered con- 
 tinued without regard to the imminent insolvency of the company. 
 
 "In view of all the facts and circumstances involved, the Board regrets that for the time 
 being at least the zone plan, the principle of which has commended itself to our judgment, 
 must be discontinued and the rates of fare in effect before its adoption again charged." 
 
 The Xew Jersey fiasco was little short of a tragedy to those who had begun 
 to look upon the adoption of the zone system as a possible means of restoring 
 the electric railways of the countiy to a condition of financial vigor. It came 
 just at a time when the .American Electric Railway Association was .giving care- 
 ful and hopeful thought to the solution of the practical difficulties in the way of 
 the adoption of the zone fare system in this country. Indeed, while the Asso- 
 ciation was assembled in convention at .\tlantic City early in October, 1919, the 
 ntws|)apcrs were full of tlie echoes of the zone fare riots in Camden and of the 
 Public Sei^fice Railway Company's demands that it be permitted to abandon the 
 zone system as a failure. Nothing deterred, however, the Connecticut Company 
 proceeded to put into effect u])on its lines in New Haven, Hartford, Bridgeport, 
 Waterbury, New Britain, Middletown, Meriden, Norwalk and Stamford and on 
 the rural lines connecting these cities, a conii>rchensive zone i)lan, which was 
 described at length by Mr. Lucius S. Storrs in a letter to the E.xecutive Secretary 
 under date of Deceniber 2, 1919. Mr. Storrs says: 
 
 "In laying out our zone plan we divided the property into three groups: first class cities 
 such as Hartford, New Haven, Bridgeport and Watcrlnirv, second class cities comprising the 
 reniaindcr, and, third, the country litics. \Vc took the traffic center in each city as the central 
 point and starting from this point the zones were laid out by steel tape measurements as the 
 track runs on the basis of one and one-half miles for the fir.st zone with additional zones of 
 one mile, the numl)cr of one mile zones depending upon the density of p<ipulation; this apply- 
 ing to the first class cities. In the other cities the first zone from the traffic center is 1.2 
 
The Zone Fare 233 
 
 miles in length and as the density of population usually begins to fall off materially at this 
 distance from the center, there are no one-mile zones. The country lines are divided into 
 zones eight-tenths of a mile in length. 
 
 "Our rate is si.x cents for the first two zones and two cents for each additional zone, 
 transfers being issued in all cases where a passenger has to change cars which will enable 
 him to complete two lull zones for his initial fare. You will see, therefore, that a passenger 
 who rides across the center in the first class cities may obtain a maximum ride of three miles 
 for six cents, which is at the rate of two cents per mile, and continue at this two cents a mile 
 rate until the country territory is reached where the rate is two and one-half cents per mile, 
 the zones having been fixed at eight-tenths of a mile in order that this rate may be collected 
 in two-cent increments. In the other cities the maximum six-cent ride is 2.4 miles, which 
 gives us the same rate per mile as on the country lines. 
 
 "The method of collection is very much the same as that used by the Public Service 
 Railway with which I presume you are familiar. The passenger enters at the front door, 
 is given a zone check by the motorman which indicates the zone in which he boarded the car, 
 and upon leaving the car hands the zone check to the conductor who advises him the amount 
 of his fare, which the passenger is required to deposit in the registering fare box. .-Ml of 
 our cars are equipped with Johnson fare boxes and the conductor is not allowed to deposit 
 any money in the box. 
 
 "We have adopted a metal ticket which is sold in packages of 17 for $1.00, or in broken 
 lots at six cents each, which materially lessens the number of coins which the conductor is 
 required to grind through the box. 
 
 "A tariff card, which indicates the zone in which the car is and the rate of fare to that 
 zone from any other zone, is provided for the use of the conductor and information of the 
 passengers. * * * » j ^g motorman is not required to operate one of these as is the case 
 in New Jersey. 
 
 "We realized that in order to inaugurate such a radical change in fare collection methods 
 it would be necessary that the public be fully informed as to the details and our employes 
 thoroughly instructed in the methods of operation. Both of these matters received the closest 
 of attention and for a period of several weeks we gave the public full information relative 
 to specific zone points, rates and the methods which we expected to pursue in the collection 
 of the fares. 
 
 "The car crews were divided into classes of ten and each class received three hours of 
 instruction culminating in an examination in which each individual was obliged to demon- 
 strate to the instructor that the operation was thoroughly understood. We also held meetings 
 of the employes on the different divisions at which the need of the company for additional 
 revenue was fully explained. The result of all of this was that we inaugurated the system on 
 November 2nd, with our employes thoroughly instructed and exhibiting a fine spirit of 
 cooperation and the public fully informed. 
 
 "In the beginning we experienced considerable delay and consequent irregularity of 
 schedules, but succeeded in handling the industrial operatives so that practically all of the 
 vast number using our cars to get to the factories were delivered on time the first morning 
 and have been so handled since that time. 
 
 "We e.Kperienced no trouble whatever from rowdyism, .•\fter a few days, conditions 
 became normal and we have had no disruption of schedules due to the method of fare collection. 
 Our conductors pass through the cars and make change for the passengers and issue trans- 
 fers so they have the exact fare ready to deposit in the box and the unloading is, therefore, 
 facilitated. .\s a matter of fact it requires less time to unload a car with the passengers 
 paying out than it did to load a car under the P. A. Y. E. system. 
 
 "Under the Connecticut law we are able to change a company-made rate at any time 
 without the consent of the Public Utilities Commission. However, upon petition of any ten 
 individuals or from any municipality the commission is required to investigate and decide 
 whether or no the rate is reasonable. Such petitions have been sent to the commission by 
 a number of the municipalities and civic organizations and the hearings on same will begin 
 ne.xt week. 
 
 "The increase in revenues of November this year over November last year is showing 
 approximately 20 per cent. The influenza epidemic as affecting this territor>' last year was 
 over by the first week in November, having started about the middle of September. In this 
 respect we differed in this portion of New England from experiences in points in New Jersey 
 and points south and west, in that the epidemic w-as not of as long duration and started earlier. 
 
 "What is most gratifying in connection with the revenue is that our receipts are increasing 
 from day to day. showing a return to the cars of short-distance riders who always abandon 
 the service with any change whatever in rates of fare or service changes. 
 
 "I understand that statements have been made outside of Connecticut jurisdiction that 
 neither the public nor our men were satisfied with the system. May I say from the standpoint 
 of the men there is the most loyal cooperation and while, of course, individuals will be found 
 in an Organization as large as ours who are critical to any change whatever in their accustomed 
 methods, a large majority of them are favorably disposed, and in fact many of them have 
 
234 Electric Railway Problem 
 
 expressed themselves as preferring this method of collection to the old system. The system 
 accomplishes what we have all been hoping for. namely, a closer relation between the train 
 crews themselves and the public on the cars, thus emphasizing the personal equation, which 
 is, of course, of great value." 
 
 In another letter, dated January 15. 1920, Mr. Storrs gives the gross passen- 
 ger revenues of the Connecticut Company by months for the years 1917, 1918 and 
 1919. In that connection, he says: 
 
 "Fortunately 1 have been able to include in this (retabulation) earnings for the months of 
 Novemlx-r and December, during which period we were operating under the distance tariff 
 throughout our entire territory, and you will note the figures show a very satisfying increase 
 in gross." 
 
 As a matter of fact the increase in gross passenger earnings for these two 
 months as compared with the same months of 1917 was 18.48 per cent, while the 
 increase in the month of October, immediately preceding the adoption of the zone 
 system, was 17.65 per cent. The difTerence is so slight as to be negligible. 
 
 The zone plan placed in operation by the Connecticut Company in Xovember, 
 1919, was modified in May, 1920, as a result of a decision of the Connecticut 
 Public Utilities Commission handed down in April. One of the most important 
 changes effected by this decision is the establishment of a uniform system of one- 
 mile zones on all the company's lines, similar to that which was put into effect 
 temporarily on the lines of the Public Service Railway of New Jersey. The fare 
 remains 6 cents for the first two zones, but the cash fare for each additional 
 zone is increased from 2 cents to 3 cents. A zone ticket book containing 50 tickets 
 is to be sold for $1.00, with not less than 3 tickets to be collected for a ride in 
 three zones or less, and one ticket for each additional zone. Monthly commu- 
 tation tickets, good for daily rides between traffic centers of cities with a popu- 
 lation of 25,000 or more and points 5 zones distant from the traffic center, are to 
 be sold at the rate of 1.75 cents per zone per ride. School tickets are to be sold 
 at the rate of 1 cent per zone, with an initial charge of 3 cents for a ride of 3 
 zones or less." 
 
 In his testimony before the Commission, Mr. Storrs took the position that 
 the zone system would be good for the company but bad for the community. 
 At pages 456 and 457 of the Proceedings, he discusses this matter with Com- 
 missioner Sweet as follows: 
 
 "Commissioner Sweet : Do you think that the fares charged ought to be in proportion 
 to the distance? 
 
 "Mr. Storrs: You are getting down to the fundamental theory there, on which the 
 American city has Iktii dovelopod. That is the universal fare throughout an entire area. 
 Now, wo are cumiiig down to fundamentals. 
 
 "Commissioner Sweet; Well, on the steam railroads, from city to city, the custom, of 
 course, throughout the country is to charge according to the number of miles, at so much 
 a mile? 
 
 "Mr. Storrs : Yes. 
 
 "Commissioner Sweet: Is that feasible on the electric railways? 
 
 "Mr. Storrs: Yes; un(|ucsti«nably it can be made feasible, and should be made so. 
 
 "Commissioner Sweet: It can Ix? made so? 
 
 "Mr. Storrs : Yes. 
 
 "Commissioner Sweet; Well, what would the effect of it lie? 
 
 "Mr. Storrs: Well, we would naturally hope for improvement before we would ask 
 to put it into effect. 
 
 "Commissioner Sweet: From the standpoint of the railway, do you think it would result 
 in a remedy? 
 
The Zone Fare 235 
 
 "Mr. Storrs : Yes. 
 
 "Commissioner Sweet: And it would help them out of their present situation to a very 
 considerable e.xtent? 
 
 "Mr. Storrs: We hope so. 
 
 "Commissioner Sweet : That is, assuming that people paid the fare, and that they did not 
 lose any traffic to a large extent? 
 
 "Mr. Storrs : Yes. 
 
 "Commissioner Sweet : What would be the effect, based upon the general community ? 
 
 "Mr. Storrs : It cannot help but have the effect of gradually drawing in all of the 
 tenement districts to the inner zone of the city. 
 
 "Commissioner Sweet: In European cities, has it actually worked in that way? 
 
 "Mr. Storrs: I understand so, as to the condition of the inner area of the city. That 
 is the only portion that is served, and, conversely, the fact that it is congested must be to a 
 certain extent due to the fact that it is the only part served. 
 
 "Commissioner Sweet: Well, in reasoning on the subject, is not that the natural con- 
 clusion to come to? 
 
 Mr. Storrs: Yes, sir. I have always drawn that conclusion. 
 
 "Commissioner Sweet : Then, in this regard, there seems to be a direct conflict of inter- 
 ests between the general community and the railway companies. It would be to the interest 
 of the railway companies to adopt the system that prevails on the steam railroads, would it 
 not, and that would be inherently just, would it not? 
 
 "Mr. Storrs: It would seem to be inherently just and much more reasonable. 
 
 "Commissioner Sweet: And then the people would pay for just what they get? 
 
 "Mr. Storrs : Yes. 
 
 "Commissioner Sweet : But in the interest of the proper distribution of the population 
 and to prevent the congestion in the centers of population, the other system has been adopted 
 throughout the United States ? 
 
 "Mr. Storrs: Yes, sir; the fundamental theory. 
 
 "Commissioner Sweet : And it has worked, as you no doubt would expect it to work, 
 and has produced the distribution that has decided advantages from many standpoints? 
 
 "Mr. Storrs : Yes, sir." 
 
 Here we have a rather frank admission by a witness for the companies, and 
 an advocate of the zone system as a means of their financial salvation, that the 
 American flat fare poHcy has been built up on a correct basis so far as social 
 welfare is concerned. Mr. Storrs and several other witnesses, when questioned 
 by Commissioner Gadsden, readily assented to the proposition that the electric 
 railways thus far have carried a heavy burden of community development in 
 this country. In substance these witnesses agreed that now it is time for the 
 electric railways to "cut loose" and seek first their own salvation, leaving the 
 community to solve its social problems by other means, or else subsidize the rail- 
 ways for the services they render in that connection. This brings out clearly 
 the fact that street railway fares cannot be treated merely from the point of view 
 of revenue production ; their social implications and consequences must be given 
 consideration. The witnesses who testified with respect to the zone fare system 
 were pretty well agreed that such a system is more equitable as between the 
 electric railway and its individual patrons than the uniform flat fare system can 
 be. This strain of unanimity was based upon considerations with respect to the 
 cost of the service and the value of the service to the individual car riders. The 
 deeper we go into the subject, the more complex it gets, and the more certain we 
 are that we have hit the fundamental issues imderlying the whole local transpor- 
 tation problem. What were the street railways built for — to make money or to 
 serve the commimity? What shall determine their fare policies — the financial 
 exigencies of the operating corporations, or the public welfare? Local transpor- 
 tation facilities are a fundamental part of the city plan. Local transportation 
 charges have, or may have, a determining influence upon the efficacy of the city 
 plan in its practical working out. It is idle, and worse than idle, to attempt to 
 
236 Electric Railway Problem 
 
 solve the fare problem merely from the point of view of street railway finance. 
 That is one of the fundamental dangers in the present street railway situation. 
 The companies, in their present financial distress, are turning to the zone system 
 as a possible means of getting more revenue. The state commissions, feeling 
 little or no responsibility for the social results of the policies they adopt, yield to 
 the necessity of providing the companies with more revenue from the rates, and 
 give great weight to the theoretical analysis of the cost of ser\-ice and its scientific 
 distribution among the various classes of car riders. To the extent that the mun- 
 icipalities have been eliminated from participation in rate adjustments, there is 
 nobody left in the game to represent the urban community interest. What is 
 most important is lost sight of ; what is least important prevails. From the com- 
 panies' point of view the question is: Does the zone system produce the revenues 
 required? From the point of view of the regulating commissions, the question is: 
 Does it produce the revenues by an equitable distribution of the cost of service 
 among those who use the service? From the community's point of view, the 
 question is : Does the zone plan produce the revenue without substantial injustice 
 to the individuals who pay the fares, while at the same time contributing to the 
 public welfare through the exertion of a proper influence upon the distribution of 
 population and the total direct and indirect costs of transportation service? 
 
 Unfortunately, American experience with the zone fare is quite limited, and 
 the testimony of the witnesses on this subject, though quite voluminous, is for the 
 most part rather superficial. This is a case where even unanimity might not be 
 convincing. But there is disagreement. To the question whether the zone plan 
 will produce the revenues, Mr. Thomas N. McCarter, of the Public Service Rail- 
 way Company would reply : "A thousand times, no ! — At least not in New Jersey." 
 On the other hand. Mr. Lucius S. Storrs would reply: "The results are very 
 satisfying — at least in Connecticut." .And Mr. Walter Jackson's reply would be: 
 "The zone system produces the revenue in Great Britain and Australia — why not 
 in America?" Meanwhile, the truth waits upon experience. 
 
 To the question as to whether the zone system provides for an equitable dis- 
 tribution of the cost of service. General Tripp, among others, answers, "Yes." 
 His testimony on this point, at page 160 of the Proceedings, is as follows : 
 
 "Commissioner Sweet : Do you regard the present iircvailiiig system of charging the 
 same amount for .short hauls and long hauls as just? 
 
 "Gen. Tripp: No; I do not regard it as just. 
 
 "Commissioner Sweet: Is it good business? 
 
 "Gen. Tripp: It is not good business. 
 
 "Commissioner Sweet : Well, how would you change it ? 
 
 "Gen. Tripp: (If course, the only change that 1 know atxjut would be a zone system, 
 such as is universally used almost all over England and the Continent. 
 
 "Commissioner Sweet: How is it working there? 
 
 "Gen. Tripp: Working i>erfectly well. 
 
 "Commissioner Sweet : Will you describe that zone iJystem, so we will understand more 
 fully what it is? 
 
 "Gen, Tripp: .\ zone system simply consists in certain zones. After you pass out of 
 one zone into another, you pay an additional fare. The fare in England, in the shorter zone, 
 is low. I just do not rccill wh.Tt it is, but it is less than live cents or its ttiuivalent. 
 
 "Commissioner Sweet : Yes. 
 
 "Gen, Tripp : Rut it increases as you go out into the suburbs. 
 
 "Commissioner Sweet: Would not that necessitate a great deal of Ixjthcr and annoyance 
 that .'Nmericans would object to? 
 
The Zone Fare 237 
 
 "Gen. Tripp: That is the objection. It is not based on sound economics, and it is not 
 just, but it is the custom in this country. 
 
 "Commissioner Sweet: You mean the present system? 
 
 "Gen. Tripp : Yes ; the present system. 
 
 "Commissioner Sweet ; Hut I am speaking of the zone system, and I am asking you 
 whether Americans would not rather object to paying these small amounts as they pass from 
 one zone into another? 
 
 "Gen. Tripp : Well, I don't know. They are becoming more or less educated to do it 
 on interurban lines, and I have heard some cities have recently adopted it. I do not know 
 how it is working. My impression has always been that they would object, but I have never 
 known of its being tried in a large community, so I do not know that it has ever been proved 
 that they would object. 
 
 "Commissioner Sweet : But you think that that is a just and a business way of handling it? 
 
 "Gen. Tripp : Yes, sir." 
 
 But here we have to make a distinction between the simple distance tariff 
 as it is worked out in British cities and a modified zone fare schedule such as the 
 plan originally proposed by the Public Service Railway Company of New Jersey, 
 and later applied with considerable modification by the Connecticut Company. 
 With respect to the British plan, the American Electric Railway Association's 
 Committee on Zone Systems, in the portion of its report which I have already 
 quoted, alleges that it is "most discriminatory in favor of the short-haul rider, 
 because cost of service is admittedly not directly proportional to the distance 
 traveled." The same point of view is taken, though somewhat more mildly, by 
 Dr. Dugald C. Jackson. In his testimony, he quoted certain conclusions reached 
 as a result of a special investigation made at the Massachusetts Institute of Tech- 
 nology a few years ago. One of these conclusions, which appear at page 1431 of 
 the Proceedings, is as follows : 
 
 "To meet increasing cost of service and to properly prepare for extensions of existing 
 systems, the street railways in the United States, both urban and suburban, will sooner or 
 later be forced to adopt a system of rates based more nearly on the length of the haul. A 
 mileage system of rates is probably not desirable in American cities." 
 
 Commenting upon the conclusions referred to, and particularly upon the one 
 just quoted, Doctor Jackson says, at page 1432 of the Proceedings: 
 
 "The foregoing conclusions all point to the necessity of some zone plan of fares for our 
 large cities. Where it is pointed out in the conclusions that a mileage system of rates is 
 probably not desirable in American cities, it is the intention to urge the fact that transporta- 
 tion, like other branches of business, has a certain proportion of overhead cost which is 
 reasonably independent of the bulk of the business, and that, therefore, the short-haul passen- 
 gers may be expected to pay a larger per-passenger-mile apportionment than the long-haul 
 passengers, and that the zone system should be laid out recognizing that fact. Zones which 
 might have been based on a 3-cent fare under pre-war cost, would, today, call for a 5-cent 
 or larger fare. 
 
 "Most of the street railways of the United States have wished to avert the introduction 
 of zone fares, partially on account of the difficulty of adequate auditing of the fares collected. 
 In the European cities where zone fares have been used for several decades, the plan has been 
 usually founded upon a straight mileage charge without consideration of the stand-by charges, 
 and measures for adequate auditing have not been introduced." 
 
 It may be admitted that theoretically the cost of street railway service is not 
 directly proportional to the length of ride, but ii: my opinion there is very little 
 basis, even from the point of view of scientific rate-making on the cost theory, 
 for the assumption that a minimum charge, considerably in excess of the mileage, 
 should be made for all passengers, no matter how short their rides may be. The 
 subject is complex and difficult, but there is danger in trying to carry over into 
 the street railway business from other utilities the theorj' of "readiness-to-serve" 
 as a distinct element of cost entering a just rate chargeable to the individual con- 
 
238 Electric Railway Problem 
 
 sumers irrespective of the actual amount of the service taken by them. In other 
 utilities — water supply, gas, electric light and power and the telephone — the 
 theoretical justification for a "readiness-to-serve" charge grows out of the fact 
 that each consumer has a fixed physical connection between the premises he owns 
 or occupies and the distribution system of the utility. The relation between the 
 street railways and their patrons is quite different. The New Jersey idea of 
 "soaking" a passenger for 3 or 4 cents as a "stand-by" charge every time he 
 boards a car is almost grotesque as an application of a scientific theory of rates. 
 It is as if the "readiness-to-serve"charge in water rates, for example, were to 
 be applied every time a consumer goes to the faucet to get a drink ; or in gas or 
 electric rates, every time he turns on the light. That would not be a "stand-by," 
 but a "get-busy" charge. If the street railways are to levy a stand-by or ready- 
 to-serve charge, they should tackle the man on the sidewalk or in the automobile 
 or the woman that stays at home when she might use the street car to go shopping. 
 It may be that a proper allocation of local transportation costs would involve the 
 levying of a service tax upon property to which street car servMce is available, 
 or the exaction of a sort of membership fee in the Car Riders Club from the 
 fellow's who ride only occasionally, hut this is an entirely different matter from 
 attempting to modify the distance tariff by imposing a disproportionate charge 
 upon the short-haul rider. In my opinion the theory of a "stand-by" charge is 
 not properly applicable to street railway rates unless it is applied to the infrequent 
 or irregular rider as such, not to the short-haul rider as such. Theoretically, 
 it would be entirely feasible to require every car rider to pay a "stand-by" charge 
 of 50 cents or $1.00 a month, or a certain larger amount every three months, 
 every six months or every year. Under such a plan, nobody could ride unless 
 he had paid his dues and could show his receipt, and then he would have to pay 
 his regular fare based on the distance traveled. This suggestion seems quite 
 fantastic, but it is eminently logical as compared with the schemes being devised 
 by the electric railway companies to justify the adoption of a hybrid zone plan 
 without the low fare for the short ride. In general, we may conclude that the 
 straight distance tariff, supplemented by a scheme of stand-by charges for the 
 potential or occasional riders, would satisfy to a reasonable extent the demands 
 for scientific rate-making on the cost basis. 
 
 The third question, as to the effect of the zone fare upon the community 
 as a whole, is still harder to answer. Secretary Raker expressed himself as in 
 favor of the zone system, but admitted the inijiortant social benefits of the uni- 
 form flat fare. He finally justified his position by alleging that the zone fare 
 by causing congestion would knock the bottom out of suburban real estate, and 
 then the people who had rushed into the central district to avoid the higher car 
 fares would rush back again to take advantage of the slump in suburban rents. 
 .^t page 1025 of the Proceedings, Mr. Baker says : 
 
 "I have always IhUcvwI in the zone plan of chafKc. I think that the payment that one 
 makes to a street railroad comiiany oiiRhf to be for the service rendered him, as near as it 
 can be. I used to arRiic with Mr. Johnson about that and his objection to it was that you 
 would have to have a bookkeeper for each passenper on the street car, which was an cxaRRer- 
 atcd but ilUistrative way of stating the difficulties. I do not sec the sliRhtcsf reason why we 
 should not have on the street railroads in this country a zone system like the British use in 
 their motor buses." 
 
The Zone Fare 239 
 
 Mr. Baker's discussion of the effect of the zone plan upon congestion comes 
 a little farther on. At pages 1025 and 1026 of the Proceedings, in response to 
 questions by Commissioner Sweet, he testifies as follows : 
 
 "Commissioner Sweet : In your discussion with Mayor Johnson of the zone system did 
 either of you bring up the question of distribution of population? 
 
 "Secretary Baker : Very constantly. It was a thing we had in mind all the time. 
 
 "Commissioner Sweet : Don't you think the zone plan would work rather in favor of 
 congestion and be objectionable on that ground, quite seriously? 
 
 "Secretary Baker: Yes, it kills the traffic on both sides of the zone line, it has that 
 effect, and I think it does have the effect of congesting the people towards the cheaper haul. 
 
 "Commissioner Sweet : When you consider 
 
 "Secretary Baker: But that accounts for itself very easily. What happens then is that 
 the rent which the landlord gets at the end of the line falls; so it ultimately goes back to 
 the land value after all. 
 
 "Commissioner Sweet : I understand that under the European system the higher charge 
 in proportion to the longer trip has seriously tended towards congestion in the cities. Our 
 system of charge, a nickel for almost any ride whatever on an electric railroad, urban or in 
 the vicinity of a city, has had a tendency, I think, to build up the suburbs of cities to quite 
 an unsual extent, more than in foreign cities. 
 
 "Secretary Baker : I think it has. 
 
 "Commissioner Sweet : .And that would certainly seem to be in the interest of sanitation 
 and perhaps good morals and the general benefit of the community, would it not? 
 
 "Secretary Baker: Yes, there are advantages on that side. 
 
 "Commissioner Sweet : I have wondered whether the advantages there were such that 
 it would be better to make up a deficiency if necessary by general taxation and charge the 
 low rate of fare to encourage people to build and own homes outside the cities. 
 
 "Secretary Baker : You may be interested to know that Mr. Johnson entertained your 
 view so strongly that he regarded the ideal way of street railroad operation as entirely paid 
 for by the taxpayers and all car riding free. He used to say there was no more reason why 
 elevators should be operated free in buildings than that street railroads should be operated 
 free. The same thing ought to apply. I do not agree with that." 
 
 Mr. Baker was in favor of retaining the 5-cent fare, even though it might 
 prove necessary to shorten the one- fare zone. At page 1035 of the Proceedings, 
 he says: 
 
 "I have never been able to get the difficulties of the zone system — I think if you start 
 with the S-cent fare, if that is the necessary fare, and you charge another cent for riding an 
 additional mile beyond the profitable limit, it is perfectly unobjectionable. 
 
 "Commissioner Meeker: Do you think the effect upon congestion is negligible? 
 
 "Secretary Baker : Negligible. 
 
 "Commissioner Meeker : We have in our S-cent fare zones the greatest congestion of 
 population to be found in the world, in New York City. 
 
 "Secretary Baker : Yes. The immediate effect undoubtedly would be to cause people 
 to move in the tenements in the cheap fare district. The next effect of it, however, is to 
 decrease the rental value of outlying lands and then people find they can rent for as much 
 less out there than they could downtown as the difference in the cost of the street railroad 
 fare, so that the effect of it is to disperse the population. 
 
 "Commissioner Meeker: Does it not also have the effect of dispersing industry? That 
 seems to be the experience in Europe. 
 
 "Secretan.- Baker : Yes, I think it does, although the European experience on that subject 
 is unreliable because the habits of the two sets of people are different. Their laborers all live 
 around their factories and workshops and ours never did." 
 
 Dr. Dugald C. Jackson expressed the opinion that there is nothing in the 
 congestion argument against the zone system, and that the full cost of street rail- 
 way service should be collected from the car riders. At pages 1433 and 1434 of 
 the Proceedings, he says : 
 
 "Voice has been given to much well-meant but incorrect criticism of zone fares for 
 American cities. This has generally been based upon an allegation that zone fares would 
 mcrease the concentration of population in tlie cities. My study has satisfied me that these 
 premises are erroneous, and the criticism incorrect. The family that has gone to the suburbs 
 for the purpose of obtaining better living conditions, as a rule, is able to pay a slight increase 
 of fare without overthrowing its margin of advantages. If such fares are not increased above 
 
240 Electric Railway Problem 
 
 5 cents, provided the distance to the suburb is greater than the passenger can be carried 
 for S cents, then the loss from carrying such passengers for 5 cents must be borne by others. 
 If this loss is assumed by the state or by the city and the suburban villages, the suburban 
 dwellers will ultimately pay more than the extra fare, on account of the increase of taxes, 
 or from the apportioning of taxes in rent, and in the cost of the various articles of food and 
 clothing purchased. 
 
 "In other words, when one pays for something indirectly, it ultimately costs him more 
 than if he had paid for it directly. While he may not know^ that he is paying for what he got 
 at less than cost, he actually is, and is paying more for it." 
 
 Mr. W. D. George, one of the receivers of the Pittsburgh Railways Coinpany, 
 was very emphatic in his contention that the zone plan tends to congestion. In 
 discussing the new rates put into effect when the Pittsburgh zoning experiment 
 was abandoned, Mr. George says, at pages 310 and 311 of the Proceedings: 
 
 "The new rate of fare which we have in effect is more of a flat fare than any fare that 
 they have ever had there, in that we are giving now what they never had before— a crosstown 
 transfer privilege. Ten cents will entitle a man to cross the downtown section, with a transfer 
 — something which they never had before. 
 
 "We put that in operation in the attempt to afford that freedom of travel from one 
 section of the town to the other, and we are getting away from this zone system of fares 
 which, to my mind, works towards the congestion of population, and it has a tremendous effect. 
 
 "I want you gentlemen to consider what any discrimination of 2 cents in railroad fares 
 will mean to a family of, say. four riders a day. To see what it would mean, I figured it 
 out one day. as a real estate man, and I figured that a lot that was just inside of a zone 
 that had a 5-cent fare was worth about $30 a front foot more than the lot that was just 
 outside of a 5-cent zone, in a 7-cent zone, to a man who had four daily riders on the street 
 cars. He could afford actually, if he was buying a 30-foot lot. to pay $30 a front foot more 
 to get inside that zone. .And don't you think they will get in? Why. they will get in, and 
 the apartment houses will get in, and there will be a tendency towards congestion in these 
 .American cities which will approach the situation in Glasgow today, and if you have been 
 familiar with the studies which have In-en made of housing conditions in Glasgow, they will 
 cure you of any notion that street car companies should be built up for the purpose of raising 
 revenue, and at the .same time working against the proper distribution of the population of 
 a city. If you will allow me to regulate rates in the city of Pittsburgh, I can move the 
 population and create land values and destroy land values." 
 
 Again, at page 311 of the Proceedings, Mr. George says: 
 
 "I do not lielieve any city can afford to see a system of zone fares built up in it. I think 
 it would Ix; tremendously destructive to the right sort of development of the city. * * ♦ 
 Not only that, but it would be destructive of business locations which have been created on 
 a flat system of fares." 
 
 It appears that the Indiana Public Service Commission has been somewhat 
 unconventional of late, as it has not considered itself bound in all rate cases by 
 purely financial considerations. This is indicated by the testimony of its secretary, 
 Mr. Carl H. Mote, who discusses the zone plan at pages 1100 and 1101 of the 
 Proceedings, as follows: 
 
 '"Commissioner Sweet: Have you considered the possibility of going to the zone plan? 
 
 "Mr. Mote: Yes. • • • * \\\. [i^vc denied a petition .isking for that. 
 
 "Commi.isioncr Sweet: What is your objection to tlic zone plan? 
 
 "Mr. Mote; Because of the tendency to cause congestion, the social objections to it. 
 We do not have the same problems. I frankly recognize, like a city like New York or Boston 
 or the larger cities have. There I would think the zoning system would be inescapable, but 
 I do not think that it is tnic of our state, 1 do not think it applies to any of our cities. 
 
 "Commissioner Sweet: V\'hat is the population of Indianapolis? 
 
 "Mr. Mote: 300.000. 
 
 "Commissioner Sweet: How many square miles does it cover about? 
 
 "Mr, Mote: Well, roughly, 100. 
 
 "Commissioner Sweet : Were it not for the objection th.it you speak of, the tendency 
 to congestion, would you favor the zone system in Indianapolis? 
 
 "Mr. Mote: There is onr i>tlier reason, and that is that people have built their homes 
 
The Zone Fare 241 
 
 in the suburbs upon tlie theory that they are going to be able to ride downtown as cheaply by 
 living in the suburbs as it they lived down at 10th street or 11th street or down near town, 
 and I should think the moral eti'ects of a change to the zone system would be bad in our city." 
 
 Lieutenant Colonel Charles W. Kutz, Chairman of the Public Utilities Com- 
 mission of the District of Columbia, where two rival street railway companies 
 operate, explains at pages 1039 and 1040 of the Proceedings the reasons why the 
 zone system was not adopted in Washington. He says : 
 
 "Then the suggestion was that we adopt a zone system, which would also have an 
 equalizing efifect in this particular case, because of the ten suburban lines of the one company 
 as against the two of the other. But when the zone system was suggested some months 
 ago, very great opposition was voiced to it. 
 
 "The District of Columbia is somewhat different from the average city in the country in 
 that its boundaries were fixed a great many years ago, and probably will remain unchanged 
 for a great many years. In other words, it is not an expanding community, from a territorial 
 standpoint. 
 
 "Of course, all property values within the District have for many years been based on 
 this flat rate for street car fare, and of course we distribute electric light to all parts of the 
 city on the same rate and we distribute gas to all parts of the city on the same rate, and yet 
 we know it costs more to deliver gas ten miles than it does to deliver gas one mile. Also, 
 sociologically, we think there are a great many advantages in a flat rate of fare within the 
 
 District of Columbia. 
 
 ******** 
 
 "The evidence seems to indicate that a zone system in the District would be very unpop- 
 ular, and I believe if submitted to a referendum of the people, their preference would be 
 expressed for a flat rate of fare rather than the zone fare. 
 
 "I might say that the charge for transfers is not a popular charge in the community. 
 Many people, individually and collectively, have expressed the opinion that an increase in the 
 flat rate of fare would better satisfy the public than a charge for transfers." 
 
 Mr. Walter Jackson was the best qualified witness before the Commission 
 so far as zoning is concerned, as he had spent several months in Great Britain 
 and Ireland making an intensive study of the zone methods in use there, besides 
 being familiar through many years of personal observation with the conditions 
 prevailing on the electric railways of this countrj\ He advocated the introduction 
 of one-man safety cars as "by all odds the surest road to decreased costs and in- 
 creased revenue," but referred to the zone system as "a second way of more 
 limited application." His discussion of the zone fare system appears at pages 
 1600 to 1608 of the Proceedings. Two of his general conclusions are given at 
 pages 1601 and 1602, as follows : 
 
 "The first thing that I gathered from these studies was that the true zone fare inevitably 
 brings out a large proportion of people who ride one mile or less ; and this has been found 
 to apply under a great variety of topographical, density and other conditions ranging from 
 the tenement house condition of Glasgow through the small-house cities of England to the 
 more scattered construction of the newer cities of .\ustralia. This indicates clearly that the 
 minimum fare must be one that will attract the walker. In Great Britain this minimum fare 
 is usually one penny ; in Australia with conditions closer to our own, it is more likely to be 
 ly2 pence or three cents for an initial zone up to 1^ miles or so. 
 
 "If any American city of reasonably compact population can show only ten to twenty 
 per cent of its riders within a one-mile ride, it is obvious that it could do something with 
 a lower fare for the shorter distance. It would be unwise to specify any particular scale 
 of fares for universal application. In many towns, there might be but few situations where 
 the additional revenue from a diflterential fare system would make the extra cost and com- 
 plication worth while. I would always wish first to exhaust the technical resources of the 
 art. Ideal places for the zone fare, beqiinning with a rate to attract present walkers, are such 
 cities as Boston. Providence, New York, Philadelphia, thereby making the street railway 
 of maximum value to the public. I just mention those to be specific. Cities that are not of 
 that type are San Diego and East St. Louis. 
 
 "The second thing gathered from studies of the zone fare was that there is little or no 
 connection between the zone fare and congestion. Zone fares are found in almost every kind 
 of community. The character of housing often appears to be a national characteristic, as the 
 
242 Electric Railway Problem 
 
 tenements of French cities and the individual homes of English ones. Furthermore, the 
 expansion of American cities has been promoted largely by the ease of securing land, there 
 being no century-old estates to interfere. Where a city has had a zone fare from the begin- 
 ning, it must be obvious that the higher fare on the outskirts is offset in some measure by 
 the lower cost of land. In the United States, contrariwise, the realty man has fattened upon 
 the expansion of the electric railways far beyond the true needs of the community. The 
 municipality itself, as Dr. W'hitten has pointed out, has also been paying a bonus to the realty 
 operator iri overrapid extensions of its streets, water system and other utilities. In any 
 event, it is noticeable that under a correct zone system the fare is not absolutely cumulative, 
 so that the further a man lives away from the center, the less his fare per mile. For example, 
 Australian roads make a concession to the suburbanite just as the companies and the municipal 
 tramways of London do." 
 
 His further conclusions are found at pages 1607 and 1608, where he says: 
 
 "The third thing gathered from studying the zone fare in practice was the usclessness 
 of comparing track mileage to population for the purpose of comparing the zone fare versus 
 the universal fare. The older European cities show a comparatively small amount of tracks 
 to population, whether they have flat fares or zone fares. The new American cities and newr 
 Australian cities show liberal trackage, although the .Americans have flat fares and the 
 Australians have zone fares. All in all. it is true that European cities have too little track, 
 whereas American cities certainly have too much, because formerly competitive railways still 
 have their tracks in place although they have long been consolidated. A reduction in track 
 mileage would be a healthful blood-letting for many American cities. I may add that while 
 British cities have so little track in proportion to population, it does not appear that their 
 operators feel the need for much more. The tendency is to serve the suburbs first with 
 buses or trackless trolleys and to refrain from putting down costly track until the population 
 is dense enough to pay for, say, a 10-minute headway. This is common sense. In other 
 words, instead of having that development out in East St. Louis with its very costly track 
 construction, running out for miles and miles, because there was too much optimism or too 
 much pressure from realty developers, you would put down as the Englishman does two or 
 three buses and say: 'We will give a bus service every 30 minutes and if the population out 
 here grows we will put on some more buses and by and by we will put on a trackless trolley 
 or perhaps put down a track when we know it is there. We are not going to take a chance 
 on building something that is going to be a dead dog on our hands afterwards.' 
 
 "The fourth thing to be gathered from a close study of British practice is that the success 
 of the zone fare depends as much upon close headways as upon a short fare for a short ride. 
 It is obvious that people will not wait ten to fifteen minutes in order to ride one-fourth of 
 a mile to a mile. In Glasgow, where the minimum fare zone is l.IO miles,_ fully 62 per cent 
 of the passengers ro<le within that distance last year, and it is a long city, along a river 
 valley; and it must be clear that they would not have done so much short riding if the car 
 service had been infre(|uent. It does not follow, of course, that the cars themselves are as 
 good as our own in comfort and upholstery. Generally they arc nut, although the provision 
 of cross seats on the upper decks and permission to smoke there arc much appreciated. 
 Jitney experience in this country indicates that people tend to take the first vehicle that 
 offers, a .•ihabby auto Ixing often preferred to a finely upholstered car because the jitney 
 is there and the car is not. 
 
 "The fifth thing to be gathered from a study of zone fare systems was that they are not 
 to be judged in connection with the wages paid to the carmen unless we were to use the 
 same scale of fares. .-Vs a matter of fact, the British carman today is earning pre-war 
 American wages, has an eight-hour day and gets certain privileges like payment for reporting 
 time, unifdrms free and vacations that make the platform cost just as dominant as here. 
 On this new basis most fares are still one penny or two cents minimum. On tlie other hand, 
 the zone fare in .-Vustralia has been applied for years on railways which are paying American 
 wages. No matter what the wages are. a zone system can be worked out on the plan of 
 maximum revenue from maximum riders as against the plan of 8, 9 and 10-cent fares for 
 all who can Ik- compelled to pay them." 
 
 It cannot be doubted tti.it the iiiiifomi flat fare policy has been carried to 
 unreasonable limits on some .\nicrican street railway systems. In some cases, 
 it may even be argued that this policy has spread the urban population out too 
 much, and caused a scattered and unsymmetrical development which is expensive 
 from the community standpoint without doinp anybody except certain realty 
 people any more good than would have come from a more moderate distribution 
 of the people. In such cases the uniform fare area can properly be curtailed. On 
 intcrurban lines, a distance tariff is obviously proper. Possibly on some urban 
 
The Zone Fare 243 
 
 systems a modified zone plan may be adopted with advantage to the street railway 
 and to the community at large. But it is clearly intolerable that our American 
 uniform flat fare policy should be swept away and a zone system substituted for 
 it merely as an expedient for getting more revenue out of street railway service, 
 without first getting the advice in each particular case of the municipal author- 
 ities who are responsible for the city plan. It would be quite unsafe for the 
 electric railways to look to a distance tariff, whether it be a thoroughbred with a 
 British pedigree or a mere American scrub, to pull them out of the slough into 
 which they have fallen. 
 
Chapter XXX 
 RELIEF FROM TAXATION AND OTHER PUBLIC BURDENS 
 
 I have already discussed, in Chapter X\'I of this report, the extent of the 
 tax burdens levied upon the electric railway industrv- and of the franchise obliga- 
 tion's requiring the electric railways to make special contributions to the cost of 
 government. A gre:it deal of testimony was taken by the Conunission with re- 
 spect to the possibility of procuring for the electric railways a substantial amount 
 of relief through the abrogation of special taxes, paving obligations, etc. This 
 general subject was attacked along several ditlerent lines. Special franchise taxes, 
 when coupled with general property taxes, were denounced as a form of double tax- 
 ation quite inconsistent with the theory of "equal taxation" advocated by Professor 
 Bullock. In the second place, street railway paving charges were attacked on the 
 theory that they are a "relic of horse car days" and no longer appropriate, and 
 also on the theory that the street railway paving ta.x represents a discrimination 
 in favor of the automobiles. In the third place, some of the witnesses advo- 
 cated the temporary or permanent exemption of the street railways from all taxa- 
 tion as an alternative preferable to fare increases ; but this policy was strongly 
 combatted by other witnesses. A great deal of emphasis was laid upon the theory 
 that taxes, paving obligations and other special burdens placed upon the street 
 railways are in fact elements in the cost of serv'ice which are automatically trans- 
 ferred to the car riders; but on the contrary it was pointed out by some of the 
 witnesses that special forms of taxation were developed as a means of compelling 
 the street railway companies to share their profits with the public during the 
 period when the companies were believed to be making exorbitant profits out of 
 the fixed 5-cent fare. 
 
 This subject of "relief" from taxation and franchise obligations having to 
 
 do with the occupation of the public streets by electric railway tracks and other 
 
 fixtures is an extremely complicated one. The policy that should be followed 
 
 depends upon the accepted status of the electric railway as a means of rendering 
 
 public service. In the .\nnals of the American .\ca«lemy of Political and Social 
 
 Science for March, 1913, I discussed "Taxation of Public Utilities." This was 
 
 just after the World War broke out, but two years before the United States got 
 
 into it. At the time, business in general was rather stagnant in this country, 
 
 and this condition was reflected in relatively low street railway earnings. Prices 
 
 were still nonual, but the growth of traffic had been temporarily checked. It was 
 
 shortly after the first national utilities conference had been hold in Philadelphia, 
 
 and the whole subject of the public relations of public utilities was unsettled. In 
 
 the article referred to, 1 said: 
 
 "If a piil)lic utility i.s tii Ik- rcRanled as a priN-atc enterprise, operated primarily for profit, 
 subject to the ordinary restrictions imposed upon other protit-scekinR enterprises, no objection 
 ran be raised to the IcvyinK of taxes uiuin its prniicrty or earnings in the same way that 
 
Relief from Taxation 245 
 
 similar taxes are to be levied on the property or earnings of other private undertakings. On 
 the other hand, if public utilities are to be regarded as agencies of the state or the municipal- 
 ity, performing strictly public services under stringent public regulation, the levying of taxes 
 upon their property or earnings is quite another matter. At this moment the relations 
 between public utilities and governmental bodies are in a transition stage, and, therefore, it 
 is not easy to formulate a rule in regard to the taxation of utilities that will be universally 
 recognized as correct in theory or practice. In ray judgment, however, we can assume that 
 the patent and inevitable tendency in tlie development of the relations between the utilities 
 and the public is toward the recognition and full establishment of the agency theory. 
 ******** 
 
 "Even if we assume the ultimate establishment of the public agency theory in universal 
 practice, we shall still have to consider just what that means. When we escape from the 
 theory that public utilities are luxuries operated for profit, we start off on a long road with 
 many possible stopping places. Many public services are even now rendered free to those 
 who have need of them. While it is a rather far cry from the assertion that public utilities 
 should not be operated for profit to the prophecy that some time they will be operated entirely 
 at the expense of the general taxpayers, the road from one point to the other in public policy 
 is a direct one. At the present time, it is customary to say that public utilities ought not to 
 be operated for profit, but that they should be treated as self-sustaining business enterprises 
 rendering their services at cost. Yet, in practice, while the rearguard of the utilities lingers 
 in the realm of profitable exploitation, the vanguard has reached beyond the neutral area into 
 the field of governmental subsidy. Indeed, it requires careful analysis to determine just 
 what it takes to make a utility fully self-sustaining. For example, while the writer has 
 strongly opposed any system of profit-making or special taxation that would result in taking 
 a portion of the earnings of the utility out of the business, he has with equal urgency favored 
 a plan by which public utilities should be made to pay for themslves out of earnings. In 
 other w'ords, according to his definition, a public utility is fully self-sustaining only in case 
 its earnings are sufficient to pay operating expenses, interest on investment and also amor- 
 tization charges. This definition has a leaning toward conservatism. It is based upon the 
 theory that the capital invested in a public utility should be retired within a reasonable time, 
 partly because the physical property may become obsolete and partly because a utility that 
 has paid for itself will be in a better position to render increased service at reduced cost, 
 in accordance with the inevitable trend of public need as time goes on. 
 ******** 
 
 "We may mark several stages in public utility development as follows : 
 
 "1. Public utilities operated for profit and, in case of private ownership, accompanied 
 by various forms of taxation and partnership intended to give the public a share in the profits. 
 
 "2. Public utilities operated at cost, including in cost ordinary ta.xes and interest, and 
 amortization charges sufficient to retire the investment within a reasonable fixed period. 
 
 "3. Public utilities operated at cost, including in cost ordinary taxes and interest charges, 
 but no amortization. 
 
 "4. Public utilities operated at cost, including in cost interest charges, but excluding both 
 amortization charges and general taxes. 
 
 "5. Public utilities operated at cost, with the help of subsidies from taxation to take 
 care of interest charges. 
 
 "6. Public utilities operated according to a fixed standard of rates and service, with 
 deficits in operating expenses made up out of taxation. 
 
 "7. Public utilities operated at the expense of the taxpayers, all service being rendered 
 free of charge. 
 
 "The public agency theory is controlling in all of the stages just enumerated except the 
 first. This first stage may be regarded as a 'left-over.' It is a relic of the past. At the same 
 time, some individual utilities are so surrounded by tradition and so fortified by contracts and 
 judicial decisions that no one can foresee how long they may linger in this first stage. So 
 far and so long as public utilities continue to be operated on a speculative basis in accordance 
 with the ancient traditions, taxation may be regarded as a legitimate means of securing public 
 reventie and also as an instrument for shrinking the values of special privileges that have 
 slipped out of public control in past years through the improvidence or corruption of public 
 officials. Taxation should certainly be regarded as one of the most eflfective weapons the 
 state has for subduing the pride and independence of the perpetual franchise barons. Relief 
 from various forms of taxation may be used properly and effectively as a means of inducing 
 public utility franchise holders to accept a readjustment of their contractual rights with the 
 public, wherever such a readjustment seems to be of vital public necessity." 
 
 With respect to the taxation of public utility real estate, special franchise 
 values, personal property and corporate franchises, I said : 
 
 "One of the chief points at which the agency theory has been limited by the trend of 
 court decisions is in the matter of the value of land upon which public service corporations 
 
246 Electric Railway Problem 
 
 arc entitled to a fair return. As the law now stands, the private owners of a public utility 
 are entitled to the l)cnetit ot the increment in land values. One of the tax reform programs 
 that is receiving wide support calls for the gradual increase of the tax on land values and 
 the gradual elimination of other taxes. This policy, if carried through to the final limit, 
 would have the effect of taking away all or most of the selling value of land, and would 
 therefore deprive public utility owners, by means of taxation, of the increment in land value 
 in just the same way as it would deprive other land owners of such increment. If the 
 gradual stiffening of the land tax is to be adopted as a permanent public policy, there cer- 
 tainly is no reason why the private owners of public utilities should be exempted from its 
 effects. Therefore, it becomes important to consider just what is the effect of the taxation 
 of land devoted to public use in connection with a public utility. Under monopoly conditions, 
 if the rate charged for the service is a fixed sum, such as the 5-ccnt street car fare, it is 
 obvious that the exemption of public utility land from taxation would redound to the benefit 
 of the owners of the public utility and not to its patrons. If. instead of a predetermined, 
 fixed rate for the service, a corporation is permitted to charge 'all the traffic will bear,' then, 
 al.so. the exemption of the company's land from taxation would result in a direct benefit 
 to the owners rather than to the patrons of the utility. If, however, the utility is subject 
 to continuing regulation, on the theory that it will Ik allowed to earn a fair return upon a 
 fair present value of the property and no more, then the exemption from taxation of land 
 occupied by the utility would result in a reduction of rates or an improvement of service, and 
 in either case would redound to the iK-nefit of the utility's patrons, and would not confer 
 any particular advantages upon the owners of the utility. This result follows from the fact 
 that under the system of continuous regulation all taxes arc made a part of operating expenses. 
 Therefore, it would appear that in so far as public utilities are to be subject to constant and 
 effective regulation in the matter of rates and charges, the correct policy would l)e to exempt 
 their lands from taxation, on the same theory that any other lands devoted to public use are 
 so exempted. The fact that the owners of the utilities are considered to be entitled to the 
 incretnent in land values has no bearing upon the subject, for the taxation or exemption of 
 the particular lands owned by the public utilities would, under conditions of perfect regulation, 
 be a matter of interest to the consumers on the one hand and the general taxpayers on the 
 other, but not to the owners of the utility as such. 
 
 "What has just been said in regard to the land tax applies with efjual force to the special 
 franchise or easement tax so far as this tax applies to intangibles. The special franchise tax 
 of New York, however, defines the intangible right to use the street as land, and the tracks, 
 poles, wires, pipes and other fixtures in the street as improvements upon land, analogous to 
 the buildings on land not situated within street limits. The taxatfon of buildings and street 
 fixtures devoted to public use by a public utility has all of the disadvantages of the taxation 
 of improvements generally, except that in cases where the utility is not subject to continuous 
 public regulation as to rates the taxation of these portions of the company's property cannot 
 be shifted to the shoulders of the consumers. It would seem, therefore, that the special fran- 
 chise tax, as applied cither to intangibles or to tangibles, is of no value as a restrictive measure 
 except in the case of public utilities which are not subject to public regulation or which have 
 their rates established by contract. Under all other circumstances, the tax upon public utility 
 real estate, whether in the streets or not, is to be considered merely as a revenue measure. 
 If the occupation of land and the use of buildings and other improvements upon land are 
 considered as a part of the legitimate cost of a self-sustaining business, then public utilities 
 may be reiiuircd to contribute their share to the public treasury to the same extent that other 
 occupiers of land and buildings arc required to contribute. Exemption from ordinary real 
 estate taxes will gradually Ix- brought about as public utility scr%'iccs come to be recognized 
 as more and more public in character. 
 
 "The personal property tax. the corporate franchise tax, and the tax on gross or net 
 earnings, as a|)plicd to public utilities, are to be regarded as relics of the time when public 
 service corporations, in spite of their name, were not regarded as agencies performing 
 public fimctions. Thc^e kinds of taxes cannot be justified except as they apply to public 
 utilities still lingering in the speculative profit-seeking stage. To the extent that privately 
 owned utilities are brought under effective public regulation, these taxes become as illogical 
 as they would be if applied to municipal water works, docks, markets and lighting plants." 
 
 Passing on to the group of taxes and public cliarges which represent legiti- 
 mate items of operating cost, I continued : 
 
 "This group includes the obligation to pave and repair streets (or in lieu thereof the 
 paving commutation tax), sprinkling and snow removal charges, license fees, pole taxes, 
 bridge tolls, and so forth. The theory of these taxes and charges is cither that the public 
 titililv has the special use of certain public property to the disadvantage of other users and 
 should therefore he required to pay an ecpializing tax or rental, or that in the course of its 
 operations a public utility actually destroys portions of the street which it ought to replace, 
 or compels the general municipal authorities to incur expenses which the utility ought to 
 stand. In so far as it can lie shown that the presence of street railway tracks in a street 
 
Relief from Taxation 247 
 
 destroys the pavement or requires the widening of the roadway for the accommodation of 
 general traflic, the additional costs involved may properly be charged to the street railway 
 if that utility is to be self-sustaining. In like manner, as the operation of cars increases the 
 dust nuisance, a part of the cost of oiling or sprinkling the streets may properly be charged to 
 the street railway. The same reasoning applies to the removal of snow and ice. Furthermore, 
 in all cases, the .street railway or other utility should be charged with the actual damages 
 to persons or property caused by the construction or operation of the utility in the streets. 
 The erection of poles and wires naturally interferes with and damages to a certain extent 
 the shade trees along the streets, and the laying of conduits or water or gas pipes may also 
 damage trees and injure pavements. Whether these various extra expnses and costs shall 
 be paid directly by the utility, or whether they shall be paid in the form of commutation taxes, 
 is immaterial to this discussion. In either case, they form a legitimate part of the operating 
 expenses and cost of service of the utility. What forms they shall take is a question of 
 public expediency and public policy in each state or city." 
 
 My general conclusions five years ago were couched in the following terms: 
 
 "1. In so far as public utilities remain on a speculative basis, and continue in the 
 enjoyment of special privileges protected by judicial decisions and contractual rights, ta.xa- 
 tion may be resorted to botli as a revenue measure and as a weapon for regaining public 
 control over such utilities. 
 
 "2. In so far as privately owned public utilities are subject to adequate continuous 
 public regulation as to service and rates, the principles of ta.xation as applied to them should 
 be the same as the principles of taxation and profit-making applied to publicly owned utilities. 
 
 "3. Whatever revenue public bodies may derive from public utility taxes or contributions, 
 except to the extent that such taxes and contributions may be regarded as a part of the 
 actual and legitimate cost of service, should be used as a fund for amortizing, first, franchise 
 and other intangible values and, second, the capital investment in the physical property of the 
 utilities. 
 
 "4. As the public agency theory of public utility operation comes to be more widely 
 recognized and more fully established, the tendency will undoubtedly be to diminish and 
 finally eliminate public utility taxes and contributions and, per contra, to subsidize public 
 utilities out of taxation to the end that a higher standard of service may be rendered at a 
 fixed or diminishing charge to the public." 
 
 The exigencies finally created by the World War. to my mind, have em- 
 phasized what was already obvious to close observers before the war started, and 
 have brought matters to a crisis that demands the immediate formulation of public 
 policy with respect to the regulation of electric railways and the imposition of 
 taxes and other public burdens upon them. With reference to the testimony 
 before the Commission, the subject may be discussed under several heads : ( 1 ) 
 the theory of equal taxation; (2) the effect of taxes upon the fares paid by the 
 car riders; (3) the extent to which paving and miscellaneous charges are legiti- 
 mate operating expenses; and (4) exemption from taxation as a temporary emer- 
 gency measure. 
 
 In Chapter X\T, I quoted Professor Bullock at some length, where he 
 advocates equal taxation, and analyzes various forms of street railway taxes and 
 imposts from that point of view. Upon the general theory that street railways 
 should be taxed the same as "anybody else," Ex-President Taft's testimony at 
 pages 19 and 20 of the Proceedings undoubtedly represents the general trend of 
 intelligent but conservative public opinion on this subject. He says : 
 
 "I never have been able to see why street railway companies should be taxed by any 
 other rule than that under which other invested capital is taxed. You can tax them by income, 
 you can tax them by a percentage of the amount invested. Those are the two methods : 
 and 1 think that simplifies the methods. 
 
 "What you are going to find, if you have this percentage tax, is that the value of the 
 street railways will be taxed at a higher rate, I mean the property of the street railways will 
 be taxed at a higher assessment than the real estate of the ordinary taxpayer; and perhaps, 
 therefore, it is a fairer method to tax by income. I suppose you could not tax by income 
 only. You would have to have both systems of ta.xation. 
 
 "Commissioner Wehle : Your thought on this subject has suggested to me that possibly. 
 
248 Electric Railway Problem 
 
 in view of the fact that you regard the street railway service as, in a way, similar to the 
 service of conducting a public road 
 
 "Mr. Taft: 1 only mention that as an argument in favor of taxation to meet the deficit, 
 if it be inevitable, oi running suitable street railways. 
 
 "Commissioner W'chle : The thought was suggested to me that possibly you would view 
 any tax that goes beyond the necessity of meeting the expense of the state with reference 
 to the property itself as poor public policy. Is that your view? 
 
 "Mr. Taft: Well, no; because I think those who get any profit out of it ought to pay 
 the same taxation that men who make a profit out of other business pay. 
 
 "Commissioner Wehle : When you come to analyze the nickel or the 7 cents that goes 
 into the conductor's hands, and sec what it pays for. does it siem to you that the element 
 of taxation that is represented in that fare should go beyond paying for the conducting of the 
 property itself, as it affects the state or the municipality? 
 
 "Mr. Taft: I confess that if a man owns stock in a street railway and the stock pays 
 him, I do not see why he should not pay taxes on that income, or on the value of the stock, 
 just as if he had an investment anywhere else. 
 
 "Commissioner Wehle : That suggests taxing the stock or the income, rather than the 
 property itself? 
 
 "Mr. Taft: Yes. it docs; and I think the greater uniformity you make in taxation the 
 more likely you are to reach justice, and therefore if you treat .shares of stock in street rail- 
 ways just as you do shares of stock in a manufacturing corporation, or in any kind of an 
 enterprise. I think you are more likely to do justice; and you create a simplicity which is more 
 likely to lead to ju.stice or a just operation. 
 
 "Commissioner Wehle : That is. by making the taxation come upon the shareholder 
 or the bondholder, who obtains income out of the property, rather than on the property or 
 the franchise itself, you would think was the direction in which to go in the matter of 
 taxing public utilities. 
 
 "Mr. Taft: You arc there confronted with a lot of questions of expediency in taxation — 
 the ability to find the bonds and tax them, or the inability to find the bonds and tax them, 
 is one thing. You have got the railroad right in front of you. You have the wires, you have 
 the electric power plant, and with some experience in levying taxes. I do not think that 
 clearness of view that the state has of the actual property ought to be given up as an 
 advantage. I think it ought to l>e reconciled, as it seems to me it might be. with treating 
 that property just as you treat any property in corporate ownership. **»»•' 
 
 General Tripp and Doctor Conway, testifying on hchalf of the .American 
 Electric Railway Association, both expressed the opinion that exemption from 
 tax burdens and special franchise obligations would not alone afford the electric 
 railways suflficient relief in the present crisis. At page 157 of the Proceedings, 
 General Tripp, on cross examination by Commissioner Sweet, reafifirmed his 
 belief that the elimination of taxes, direct and indirect, would not afford "a proper 
 and perpetual solution" of the problem. At pages 160 and 161, his testimony 
 with respect to property and franchise taxes is as follows : 
 
 "Commissioner Sweet: How about general taxes? Do you think that the street railway 
 companies ought to lie taxed on their physical property? 
 
 "Gen. Tripp: Under the present theory of relationships, there is no reason why they 
 should not be taxed. 
 
 "Commissioner Sweet : Is there any consideration, do you think, which should be taken 
 of the value of their franchises? 
 
 "Gen. Tripp: For purposes of taxation? 
 
 "Commissioner Sweet : Yes. 
 
 "Gen. Tripp : Xo, sir. 
 
 "Commissioner Sweet: Merely the physical properties? 
 
 "Gen. Tripp: Yes. sir. 
 
 "Commissioner Sweet : That should be assessed on the .same general basis as other 
 properties owned by private individuals? 
 
 "Gen. Tripp: Yes. sir. 
 
 "Commissioner Gadsden : General, on the present basis, do you think the present 
 franchises have any value on which to base taxation? 
 
 "Gen. Tripp : No. sir. 
 
 "Commissioner .">weet : Tliev are rather negative, arc they not ? 
 
 "Gen. Tripp : Precisely. They are decidedly negative." 
 
 The question of the effect of street railway taxes and paving obligations on 
 fares raises several points of interest. Many of the witnesses discussed these 
 
Relief from Taxation 249 
 
 items of street railway cost as being merely indirect burdens on the car riders. 
 Whether or not they are such depends on whether or not the companies are in a 
 position to pass them along to the public. It is the same as it is with wages or 
 other items of operating expense or of cost of capital. If there is a perfect ad- 
 justment of fares to the cost of service, either through unrestricted and continuous 
 regulation, or through an automatic adjustment brought about under service-at- 
 cost contracts, the entire tax burden falls upon the car riders, and the amount of 
 taxes and other imposts levied upon the street railways is a matter of relative 
 indifference to the companies. On the other hand, so long as fares are directly 
 fixed by contract or custom, or so long as regulation is incomplete or not quickly 
 responsive to changes in the cost of service, any increase in taxes or other public 
 charges will fall, at least in part and for the time being, upon the companies. It 
 is to be presumed that in the long run fares will be adjusted to take all these costs 
 into account, except to the extent that public policy calls upon the taxpayers for a 
 share of the cost of transportation service. From the point of view of the com- 
 panies, the adoption of a serv-ice-at-cost program solves the tax problem except 
 to the extent that the inclusion of taxes in the cost of service tends to make it 
 doubtful whether the full cost can be collected from the fare payers. Professor 
 Bullock, in one of the paragraphs already quoted from his testimony, suggests 
 that "before you reduce the ordinary taxes levied on property, you should raise 
 your fares to the maximum point that is practicable, looking at the matter from 
 the revenue result." It is reasonably clear from the evidence that in the larger 
 cities Professor Bullock's suggestion of "charging all the traffic will bear" before 
 reducing ordinary taxes, if carried through relentlessly, w-ill yield enough revenue 
 to pay the taxes, certainly where jitney competition has been closely curtailed or 
 eliminated. Apparently, Mr. Newman was filled with optimism along these lines 
 when he testified that service-at-cost was a big enough program, without getting 
 it complicated by an insistence upon relief from taxation. After admitting to 
 Commissioner Sweet that taxation and paving obligations had imposed a "tremen- 
 dous" burden upon the companies, Mr. Newman's testimony, at pages 571 and 
 572 of the Proceedings, proceeds as follows: 
 
 "Commissioner Sweet : And what is your view with regard to the future of those bur- 
 dens? Should they be removed under the service-at-cost plan? Do you think it would 
 be wise and the proper thing from every standpoint for the general public to relinquish 
 voluntarily whatever advantage it might have obtained by reason of such paving and taxation? 
 
 "Mr. Newman : I would answer that in this way : The idea of service-at-cost based 
 upon a valuation is such a tremendous question in itself that when you attempt to complicate 
 that with these other questions you will be getting nothing accomplished. Now I prefer not 
 to bring up the question of taxes and of paving and to let that go along as part of the future 
 obligations of the company, because it makes no difference whether you do the paving or the 
 city does the paving, provided you are getting a return on your investment and provided 
 the public will pay the increased fare to justify that investment. That is almost mathematics, 
 is it not? 
 
 "Commissioner Sweet : Yes. The result, however, would be more certain, would it not, 
 and more satisfactory to investors if the burdens that I have been speaking of were removed 
 so that the total amount necessary to earn would be less? That would mean that the fares 
 would be somewhat less, would it not? 
 
 "Mr. Newman : Yes. 
 
 "Commissioner Sweet : And with a lower fare you are more certain to hold up your 
 patronage and the whole thing would move more smoothly, would it not? 
 
 "Mr. Newman : Yes, but I am afraid if we tried to be too much hog we might not 
 get anything. 
 
250 Electric Railway Problem 
 
 "Commissioner Sweet : You do not think there would be any hog about demanding or 
 trying to get absolute justice, do you? 
 
 "Mr. Newman; Not at all, but when you remove the paving and taxes you are throwing 
 a burden hack on the people that has been on the street railroads and then asking them to 
 pay increased faros, and 1 think you are complicating the question so you cannot present it 
 in a concise and clear manner and cannot get relief. I am afraid to tackle too many phases 
 of this problem. It is unfair in the light of today's operations to pay for paving l)ecause 
 we all know the city paves every street with rails on before any others are paved, and in 
 New Orleans we pay more ta.xes than the steam railroads together, and the same is true in 
 Birmingham. Now if you cut off those big taxes you are transferring your troubles back 
 to the administration. In the City of New Orleans they cannot do without these street rail- 
 road taxes. In the City of Birmingham they cannot do without these street railroad taxes. 
 .\nd that is where this thing is going to come back home to the city, they are going to choke 
 these companies to the point of receivership and poor service and then the companies are in 
 shape to go into court and contest the taxable value and get a reduction on this franchise 
 ta.x, and that is going to be a boomerang to the cities who cannot afford to cut off this tax. 
 I do not believe in complicating the question with this tax problem and the paving problem 
 and starting more antagonism to the street railroads, because I believe we can get a fare 
 which will return us a fair rate on our investment and at the same time take care of the 
 paving and the taxes without having to go back to the city and complicate the problem 
 further." 
 
 Mr. Luther R. Nash, of the Stone and Webster organization, testified at 
 length about sei^ice-at-cost franchises. His testimony as to the policy embodied 
 in these franchises with respect to franchise taxes is found at page 470 of the 
 Proceedings, as follows : 
 
 "Mr. Warren: What do these franchises provide, if there is any usual provision in them, 
 with respect to franchise taxes and what in your opinion should be the provision regarding 
 franchise taxes? 
 
 "Mr. Nash: There are only two or three of the dozen, approximately, that I recall that 
 provide specifically for a tax which could l)e called a franchise tax or a rental. In fact the 
 only two that I recall at the moment are Montreal and Cincinnati, in which substantial sums 
 are provided to be paid aniuially as a price for doing business on the city streets. In both 
 those cases the percentage of the gross earnings, if I remember rightly, is in excess of four 
 or five per cent ; in one case it is (Considerably higher than that. 
 
 "I do not at all approve of that kind of a tax. Theoretically a tax on a franchise ought 
 to be a tax on the right to earn a profit in excess of that which investors could earn in 
 ordinary industrial or commercial enterprises. Under a service-at-cost plan there is no 
 excess profit. The profit is just the bare amount which theoretically the investor could earn 
 somewhere cl.se. So that the opportunity for rendering a public service has no special value 
 on which a tax should be levied. So that I think taxation of public utilities should be limited 
 to the ordinary ad Talorein taxes which are paid by other industrial and commercial industries, 
 plus also such license fees as are paid by other kinds of business; in other words, the same 
 kind of taxes which other industries pay and no more. 
 
 "Mr. Warren: In other words, I supiiose the effect of the franchise tax, if it is levied, 
 is to add just that much more to the cost of service to the car rider. 
 
 "Mr. Nash: Yes, it is passed along directly to the car rider, which means that amount 
 of taxes is paid by a certain group of citizens instead of being distributed uniformly over 
 the entire list of tax payers, as it should be." 
 
 Mr. W. C. Culkins, at that time Director of Street Railroads of Cincinnati, 
 explained that the franchise tax under the new service-at-cost franchise there is 
 fixed at the flat yearly sum of $350,000. His explanation of this payment, and 
 of the attitude of the people of Cincinnati towards it, is found at page 497 of the 
 Proceedings, as follows : 
 
 "That is .supposed to take the place of the paving obligations. They are not required to 
 pave. That goes into the public service fund. 
 
 "The Chairman: If you excluded the franchise tax from the operating cost, you would 
 be able tn reduce your fare? 
 
 "Mr Culkins: We would not be able to reduce it, but we would be able to hold it where 
 it is, without any (piestion. 
 
 "The Chairman: Has any consideration l>cen given to that subject? 
 
 "Mr. Culkins: Well, there was discussion at the time the franchise was issued, hut it 
 was not seriously discussed, because it has Ix-en there so long that no power could have 
 
Relief from Taxation 251 
 
 convinced tlie people of Cincinnati that to remove that tax would not have been taking the 
 money out of their pockets and presenting it to the traction company. The city's financial 
 system was built around it. We have the present limitation of ta.xes in Ohio, and the cities 
 are all bankrupt. The taking away of $350,000 was a matter that the council would not have 
 agreed to in any event. 
 
 "Commissioner Sweet: If they had the option of paying 7 cents for a ride, or simply 
 paying this $350,000 in the form of a general tax, which would be more satisfactory? 
 
 "Mr. Culkins : I think, Mr. Chairman, that the car riders, if you ever get them up to it, 
 would begin to then understand it for the first time. Of course, there is no option in it. 
 It is a part of the ordinance now." 
 
 In the Montreal service-at-cost franchise, referred to by Mr. Nash, the annual 
 franchise tax or street rental payment is the flat sum of $500,000. Prior to 1918, 
 this payment to the city took the form of a graduated ta.x upon the Montreal 
 Tramways Company's gross receipts. When the Montreal contract was being 
 drafted, the attention of the Tramways Commission was called to the fact that 
 this annual payment to the city would be reflected in higher fares, but the chief 
 city attorney, who was a member of the Commission, said that the city regarded 
 this item in the nature of a reimbursement for municipal expenses caused by the 
 presence of the electric railway tracks and equipment in the streets. This Mon- 
 treal payment, however, is not in lieu of paving obligations. 
 
 A good deal was said by the witnesses about the exemptions enjoyed by the 
 Cleveland Railway Company under the Tayler franchise, and this is often re- 
 ferred to by street railway men as one of the explanations of the low fares in 
 Cleveland. There seems to be considerable misapprehension about the extent 
 and significance of these exemptions. Mr. John J. Stanley, President of the 
 Cleveland Railway Company, referred to this matter at page 606 of the Pro- 
 ceedings, as follows : 
 
 "You know, the city of Cleveland does a great many things for the railway. We operate 
 over eight bridges. One of those bridges cost $5,000,000. Now, we do not pay a cent for 
 rental in going over that bridge, and at each end of the bridge they have subways, and, as I 
 say, that one particular bridge cost $5,000,000. Now, we do not have to repave." 
 
 Mr. Stanley then called attention to the fact that many of the extensions 
 built during the past five or six years have been paid for by real estate men. In 
 regard to street sprinkling in Cleveland, Mr. Stanley said, at page 607 of the 
 Proceedings : 
 
 "At one time, we sprinkled the streets at a cost of thirty or forty thousand dollars. 
 Then, the city saw it was a burden to the car riders, and they said, "Now, you flush the 
 streets for us. and we will pay you for flushing them.' So they relieved us of sprinkling. 
 We flushed the streets, and we are getting out of that anywhere from fifteen to twenty 
 thousand dollars a year." 
 
 Secretary of War Baker, formerly City Attorney and later Mayor of Cleve- 
 land, explained the matter of the Cleveland Railway's taxes and paving obliga- 
 tions in some detail. At pages 1019 and 1020 of the Proceedings, he testified 
 as follows : 
 
 "Commissioner Sweet: The street railroads of Cleveland are taxed? 
 "Secretary Baker : Yes. 
 
 "Commissioner Sweet : They pay regular city and county and municipal taxes upon their 
 physical property? 
 
 "Secretary Baker : Yes. 
 
 "Commissioner Sweet: Is the francliise taxed? 
 
 "Secretary Baker : No. 
 
 "Commissioner Sweet: Is the income taxed? 
 
 "Secretary Baker : No. It may be under Federal law, but not local. 
 
252 Electric Railway Problem 
 
 "Commissioner Sweet : Are they required to do paving between the tracks and for a 
 short distance outside? 
 
 "Secretary Baker : They are required on all new paving, that is. on all streets not 
 previously paved, where they make extensions, or in a street in which they have tracks which 
 has not been previously paved, they are required to pave between the rails on each track and 
 the strip outside and are required to keep up the pavement and they make any repairs; but 
 in the case of repaving they are not required to pay the cost of repaving." 
 
 In connection with the Cleveland situation attention should be called to the 
 fact that although the company does not have to repave, it is required to lay the 
 pavement originally and is also required to maintain it. Therefore, the original 
 cost of paving is found in the capital account, and paving repairs appear in the 
 maintenance expenses. In fact, the company spent during 1918 no less than 
 $274,694.49 for paving maintenance, as compared, for example, with $151,541.35 
 spent by the Public Service Railway Company of New Jersey in the same period. 
 On the other hand, the Cleveland comi)any spent only $45,S2S.36 for cleaning and 
 sanding track and $12,184.62 for removal of snow and ice, as compared with 
 $86,425.70 and $45,848.08 spent for these two items, respectively, by the Newr 
 Jersey company. The three items together amounted to $332,707.47 in Cleve- 
 land, as compared with $283,815.13 in New Jersey. The Cleveland mileage was 
 385.3, as compared with 849 miles on the New Jersey system, including about 
 600 miles in paved streets. 
 
 The taxes levied against the Cleveland coinpany in 1918 amounted to 
 $720,413.14, as follows: 
 
 Real and Personal Property $420,000.00 
 
 Ohio Excise '. 149.192..S0 
 
 Ohio Utilities Commission 3.606.58 
 
 U. S. Income 123,541.40 
 
 U. S. Internal Revenue 135.00 
 
 U. S. Capital Stock 14,712.85 
 
 U. S. War 6.832.81 
 
 U. S. Bond Interest 2,392.00 
 
 Total Taxes $720,413.14 
 
 These taxes amounted to 2.0535 cents per car mile, or 5.79 per cent of the gross 
 earnings. The taxes levied against the Public Service Railway Company in 1918 
 amounted to $1,644,398.82 as follows: 
 
 State Franchise Tax on Capital Stock $ 713.99 
 
 State Franchise Tax on Gross Earnings 547.756.57 
 
 Taxes on Real Estate & Personal Property 662,518.08 
 
 591- Tax on Gross Earnings (Local) 233,068.96 
 
 Car Licenses 1 7.77^.33 
 
 Franchise Tax (Local) 17.46.3.54 
 
 Federal Income Tax 149.032.57 
 
 Federal ICxcisc Tax on Capital Stock 5. .538.50 
 
 Federal Excess Profits Tax 10,5.?3.28 
 
 Total $1,644,398.82 
 
 These taxes are the equivalent of 3.088 cents per car mile or 8.28 per cent of 
 the company's gross earnings. I'rom these figures, it appears that the taxes levied 
 against the Public Service Railway are nearly fifty per cent higher than the 
 Cleveland Railway taxes under the Taylcr franchise. 
 
 Hon. Lewis Nixon, at that time Public Service Commissioner for the First 
 District of New York, favored the elimination of street railway taxes and paving 
 
Relief from Taxation 253 
 
 requirements, but thought this poHcy could not well be adopted while the fixed 
 5-cent fare is retained. At page 1292 of the Proceedings, he says : 
 
 "Since this is a public service I am under tlie conclusion that both paving requirements 
 and taxes sliould be done away with. Now understand, that, like the Hquor ta.x, means a 
 tremendous sacrifice to the government in itself, and the government of the city has not any 
 too much money now; hence it would be combated. This is a public service. The streets 
 belong to the people for walking on them or driving on them or for travel on these cars. 
 The man that drives and walks, certainly the man that walks, pays no special tax. The 
 automobiles pay their tax to the state ; they are all equally wearing upon tlie street, but the 
 streets are lor the purposes of the city. We have made our bridges free, and it seems to me 
 that proper consideration of the burdens which are to be placed upon these companies will 
 require an assumption of the fact that taxes in general and the fixing and repairing of the 
 streets should not be paid by them, because we must not lose sight of one fact, that no matter 
 what it costs, the people are going to pay it in the long run. 
 
 "The Chairman : Do you favor eliminating assessments and taxations when the com- 
 pany is operating under a fixed charge? 
 
 "Mr. Nixon: No, not at all. As long as the S-cent fare remains fixed we must I think 
 put the taxes on them." 
 
 With respect to the appropriateness of paving charges considerable dif- 
 ferences of opinion developed. In so far as original paving costs are concerned, 
 if borne by the companies they are capitalized and affect the cost of service only 
 as they increase the total cost of capital. Paving repairs are a matter of main- 
 tenance, and repaving is properly a matter of depreciation reserve. The presence 
 of street railway tracks in a public street makes paving practically necessary if the 
 entire roadway surface is to be available for use by vehicles generally. Where 
 paving is required for other reasons, the cost of it is probably enhanced to a slight 
 extent by the presence of the rails. Where pavements are in existence when 
 the tracks are laid, the cutting and restoration of the pavements are obviously 
 a part of the cost of construction of the railway. Mr. Harlow C. Clark stated 
 that about ten per cent of the capitalization of the Rhode Island Company was 
 based on paving construction costs which the coniipany had been compelled to 
 assume. From the street railway appraisals which I have examined, it appears 
 that paving generally ranges between five and ten per cent of the entire reproduc- 
 tion cost new of street railway properties. Some witnesses regarded paving 
 charges as logical in their origin, on the ground that street car horses with their 
 iron shoes used to wear out the pavements ; but contended that these charges are 
 now out of date, alleging that electric cars do not materially affect the pavements. 
 It may perhaps be said that the bankers, the electric railway operators and the 
 lawyers were more or less agreed that the electric street car should be acquitted 
 of any serious offense against the pavements, while the engineers, the city of- 
 ficials and some of the regulatory men spoke out for conviction of offenses rang- 
 ing all the way from assault and batterj' to murder in the first degree. Mr. Lucius 
 S. Storrs laid especial emphasis upon the injustice involved in giving the new 
 competitors of the street railway the free use of pavement laid at street railway 
 expense. At pages 442 and 443 of the Proceedings, Mr. Storrs says : 
 
 "I would like to emphasize, if I may, this point, the one phase of the combination of 
 competition and imposts which is so hard upon us, and that is that of the motor truck. I 
 think we will all acknowledge that the one thing that wears out the city pavement most is 
 the highly developed motor tnick. I happen to recall now, passing in front of my house 
 which is on one of the principal city streets leading through the city of New Haven, frequent 
 fleets of trucks which pass by there, going at as high a rate of speed as they can and escape 
 on, and at night-time, unfortunately, there are no traffic policemen out there to stop them. 
 The result is that the pavement through there is being torn up. The wooden blocks are 
 
254 Electric Railway Problem 
 
 being torn out of the pavement. When it rains the wooden blocks are sucked out of the 
 pavement by these trucks, and, unfortunately, the poor electric railway company has paid 
 for 19 feet out of a total of 40 feet of the pavement. 
 
 "Mr. Warren : The street railway company has paid for 19 out of a total of 40 feet 
 of the pavement? 
 
 "Mr. Storrs : Yes, sir; and that is true throughout the country, wherever the right of 
 way has been given to that competitor. Of course, in this case, a long-distance motor truck 
 would not be a particular competitor. The right of way has Ixen provided very largely at 
 the expense of the riders on the cars, and that is being torn up and destroyed by a form of 
 transportation that pays nothing whatever towards the maintenance and upkeep of that 
 highway." 
 
 Further on, at page 444 of the Proceedings, Mr. Storrs and Mr. Warren dis- 
 cussed the relative rights of the general tax payers and the car riders, and gave 
 the impression that they had the matter analyzed down to a very simple question. 
 The discussion follows : 
 
 "Mr. Warren : These imposts which you have described, such as paving, bridges, street 
 widening, street cleaning, and other requirements of that sort through the street railways on 
 the car riders, really all analyze down, do they not. to a question of the ex[)edieTicy of relieving 
 the general taxpayer through an indirect tax upon the car rider? 
 
 "Mr. Storrs: .'\bsoluteIy. There is no question about that. That has to be recognized 
 cither in an increasing rate of fare or a decreasing facility, or deteriorating facility. 
 
 "Mr. Warren: .^nd while the street railway was supposedly prosperous, it seemed an 
 easy way to increase municipal revenue? 
 
 "Mr. Storrs: Yes. sir. 
 
 "Mr. Warren ; Rut now it becomes a very acute question as to whether the people 
 who have the property shall pay for these various burdens, or whether the people whose 
 interests force them to ride on the street cars shall pay? 
 
 "Mr. .'^torrs : Yes. sir. 
 
 "Mr. Warren: That is all there is to the question, is it not? 
 
 "Mr. Storrs : Absolutely, as far as those imposts are concerned." 
 
 At this point. Commissioner Meeker raised the question as to the possihle dam- 
 age done by cars to jjavemcnts, and Mr. Storrs was led to make a slight admis- 
 sion at page 444 of the Proceedings, as follows : 
 
 "Commissioner Meeker : Mr. Storrs, it is true, is it not, that the street railways do wear 
 out the surface of the street, to a limited extent, next to the rail? 
 
 "Mr. Storrs: Next to the rail for a distance of 5 or 6 inches. 
 
 "Commissioner Meeker : Would you advocate the exempting of the street railways en- 
 tirely from any charge for paving the streets, because of the insignificance of the area that 
 the street railway traffic actually affects? 
 
 "Mr. Storrs: I think not particularly on that basis, hut upon the theor\' that cummunities 
 are giving to other means of transportation a thoroughly improved highway, and they cer- 
 tainly should be willing to take up the relatively insignificant burden that that might tie, but 
 which is a very large burden, of course, in the total paving costs." 
 
 Mr. Roger W. Babson was questioned about the implications of his sug- 
 gestion that certain restrictions on the street railways should be removed, so as 
 to allow thern freedom to compete with the automobiles and jitneys. At page 
 1057 of the Proceedings appears the following: 
 
 "The Chairman: .\re you willing to suggest that where there are automobiles and no 
 jitney service, the laws giving the commissions the right to fix just and reasonable rates 
 should be repealed? 
 
 "Mr. Rabson : Not for the first thing, ho; T would not say that. I would say that the 
 first step in such conimunilics would be to relieve the roads of taxation and paving and 
 various other forms of persecutic>n. That is the first step.'' 
 
 A little further on, Chairman Klmquist asked Mr. Babson what be referred 
 to as "persecutions." The answer is given at pages 1057 and 1058 of the Pro- 
 ceedings, as follows: 
 
 "Mr. Babson: I mean these questions alxiut the traffic, for instance; in some cities 
 where they have to pay for a portion of the traffic officers, for example. Also, I think this 
 
Relief from Taxation 255 
 
 matter of paving between the rails, at the present time, has absolutely no excuse whatever; 
 because in a great many cities it is the only part of the street that is used by the automobiles. 
 I took a trip yesterday from Boston out, and it was a double track road, and the only place 
 where the automobiles could run with any degree of comfort was on the paving which was 
 put in by the street railways. The boulevard on each side of this paving was very rutty 
 and very bad, and no automobile could run in it with any comfort. 
 
 "The Chairman : Now you have described traffic conditions and the paving. What other 
 persecutions have you in mind? 
 
 "Mr. Babson; I should say the general taxation. In Massachusetts we have, I think, 
 three forms : We have the property ta.x and we have the excise ta.x and we have the 
 franchise tax. 
 
 "The Chairman : Do you regard as persecution most of these efforts by which the public 
 seeks to impose charges or burdens upon the street railway companies? 
 
 "Mr. Babson : Not when they had a monopoly. I believe in the taxation of monopolies, 
 absolutely. If I had charge of the taxing of this Government, I would raise every cent by 
 the taxation of monopolies, and land values, and natural resources. I would take off income 
 taxes, and take off all taxation on enterprise and effort. I should raise my money from the 
 taxation of monopolies and natural resources and land values, and sp forth. But when that 
 monopoly has gone by, and when the street car business is no different from the dry goods 
 business, or the restaurant business, or any other business in town, which is the condition 
 it is in in most of the communities today, I should relieve it from those burdens." 
 
 When we turn to the testimony of a man who has been a city engineer and 
 a city manager, we get quite a different result. On this matter of the justice of 
 the paving charge. Mr. Gaylord C. Cummin gives the following testimony at pages 
 46 and 47 of the Proceedings : 
 
 "Commissioner Sweet : What do you say about paving between the tracks and for a 
 foot or so outside? 
 
 "Mr. Cummin: The cost of paving between the tracks and for a foot or two outside is 
 an unjust burden on the street railroad companies at present. Our street paving was started 
 in this country when we had horse cars, and the horses did wear out the pavement, and that 
 is the reason it started in that way ; and it has been put in every franchise, or almost every 
 franchise ever since, because the street railroads could not get out of it. and they just had to 
 submit to it. There is an undue burden, the maintenance of it ; and any extra cost due to 
 the track .should be paid by the street railroad; that is perfectly proper; but the pavement 
 itself should not. 
 
 "Commissioner Wehle : You mean that part of the cost of maintenance that is not due 
 to the wear and tear of other vehicles? 
 
 "Mr. Cummin: In fact, the most of the cost of maintenance of the pavement between 
 the car tracks is due to the rails and operation over them. They have to be cut into fairly 
 frequently — a joint goes down, and it w-ill break up the pavement for a little distance around, 
 soft spots develop in the roadbed, and it will result in raises and depressions and so forth, 
 and the big bulk of your maintenance is maintenance that is fairly well traceable to the 
 street railroad. The maintenance is a proper charge against the street railroad. 
 
 "Commissioner Sweet: But the original construction is not? 
 
 "Mr. Cummin : The original pavement, except that part of it which may be an extra, due 
 to the cost of paving around the rails, and things of that kind, if it should exist, should not 
 be paid by the railroads. The extra cost, of course, that is necessitated by reason of the 
 pavement being laid around the rails, should be paid by the road. 
 
 "Commissioner Sweet : Even at that, hearing in mind the fact that the public is so 
 deeply interested in having the advantage of the street railroad there, is there any unfairness 
 in having the public pay for all the paving? 
 
 "Mr. Cummin: If they want to; but I think if they pay the maintenance as well — I do 
 not believe it is going to be a practical operating proposition, because a large part of that 
 maintenance may have to be done by the track men of the street railroad, the men who are 
 taking care of the track." 
 
 Further on Mr. Cummin expressed the opinion that a portion of the con- 
 struction cost of the paving in and about the tracks ought not to be charged to 
 the street railway companies ; and in some cases certain other charges against the 
 companies have been too high. At page 48, he says : 
 
 "There are two parts in the paving to the street railroad. One of them is absolutely 
 charged against the street railroad, and that is the cost of preparing the roadbed and putting 
 in the new track and ties, and concreting in the ties. They concrete them in, getting up to 
 the point where the surface is to go on. That is perfectly all right. That is chargeable 
 
256 Electric Railway Problem 
 
 actually to tlie company. Then the rest of it is generally charged for at just the same price 
 as for the rest of the paving job. per square yard. In most cases the contractor makes no 
 difference for the paving between the rails and a foot outside as compared with the rest of 
 the paving. 
 
 "Commissioner Sweet : Is the paving requirement of a privately owned street railroad 
 company universal in this countr>-, or does that vary? 
 
 "Mr. Cummin: As far as I know, I have not been in any city yet where it was not 
 required, and in my experience I have never seen any franchise where it was not required. 
 
 "Commissioner Sweet: So that as far as you I<now it is a uniform requirement? 
 
 "Mr. Cummin: Yes; and that is an unjust burden. That is something that can be taken 
 off. I think the same thing occurs on some bridge rentals. In some cases they have not 
 been rentals, but they have paid a lump sum, I think, in some cases, and that has been too big. 
 
 "I think it proper that a street railroad should compensate for e.xtra cost in making that 
 bridge strong enough to carry the additional loads put on it by the street railroad company. 
 It perhaps should pay a small additional rent, but I think in some instances the amount required 
 to be paid has been unreasonable." 
 
 Lieutenant Colonel Charles W. Kutz, Chairman of the Public Utilities Com- 
 mission of the District of Columbia, was so much impressed with the difficulty 
 of relieving the companies of the responsibility for paving repairs so long as 
 they own the tracks that he suggested municipal ownership of the roadbed and 
 undivided numicipal responsibility for its construction and maintenance. His 
 testimony on this point is found at page 1040 of the Proceedings, as follows : 
 
 "I would like to say just one word about the question of paving, which the Secretary of 
 War brought up this morning, because from an engineering standpoint I see great difficulties 
 in a divided responsibility for the paving between the rails and over the ties. 
 
 "The damage to the paving between the rails and for two feet outside the outer rail is 
 not caused by the traffic on the street to anything like the extent that it is caused by the 
 character of the foundations under the rails. 
 
 "If the rails are on ties, and those ties are not properly tamped, they are going to heave 
 up the best pavement that can be laid. 
 
 "If the rails are on cast iron yokes imbedded in concrete, and those concrete foundations 
 under the yokes are not adequate, so that the rails settled, they will break up the best con- 
 crete and asphalt pavement that can be put down. 
 
 "If you have the railway company responsible for the foundation under the rails, and 
 the city responsible for the paving, there is going to be a constant source of trouble and 
 difficulty. So the sugge.stion has Ix'cn made that if the companies are to be relieved from 
 the cost of paving and maintaining the pavement between the rails, it would be l>ettcr to go 
 one step farther and let the city acquire title to the roadbed, that is. the rails and their 
 foundations, leasing them to private operating companies. In other words, it would be 
 municipal ownership of the roadbed, but with private operation of the railway company." 
 
 Interstate Commerce Commissioner Eastman also called attention to the fact 
 that electric railway tracks affect the pavements. Conmiission Sweet brought 
 up the analog)' of fire hydrant service paid for by the tax payers. The following 
 question and answer appear at pages 2082 and 2083 of the Proceedings : 
 
 "Commissioner .Sweet : Looking at it ns a matter of justice between one part of the 
 community and another, is not the same kind of a question involved in the paving between 
 the tracks of street railroads, as practiced at the present time? Are we not cx,icting from 
 the car rider a service that ought to be performed by the entire community? 
 
 "Commissioner Eastman: T think you are. There is something to be said on the other 
 side of that question, because while the situation is not now as it was when the practice 
 originated : that is to say. it originated at a time when horse cars used to wear down the 
 pavement, at the same time I think it is true that the presence of street railway tracks in the 
 street increases the expense of pavins. The paving is apt to wear out quicker in streets 
 where there arc street railway tr:icks than where they are absent. So that the presence of 
 the street railwav tracks in the street di>es impose some extra burden uni>n the paving cost. 
 It is verv difficult to measure that, and under present conditions, faced by the plight of the 
 street railways at the present time. I think it is entirelv desirable that that expense should be 
 met by the entire community, rather than by the car riders." 
 
 Commissioner Eastman evidently recognized an emergency as a result of 
 which policies might properly be adopted which under other conditions would be 
 
Relief from Taxation 257 
 
 of doubtful propriety. Chairman Richard T. f-Iiggins, of the Connecticut Public 
 Utilities Commission, also recognized an emergency, and advocated not only the 
 permanent elimination of paving assessments and other special burdens imposed 
 on the electric railways, but also the temporary elimination of street railway 
 taxes. Mr. Francis H. Sisson also expressed the view that in many cases the 
 companies might be saved by this kind of relief. At page 325 of the Proceedings 
 the following testimony is found : 
 
 "Commissioner Sweet : In regard to ta.xation, you said you thought certain forms of 
 indirect ta.xation, like paving between the tracks, bridge tolls, bridge repairs and that sort of 
 thing, all of which are now borne by the street railway companies, in many instances that 
 should be avoided, that that is a bad practice. 
 
 "Mr. Sisson : Well. I think it imposes undue hardships upon the transit lines in many 
 cases, and it might mean the difference between solvency and insolvency in many cases. 
 It seems to me that when these lines are operating so near the danger line as they are, the 
 community might very well afford to undertake those improvements at its own expense, 
 rather than force the issue against the lines. Of course, that situation would vary in differ- 
 ent communities. It is very hard to generalize about that." 
 
 When Mr. Henry L. Doherty appeared before the Commission, Chairman 
 Elmquist asked him for suggestions as to what the Commission might do to help 
 the situation. At pages 409 and 410 of the Proceedings, Mr. Doherty says : 
 
 "We have lots of obligations forced on us now that are relics of the past, and we cannot 
 get rid of them. I cannot think of all of tliem sitting here. But every possible relief which 
 can be given to the street railways and transferred from a specific charge against them to 
 either the property holders or the general fund should be done. Because even if a man has 
 an automobile and does not use the street railway, he wants it there, it is an asset there to 
 him. It is there ready to serve the needs of his premises with a m.essenger boy or anything 
 else that comes along, and in a way you could almost justify a subsidy for a railway rather than 
 have it shut down. Even if the people did not use it enough to pay for it, it would still be 
 a municipal necessity. One of my first thoughts would be to take off every load that can 
 possibly be taken off of the street railway company.'' 
 
 Dr. Thomas Conway was not very optimistic of the results, but he thought 
 that the first step toward a solution of the street railway problem should be the 
 lifting of the burdens. At page 952 of the Proceedings, he says: 
 
 "I sat here this morning and listened to various gentlemen express their views on taxes 
 — paving, for instance. My belief is that, taking the companies as a whole, all the things 
 that you can suggest of relieving them of taxes and of paving requirements and all of the 
 other obligations which represent an indirect tax on the car rider, a necessary addition to 
 his fare, will not meet the situation by offsetting these increased costs ; but all of that, if given 
 to them, still means for many properties a rate of fare which is almost prohibitive, as a 
 practical question. 
 
 "Therefore, as I see it from the Commission's point of view, you start by these abatements 
 as a necessary element, because without them there will be hundreds of electric railways that 
 will have to go to the junk heap, unless they are to be taken over and operated by the 
 public, who bear the deficit through taxation." 
 
 Professor Bullock was strongly opposed to the adoption of a periuanent 
 policy of tax exemption with respect to street railways. He even favored the 
 payment of regular taxes by municipally owned utilities. But he conceded the 
 existence of an emergency that would justify the complete abolition, for a period 
 of years, of the property tax as applied to street railways. As coming from the 
 most eminent authority on taxation who appeared before the Commission, Profes- 
 sor Bullock's final suggestions are entitled to very careful consideration. At 
 pages 653 and 654 of the Proceedings, he testifies as follows : 
 
 "Commissioner Sweet : Do you think there would be any impropriety, anything wrong 
 or unreasonable in the total remission of taxes for a limited period? 
 
258 Electric Railway Problem 
 
 "Mr. Bullock : 1 do not. I think it will come to that in many cases, or else it will be 
 made up in some other way. We may go through the form of levying taxes and then make 
 up a deficit. That is what we are doing in Massachusetts. * * * * It is whipping the 
 devil around the stump. » » » * What is involved is giving a subsidy to an industry 
 that faces ruin. • » * * I think that undoubtedly the adjustment of all these inequalities 
 in taxation will take time. Where the situation is bad enough, however, the adjustment 
 might be quickly reached and a recommendation from the Commission would be helpful. 
 Moreover, a recomimiidatiun of liigher rates to he paid by car riders would have more force 
 in it were it accompanied with a recommendation that unequal charges be done away with. 
 Whether your Commission went on the theory that the time had not come to take off ordinary 
 taxes and recommended that ordinarj- property taxes be left, but that taxes in excess of 
 what ordinary property pays should be remitted and other charges cut down, such a recom- 
 mendation would help very much a recommendation for higher rates. 
 
 "The street car rider will object, and justly, to higher rates that enable the continuance 
 of taxes which under a scheme of public regulation amounts to a special ta.x on the trans- 
 portation industry and which he pays for the benefit of property owners. It is hard to raise 
 the fares. .'\ street car fare is not like your gas bill that you have once a month ; you have 
 your bill presented to you twice a day, six or seven days in the week, and the increase comes 
 to you, the fact of the increase is very obvious, it is rubbed into the street car riders twice 
 ever)' day. And a recommendation w:ould come with greater weight, it seems to me, if it were 
 accompanied with a very strong recommendation for the abolition of unequal taxes." 
 
 Fuilher along, Professor Bullock was questioned about the possible abolition 
 of all taxes under a service-at-cost plan and about the adoption of a net income 
 tax as a pennanent policy. His answers are given at pages 660 to 662, as follows : 
 
 "Mr. Warren: Is it not at least a debatable question whether if a service-at-cost plan 
 or some other form of partnership between the corporation and the municipality were 
 adopted, whether under those circumstances the property should be taxed? 
 
 "Mr. Bullock: It is perhaps debatable. I believe that under normal conditions the 
 property of municipal industries ought to be taxed. 
 
 "Commissioner Meeker: Municijially owned industries? 
 
 "Mr. Bullock: Ves, and of course, in England that is done. If the city municipalizes its 
 gas works it pays the national income tax. The exchequer does not lose thereby and the 
 real estate is supposed to Ix- taxed for local taxation like other things. • * * *' Exempt- 
 ing the property of public industries from taxation can Ix- carried only a certain distance 
 without producing conditions which lead to a reversal of policy. In Europe the property of 
 municipal and state industries is not uniformly taxed. In this country it sometimes is. Our 
 Federal forest reserves, for instance, are not taxed, but a part of the revenue is given to 
 the counties in which they are located. 
 
 "Mr. Warren: So that in the English system the car rider or gas consumer pays a 
 proper proportion of tax ? 
 
 "Mr. Bullock: Pays a proper proportion of tax. 
 
 "Mr. Warren: Whether it is municipally or privately owned? 
 
 "Mr. Bullock: Whether it is municipally or privately owned. 
 
 "Mr. Warren : And you see no distinction between the principle of taxation which 
 ought to apply, whether the plant is publicly or privately owned? 
 
 "Mr. Bullock: I do not. Under proper conditions the city— well, there is an absolute 
 limit to the amount of property that you can withdraw from taxation. The Prussian rail- 
 roads were taxed locally, and they had to be. They never would have lM?en nationalized 
 otherwise. If our government takes over the railroads it has to have the consent to tax them, 
 and the proper condition is one in which industries of this character, if owned by the 
 municipality, have charged against them their due share of all taxes. 
 
 "Commissioner Meeker: • » • * You spoke of the property tax being rescinded in 
 favor of a net income tax for the time being. Would it not be better to adopt the taxation 
 of net income as a permanent policy? 
 
 ***t**** 
 
 "Mr. Bullock: 1 doubt if it would. At least so far as all the real estate is concerned. 
 Real estate cannot be taxed on its net income for local purposes. 
 
 ■'Commissioner Meeker: But what real estate does the street railway company own? 
 
 "Mr. Bullock: Well, it has its power houses and h;iriis .md electric railway rights of 
 way which they own in a good manv cases. The real estate element with the electric railway 
 is not as important an element as with steam railways, but still it is an element. I should say 
 such real estate as they own should not be exempted from the properlv tax under any con- 
 dition. Their other property, their cars and other things might very well Ix- exempted from 
 taxation and yon might verv well have an income tax on the railroads and then a real estate 
 tax on their real estate. Now, that solution might be a very goc>d ultimate solution. To 
 illustrate, in other 
 
Relief from Taxation 259 
 
 "Mr. Warren: Under normal conditions? 
 
 "Mr. Bullock: Yes. 
 
 "Mr. Warren: You are not proposing to modify what you said about the possible exemp- 
 tion in view of the peculiar conditions? 
 
 "Mr. Bullock: My income tax suggestion which I make on the last page of the brief 
 has reference to an immediate measure of relief. To suspend the property tax for five or ten 
 vears and impose a tax on the net income would give a very large amount of relief, and it is 
 fairly justified if the emergency is as great as I think it is in many cases. 
 
 "Commissioner Meeker ; But you think it should not be adopted as a permanent policy — 
 
 "Mr. Bullock : I think it should not be adopted as a permanent policy. 
 
 "Commissioner Meeker: Except as you have indicated, in a modified form? 
 
 "Mr. Bullock : In a modified form." 
 
 The confusion of testimony with respect to street railway taxation and other 
 public charges only emphasizes the fact that first of all we need a policy. Then 
 emergency measures can be adopted that are consistent with it; but until we have 
 settled the great debate as to the ownership and operation of the electric railways, 
 temporary expedients are likely to prove both futile and full of danger. While 
 the electric railways remain in private hands, the granting of substantial relief 
 through the lifting of franchise burdens or the lightening of taxation will neces- 
 sarily be a slow and painful process. Governments everywhere need money. To 
 give up familiar and established sources of revenue is like having one's teeth 
 pulled. No doubt, under great pressure and in connection with an entirely new 
 deal such as a service-at-cost arrangement, it will be possible here and there to 
 remove some of the burdens. Yet it is not clear that any uniform rule of exemp- 
 tion can be carried out or even recommended except in terms of a definite and 
 comprehensive policy for the permanent readjustment of the public relations of 
 the electric railway industry. Where unjust burdens exist, as a matter of course 
 they ought to be lifted. But the sweeping statements sometimes made with re- 
 spect to the overtaxation and the overburdening of the street railway com- 
 panies are by no means uniformly true. It would be easy to recoinmend exemp- 
 tion from taxation if the municipalities were not in serious need of the money 
 or if the direct tax payers did not have their backs against the wall just like 
 '"other people." The city of Detroit which has recently voted $15,000,000 of 
 general bonds to be used in building a municipal street railway system adopted a 
 municipal ownership amendment to its charter in 1913 and later adopted a new 
 charter with a municipal ownership chapter embodied in it. This chapter pro- 
 vides for the construction or acquisition of a unified municipal street railway 
 system and requires that the municipal railway shall pay taxes just as if it were 
 privately owned. It is not to be expected that the voters will willingly grant 
 exemptions to private companies which they deny to themselves. It can easily be 
 argued that from the point of view of public welfare complete or partial exemp- 
 tion of the street railways from taxation, paving obligations and other public 
 charges is preferable to radical fare increases, but this preference cannot readily 
 become eflfective while local transportation service continues to be furnished by 
 private agencies actuated by desire for profit. When local transportation be- 
 comes a recognized factor of the city or the state plan, then we can begin to talk 
 more effectively about the social aspects of street railway taxes and street railway 
 fares. 
 
Chapter XXXI 
 EFFICIENCY IN MANAGEMENT AND ECONOMIES IN OPERATION 
 
 Those who advocate the continuance of the policy of private ownership and 
 operation of the electric railways, even under the adverse conditions that now beset 
 the local transportation industry, find their principal support in the assumption 
 that private management is more efficient and that private operation is more 
 economical than public. Xone can dispute that the past two or three years have 
 been an appropriate time for the searching of hearts in the electric railway busi- 
 ness. Is it a fact, or is it not, that up to the present time the industry has been 
 efficiently and economically managed? The record proves conclusively that the 
 financial management of the industry, at least in its relation to capitalization and 
 fixed charges, has left much to be desired. The operating men have been handi- 
 capped in several ways. Eirst, they have been subject to the control of the finan- 
 ciers and speculators who have mismanaged the capital account. Second, they 
 have been subject to a more or less intermittent and arbitrary control by public 
 authorities through franchise requirements, state and local legislation and the 
 orders of public service commissions. Third, they have undoubtedly suffered in 
 some measure from the paralyzing effects of monopoly. Under all the conditions 
 it would not be surprising to find that street railway management had been ex- 
 ceptionally inetTicient as compared with other (private industries of somewhat 
 similar magnitude. If the rule that freedom of initiative and definiteness of 
 responsibility are essential in producing efficient luanagement and economical 
 operation is a sound one, then it would not be difficult to prove that street rail- 
 way managers generally have not been in a position to develop efficiency and 
 economy to their full possible extent. 
 
 Before going further in the discussion, it is desirable to consider the interest 
 of the public in economy and efficiency in the operation of local transportation 
 systems. It is ea.sy to .say that economy and efficiency mean low cost of service 
 and that low cost means low fares ; but such a statement does not give a complete 
 picture of the situation. Investors, where their interests have free plav, undoubt- 
 edly secure benefits from economy of operation : and also from efficiency in opera- 
 tion, where efficiency means no more than a high-sounding or far-seeing economy. 
 It is possible that economies may be short-sighted and take the form of parsimony. 
 Such economies are not beneficial in the long run even to the investors. On the 
 other hand, efficiency may take the form of more service, better service or more 
 costly service at the same rates, and such efficiency is not directly beneficial to 
 the investors, although it may be of indirect benefit to them in the long nm. 
 From the point of view of the public, economies that actually reduce the 
 cost of service without curtailing the amount or the quality of service, if such 
 
 260 
 
Operating Economies 261 
 
 economies are reflected in the fares or in a share of profits turned into 
 the public treasurj', are beneficial ; and efficiency that means more service 
 or better service for the same money is of course beneficial ; but economies 
 that mean a curtailment in the quantity of service or a deterioration in its quality 
 are not beneficial to the public. Efficiency, if it adds to the public convenience, 
 is beneficial ; otherwise not. The distinction between the public interest and the 
 interest of the investors in economical and efficient operation is real, though some- 
 what elusive. At certain points the public and the investors have a common in- 
 terest ; at other points their interests are antagonistic. Accordingly, when we 
 are considering efficiency in management and economies in operation in the street 
 railway business, we cannot assume that this efficiency and these economies are 
 necessarily something to be desired. Each factor entering into the problem of 
 efficiency and each particular element of possible economy is to be judged on its 
 merits in connection with its double relation to the rights of the investor and 
 the rights of the public. 
 
 In general, it may be said that the witnesses for the American Electric Rail- 
 way Association assumed the general existence of good management in the in- 
 dustry and although some of them called attention to economies that might be 
 eftected, the general trend of the testimony presented on behalf of the Associa- 
 tion was to the effect that the street railway companies are primarily the victims 
 of conditions and circumstances outside of their control. With respect to the 
 efficiency of their management, Mr. Francis H. Sisson, speaking from the point 
 of view of the investment banker, gives rather emphatic and sweeping commen- 
 dation. At pages 326 and 327 of the Proceedings, he gives the following testi- 
 mony : 
 
 "Commissioner Sweet : In your judgment, are the street railway companies at the present 
 time being managed efficiently? 
 
 "Mr. Sisson; On the whole, I think they are. We, as bankers, have just finished a 
 very searching and thorough examination of the New York transit lines, entirely impartial 
 and quite critical, and the reports that we get are most reassuring that, so far as the manage- 
 ment is concerned, it is just as nearly efficient as it can humanly be made, and tliat I think is 
 true of most of the high-grade lines throughout the country. 
 
 "Cccimissioner Sweet : We had evidence yesterday from Mr. George, one of the re- 
 ceivers of the Pittsburgh Railways Company that, after taking charge of the property, they 
 reached the conclusion that the management had been both honest and capable. 
 
 "Mr, Sisson: Yes; I think that is broadly true throughout the country, of the lines 
 with which I am familiar. 
 
 "Commissioner Sweet: Have you any direct information on that point from the receivers 
 of other companies, or in any other manner? 
 
 "Mr. Sisson : Yes ; particularly in New York City and Brooklyn, where that is the 
 opinion of the receivers of all the companies there, I think I am safe in saying, and better 
 than that, it is the direct finding of capable engineers who have made this analysis for the 
 benefit of the security holders. 
 
 "Commissioner Sweet : I assume that there may be instances of incompetency, and pos- 
 sibly of dishonesty, in some particular localities. 
 
 "Mr. Sisson : Undoubtedly. 
 
 "Commissioner Sweet: What is your judgment in regard to the business as a whole, 
 whether it is managed with honesty and ability, and with an earnest desire to promote the 
 interests of the general public, as well as of the investors. 
 
 "Mr. Sisson: I think, from a very careful study of the situation, that it ranks above 
 the average business in all those particulars. 
 
 "Commissioner Sweet: You do? 
 
 "Mr. Sisson: I do. I might say in that connection, because of the necessities of their 
 situation." 
 
262 Electric Railway Problem 
 
 On the other hand, certain of the witnesses testifying on behalf of the general 
 public took the position that in the past street railway companies generally have 
 been badly managed and that with a proper spirit of initiative and enterprise they 
 could go a long way toward solving their own problems in the present crisis with- 
 out asking any favors from the public. For example, Mr. Morris L. Cooke, of 
 Philadelphia, as already noted in Chapter XXII of this report, took the position 
 that "our street railroads constitute, broadly speaking, the most completely dis- 
 credited feature in the administration of a city." It is clear from Mr. Cooke's 
 further testimony that he meant to indict them for mismanagement. At page 
 1689 of the Proceedings, he says : 
 
 "Because the profits have been made throuRh financing these properties rather than 
 through operating them as public services, the valuation factor has, from the first, been over- 
 emphasized. In fact, up to a recent date, one hardly ever heard of the cfficiency-of-operation 
 factor." 
 
 In referring to the activities of the national utility associations, including the 
 
 American Electric Railway Association, he says, at page 1690 of the Proceedings: 
 
 "Those who .seek to uphold any measure, device or system which will run counter to that 
 which has received official sanction by these associations, are subjected to a relentless and 
 usually (|uite effective pressure. There has been established an essential solidarity in these 
 industries which is freciuently anti-social, if not illegal, and which discourages initiative and 
 enshrouds the whole utility world in a maze of autocracy, secrecy and ultimate inefficiency." 
 
 Again, at page 1693 of the Proceedings, Mr. Cooke says : 
 
 "It is futile to lift the handicaps under which this industry suffers, unless it l>e preliminary 
 to making constructive suggestions which are not only possible of execution, but which give 
 promise of relief. I am convinced that any program for the rehabilitation of those proper- 
 ties to be successful must have efficient operation as its primary plank. 
 
 "After all, it is much more fundatnental to ask how these projierties are to be operated 
 than who is to operate thorn." 
 
 At page 1694 of the Proceedings, he alleges that "there is almost no cost keeping 
 on .American street railways." "What is even more astounding," he adds, "is that 
 most street railway men consider it impossible to secure costs." At page 1694 
 of the Proceedings, he says: 
 
 "Of course, after operating effectiveness has l>cen substituted for the financial and 
 pseudo-financial incentives which have heretofore obtained, there is gradually developed 
 throughout the system and in all departments a genuine science in management. Pick-up, 
 gains, economies and new ways of increasing efficiency Ix-come the rule. The inanagement 
 incomes imbued throughout with the spirit of progress, and men who look upon the industry 
 as static and use mcthcMls without present day value are eliminated. 
 
 "It is .Ts futile to make constant demands for increased fares in the absence of some 
 genuine and enlightened effort toward more efficient management as it is for labor to con- 
 stantly demand shorter hours and increased wages without making provision for increased 
 productioTi. Carried In-yond a certain point it is C(iuivalent to the effort to create something 
 out of nothing." 
 
 In closing his formal statement, Mr. Cooke says at page 1696 of the Pro- 
 ceedings : 
 
 "There is in my opinion no ultimate solution except we can get it on to a basis of a 
 contract that is continually advantageous to both parties, and the shorter the term of that 
 contract and the easier it is for cither side to change it, the Ix-tter it woidd Ix-. in my opinion." 
 
 Chairman Elmquist then asked Mr. Cooke what elements should be includc<l in 
 tlie contract, '{"he portion of his reply relating to management is found at page 
 16^)7 of the Proceedinirs. as follows: 
 
Operating Economies 263 
 
 "Starting in with good management, understand I am not interested in working out any 
 problem unless you have good management or there has been some evidence that the company 
 is not only willing to put in good management but knows what good management is. I dare- 
 say that nine out of ten men in this industry in the management are firmly convinced that they 
 have now good management and, unless you can change that point of view, then I think 
 it is perfectly hopeless. 
 
 "My idea of management is that it is something that is not static; that the better manage- 
 ment you have today the larger the opportunities for improvement just ahead of you. In 
 other words, the industrial establishments with which I am familiar that are already on the 
 best plane of management are the ones that are looking forward most to the improvements 
 and economies and forward steps of the future. It is the man that is down at the heels 
 that thinks management is static." 
 
 Mr. John A. Beeler, transportation engineer, though not an economist, may 
 properly be described as a professor of street railway economies. His long ex- 
 perience as manager of the Denver Tramways Company and his recent country- 
 wide and successful practice as a consulting engineer primarily interested in de- 
 vising means for improving street railway service, increasing street railway rev- 
 enues and effecting street railway economies gives him exceptional qualifications 
 for expert testimony along these lines. He maintains that the question of oper- 
 ating economies is paramount. Referring to them at page 166+ of the Proceed- 
 ings, he says : 
 
 "They are many, and most of them can be applied to every company, regardless of the 
 fetish of local conditions." 
 
 At pages 1674 and 1675 of the Proceedings, he summarizes his proposed 
 remedies for the present evil plight of the electric railway industry. Most of his 
 suggestions fall within the scope of our discussion in this section. He says : 
 
 "To enable the street railways to get out of the serious situation in which they now are 
 the following can be done : 
 
 "Reduce ta.xation to place the street railways on a par with other industries. 
 "Employ operating economies such as : 
 
 Better and faster schedules 
 
 Reduction of layovers 
 
 Improvement of routing 
 
 Abandonment of non-essential service 
 
 Standardization of equipment ' 
 
 Saving of power 
 
 Eliminate waste 
 "Obtain the cooperation of the authorities and the public in the following : 
 
 Installation of loading platforms 
 
 Cooperation of the police 
 
 Regulation of street traffic 
 
 Control of parking 
 
 Elimination of steam railroad grade crossings 
 
 Regulation of jitney and bus competition 
 
 Staggered hours of business 
 
 Skipstops 
 
 "Employ methods to increase the gross receipts, as 
 Encourage short-haul riding 
 Shorten headways 
 
 Replace insolence and inattention with courtesy 
 Drill employes in principles of salesmanship 
 Reroute to increase business 
 Use the safety car and more attractive cars generally. 
 
 "A raise in fare by itself, without employing methods to induce and encourage profitable 
 riding, or without employing more efficient methods of operation, will fail. 
 
 "Automobile and bus transportation is far less economical than efficient electric railway 
 service. By the adoption of the remedies proposed, good street car transportation will be 
 retained and the industry made self-supporting." 
 
264 Electric Railway Problem 
 
 The extent to wliich these several suggestions promise relief must now be 
 considered. Discussing the importance of the "schedules'* in street railway 
 operation, Mr. Beeler, at pages 1664 and 1665 of the Proceedings, says: 
 
 "The most important items in any company's operations are: 
 
 ( 1 ) Frequency 
 
 (2) Regularity 
 
 (3) Speed 
 
 W'itli these items right almost any company will succeed. They have such a far-reaching 
 effect on the operations that many an otherwise good concern has gone on the rocks on 
 account of poor schedules. 
 
 "What an increase of one mile per hour will do in the operations of the average company 
 is perhaps the most potent illustration that can be had. A company with an average schedule 
 speed of 8.4 miles per hour, which is practically the average of street railways in the United 
 States, as near as can be obtained, is represented by A, while B has been speeded up to 9.4 
 miles per hour. Note well the difference : 
 
 A B 
 
 Speed, miles per hour 8.4 9.4 
 
 Earnings per car mile 40c 40c 
 
 Earnings per car hour $3.36 $3.76 
 
 Expenses per car hour $2.52 $2.52 
 
 Operating ratio 75% 67% 
 
 With the same identical car mile earnings this increase in speed alone will come within one 
 point of making an average company self-sustaining, as it has t)een shown already that with 
 an operating ratio of 66 per cent sufficient will remain to provide proper replacement charges 
 and return si.x per cent on the investment. 
 
 "The acceleration and braking should be increased. The average road will show about 
 1.5 miles per hour per second, while 2.5 will provide much speedier operation, increasing 
 schedules say 10 per cent. The duration of stops will also automatically be shortened as 
 passengers get used to good operation. They invariably prefer it to the slow, halting, 
 undecided movements now prevalent on so many roads." 
 
 The proof of the pudding is in the eating. The Cleveland Railway Company 
 stands out conspicuously on account of its demonstrated ability to earn the stand- 
 ard return upon the investment during the war period while continuing to main- 
 tain its property without going above the five-cent cash fare with a transfer charge. 
 That the striking relative success achieved in Cleveland was due in part at least 
 to economies in operation brought about through public cooperation is amply 
 proven by the testimony. On this particular point Mr. Heeler, upon cross-examin- 
 ation by Mr. Warren at pages 16S5 and 1686 of the Proceedings, says: 
 
 "Mr. Warren: You spoke of Cleveland as giving better service, I think, at around 5 
 cents than many if not most of the companies that have raised their fares. Are the conditions 
 in Cleveland materially different from those in many cities as regards the length of haul, not 
 possible haul but actual haul ? 
 
 "Mr. Beeler: I think that is about the average condition obtaining there. Cleveland 
 was one of the first cities to adopt the elimination of untieces.sary stops and by so doing they 
 speeded up their schedules, and Cleveland today gets a higher scheduled .speed than most of 
 the average cities. At the same time they rehabilitated and put mi attractive equipment and 
 the result is that their car hour earnings are much higher than the average; their car mile 
 earnings are alxiut the average. 
 
 "Mr. Warren: Is there a direct relation between the speed and the operating expense? 
 
 "Mr. Beeler: There is. 
 
 "Mr. Warren: If you increase your speed 25 per cent is that the same as reducing your 
 operating expenses 25 per cent? 
 
 "Mr. Beeler: Not the same, but it has a very marked influence. Take an average line 
 that is earning 40 cents a car mile and making a speed of 8 miles per hour, it will l)e earning 
 $3.20 an hour. Take another line that is earning 40 cents a car mile with the same kind 
 of equipmrnl and making 10 miles per hour, it will U' eaniing $4.(X) jK-r hour. Now, the 
 expenses are practically the same, almost the same. The way si)eed is made is by better 
 .icceleraliiin and faster braking, eliminating the stops and delays, and that all has a tendency 
 to reduce the operating ratio, for the reason that your wages are paid on the hourly basis. 
 Practicallv all the income of a street railwav coes out on an hoiirlv liasis nr on .t time tasis 
 
Operating Economies 265 
 
 and the receipts come in on a mileage basis, for it is transportation that is being sold. Now, 
 the more miles that we can get out of a street car the less the operating ratio and the less 
 the ratio cf fixed charges and everything else. 
 
 "Mr. Warren: Cleveland has a very high 
 
 "Mr. Bceler : It has a high scheduled speed. 
 
 "Mr. Warren : And that was produced almost entirely, was it not, through the coopera- 
 tion between the city and the company ? 
 
 "Mr. Beeler : That was brought about very largely through the efforts of Mr. Peter 
 Witt, who was at that time a city transit commissioner. He had made a study of the situa- 
 tion ; the schedules were slow and he eliminated all of wliat he considered unnecessary stops 
 and puts the stops further apart generally throughout the city and the speed was increased 
 something like a mile and a half per hour. Not only did that increase the receipts per car 
 hciur. but it also increased the receipts per car mile, because it popularized the service and 
 more people rode. 
 
 "Mr. Warren: But he also incidentally cleared the track too. did he not? 
 
 "Mr. Beeler: He cleared the track and secured the cooperation of the police at street 
 intersections and in even- other way possible. 
 
 "Mr. Warren : Much of that e.x'cept with cooperation from the municipal authorities 
 would have been beyond the power of the company to bring about, would it not? 
 
 "Mr. Beeler: The cooperation with the authorities to obtain the full result is absolutely 
 necessary, yes, sir." 
 
 At page 1165 of the Proceedings, Mr. Beeler discusses the importance of 
 "layovers," as follows : 
 
 "The elimination of excessive layovers is most important. The ratio of layover time to 
 actual running time varies from to 2 to 25 per cent. Long layovers are given frequently as a 
 concession to labor when, if the nature of the resultant trouble were fully understood, labor 
 would not want them. 
 
 "As an example, apply the extremes to two systems each earning 40 cents per car mile 
 and making a running speed not including layovers of 9.33 miles per hour. The line with the 
 2 per cent layover will earn $3.67 per car hour, while that with the 25 per cent layover will 
 bring in but $2.79. .^fter paying the trainmen at the rate of $1.10 per car hour there remain 
 respectively $2.57 and $1.69. The long layover is a great handicap. The other line has 50 
 per cent more of its receipts left after paying wages. The only feature that is swift about 
 a road with long layovers is the rapidity with which it approaches the receiver." 
 
 At pages 1665 and 1666, upon the subject of "routing," Mr. Beeler says: 
 
 "It is of the utmost importance that the lines provide the shortest, quickest and most 
 convenient routes. Many cities today maintain routes and service designed for traffic condi- 
 tions of a generation ago. This subject deserves the closest scrutiny. Rerouting coming 
 under my observation has worked wonders in bettering service for the public, and at the same 
 time saving money for the company. 
 
 "Through-routing to eliminate overlapping service frequently proves a tremendous force 
 in reducing both expense and congestion, as both are synonymous. Short-lining and turn- 
 back service wHll frequently enable a company to accommodate twice as many people during 
 the rush as where all cars are run through irrespective of the length of line." 
 
 The Philadelphia Rapid Transit Company shares with the Cleveland Rail- 
 way Company the honors of having maintained a relatively low fare and a pros- 
 perous financial condition during the present crisis. What rerouting and faster 
 schedules accomplished in Philadelphia was brought out by the testimony of 
 Mr. Coleman J. Joyce, representing Mr. Thomas E. Mitten. The Stotesburv'- 
 Mitten management took charge in Philadelphia in 1910. At pages 1526 and 
 1527, the following question and answer appear: 
 
 "Commissioner Mahon : * * * * Pliiladelphia was considered at that time, as v.c call 
 it in the railroad world, an overrailroaded town when Mr. Mitten went in, and it was all 
 readjusted, was it not? 
 
 "Mr. Joyce: Yes. sir; there was a very complete readjustment of the running of the 
 cars. Where cars came downtown from the north and turned and made various tortuous 
 routes through the business district through the heavy traffic, they were routed through from 
 north to south and their routes were straightened out so as to improve the headway and the 
 speed of the cars and to lessen delays of traffic. That, I think, everybody in Philadelphia 
 now regards as a very beneficial change, both to the service and to the community. 
 
266 Electric Railway Problem 
 
 "Commissioner Mahon : Undoubtedly ; I am not criticizing that. The point I %vanted to 
 show is you cheapened the cost ot operation to a greater extent possibly than any other rail- 
 road in the country." 
 
 Further on, at pages 1536 to 1538, Mr. Joyce again testifies on this same 
 general subject, as follows: 
 
 "I have already referred to the rerouting of the cars. No small proportion of the success 
 of the management may be attributed to the daily study of traffic statistics and the consequent 
 routing of cars to more fully and economically serve the public. 
 
 "At the time of the incoming of the nianagoment, in 1910, little or nothing had been 
 done in the way of rerouting cars so as to take advantage of unified operation. There were 
 92 separate routes upon the system, many of which were originally established by the different 
 operating companies in competition resulting in waste and duplication of service. 
 
 ■■.\ftcr the rerouting of the cars, there are 76 routes, which comprise the system as now 
 operated. 
 
 "The changes have been made as rapidly as the confidence of the public and the coopera- 
 tion of the employes would i)ermit, the most recent change being the consolidation of 
 two lines made within the last month, and resulting, we contidently expect, in a saving to 
 the company of more than $60.1X)0 a year; and this combination of two lines resulting in the 
 setting back, in the language of the men, the setting back of some thirty or more trainmen; 
 setting them back in priority; and in spite of this, instead of opposition on the part of the 
 men to that measure of economy, the Superintendent of Transportation had a complimentary 
 expression from the men operating those two lines upon the economies effected and the 
 common sense of joining those two lines into one. Not only that, but the joining of the 
 two lines has resulted in improved income, increased riding and a lietter gross on that one 
 single than on the two lines as formerly operated. 
 
 "The passenger receipts per car hour have increased from $2.19 in 1910 to $3.48 in 1918. 
 
 "Passenger receipts per car mile have increased from 27 cents in I9I0 to 38 cents in 1918. 
 
 "Much light is thrown upon these comparative results by the fact that the average speed 
 in miles per hour for the system has increased from 8.08 miles per hour in 1910, to 9.06 in 
 1918. This increase in speed has tx^en accompli.shed through improvement in various factors, 
 as, for example, reduction in the number of stops, the cutting down of the time consumed 
 at each stop, through the introductimi of the nearside and the center e.xit doors and the 
 equipping of all cars with door-operating and time-saving devices. 
 
 "Prior to 1911, the time-table department was operating many lines upon all-day solid 
 tables, meaning that a line having l)een designated as a five-minute line, the cars would be 
 sclieduled for a five-minute headway all the time with perhaps trips for the morning and 
 evening rushes ; but in the main the schedules were not based upon authentic checks to 
 determine the varying riding characteristics of each line at the different hours of the day. 
 The elimination of wasted effort in the .schedule under the present management has included 
 a very close adjustment of car schedule to the traffic of the lino, and on soiue lines the 
 headways are scheduled to change as often as five or six times in the 24 hours, with entirely 
 new schedules for Saturdays, for Sundays and for holidays, t)ased upon traffic observations 
 which were made in several ways by special slips turned in by the conductors showing the 
 maximum numln-r of rides on the car each trip, by trained observers placed at strategical 
 ob.servalion points along the line, who report the numl)er of passengers boarding, the numl)er 
 alighting and the number of passengers on the car at these points ; analytical studies of the 
 transfers issued and collected at dominating points ; and by these and other means the riding 
 characteristics of each line, for each hour of the day, for different days of the week and 
 for different seasons of the year are determined and are checked from time to time. 
 
 "The car service is then scheduled to put the cars upon the lines when and where the 
 riding public needs them. .\ typical line would show a definite headway from the early 
 morning hours, this headway becoming more frei|uent to meet the morning rush, then becom- 
 ing longer to a mininnnn for the hours of, say, between ten and twelve in the middle of the 
 day. and then becoming more freipient, the intervals lietween the cars reaching their greatest 
 frequency at the peak of the evening rush, and then tapering off again until seven, when 
 there is a slight increase to take care of the theatre and after-dinner traffic; again becoming 
 less freipicnt from. say. twelve to one at night, and falling into the 'Owl.' all-night service. 
 
 "Traffic analysis is. of course, not iK'Culiar to Philadelphia, but the maintenance and 
 accuracy of these studies are perhaps unique, as is also the success attained by the present 
 tiine-table ex|K-rts in dividing the car runs into car hours to meet the desires of the majority 
 of the trainmen. 
 
 "Here is where cooperation again comes in. Each new schechile, t>efore it becomes 
 effective, is submitted to the Cooperative Committee men from the depot concerned, and is 
 subject to scrutiny by the Iraiiniien involved, the declared policy of the department being 
 that the cars must be placed upon the streets exactly in accordance with the needs of the 
 traveling public, but the division of the car runs into crews and crew runs is accomplished 
 to meet, sn far as possible, the convenience of the men, who, it may Ik- said, now fully appre- 
 
Operating Economies 267 
 
 ciate that increase in their wages is closely affihated with the success of the management, 
 in fitting the car service to the traffic without what we call wasted effort." 
 
 Mr. Walter A. Draper, Vice-President of the Cincinnati Traction Company, 
 testified that his company expected to save about $100,000 a year by rerouting. 
 This appears at page 512 of the Proceedings. 
 
 The possibility of aflfecting considerable economies through the adoption of 
 the skip-stop plan was discussed by a number of witnesses. In this connection, 
 public convenience should be given special consideration. In small towns or on 
 light-trafiic lines, the skip-stop may hurt the service without producing much 
 economy. If headways are infrequent, people do not enjoy walking to the next 
 corner to take the car and seeing it go by while they are on the way. In this 
 connection, it should be remembered, also, that it is the saving of actual stops, not 
 of theoretical ones, ihat produces economy of power and promotes better speed. 
 It is in the big cities where traffic is comparatively dense that the greatest econ- 
 omies can be secured by the skip-stop. On this point, Mr. Gaylord C. Cummin 
 testifies at page 53 of the Proceedings, where he says: 
 
 "In the smaller cities the skip-stop saves nothing. * * * * In the larger cities I am not 
 familiar with the actual figures, but I should say that there was a possibility that it did save 
 something. That is, it might enable them to take out a car or so on a line at certain times, 
 by increasing the speed at which they can get over the route. In a town of 30,000 or 40,(X)0 
 or 50,000 people it does not do it. You have to deal in car units, and you do not save enough 
 time to get rid of one car. If you are running fifteen cars at a time, you can not cut it 
 to fourteen." 
 
 At page 1538 of the Proceedings, Mr. Joyce describes the results of the skip- 
 stop policy in Philadelphia, as follows : 
 
 "The skip-stop was installed in cooperation with the Federal Fuel Administration, in 
 order to conserve coal by reducing the number of stops, upon the theory that the electrical 
 energy consumed in the acceleration or starting of a car is greater than that required to keep 
 the car in motion after having gained momentum. 
 
 "The application of the skip-stop plan has resulted in reducing the number of stops in 
 the city by more than 1,700 out of a total of something less than six thousand. It is difficult, 
 if not impossible, to estimate the total savings from this plan, but a definite saving of more 
 than $100,000 in payrolls due to the conservation of the time of the operating crews, and a 
 saving of $3(X),(X)0 per annum in electrical current has been demonstrated beyond doubt. By 
 comparison of the per-car-mile cost of operation for a calendar month before the skip-stop 
 was installed with the same cost for a like period after the installation, the company's engi- 
 neers estimated a saving of 1.7 cents per car mile, or a total saving of $1,318,000 per annum; 
 and they estimated an ultimate saving of approximately $100,000 per annum additional due 
 to releasing equipment from service." 
 
 Mr. Beeler laid considerable einphasis on the location of the car stops as 
 
 aflfecting speed. At page 1668 of the Proceedings, he says : 
 
 "The location of car stops is of prime importance. They should be so placed that a 
 standing car will not interfere with other cars or general street traffic, and where lines branch 
 off they should be placed so as not to block the ;iiain line. The exact location of each stopping 
 place should always be indicated plainly by a sign, so that passengers will not delay the car 
 movement unnecessarily by walking to the car after it has stopped. A walk of a car length 
 adds in excess of eight seconds to the regular stopping time, reducing the car's earnings 
 proportionately." 
 
 In discussing the various possible ways of cooperation between the public 
 authorities and the street railways, Mr. Beeler states the advantages of the skip- 
 stop without making any qualification as to the size of the town. At page 1668 
 of the Proceedings, he says : 
 
 "Another kind of team-work is the application of the skip-stop by which the practice 
 of stopping at every street intersection is abandoned in favor of spacing the stops farther 
 
268 Electric Railway Problem 
 
 apart and in accordance with traffic conditions. Instead of imposing a hardship on the public, 
 the decrease in the number of stops insures a quicker journey and more comfortable riding. 
 At the same time the reduction in starts and stops leads to a considerable saving in power. 
 It is significant that one of the first steps of the Fuel Administration was to urge electric 
 railways to install the skip-stop wherever practicable." 
 
 Other measures of cooperation by which the regularity and speed of street 
 car service can be increased are suggested by Mr. Beeler at pages 1668 and 1669 
 of the Proceedings, where he says : 
 
 "First and by far the most important step is to secure the cooperation of the local 
 authorities in all matters pertaining to faster operation on the streets, not by increasing the 
 maximum speed, but by reducing delays and removing causes of congestion along the tracks. 
 
 "Loading platforms should be placed at all heavy loading and unloading points where 
 street width permits. They concentrate passengers at the proper point ready for quick 
 loading, reduce the height of the step into the car, save time, i)rovide a safe, comfortable 
 place for the patrons to stand, prevent accidents, and permit the general street traffic to 
 proceed without delay, thus mightily relieving congestion. Few people would guess that 
 the humble loading platform has a direct tjearing on the rate of fare, but by enabling the 
 car to make better time operating e.xpenscs are kept down. Where raised platforms are 
 impossible the next best substitute is the so-called marked .safety zone; but for efficiency, 
 safety and comfort it does not begin to compare with the loading platform. 
 
 "Traffic officers should always give precedence to the street cars over all other classes of 
 traffic, as they carry twenty to one by all other means. By traffic I do not mean fire depart- 
 ments or police patrols or ambulances, but general traffic. 
 
 "The police should a.ssist in keeping tracks clear from trucks and other vehicles. The 
 left-hand turn for all vehicles should be prohibited at congested intersections, such as 15th 
 and New York .-\vcnuc in Washington or 42nd .Street and 5th .Avenue in New York. The 
 rule of one-way traffic on narrow and congested streets should he enforced. 
 
 "Parking of automobiles should he regulated so that traffic will not be forced on the car 
 tracks or otherwise interfere with the free operation of the street cars in the congested 
 districts. 
 
 "Double berthing of street cars should he the rule in all congested locations so as to 
 save unnecessary stops. 
 
 "The abolition of all steam railroad grade crossings is also an item of great importance 
 to speed and safety." 
 
 The cost of power to the street railways may be reduced in various ways. 
 The effect of the skip-stop has already been referred to. The use of lighter 
 equipment will be discussed later on. Other possible power economies are dis- 
 cussed by Mr. Beeler at page 1667, where be says: 
 
 "If we go hack to the power stations, frequently it is found that they are generating 
 power at a higher cost than if the electricity for a locality were obtained from a single central 
 generating plant that provides the whole community with power and light as well as the 
 railway. Hut assuming that the railway is generating power, this branch of the business 
 presents a fertile field for economies, among which may be mentioned the following : 
 
 "Con.solidation of power plants, shutting down less efficient ones when demand permits. 
 
 "Economies in central station generation, including both the steam and electrical plant, 
 handling of coal and ashes, and the many details that go with a generating plant. 
 
 "Purchase of part of the power if necessary. 
 
 "Ixediirtion of di>;trihution losses, proper feeder system, track bonding and negative 
 return, autoniatic substations, etc. 
 
 "Thermostat regulation to cut out heat automatically in crowded and overwarnied cars. 
 
 "Klimination of the use of power as far as possible in shops and el.sewhere during the 
 transportation peak. Keep work and freight cars off the line at such times. 
 
 "A great field for saving is the conservation of power at the car itself. The installation 
 of an efficient checking device will reduce excessive power consumption to a minimum. To 
 my pcrs<inal knowledge as high a saving as 25 per cent of the power used to propel the cars 
 was effected by such a means. ,\s the combined fuel bill of the electric railways is not far 
 from SO millions of dollars annnnllv a 20 per cent saving, which could Ix- obtained, would 
 release a large amount of fuel which could Ik- diverted to other essential u.ses." 
 
 In relation to possible .savings in the generation and use of power, Mr. Wal- 
 ter Jackson says, at page 1593 of the Proceedings: 
 
 "A great deal has been done in making our power plants and distributing .systems 
 efficient. \ery recently there has come the automatic substation which will be a boon to 
 
Operating Economies 269 
 
 interurban railways especially in cutting down the cost of attendants, in saving copper, in 
 giving a higher voltage, which means better schedules, so that we may say that in the 
 generating and distributing end electric railways are very efficient. It is a curious fact, 
 however, that in the use of that power electric railways are not as efficient as they might be. 
 Within the same schedules it is possible for motormen to show a variation of 25 to 50 per 
 cent in the use of power. There is no way of making the motorman efficient in the use of 
 power except first by personal instruction and then by the use of some instrument that will 
 check the correct use of energy for a given service. Such instruments have been used abroad 
 for a period of some fifteen years, and 1 would say that in Great Britain and on the Continent 
 the majority of cars have been equipped with devices of that sort. In the United States that 
 development has come later and today we find that not more than 20 per cent of the cars 
 in the United States are equipped with a power checking device." 
 
 It is noteworthy that Mr. Beeler puts the number of cars equipped with a 
 power checking device at not over five per cent of the total. 
 
 Mr. Henry G. Bradlee, of Stone & Webster, after discussing the possible 
 savings in the cost of electric railway power through the combination of street 
 railway and lighting plants and through the development of central power plants 
 at the mines, concluded his discussion of this matter with the following statement, 
 which appears at page 224 of the Proceedings : 
 
 "But the saving in power will not go very far in the street railway situation. Power, 
 after all. is not a very large percentage of your total expense." 
 
 One of the great economies effected in Cleveland and Detroit has been the 
 use of trailers. Discussing the fine spirit of cooperation between the city author- 
 ities and the street railway under the Tayler plan in Cleveland, Secretary Baker, 
 at page 1033 of the Proceedings, says : 
 
 ".\nother conspicuous illustration of it was the reintroduction of the trailer car. Cleve- 
 land is especially adapted to the use of trailer cars, and of course it cuts the expense of 
 operation practically in half; you can operate a car and a trailer for one and a half times 
 the cost of operating the main car, and the car itself is not so expensive. There was a 
 tremendous objection against trailer cars all over the United States ; they were characterized 
 as murderous things. And yet an effective and safe trailer car was used and worked with 
 the consent of the city, and the city adopted it at once." 
 
 With respect to the advantages that would result from the standardization 
 of equipment, Mr. Beeler speaks with great emphasis at pages 1666 and 1667, as 
 follows : 
 
 "Because adequate allowances for replacement were not provided from earnings, many 
 electric railways operate today with dingy, dilapidated equipment that actually repels custom. 
 These cars are usually much heavier than necessary. They pound the track and paving to 
 pieces, while their excessive demands for power eat up the coal pile. In operating such cars 
 an indifferent motorman can waste readily several dollars a day for power alone. Yet only 
 5 per cent or less of the cars in the United States are equipped with devices to check up the 
 motorman's skill and assist him in becoming efficient. The older, heavier cars are costly 
 to run, and to maintain. They must be replaced by far lighter, faster and more accessible 
 cars with full automatic equipment before the full degree of success is had. 
 
 "Standardization of equipment and a complete change in manufacturing methods must 
 come. Cars must be turned out ready to run like automobiles, in large quantities, and at 
 a fraction of the present costs. They must be light and attractive. Cross seats should always 
 be employed, as comfort is a prime requisite, and to sit with one's feet in the passageway 
 with nothing to look at but a jam of passengers gives the patron a bad impression of the 
 management. I think one of the most important things is attractive, economical rolling stock. 
 ******** 
 
 "Two or three car types will be sufficient to meet the varying conditions throughout the 
 country. Car trust certificates will then be attractive to the investor, especially when he 
 knows that the car has full value on other lines. 
 
 "\\'here older rolling stock is in use it should be segregated by types and the service 
 made as nearly uniform by lines or districts served as possible, so that the cars will not nni 
 hit-or-miss in heterogeneous bunches. The motor characteristics and speed should be classi- 
 fied with care and cars used on lines where they best fit the schedule requirements. 
 
270 Electric Railway Problem 
 
 "I have in mind an actual illustration on a line that was about ten miles long where a 
 dozen different types of cquipinent were used. Some of the cars on that line had a maximum 
 speed of considcral)ly over 30 miles an hour, 3i or 35 miles an hour; others had a speed of 
 18 miles; and they were all making the full length of the line, so you can imagine what kind 
 of schedule economy you got on a line of that kind. They invariably ran in bunches with 
 the slower car leading the procession. 
 
 "Often a change in the gear ratio will make faster schedules possible. .^11 equipment 
 should he kept clean and w^ell painted, brilliantly lighted, and wear an inviting look. 
 
 "The use of specially constructed light-weight trailer cars in rush hours and other periods 
 of heavy traffic has proved of immense value in augmenting the service with a minimum of 
 expense. Such cars will aid to give more service at less cost. The light weight saves 
 power and wear and tear." 
 
 Another mode of eflfecting economies is through a reduction in accident ex- 
 pense. The striking results obtained by the Philadelphia Rapid Transit Company 
 in this line are stated by Mr. Joyce at page 1539, as follows: 
 
 "For the eight years ending 1910, that is, prior to the Mitten management. 6.08 per cent 
 of the gross earnings of the company was spent for accident claims and as a result of 
 accidents, and there was an unpaid liability not estimated involved in a total of 4.953 unsettled 
 suits at December 31, 1910. With the introduction of modern equipment and the equipping 
 of the cars with every known safety device a cru,sade was undertaken to reduce the number 
 of accidents and particularly accidents to children. A special bureau was created under the 
 direction of a capable young woman who soon became known throughout the city as 'Miss 
 Safety First.' Both school authorities and the Police Department rendered cheerful and 
 enthusiastic cooperation, A system of lectures to school children on safety devices was 
 devised and executed and more than 100,(XX) children are addressed annually on safety. This 
 young woman goes about from school to school, assembles the children in their assembly 
 rooms and lectures to them on safety precautions. She organizes the boys into safety-first 
 scouts, and drills them so that at the letting out of school each boy in that scout squad knows 
 a certain point at which he is expected to station himself to protect his fellow school children 
 in crossing the streets. 
 
 "During the eight-year period of this management the accident cost was reduced from 
 6.08 per cent in 1910 to 3.4 per cent of gross earnings in 1918, and the number of pending 
 suits was decreased from 4,953 to 2.S24 at December 31, 1918. 
 
 "This reduction in accident costs represents a saving of $5,392,000. While the police 
 reports for 1918 show an increase of 1,980 street accidents over 1911. the records of the 
 Philadelphia Rapid Transit Company shows a decrease of 752 trolley car accidents in the 
 same period. 
 
 "In 1911 there was one accident for every 18,640 passengers carried, while in 1918 the 
 ratio was one accident to every 41,622. 
 
 "The crusade against accidents amongst children during the past four years resulted in 
 a showing of 32 fewer deaths from accident to children as compared with the preceding 
 four years." 
 
 At pages 1539 and 1540 of the Proceedings, Mr. Joyce explains the Phila- 
 delphia Rapid Transit Company's fire insurance policy, by which large savings 
 are now being efltected. He says: 
 
 "Under the head of Fire Insurance I have a memorandum to note that the company in 
 1910 carried $18,500,000 of fire insurance at a premium of 50 cents ix-r hundred. Adequate 
 and efTective inspection has reduced this cost to 25 cents per hundred and in this way a 
 saving of $25,(KX) per anniun net after paying the cost of inspection was accomplished and 
 many collateral iK'ncfits derived from the regular and careful in.spection of the property. 
 I'rom 1911 to 1918 over $<>00,000 was (laid in premiums to insurance companies, and the 
 company received in return less than $60.0(X) for fire losses. 
 
 "At December 31, 1918. the company assumed i3 per cent of its fire risk A careful 
 survey of the property demonstrated that the greatest possible loss that could be sustained 
 in one fire would not exceed $250,0(K1. The insurance fund discontinued in 1910 to aid the 
 company in meeting obligations has been reestablished with assets of over a million dollars." 
 
 In response to questions by Commissioner W'ehle, Mr. Joyce stated that the 
 subject of frcigln-carrying by street railways was being carefully studied by the 
 Philadelphia Rapid Transit Company as a possible source of additional revenue. 
 
Operating Economies 271 
 
 With respect to other methods of developing revenues or effecting economies, 
 the following testimony is found at pages 1565 and 1566 of the Proceedings: 
 
 "Commissioner Wehle : Are there any other sources of saving or of effectualization for 
 the Philadelphia system which are in the minds of the management and which it is the inten- 
 tion of the management to develop? 
 
 "Mr. Joyce : They are almost without end, Mr. Commissioner. We have a corps of 
 men who do nothing else but study the probabilities of economies and coordination to the 
 end of serving the public better, at a lower cost, rearrangement of schedules, rearrangement 
 even of the offices, rearrangement of the departments, the location of the offices at convenient 
 points, and the arrangement of the machinery in our shops, the arrangement of the repair 
 bays in our barns; and all of those things and many others that I cannot enumerate are the 
 subject of constant study, and the day hardly passes that something new is not done in the 
 way of improvement. 
 
 "We have just recently, by a rearrangement of the offices on the subway-elevated, effected 
 a saving of time of twenty people, and were able to drop that many people from the payroll 
 without any appreciable change in the service to the public, and with, in many cases, an 
 improvement in that service. 
 
 "Conditions change from day to day, and a schedule of duty assignments that will obtain 
 today may not fit the conditions at all six months from today. The time of reporting on 
 duty and off duty for certain people, to relieve stress at certain times, such as we have in 
 the system of collection of fares on the subway-elevated, changes from year to year. 
 
 "Commissioner Wehle : But those are really improvements in efficiency, generally speak- 
 ing, are they not, that you now refer to? 
 
 "Mr. Joyce : Yes. 
 
 "Commissioner Wehle: Efficiency in office management or something of that sort? 
 
 "Mr. Joyce : Efficiency in management in the broad sense." 
 
 Mr. Beeler ought to be a welcome visitor at any electric railway office. He 
 is fertile in suggestions for economies. In addition to those previously discussed 
 at some length, he mentions at page 1668 of the Proceedings, the following : 
 
 "Considerable might be said on the methods of organization, telephone dispatching, the 
 operation and location of division headquarters, methods of accounting, fare collection and 
 registration, use and abuse of transfers, prepayment areas, reduction of non-productive miles 
 to and from car houses, advantages of good track, spiraled curves, smooth special work, 
 efifects of corrugation, bad joints, poor drainage, excessive use of sand, methods of greasing 
 curves, accident prevention, and scores of other equally important items all having a direct 
 influence on the operations and expenses." 
 
 Interstate Commerce Commissioner Eastman summarized the opportunities 
 that exist for improving service "in ways that will result in substantial economy 
 and also add to traffic and revenues." At page 2067 of the Proceedings, he says : 
 
 "I think there are very great opportunities, or at least very substantial opportunities, 
 which exist in that respect. * * * * i can summarize at the present time, simply by say- 
 ing that they consist, first, of means of conserving labor by increasing the mileage of the cars 
 per hour, in various ways, such as the skip-stop plan, improved motors, better acceleration 
 and deceleration, decrease in the number of layovers, and all those various means of making 
 the car do more work in a given hour, and thus conserving labor. 
 
 "Second, by the introduction of trailers, which are really one-man cars, and conserve 
 labor in that way; by the introduction of one-man cars of proper type, which we laid a great 
 deal of emphasis upon in the Public Service Commission of Massachusetts ; and by properly 
 located and equipped car houses and shops. Those are all means of conserving labor. Then 
 you have means of conserving power, by lighter cars, by adequate feeders and by various 
 power-measuring devices, which help the motorman to use power more economically. 
 
 "Then you have means of conserving property, and these, I think, are very important, 
 by proper maintenance of tracks and cars. So long as you have properties where the cars 
 are bumping along over poor joints and poor rail, and where the cars themselves are in poor 
 condition, you not only increase the expense of operation and the necessity for repairs, but, 
 at the same time, you decrease the respect for property on the part of the public. Nobody 
 can be very friendly to a property which is giving poor service and does not look as though 
 it were in good condition: that looks as though it were nearing the end of its existence. 
 
 "In the final place, there are means of conserving revenue, such as various fare regis- 
 tration devices, fare boxes and reduction in the misuse of transfers." 
 
272 Electric Railway Problem 
 
 This brings us squarely to the matter of the possible revolution in operating 
 methods that would result from the general adoption of the one-man safety car, 
 and the more radical revolution suggested by Henry Ford's proposed change in 
 street railway motive power from electricity to gasoline or alcohol. 
 
 Mr. Charles W. Kellogg, of the Stone and Webster organization and Chair- 
 man of the Committee on One-Man Car Operation of the American Electric 
 Railway Transportation and Traffic Association, described to the Commission the 
 characteristics and advantages of the one-man safety car. His testimony is 
 found at pages 730 to 750 of the Proceedings, where he gives in considerable detail 
 the results of the investigation conducted by the committee through question- 
 naires sent out to the companies known to be operating one-man cars, either of 
 the modern safety type or of the made-over type. The results of this investiga- 
 tion were also embodied in a report presented by the conmiittee at the Atlantic 
 City Convention of the Aniericaii Electric Railway .Association in October, 1919, 
 copies of which were filed with the Commission.' Mr. Kellogg's testimony 
 starts off with what seems like a very severe indictment of the management of the 
 entire electric railway industry duriiig the period of ten years or so immediately 
 preceding the war. It might be paraphrased and condensed into this three-word 
 sentence: "Monopoly fell asleep." At pages 730 and 731 of the Proceedings, 
 Mr. Kellogg says: 
 
 ".\boiit ten or fifteen years ago. or, perhaps, as long as fifteen years ago. there was 
 a perfect mania among street railway companies for heavy street cars, Pullman cars. 
 
 "The Chairman: Why? 
 
 "Mr. Kc'lIoKg: It was felt that they were more dignified; they rode smoother on rela- 
 tively poor track, and therefore would attract traffic; and anyone who has studied the situation 
 and remembers the conditions in those days will know that even a small town that did not 
 have large, heavy douhle-truck cars was considered rather out of the running. 
 
 "It was not until after all of the city systems were equipped with these very heavy cars, 
 weighing around 50,000 iwunds — some of them even heavier — that the industr)- woke up to 
 the fact that an enormous umiecessary weight was being dragged around the streets, that they 
 meant excessive investment, a corresponding heavy track, and an expensive construction to 
 carry these big cars. It meant correspondingly more power station capacity to move them, 
 inchirling in that also substations, cables, etc.. and correspondingly higher maintenance costs, 
 both of the cars themselves and for the track they ran over to keep the service .going. 
 
 "The Chairman ; Would you say that these large cars were urged by the car manufac- 
 turers? 
 
 "Mr. Kellogg: I should say not. although I am not able to pass on that point. At all 
 events, the street railways were willing customers. 
 
 "It was not until after this effect had occurred — I think that is a fair statement — until 
 it had practically fully occurre<l. that the results were realized by the industry.'' 
 
 Mr. Kellogg's committee inits the case somewhat more mildly in the intro- 
 ductory paragraphs of its report, where it describes the origin and developtnent 
 of the modern one-man safety car, as follows: 
 
 "The operation of street cars by one trainman in small communities where small gross 
 per car mile demanded the utmost economy in operating expenses, is not a new idea in the 
 .street railway business, the practice having been followed for years by manv of the smaller 
 companies; but the modern light safety car represents a radical improvement in the whole 
 art of urtan (rans|H>rtation and, therefore, will Ixr the principal topic discussed in our report. 
 
 "It is interesting to consider the evolution of the safety car. Some years ago, when a 
 franchise providing a .S-ceiit fare was considered an important asset of a street railway com- 
 |)any, heavy cars were deemed necessary for city service. It was felt that a heavy car rode 
 more smo<ithly and would allract patronage correspondingly, so that car weights of 50,000 
 to S5,(XX) lbs. and even heavier were the rule rather than the exception for up-to-date city 
 systems. These heavy cars recjuired, of course, a corresponding investment in massive track 
 construction to carry them and in power stations and subst.itions to move them, antj a corre- 
 
Operating Economies 273 
 
 spending operating cost for track and car maintenance and fuel to keep them in service. 
 Troubles have come thick and fast since then. First, the waning popularity of the street car, 
 due to the fast multiplying automobile (recent figures show that there are today in this 
 country 75 automobiles for every street car) and second, five years ago. the jitney competi- 
 tion, followed, due to the war, by the sharp rise in prices of labor and material. 
 
 "The jitney was what produced the Light Safety Car. The popularity of the jitney 
 proved beyond a possibility of doubt that frequent, quick service would get passenger business 
 away from the slow and infrequent street car, and it was up to the street railway industry 
 to develop light cars that would simulate jitney service. Following this idea. Mr. Charles O. 
 Birney designed the car that now bears his name. It was realized that the car must be light 
 in order to accelerate quickly and that it must be operated with one man in order to compete 
 with the jitney which was similarly manned. The safety devices followed from the realiza- 
 tion that the public would not patronize the car unless it was convinced that it took no more 
 chances of doing so than with the two-man car. 
 
 "The design of the new car, weighing only 15,500 pounds and seating 32 people, had 
 to be from the bottom up — wheels, axles, truck, body and motors were all radical departures 
 from previous practice and the automatic safety features alone were a triumph of adaptation 
 to the compelling forces w-hich led to the development of the new car. These safety devices 
 consisted, in general, of ways to make the operation safe in case the operator dropped dead, 
 or slackened in attention. The 'dead man's handle' required that the operator have his hand 
 constantly on the controller or it would throw the power off. Similarly, if the power were 
 so thrown off, the brakes were automatically applied and sand fed to the track, and, when 
 the car came to a stop, the doors, previously held securely closed by air pressure, are made 
 available for manual operation to form emergency exits if desired." 
 
 From the above it may be gathered that the purpose of the one-man safety 
 car is to reduce the cost of service and to make possible an increase in the amount 
 of service where there is enough potential trafific to make additional service pay. 
 In brief, the safety car attacks the street railway problem at both ends — by reduc- 
 ing cost and by developing trafific. This car suggests great possibilities ; but as a 
 potential remedy for the existing troubles of the electric railway industry it will 
 have to pass certain tests. First, from the point of view of the service now being 
 rendered by the electric railways, can the one-man car do the entire job every- 
 where and under all conditions? If not, can it, either as the principal type of 
 street railway equipment or as an auxiliary type, do the job under all those con- 
 ditions where street railway service is necessary but is now being operated at a 
 loss? Second, if the one-man safety car is capable of furnishing the service, 
 either universally or in all places where the service is now unprofitable, what re- 
 duction can it effect in the cost of the service? Third, if this car is capable of 
 furnishing the required service, what can it do in stimulating traffic and in- 
 creasing the gross revenues of the street railways? Fourth, if the one-man 
 safety car does not offer a complete and universal remedy for the present dif- 
 ficulties of the electric railway industry where a remedy is needed, how will it fit 
 in with other proposed remedies to be applied at the same time? 
 
 Can the one-man safety car do the entire job? Obviously, it cannot do the 
 work of elevated and subway lines where extreme density of traffic makes rapid 
 transit train operation necessary. Therefore, to begin with, we have to restrict the 
 use of the new car as a remedy to the surface lines. Furthermore, it does not 
 appear that this car is adapted to high speed interurban transportation. While 
 it may be used for service between adjacent urban communities, a single-truck 
 car cannot well be operated at the high speed usually attained by a "regular inter- 
 urban" which Mr. Kellogg describes at page 746 of the Proceedings, as follows: 
 
 "An interurban generally means a pretty high-class road with a private right of way, 
 good track, well-ballasted and high-speed cars, very different from city service." 
 
274 Electric Railway Problem 
 
 It seems clear that the one-man safety car is adapted for "city"' rather than 
 "interurban" service, as described by Mr. Kellogg. Furthermore, there is still 
 considerable uncertainty as to the adaptability of the one-man safety car for 
 exclusive service in the congested streets of a great city, particularly where the 
 traffic load is heavy. For example, General Tripp, Chairman of the Committee 
 of One Hundred of the American Electric Railway Association, after stating that 
 he did not look for the cutting down of the cost of service to any great extent, 
 was asked what he thought about the adaptability of the one-man car for opera- 
 tion on the New York City surface lines. His testimony on this point is found 
 at pages 170 and 171 of the Proceedings, as follows: 
 
 "Commissioner Meeker: In refiard to the New York City situation, would it be at all 
 feasible, do you think, to adopt perhaps the one-man car for the surface lities, some of the 
 surface lines that are competing with the long-haul subway and elevated lines? 
 
 "Mr, Tripp: 1 should think in New York City it would be about the worst place that 
 you could operate a one-man car. .At rush hours a one-man car simply could not handle 
 some of the traffic, particularly on the downtown crosstown lines leading to Brooklyn Bridge 
 and to the various ferries and Hudson tubes. 
 
 "Commissioner Meeker: Pardon mc. may I interrupt there? I was speaking of the 
 lines that are running in competition with the elevated and the subway lines, the north and 
 south lines in general, and may 1 add here, would it he possible to run them at frequent 
 enougli intervals merely for local traffic under a zone system .so that it might relieve the 
 elevated and subway lines and might perhaps contribute towards the solution of the trans- 
 portation problem? 
 
 "Mr. Tripp: My judgment would he that it would not, generally speaking. The cars 
 are already operated on the principal longitudinal lines about as closely as they ought to run 
 in rush hours and they could not get them any closer. .And, of course, a car that seats forty 
 or fifty people will carry more than a one-man car." 
 
 Further on, at page 171 of the Proceedings, General Tripp continues his tes- 
 timony with respect to the one-man car : 
 
 "A one-man car under my theory should be considered only from the standpoint of its 
 economy, looked at from the standpoint of the public. Will it properly serve the public, is 
 it all they rc(|uire. and if it is a satisfactory ser\Mce it is a cheaper service and the public 
 ought to get its service as cheap as it can. But it is not a cure, nor is it fundamentally proper 
 to attempt as a step in the solution of this problem to force a one-man car into a situation 
 that economically requires a larger car. It is forcing an economy at the expense of the public, 
 because the whole situation is set up on an erroneous foundation." 
 
 Nevertheless, two hundred of the one-man safety cars have recently been 
 put in use on the surface lines of Brooklyn, antl it seems to be the general con- 
 sensus of opinion among the advocates of the safety car that it is adapted to 
 much heavier traffic lines than was at first supposed. The evidence shows that 
 these cars have been used successfully on heavy traffic lines in Dallas, Houston, 
 Fort Worth, Bridgeport, Seattle and Kansas City, Mo. However, it is still un- 
 doubtedly the prevailing opinion that the one-man safety car is less well adapted 
 than existing equipment to traffic conditions such as f>revail on the principal car 
 lines of cities like Cleveland and Detroit where trailers have proven their value. 
 
 A kindred problem presents itself in the matter of the adaptability of the 
 one-man safety car to rush hour and peak load service. Obviously, where the 
 existing equipment of the large type is loaded to capacity, the smaller safety cars 
 could not handle the traffic on the same schedules: and if at the present time as 
 many large cars are being moved during the rush hours as the tracks will accommo- 
 date, the smaller safety cars would be less well adapted to the service than is the 
 present equipment. Mr. Kellogg, in his testimony, suggested that where the 
 
Operating Economies 275 
 
 traffic is too heavy over the peak for the Birney cars, the old heavy cars can be 
 brought out and operated as auxiliaries to the safety equipment. Wherever this 
 is necessary, it means that a negative answer must be given to the question here 
 under discussion, namely, can the safety car do the entire job? 
 
 Another question with respect to the adaptability of the small safety cars 
 applies to the conditions of ice and snow that often prevail during short periods 
 of the winter in most northern cities. Here, again, Mr. Kellogg suggested that 
 the heavier two-man equipment might be called out in an emergency to fight the 
 adverse weather conditions, but it is clear that if a street railway company has 
 to keep a complete complement of heavy two-man cars on hand to take the place 
 of the Birney cars during snow storms or during the rush hours, this involves a 
 tremendous offset to any possible advantages derived from the use of the Birney 
 cars at other times. Mr. Kellogg freely admits, at page 744 of the Proceedings, 
 in answer to questions from Commissioner Sweet, that the Birney car is better 
 adapted to the cities in the southern part of the country and on the Pacific coast 
 where there is verj- little snow, than to cities in the extreme north; but, if neces- 
 sary, the snow-fighting can be done by special snow-fighting equipment. He also 
 admits that a great deal more time must elapse before a real test of these one-man 
 safety cars can be made. At pages 744 and 745 of the Proceedings, the follow- 
 ing questions and answers appear: 
 
 "Commissioner Sweet : Before a real test can be made of these cars, don't you think 
 that a great deal more time must elapse so that the public taste with regard to the matter 
 may be better determined? 
 
 "Mr. Kellogg : That is perfectly true. It is a new thing. 
 
 "Commissioner Sweet : So that it would be stretching the point somewhat, do you not 
 think, for the Commission to make any particular recommendation with regard to these cars? 
 
 "Mr. Kellogg : Oh. I think for the Commission to hang anything definite on as relatively 
 new a proposition as this, especially with its limited application, would be very dangerous." 
 
 Further on, however, in response to questions by Chairman Elinquist, Mr. 
 Kellogg reiterated his belief that the safety car has important benefits for the 
 public, for the companies and for the trainmen. After this the following testi- 
 mony appears at page 748 of the Proceedings : 
 
 "The Chairman : That being so, why is it not a very good thing to advocate the use 
 of the one-man car just as much as possible? 
 
 "Mr. Kellogg: I think it is a good thing. 
 
 • "The Chairman: If it is a good thing for the companies as well as for the public 
 
 I "Mr. Kellogg: And for the trainmen. 
 
 "The Chairman : .-^nd for the trainmen, why should it not be a good thing for this 
 Commission to advocate the use of such a car? 
 
 "Mr. Kellogg : I think they should advocate it wherever it can be used to advantage." 
 
 Still further on, after stating that a number of companies might be finan- 
 cially able to buy the new equipment, but that "most street car companies are 
 nearly broke now," Mr. Kellogg, at page 749 of the Proceedings, testifies as 
 follows : 
 
 "The Chairman: Is it not true that these replacements must be very gradual if at all, 
 on account of the financial condition of the companies? 
 
 "Mr. Kellogg: Yes, and even if they had the money they would have to go at it gently, 
 one line at a time. 
 
 "The Chairman: Then the one-man car is not an expedient that can remedy the present 
 situation ? 
 
 "Mr. Kellogg: No. As I said this afternoon, it is not a panacea, it is not something 
 that you simply fill in a blank check and say that is all there is to it. It is a great help in 
 some cases." 
 
276 Electric Railway Problem 
 
 Mr. C. I.. S. Tinglcy, of the American Railways Company, raised a doubt as 
 to the adaptability of the one-man car to operation on heavy grades, but this 
 point was not touched upon by Mr. Kellogg in his testimony, or by Mr. Kellogg's 
 Committee in its report. With respect to operation at grade crossings, the Com- 
 mittee made particular inquiry with results which are stated by Mr. Kellogg at 
 page 739 of the Proceedings, as follows : 
 
 "One point we asked particularly about wa.s that of flagging railroad crossings. You 
 gentlemen of course realize that it has lieen the practice from time immemorial in the street 
 railway business when a street car approaches a railroad crossing for the conductor, after 
 the car has been stopped, to get off and go ahead of the car onto the crossing, look up and 
 down the track and signal the car to come across. With the Birney car that practice is 
 impossible, in fact it would be dangerous for the trainman to leave the car and go onto the 
 railroad crossing. So the meth(xl of flagging is simply to stop the car. for the operator to 
 look up and down the track and if all is clear to proceed. There is some difference of opinion 
 as to the safety of that. Personally. I do not think with a normal railroad crossing where 
 the view is unobstructed that that method of flagging is any more dangerous than the old- 
 fashioned method. But wherever a complicated set of tracks are crossed it is nccesi>ar>- with 
 the Birney cars to maintain a flagman who can actually be there at all times. Of course, 
 to such an extent, whatever that amounts to, it tends to oflfsct the saving in expense in the 
 use of these cars." 
 
 From the discussion thus far it is perfectly clear that the one-man safety car 
 cannot perfomi all the work of local transportation now required of the electric 
 railways. This is true even if we exclude rapid transit and interurban service. 
 Mr. KeIlogg"s Committee in its report stated that the number of light safety cars 
 in operation up to October, 1919, was about 1100, and that 600 more were under 
 order and in process of manufacture. In addition to these, about 900 other one- 
 man cars of different types were at that time in use in the United States. In the 
 issue of April 10. 1920, the Electric Railway Journal places the number of safety 
 cars to be built during the year 1920 at from .^,000 to 4.000. The number ordered 
 during Januar>' and February was 545. Mr. Homer luring. Chairman of the 
 Board of Public Trustees operating the Eastern Massachusetts .Street Railway 
 Company, told the Commission that 200 of the safety cars had been ordered for 
 the Bay -State lines, the first of the cars to be delivered in October. With respect 
 to them he says at page 1650: 
 
 "We hope to save some operating expense; but much oftener we hope to increase our 
 fret|uency of service and give better service at the same expense. That is what we are really 
 hoping to gain." 
 
 In a letter dated March 15, 1920. Mr. Loriiig states that about 100 of the 
 safety cars have been delivered, but that "none have been put in operation because 
 of the very bad track conditions, due to snow and ice." 
 
 While it is not possible, from the testimony and the data submitted to the 
 Commission, to determine what proportion of all electric railway service the 
 Birney car could be depended on to sujiply successfully, the evidence shows great 
 advantages to be derived from the use of this car under favorable conditions. 
 The possible savings to be effected apply principally to platform c.\])ense. power 
 consumi)tion. accident ex])ense. car and track maintenance, and. ultimately, the 
 capital account. Platform expense is saved in two ways: first, by the elimination 
 of the conductor, and second, by the speeding up of the cars. It is customary to 
 pay the ojicrator of a one-man car a higher wage than is paid to either the motor- 
 
Operating Economies 277 
 
 man or the conductor of a two-man car. The difference averages about ten per 
 cent, ranging all the way from one cent to ten cents per hour. The operator of 
 a one-man car is a busy man, and needs to combine the qualifications of motor- 
 man and conductor. Mr. Kellogg's committee found that on the average the 
 differential in his favor was about four cents an hour ; but in my opinion, the 
 ultimate differential will probably be much larger — perhaps, as much as ten cents 
 per hour. The average speed of the safety car appears to be from ten to twenty- 
 five per cent greater than the speed of the heavy two-man equipment. This re- 
 sults in a better utilization of labor, which tends to offset the effect of the higher 
 wage rate so as to bring the saving in platform expense, on a car-hour basis, back 
 to the full SO per cent that would be expected from a reduction of one-half in the 
 number of employes. The greater average speed attained by the safety cars is 
 accounted for by faster acceleration in starting and faster deceleration in stopping 
 and perhaps to a slight degree by the fewer stops resulting from the smaller aver- 
 age passenger load. 
 
 The power saving results from the light weight of the car, and averages 
 about 50 per cent. The saving in accidents is less uniform, but is due, where it 
 occurs, to the safety appliances from which the safety car gets its name. It is 
 believed that a considerable saving in car maintenance per car mile will be a per- 
 manent result of the use of the lighter equipment, but the safety car is still new 
 and its many devices have not yet had time to get out of repair. With respect 
 to track maintenance, there is even better reason to expect a saving as the result 
 of the use of light-weight cars, particularly in those cases where this type of 
 equipment is used exclusively. After a while, the effect will undoubtedlj' be seen 
 in the capital account, as the light cars will permit of lighter track construction 
 and reduced power plant capacity. Moreover, the cars themselves represent a 
 much smaller capital investment per seat than the big two-man cars do. It will 
 take a good while, undoubtedly, to work oft' the obsolete investment due to the 
 big-car policy of the past, but once that is done the total investment necessary 
 on a system completely equipped with light one-man safety cars will be much 
 less than has been found necessary where the heavy cars are used. 
 
 It can readily be seen that the economies normally resulting from the use 
 of the light one-man safety cars, if they could be realized to the full extent with- 
 out a diminution of gross earnings per car mile, might easily make all the dif- 
 erence between bankruptcy and prosperity in the street railway business. Unfor- 
 tunately, there is the peak load of the rush hours which usually taxes the old-type 
 cars, no matter how big they are, to their capacity. As a rule, the rush-hour 
 service cannot be cut down, which means that, if smaller cars are used, it will 
 be necessary to run more of them to take care of the peak. However, it does not 
 mean that the car miles run must be doubled, as the capacity of the safety cars 
 is much more than half the capacity of the two-men cars in most cases. So far 
 as seats are concerned the ratio will generally be as 32 is to 42 or to 44, though in 
 some cases the seating capacity of the old cars runs considerably higher. If more 
 of the small cars are required for the rush hour, the saving in operating expenses 
 
278 Electric Railway Problem 
 
 is greatly reduced even though the extra number of small cars is not run during 
 the rest of the day. This is the "fly in the ointment" from the point of view of 
 operating economies. But here comes in the opportunity to increase revenues by 
 increasing service. The safety car is said to have been invented to meet the com- 
 petition of the jitney. Therefore, it is logical that the larger number of units 
 required to handle the peak load of traffic should be operated throughout the day 
 for the purpose of furnishing better service and stimulating traffic. In fact, the 
 car is often called the "frequent-service" car in order to emphasize its advantages 
 to the public. Mr. Kellogg explains, at pages Thl and 71i^ of the Proceedings, 
 the financial results of safety car operation under conditions that are just right. 
 He says: 
 
 "Now, on the matter of earnings, of course these reports on earnings refer to the most 
 successful lines where the conditions were exactly right ior the use of these cars, and the 
 most successful lines showed a slight decrease in gross iier car mile, from 21.11 cents to 20.65 
 cents, with this increase in car miles operated of 53.4 per cent and an increase in gross 
 earnings of 51 per cent. In other words, where the conditions are just right for the use of 
 these cars their benefit comes from taking the saving in operating e.\pense, that is in power 
 and platform time, and spending that money on additional service. 
 
 "Now, I want to explain right here, so that the Commission will realize the limitations 
 of this Bimey car, that tlic only place where it can accomplish its best results is where the 
 schedule initially is such that more people will ride if cars come more frequently. * * * • 
 Now, the other cases would Ik; a very light traffic in a small city where if you had a car 
 every 30 seconds you would get no more people, because no more are there to ride — there the 
 car would save nothing but platform expense and fuel — or in a very dense traffic where cars 
 were frequent enough to be in sight, you might say, most of the time. The Birncy car would 
 add nothing there to the amount of traffic. So its most useful field is in cases where the 
 traffic on a line can Ik? increased if the frequency is furnished, and that represents the maximum 
 effective use of these cars." 
 
 Based upon these returns from the six companies which had been most suc- 
 cessful in the use of the safety cars, Mr. Kellogg"s committee in its report worked 
 out a mathematical demonstration calculated to make cheerful reading for street 
 railway managers looking for some solution of their troubles Other than higher 
 fares or public subsidies. The committee says : 
 
 "In order to indicate clearly the effect to l)e expected, from the results already actually 
 obtained by street railway companies, from the use of safety cars, the following typical 
 example has been worked out." 
 
 The committee then assumes the case of a double-track line four miles in 
 length upon which, under present conditions, six two-man cars are being operated 
 at an average speed of 8 miles per hour on a 10-niinute headway, with gross earn- 
 ings of 25 cents per car mile from the 5-cent fare. It figures out that with 9 
 safety cars making a speed of 9 miles per hour, the headway could be reduced to 
 6 minutes and the service, in terms of car miles run, would he increased 66% 
 per cent, with car mile earnings of 24 cents. The committee states that the safety 
 cars can be bought on the basis of 25 per cent cash down and the balance of the 
 price payable in monthly instalments with interest at seven per cent on deferred 
 payments covering a period of five years. The indicated results are certainly 
 very cheerful. The comparative earnings will he as follows: 
 
 Old conditions. .M5.2in car miles per year at 2.Sc, equals $78,802.50 
 
 New conditions. 525..550 car miles iier year at 24c, equals 126.084.00 
 
 Increase in gross earnings 47,281.50 
 
Operating Economies 279 
 
 The effect of the safety cars upon annual expenses is estimated as follows: 
 
 Increased Cost 
 
 One-fifth of purchase price of 9 cars at $6,000 apiece $10,800.00 
 
 Average yearly interest on deferred payments, 9 cars 1,530.00 $12,330.00 
 
 Car maintenance, old conditions, 3c. x 315,210 (car miles).... $9,456.30 
 Car maintenance, new conditions, 2.1c. x 525,350 (car miles).. 11,032.35 
 
 Increase in annual car maintenance expense $1,576.05 
 
 $13,906.05 
 
 Sai'ings in Expense 
 Power, under old conditions : 
 
 315,210 (car miles) x 3 kwh. equals 945,630 kwh. 
 Power, under new conditions ; 
 
 525,350 (car miles) x 1.5 kwh. equals 788,025 kwh. 
 Decrease in power used, 157,605 kwh. 
 
 Saving, at 0.8c. per kwh. for fuel $1,260.84 
 
 Trainmen's wages, under old conditions : 
 
 12—18 hour men at 45c, equals $97.20 
 
 Trainmen's wages, under new conditions : 
 
 9—18 hour men at 50c, equals 81.00 
 
 Saving per day $16.20 
 
 Saving per annum 365 x $16.20, equals 5,913.00 
 
 Accidents under old conditions, 5% of $78,792.50, equals 3,939.63 
 
 Accidents under new conditions, 2}/^% of $126,0»4.00, equals.. 3,152.10 
 
 Saving per annum 787.53 
 
 Total savings 7,961.37 
 
 Total increase in expenses 13,906.05 
 
 Net increase in expenses 5,944.68 
 
 Increase in gross earnings 47,281.50 
 
 Increase in net earnings $41,336.82 
 
 Increase in net earnings per mile of single track 5,187.10 
 
 This is the equivalent of 6 per cent upon an investment of $86,452 per mile 
 of single track, although the committee uses the figure $76,500. 
 
 These results, compared with the income statements usually put forward 
 nowadays by the electric railway companies in which they commonly see red at 
 the end, excite admiration as a proof of the versatility of thought that subdues 
 mathematics with equal skill to the service of pessimism or to the service of 
 optimism according to the occasion and the motive. It must be borne in mind 
 that these figures are given out by Mr. Kellogg's committee as typical of results 
 "already actually obtained" by street railway companies from the use of safety 
 cars. They suggest as an appropriate answer to a street railway plea for an 
 increase of fares on a system adapted to one-man car operation, the injunction : 
 "Go thou and do likewise." 
 
 The conclusions of Mr. Kellogg's committee are as follows : 
 
 "1. The Safety Car is one of the most important improvements in street railway service 
 that has appeared for many years. Its valuable features in the order of their importance are: 
 
 (a) Greatly improved service to the public, both as to frequency and safety. 
 
 (b) Increased earnings for the company. 
 
 (c) Decreased operating expenses. 
 
 "2. One-man operation alone, while useful in saving plat'form expense, in the smaller 
 communities is not comparable with the improved service that can be obtained with the 
 Light Weight Safety Car with its more frequent headway and greater average speed. 
 
 "3. The savings obtainable from One-Man Cars should be shared with the trainmen 
 
280 Electric Railway Problem 
 
 in the form of a higher hourly rate for the operators of such cars than is paid to the 
 trainmen on two-man cars. 
 
 "4. When inaugurating One-Man Car service, it is good policy to assure the trainmen 
 that no one will lose his job due to putting in the new cars. They are installed, as a rule, 
 a line at a time, and experience has proved that the company is not burdened with extra men 
 through thi.>i policy. 
 
 "S. I'rom the nature of the traffic available, the Safety Cars can accomplish more in a 
 larger city than in a small one, for the reason that the possibilities of increasing riding in 
 the small community arc limited. This statement is made to correct the erroneous impression 
 existing in some minds that the Safety Car is useful only for saving expense in the smaller 
 cities. 
 
 "6. Where traffic is believed to be too heavy on peak to be successfully handled by 
 Safety Cars, the larger, heavy cars may be used for tripper service on peak, thus making the 
 light cars handle the long-hour runs, 
 
 "7. Similarly, where snow storms require the use of the heavier equipment at rare inter- 
 vals, the Safety Cars can still be used to advantage during other times. 
 
 "8. The Safety Car. though light, is just as substantial and with the same care in 
 maintenance should last just as long as the former types of car. It has a steel frame and 
 thoroughly modern, ventilated interpole motors. 
 
 "9. Regarding the matter of standardization, your Committee was not unanimous, but the 
 majority opinion favored adhering to the present standard design of the Safety Car in the 
 interest of cheaper costs through quantity production. 
 
 "10. Experience has shown that the overwhelming majority of both riding public and 
 trainmen favor the One-Man Safety Car; that it can. at one and the same time, improve the 
 public's service, increase the trainmen's wages and raise the company's profits: that it can be 
 juirchased without financing and operated for about hall the cost of an ordinary car; and 
 that most of the companies that have tried it want more. We predict an increasingly rapid 
 extension of the use of a device that can make a showing like the above." 
 
 It makes one rub his eyes to be sure he is seeing straight when a responsible 
 committee of the organized electric railway industry makes such a promising 
 report at a time like this. Still, from considerations already discussed, we can- 
 not accept the theory that the one-man safety car is to he everywhere the salva- 
 tion of the industry, and accordingly we must inquire as to how this particular 
 remedy will lit in with others that have been or may be suggested. ( )hviously, 
 there is nothing in one-man car operation inconsistent with the relief of the electric 
 railways from excessive tax burdens and other public obligations where they 
 exist. It is agreed, however, that the one-man car is not well adapted to a dis- 
 tance tariff or a complex zone plan. One-man operation can readily be arranged 
 for two zones by the adoption of a combination of the ])ay-enter and the pay- 
 exit methods, but beyond two zones the problem of fare collections is likelv 
 to be too complicated for the motorman-conductor. In this connection it should 
 not be forgotten that in the Hritish cities, where the zone system has long been 
 successfully applied, two-man operation is the rule. 
 
 The next question relates to the compatibility of one-man car operation with 
 straight fare increases above the 5-cent rate. Anything that complicates fare col- 
 lection, as for instance the odd 6-cent, 7-cent or S-ceiit fare, makes one-man 
 operation more difficult. Moreover, where the light safety car is to be used to 
 beat the jitney or to cultivate jwtential sliort-haul traflic. high fares mtist neces- 
 sarily netitralize to some extent at least the allurements of more fre(|uent service. 
 The potential short-haul rider naturally responds to two inducements — conveni- 
 ence and cheajjuess. lie will walk if he has to wait too long for a car; also, 
 if he has to pay too much for a ride. And so, while one-man car operation can- 
 not be said to be theoretically and necessarily inconsistent with fare increases, 
 it would appear as a matter of trans|)ortation psychulogv that to attempt simul- 
 taneously to attract a larger number of riders by more frequent service while 
 
Operating Economies 281 
 
 at the same time compelling each rider to pay a higher fare, no matter how short 
 his ride, would be more or less futile. Fare increases and safety car service are 
 likely to work against each other, although the testimony and available records 
 do not throw much light on this point from actual experience. 
 
 Most of the street railway men who appeared before the Commission whose 
 attention was called to Henry Ford's scheme for substituting gasoline for elec- 
 tricity as a motive power on street railways were quite skeptical about it. In the 
 present state of Mr. Ford's experiments, so far as the public knows about them, 
 a state of mild skepticism seems to be justified. It is clear that the coming of the 
 Ford gas car would bring the electric railway business to its Judgment Dav, sure 
 enough. The street railway power stations, transmission lines and overhead and 
 underground electrical equipment would all go to the scrap heap along with the 
 old cars and motors. The Henry Ford car as promised is a light car, but not so 
 light as the safety car. It may become in the near future a tremendous factor 
 in revolutionizing the street railway business, but at the present time it is no factor 
 at all except possibly a psychological one. The industr}' will either have to wait 
 or else go on without it. 
 
 So much is involved in the release of street railway companies from their 
 franchise contracts, and the policy of higher fares or of subsidies is so perilous in 
 many ways, that everybody concerned ought to seek to solve the financial problem 
 of street railway operation by the application of the principles of good management, 
 if possible. Therefore, it would seem that before fare increases are granted or 
 new contractual relations between the public and the companies are established a 
 board of experts ought to be appointed in each particular case to hold an inquisi- 
 tion on the management for the purpose of determining what possibilities there 
 may be in operating economies and efficient methods of conducting and developing 
 the business. 
 
 There can be no doubt whatever, from the testimony presented to the Com- 
 mission, that substantial economies could be effected on a great many street rail- 
 way systems without any curtailment of the net value of the service rendered to 
 the public. No doubt, re-routing, changes in car schedules, the introduction of 
 the one-man car, and other possible changes in operating methods may in certain 
 minor respects and in spots adversely afifect the quantity or the quality of service 
 now rendered. Such a result is inevitable with any rearrangement of methods 
 W'hile it is as true now as it ever was that good service and plenty of it is, from 
 the public point of view, the desideratum of street railway operation, there is 
 no sufficient reason for continuing extravagant and wasteful service. During the 
 war, and even during this reconstruction period, it is obviously advantageous for 
 the public to be thrifty and somewhat conservative in its demands where thrift 
 and conservatism are an essential means of escaping radical fare increases. Still, 
 from the public point of view, it would be a mistake to press the matter of 
 economies in operation to an extreme, or to insist upon electric railway companies 
 abandoning old methods, and immediately scrapping all their existing equipment 
 in order to take advantage of a new type of cars or new methods of operation 
 that have not yet been fully proven by experience. In other words, it is important 
 that the street railway industry should learn a lesson from its experience at the 
 
282 Electric Railway Problem 
 
 time of electrification when undue optimism with respect to possible future econ- 
 omies, without any immediate or adequate provision for writing off the superseded 
 equipment, was to a considerable extent responsible for the bad financial condition 
 into which the business fell. 
 
 In view of the public interest in electric railway service and electric railway 
 prosperity, and particularly in view of the effect of public regulation in one form 
 or another upon the expenses and profits of the business, it is quite essential that 
 the operating companies should get "outside advice" with respect to all major 
 changes in equipment, economies in operation and readjustments of service. 
 Some of this outside advice can be furnished by the state utility commissions, but 
 too often the commissions feel themselves pretty closely restricted to a considera- 
 tion of the financial needs of the companies. .As the cooperation of the riding 
 public and its local representatives is essential to street railway success, it is 
 desirable that the outside advice should include any constructive help which the 
 municipalities may be in a position to give. 
 
 An illustration of the doubtful ultimate results of operating methods and 
 economies which, from the point of view of the company, may for the time being 
 appear to be very beneficial, is found in the attitude of Philadelphia toward the 
 Philadelphia Rapid Transit Company. Under date of October 16, 1919, the com- 
 pany submitted certain proposals to the City of Philadelphia for the lease of the 
 new municipal elevated railway now under construction, and for an amendment 
 of the settlement contract of 1907 under which the surface lines are being oper- 
 ated. The company proposed to abolish the three-cent exchange tickets and to 
 substitute free transfers except within the central business district of the city, 
 where neither exchange tickets nor free transfers would be accepted. In con- 
 sideration of the relinquishment of the exchange ticket revenue, the company asked 
 the city for relief from the cash payments which it now makes under the 1907 
 contract in lieu of paving, snow removal, car licenses and other franchise obliga- 
 tions which were commuted in 1907, and for relief from the tax on dividends of 
 subsidiary companies and from payments to the city sinking fund for the ultimate 
 amortization of the company's investment as a step toward municipal ownership 
 in the future. Under date of Xovember 14, 1919. Mr. William S. Twining, form- 
 erly chief engineer of the Philadelphia Rapid Transit Company, and during the 
 past four years Director of the Department of City Transit of the City of Phila- 
 delphia, submitted to the municipal legislative body a report on the company's 
 proposals. In this report, in connection with his discussion of the particular 
 points at issue, he referred at some length to the statements made on behalf of 
 Mr. Mitten to the Federal Electric Railways Commission with respect to the 
 results of the Philadelphia cooperative plan and the economies effected thereunder. 
 It is impracticable in our present discussion to present Mr. Twining's criticisms 
 of the Mitton management in full, but a few quotations will sufiice to indicate the 
 attitude of the responsible head of the city transit department toward the much- 
 vaunted economies by which the Philadelphia Rapid Transit Company has been 
 enabled to maintain the five-cent fare. The burden of Mr. Twining's argument 
 is that the company in its etTort to maitUain its existing capitalization without 
 abandoning the five-cent fare has made inadequate provision for the service of the 
 
Operating Economies 283 
 
 public. At page 19 of his report, Mr. Twining states that while the company's 
 gross earnings for 1919 showed an increase of approximately 46 per cent over the 
 year ended June 30, 1913, the increase in passenger car miles was less than 5 per 
 cent. At page 21 of his report, he makes the following statements with respect to 
 the loading of the company's cars : 
 
 "A traffic count of the loading of the company's cars taken during the Christmas rush 
 of 1910 showed that of the passengers carried out of the central business district 45 per cent 
 were required to stand. A similar count in October of 1919, shows that 40 per cent of the 
 riders stood. This percentage will, of course, be increased during the Christmas rush of the 
 present year. Rush-hour loading conditions therefore are little better now than during the 
 heaviest ' period of 1910, when conditions were notoriously deplorable. The large number 
 of passengers who are required to stand during the non-rush hours of the day is a noticeable 
 feature of present loading conditions. 
 
 "A comparison of loading conditions in 1915 and 1919 shows that the company is now 
 carrying 44.7 per cent more passengers out of the business district during the maximum 
 evening rush hour with only 14.5 per cent more seats. The result is that while 24.5 per cent 
 of the riders were required to stand in 1915, 40.1 per cent were required to stand in October, 
 1919." 
 
 With respect to the effect of existing capitalization upon the Company's 
 finances, Mr. Twining, at page 7 of his report, says: 
 
 "The future of the Philadelphia Rapid Transit Company is continuously threatened 
 because of the deplorable condition of overcapitalization which exists. This condition has 
 existed at all times during the history of the system and results from the watering of 
 securities and the paying out in excessive dividends those funds which should have been used 
 to provide for amortization and the depreciation and obsolescence of the property. .Mthough 
 the originally overcapitalized property has been allowed to depreciate and disappear, it is 
 still represented in the Philadelphia Rapid Transit Company's fixed charges and must be 
 satisfied before the payment of any dividends to the Philadelphia Rapid Transit Company 
 stockholders." 
 
 It will be remembered that a ser\ice-at-cost contract entered into by the City 
 of Philadelphia and the Philadelphia Rapid Transit Company early in 1918, which, 
 among other things, provided for the operation of the City's rapid transit lines 
 now under construction, was finally disapproved by the Public Service Commis- 
 sion of Pennsylvania largely because it perpetuated as a fixed expense of transit 
 service in Philadelphia the extraordinary rentals now being paid to a multitude of 
 underlying leased lines. Mr. Twining in discussing "The Effect of Dead Capital 
 on the Fare" makes the following statement at page 39 of his report : 
 
 "All capital invested in obsolete or superseded apparatus or equipment should be amortized 
 and only such money as is now active in the carrying on of the business should be entitled 
 to draw interest on dividends. In other words, dead capital, like the superseded equipment, 
 should not burden a public utility business and hamper the w'orking capital. In the Phila- 
 delphia Rapid Transit Company much equipment and apparatus — horses, cars, rails, etc., 
 purchased and their cost capitalized during the horse-car, cable-car and early electric periods, 
 liave long since disappeared, but the capital invested in those discarded facilities, although 
 actually dead and representing nothing but a memory, still rides on the back of the capital 
 now working. The active capital is forced to not only earn its own interest, but must carry 
 a load of dead capital besides. In the Philadelphia Rapid Transit Company's capitalization 
 there exists today at least $40,000,000 of dead b\it unamortized capital drawing from the 
 net earnings of the system an average of at least 10 per cent, or $4,000,000 annually. Is it 
 any wonder that the company finds it difficult to increase its working or active capital when 
 the new capital must share in carrying such a load? To make matters worse, this dead capital 
 must be given its pound of flesh before the new and active capital can be fed. In addition to 
 being inactive capital, a part at least of the Philadelphia Rapid Transit capitalization is 
 what is known as 'water.' This only aggravates a bad matter, and with this load, whether it 
 be dead capital or water, the company finds itself unable to support the necessary capital 
 burdens which the increasing traffic demands. New capital can only be supported by unen- 
 cumbered profits and such profits are now exceedingly speculative on 5-cent fares. 
 
 "Since Mr. Mitten came here eight years ago, he has discarded at least 1,000 cars, six 
 
284 Electric Railway Problem 
 
 or more power plants, five battery sub-stations, car barns and considerable mileage of track, 
 and distribution svstem amounting in the aggregate to several millions of dollars; but aside 
 from comparatively small renewal appropriations, this capital invested by the underlying 
 companies still draws the same return as when this equipment was active and used in the 
 service of the public. 
 
 "The reason why the company must ask the city to buy up its exchange busmess, why 
 the contract-lease was rejected by the Public Service Commission and why so much difficulty 
 is contemplated in arriving at a new lease, is because the company's capitalization has been 
 allowed to pile up. propeny deteriorate and disappear without the establishment of depreciation 
 or amortization funds and a pyramid of leases built up which, for 999 years, make the 
 superseded property more potential in controlling the company's service and fares than the 
 property now used in public service." 
 
 It is evident from Mr. Twining's report that the popularity of the Mitten 
 management does not extend to the City Hall. The following quotation is from 
 pages 1 to 3 of the repoil : 
 
 "Mr. Mitten recently presented Philadelphia's answer to the traction question before the 
 Federal Electric Railways Commission at Washington, in which he claimed that the solution 
 of the problem lies in the elements of money, management and men, and that management is 
 the main connecting link between the money and the men. This solution absolutely ignores 
 the needs of the public, and I desire today to call your attention to the fact that the problem 
 is far broader, involving the city and the company as two corporations connected by the car 
 riders as individuals. 
 
 "At the last meeting Mr. Mitten told you that the S-cent fare was a religion with him. 
 The two ordinances now before you are iKith intended to help su()port that religion and to 
 disguise the fact that the .S-cent fare is no longer able to even appear to support adequate 
 transit service. He has now reached the part of his religious service where he is passing 
 the hat for the city's contributions in support of home missions. One of these ordinances 
 is an appeal for a direct contribution ; the other contains provision for an indirect contribution. 
 Philadeliihia has always been generous in charitable work and Mr. Mitten figures the time 
 is now propitious to make an appeal lor the poor car rider, whom he has undertaken to ser^•e 
 at a f^xed rate per head, but finds the contract growing unprofitable, so he makes an appeal 
 for charity ostensibly for the car rider's benefit when the real beneficiary is the company, 
 .^s the company's finances are very sick, there is an old couplet which may or may not apply 
 in this case : i.r.. "When the devil was sick, the devil a monk would be : and when the devil 
 was well, the devil a monk was he.' The Company is in desperate need of money, and Mr. 
 Mitten thinks, as a bit of business psychology, it will be much easier to get it in large pay- 
 ments through the City as a corporation on a charitable plea than to extract it in pennies 
 from the car riders as individuals. He has reasons for such psychology — the plan worked 
 in 1907. Fear is one of the mo.st potent means of controlling human action, and by creating 
 a fear in the public mind that fares may be raised if his appeal be not heeded, and that he is 
 endeavoring to prevent such a contingency, he makes it appear that he is the champion 
 of the public. This is not the fir.st attempt that the Company has made to raid the City's 
 Treasury, and when preparitig to make such a raid it has always Ix'cn the Company's policy 
 to represent that its action has Ix-en inspired by a desire to benefit the public and render 
 greater .service without increasing the cost. That was the ostensible pun^ose of the 1907 
 contract, at which time the Company claimed that, if relieved from burdensome franchise 
 obligations, the then existing schedule of fares was ample to provide not only the service 
 then recpiired but adequate service to meet the future growth of the City, .^t that time the 
 Company's gross earnings were approximately $ 1 8.0(X).(X10 ; today, although the Company's 
 gross earnings have practically doubled, it is again appearing Ix^fore this body with the same 
 pica and for the same purpose, with this difference, however : it now holds out simply the 
 hnfif that if relicvi-d of the remainder nf its franchise nhliitations it may he able to maintain 
 present conditions of sef^ice. It holds out absolutely no promise, hope or prospect of im- 
 provement of conditions in the future. 
 
 "From the date of its fdrmalion in 1902. the Company has been 'seeking the pocket of 
 gold which lies at the end of the rainbow.' and it still is trying to convince itself and the City 
 that it will eventually escape from the influence of the unlucky star under which it was bom. 
 
 ".■^incc the organization of the Company, it has been its constant hope and Ix-lief th.it 
 with the growth of gross earnings it would \ic able to escape from the financial Nemesis 
 which has continued in pursuit, and each time that the shadow of financial disaster has hung 
 over the Comi>any it has ap|x-ared licfore Councils and presented an ingenious plea that it be 
 allowed to trade some of its franchise obligations for real cash from the City Treasury." 
 
Operating Economies 285 
 
 Without being able to fathom the depth of the antipathy that has evidently 
 grown up between Mr. Mitten and Mr. Twining, we can at least see from the 
 quotations given above that in applying operating economies as a means for the 
 solution of the financial difhculties of the electric railways, the interest of the 
 public in good service must not be overlooked, and that economies affecting service 
 cannot be carried far as a means of producing dividends on excessive capitalization 
 without arousing public resentment. 
 
Chapter XXXII 
 CONTROL OR ABOLISHMENT OF JITNEY COMPETITION 
 
 J II Chapter XX of this report I have discussed at considerable length, in the 
 light of the testimony adduced before the Commission, the effect of automobile 
 and jitney competition upon the credit of the electric railway industry. As Inter- 
 state Commerce Commissioner Eastman remarked in his discussion of the failure 
 of street railway credit, the investors are afraid of street railway securities, not 
 only because of their experience in the past, but because of their fear of what 
 may possibly happen in the future, particularly with respect to the possibilities 
 of automobile competition and labor complications. The old structure of street 
 railway credit, now fallen into ruins, was undoubtedly built on the fact of exist- 
 ing, and the assumption of future, monopoly. When the automobile appeared as 
 an active competitor of the electric railway it introduced a new factor in street 
 railway service and street railway finance that cannot be ignored in the formula- 
 tion of public policies, whether it be from the point of view of the protection of 
 the investors in street railway property or from the still broader point of view 
 of the protection of the interests of the general public in the development and 
 maintenance of sufficient and ettlcient local transportation service. 
 
 The automobile and the jitney bus are facts. The question is, from the 
 point of view of street railway service, what, if anything, arc we going to do 
 about them? The public, through its governmental agencies, would not concern 
 itself with the effects of this competition if it were not that local transportation 
 is recognized to be an essential public service. So far as private automobiles 
 are concerned, although they undoubtedly have their effect upon the extent to 
 which people make use of the street cars, they are even now less important than 
 human legs as a competitor of the electric railways, and it is not deemed to be 
 consonant witii the theory of .American institutions and government that the free 
 movement of private citizens by their own means of locomotion should he re- 
 stricted in order to compel them to nvikc use of public vehicles, whether the latter 
 be o|)erated by private agencies or directly by the government. Therefore, we 
 may dismiss from consideration the feasibility of curtailing the use of private 
 cars by restrictions established in the iiUerest of the common carriers. All that 
 could properly be done in this direction would be to compel the private vehicles 
 using the public highways to pay license fees or taxes proportionate to the bur- 
 dens they place upon the highways as compared with the burdens placed upon 
 the highways by the street cars. In this connection, the result aimed at might be 
 accomplished either by the elimination of special taxes and other financial obliga- 
 tions imposed upon the electric railways on account of their use of the public 
 streets, or by the levying of corresponding ta.\cs and public burdens upon motor 
 
 286 
 
JiTNEV Control 287 
 
 vehicles. The testimony before the Commission does not show clearly the ex- 
 tent, if any, to which the competition of private automobiles could or ought to be 
 restricted by the adoption of this policy. It seems to be accepted that the free 
 development of private automobiles is not to be interfered with except that regu- 
 lation of parking and the use of congested thoroughfares should be such as to 
 prevent the automobiles from cluttering up the street railway tracks and delaying 
 the street cars. 
 
 The real issue arises with respect to the abolition or curtailment of the auto- 
 mobile bus and the jitney as common carrier rivals of the street car. Probably 
 most street railway men will now admit that the street car had something to 
 learn from the jitney, and that its failure to learn the lesson in advance of the 
 jitney has been one of the important factors in bringing the electric railway 
 industry into its present deplorable condition and in unsettling the confidence of 
 the general public and of the investors in the future of the electric railway as an 
 institution. Speaking abstractly, most people would undoubtedly agree that if 
 the automobile as a common carrier gives promise of being able to perform the 
 full serv'ice now rendered by the electric railways and to do it more efficiently 
 and economically, then it would be against the public interest for the government 
 to interfere by restrictive regulation to save from the junk pile the equipment of 
 an obsolete mode of transportation. Therefore, the fundamental questions to 
 be answered in attacking the problem of public policy toward the jitney and the 
 automobile bus are these : First, is the electric railway operated on permanent 
 tracks obsolete, or, if not interfered with, about to become obsolete as the prin- 
 cipal means of local transportation ? Second, if not capable of supplanting the 
 electric railway as a means of local transportation, to what extent and by what 
 means can the motor vehicle be used to supplement and round out electric rail- 
 wav service? While there is considerable difference of opinion as to the relative 
 superiority of the automobile and the electric street car as the permanent prin- 
 cipal means of supplying local transportation service in small towns, and even 
 in medium-sized cities, the opinion appears to be nearly unanimous that the 
 electric railway operating on tracks is by all odds the most efficient means of 
 furnishing local transportation service in the big urban centers. In the very 
 largest cities, where the bulk of the transportation service is now rendered or 
 is likely to be rendered by elevated railroads or subways operating at high speed, it 
 is not altogether clear that the residuum of passenger traffic to be carried on the sur- 
 face of the streets may not, under some conditions, be carried more efficiently by 
 motor vehicles not restricted by the necessity of using fixed tracks or fi.xed over- 
 head equipment, than by electric railways such as we now have. That this pos- 
 sibility is receiving serious consideration is evident from the recently adopted 
 policy of the City of New York, looking to the general use of motor buses to 
 compete with and take the place of the surface car lines. Mayor John F. Hylan 
 quotes the late Theodore P. Shonts, President of the Interborough Rapid Tran- 
 sit Company, as having expressed the opinion that the ideal system of local trans- 
 portation for New York would handle the surface traffic by means of motor buses. 
 Unfortunately, Mr. Shonts is dead and cannot be appealed to for a confirmation 
 of his alleged statement, but there are many living witnesses who are ready to 
 
288 Electric Railway Problem 
 
 predict that the surface cars in Manhattan, at least in downtown Manhattan, are 
 doomed. This question of the relative qualifications of the motor bus and the 
 street car as a njeans of transportation on the surface of congested streets as- 
 sumes great practical importance at the present time, particularly in New York, 
 on account of the warfare that has sprung up between the bankrupt surface elec- 
 tric lines and the motor buses recently brought into service at the instigation of 
 the city administration. It is clear that if public welfare requires the continua- 
 tion of electric railway service under the conditions that prevail in a given com- 
 munity, the public authorities ought not to attempt to destroy this essential 
 means of public service through a subsidized or patronized competition. In 
 New York, however, the motives of the city administration in promoting the 
 operation of the buses appear, from the public pronouncements of the city of- 
 ficials, to be mi.xed. Apparently there is the desire to establish a new means of 
 transportation that will ultimately displace the surface street railways entirely. 
 Along with it is the immediate desire to furnish service where street railway 
 transportation has been suspended, and also to punish the street car lines for 
 attempting to increase their charges above the uniform 5-cent fare with free 
 transfers. The recent partial disintegration of the Brooklyn Rapid Transit lines, 
 for example, had the etlect of breaking many individual car lines into two or 
 three parts, with a duplication or triplication of the original 5-cent fare. One 
 of the announced purposes of the city administration in connection with the 
 development of bus service was to supply a 5-cent service in direct competition 
 with these car lines for the purpose of compelling the restoration of the 5-cent 
 fare on the electric railway. 
 
 Where jitneys and automobile buses acting as common carriers are subject 
 to regulation by state commissions and are required to procure a certificate of 
 public convenience and necessity before establishing a route or undertaking to 
 render public service, the motor vehicles are usually prevented from entering into 
 active competition with street car service unless the latter is shown to be wholly 
 inadequate. That street railway service and jitney service cannot permanently 
 exist and pay their own way in competition with each other under any ordinary 
 urban conditions seems to be well established by experience and by the condi- 
 tions inherent in local transjiortation service, but the belief is general that the 
 motor bus may properly be used to supplement the service rendered by the 
 street cars. The motor bus may be used to render a sort of dc luxe service at 
 a higher rate of fare, such as the service now rendered on Fifth Avenue and cer- 
 tain other high-grade residential streets in New York City, by the Fifth Avenue 
 Coach Company, or the buses may be operated on other independent routes 
 where no street railway ser\Mce has been installed, or they may be operated 
 merely as feeders to the street railway system to take care of traffic in partially 
 develojied territory in advance of the time when street railway tracks can be 
 laid with reasonable assurance that the investment will be self-sustaining. 
 
 Mr. John .\. Heeler, transportation engineer, discusses automobile and bus 
 competition at pages 1673 and 1674 of the Proceedings, where he says: 
 
 ".■\t present a RriMt deal of publicity is lioiiiR Riven to the pos.sibilities of motor buses 
 to replace ni>n-payinK street car lines, and it has even been predicted that the street railway 
 
Jitney Control 289 
 
 industr>- is doomed. These predictions are based largely on the operations of jitney lines, 
 where the buses are running in competition with the street cars, and skimming off the best of 
 the short-haul business, or where operations of the buses are made possible by higher fares 
 such as on the Fifth Avenue Coach Company of New York City, where a ten-cent fare has 
 been charged for years. 
 
 "The bus, with its limited carrying capacity, requires a higher ratio of man-power per 
 passenger carried. The greater number of units increases the congestion and street accidents. 
 The cost of fuel and repairs is much higher per car mile. The bus has higher depreciation. 
 The street car wears out its own roadway of steel rails while the bus wears out the paving 
 laid at great expense by the public. Where any considerable volume of traffic exists, motor 
 bus service, considering everj'thing, costs more than good street car transportation should. 
 There are many places, however, where the bus can be employed to the great advantage of 
 both public and company. There are other places where the bus should not be allowed. 
 Unquestionably, however, the companies should study this with a view of coordinating bus 
 service with the car service, where use is warranted as a part of the general transportation 
 scheme." 
 
 Mr. Walter Jackson expressed views substantially in accord with those of 
 Mr. Beeler. He had made a considerable study of bus operation in Great Britain 
 in connection with his study of the British zone-fare system. The following tes- 
 timony in regard to bus operation is found at page 1615 of the Proceedings: 
 
 "The Chairman : Are the buses in England operated in connection with the tramway 
 companies? 
 
 "Mr. Jackson : Generally they are and have been. 
 
 "Here is a peculiarity of English law : A private operator, a private person or company, 
 can go into the bus business with no other preliminaries than securing police approval for the 
 form of bus. It must comply with certain safety precautions and speed conditions and 
 weight, and thereupon you can go into the bus business just as cheerfully as people go into 
 the jitney business here. 
 
 "On the other hand, if the municipally owned railway wants to go into the bus business, 
 it has to apply to Parliament for a special privilege. 
 
 "The British Electric Traction Company, which operates over thirty properties, has bus 
 operation in connection with sixteen or seventeen of them, and the Leeds Municipal Tram- 
 ways operate motor buses and trackless trolleys. Edinburgh, which has just acquired the 
 system, has laid out half a dozen motor bus routes, and Aberdeen is putting in motor bus 
 routes, and Glasgow is considering them. 
 
 "The Britisii idea for using buses is, so far as most of those properties are concerned, 
 the development of the suburban traffic, to know where you stand. A comparable case is that 
 of the Municipal Railway of San Francisco, in developing bus service across Golden Gate 
 Park and other places. The Stone & Webster interests in Washington run a number of 
 bus lines and feeders to the interurbans. They do not make money on them. They did make 
 a little money on one, but generally speaking you give a bus service because you lose less 
 money on it than on the track, and you feel that you have to give it because you are a 
 utility and there is a demand for it. 
 
 "The buses in Leeds are run, say, on a thirty minute headway and the trackless trolleys 
 about twenty; and when the service justifies ten minutes, they will put down track, but not 
 before.'' 
 
 Further on, at page 1616, Mr. Jackson explains why he does not think that 
 the bus can entirely supplant the street railway. His testimony is as follows : 
 
 "The Chairman : Can the bus entirely supplant the street railway in cities in this 
 country ? 
 
 "Mr. Jackson : Certainly not. 
 
 "The Chairman: Why? 
 
 "Mr. Jackson : It is a matter of capacity as well as operating expense. The buses 
 proposed in this country do not exceed SO seats. A bus operation calls for no standees. In 
 this country it is being developed along the lines of a de luxe line, with ten-cent fares; and 
 the biggest excuse or the best reason they have got for asking the double fare is that there 
 is a seat for every passenger. 
 
 "The ratio of labor expense, platform expense, on a bus is far more unfavorable than 
 on a street car. 
 
 "Take the comparison in London : The London County Council car seats 78 passengers 
 and has two operators. The London bus now in use seats 34 passengers and has two operators. 
 In one case you have got 39 passengers to each employe and in the other case you have got 
 17 passengers to each employe." 
 
290 Electric Railway Problem 
 
 Mr. William J. Dark, for the past thirty-two years connected with the Gen- 
 eral Electric Company, and a pioneer in the development of the electric railway, 
 in discussing possible economies in electric railway operation, expressed the 
 opinion that very little further improvement can be expected in the type of 
 motors used. At pages 144 and 145 of the Proceedings, he discusses the future 
 possibilities of the Ford gasoline car and of the motor bus not operating on 
 tracks as a substitute for electric railway transportation. In this connection he 
 says: 
 
 "Of course, this is true, that as long as your labor item is the great big one in your 
 operating expense, there is not very much room to cut down otherwise. Now, your current 
 costs are small, relatively. Of course, it is entirely possible. I have ceased saying that 
 anything is impossible. I have seen such wonderful things come. We will say, for instance, 
 Mr. Fcrd may revolutionize all traction on street railways, as he has said he is going to do. 
 I don't think he will be able to do it, but it may come along and better our present form of 
 electrification ; but, as I remarked a moment ago, so long as you have to have platform 
 wages, you understand, and switchmen and men in the car bam, you have not a great way 
 to go in the way of economy. 
 
 "Mr. Warren: Mr. Clark, right at that point, you spoke of Mr. Ford. Do you * * * * 
 think that a carrier on tires through the highway can ever be as satisfactory economically 
 
 as a carrier on rails? 
 
 ******** 
 
 "Mr. Clark: .'\s a wholesale transp<irtation proposition, something equivalent in trans- 
 portation facilities to that given by the street railway, no. 
 
 "Mr. Warren: Mr. Ford's suggestion, as 1 recall it, was to equip an automobile car 
 which would run on rails, was it not? 
 
 "Mr. Clark : Yes. 
 
 "Mr. Warren: It was not to run a large jitney, for instance? 
 
 "Mr. Clark: Oh, that was not his idea; but if you will let me finish my answer, of 
 course, it does appeal to the average person, if he can be picked up at his own curbstone, 
 you understand, and delivered at the curbstone where he wishes to go; but, in my opinion, 
 with any vehicle propelled by any power, not operating on rails, you cannot care for local 
 travel under the requirements of the .American pulilic. You cannot do it." 
 
 Mr. Frank J. Sprague, the celebrated engineer who in 1887 at Richmond, 
 Va., equipped the first conmiercially successful electric railway, gave his opinion 
 as to the future of the industry at pages 759 and 7f>0 of the Proceedings. Chair- 
 man Elmquist's questions and Mr. Sprague's replies at this point are as follows : 
 
 "The Chairman : Now, Mr. Sprague, you have Iwrne a very conspicuous part in the 
 develoi)ment of this industry and have naturally given very close attention to it. You have 
 seen it developed from a small industry to iK-rhaps the second largest in the country and 
 performing a very great public service. In recent years you have also witnessed the 
 tremendous development in gocKl roads and in the automobile industry and in the very recent 
 years in the aircraft industry. Now Ix^aring in mind the very great initiative of the .Ameri- 
 can people, can you for a few moments present to us what you believe to be the future 
 of the electric railway industry? 
 
 "Mr. Sprague: Well, the electric railway industry is going to face greater and greater 
 competition all the while. It is facing it tixlay in the automobile. The better the roads, 
 the better the pavements, the cheaper the automobile, the more people who can buy one, the 
 more the electric railway has got to suffer. That is undoubtedly tnic. 
 
 "The Chairman: .Xnd will it .stand up under the force of this competition and rapid 
 expansion of other linos of activity in transportation? 
 
 "Mr. Si)raguc: NVcll, any of them, the aircraft and the automobile, will create a traffic 
 of their own which will Ix- in addition to the traffic the electric railway will carry. 
 
 "When the electric light was first introduced it was widely predicted that the day of 
 gas was ended. The principle of the incandescent lamp itself has lx?en but little changed in 
 all these years. \\'c have gone, it is true, from a carbon filament to the metallic filament, 
 but the twsic principle is the same, a high resistance filament inside of a vacuum and operated 
 at certain standard pressure, and that pressure has remained practically constant all these 
 years. There has b»-cn an improvement in the economy of the lamp. On the other hand, 
 those interested in the gas industry have tried to improve their product and widen the uses 
 of it. and 1 guoss there is more gas used today, despite the rivalry of the electric light, than 
 there rver was in the past. 
 
Jitney Control 291 
 
 "People get the habit of riding. They do not entirely forsake one method and adopt 
 some other. They simply ride more. And I think the electric railway has a field of its own, 
 meeting competition, of course, all the while, but if it is well managed, if it is well kept up, 
 if its standard is maintained, it will hold a traffic of its own. 
 
 "The Chairman : Will not the improvement such as you have mentioned cause a more 
 general distribution of our population throughout the country, decentralizing the cities and 
 spreading them out into suburban territory on small tracts of land, thus causing more travel? 
 
 "Mr. Sprague : The more you spread them out the more intercommunication will exist. 
 
 "The Chairman : And that will be beneficial to the railroad industry ? 
 
 "Mr. Sprague : Yes, I think so. 
 
 "The Chairman : Do you feel hopeful that the electric railway as it now stands is a 
 permanent institution? 
 
 "Mr. Sprague: Absolutely. 
 
 "The Chairman: And such an institution that capital can safely invest in it and people 
 depend on service from it? 
 
 "Mr. Sprague: They can, if they can be assured of reasonable treatment." 
 
 Mr. Richard T. Higgins, Chairman of the Public Utilities Commission of 
 Connecticut, closed his direct statement at pages 1109 and 1110 of the Proceed- 
 ings, with the following: 
 
 "I believe that the states that have imposed burdens upon street railway companies in 
 the nature of street paving, heavy expense of maintaining highway bridges and so on, 
 should reduce or repeal those impositions, if we are going to save our street railways. 
 
 "I think it would be difficult for any man to prophesy what effect the future will have 
 as between the automobile and tlie street railway ; but we know today that street railways 
 are absolutely essential for the handling of the traffic in our populous cities, and during the 
 transition period at least those companies and the public should be protected and safeguarded 
 in their rights until such time as the change comes about. 
 
 "Further than that, if we are in a transition period, where the policy of transportation 
 is changing from the street railwav car to the rubber-tired vehicle, I believe that the street 
 railway companies' franchises should be so amended as to permit them to make a charge in 
 keeping with the public demand, and to protect the millions of dollars of investments now 
 in street railway properties owned by millions of people all over our country." 
 
 Mr. Richard Schaddelee was severely critical of commission regulation from 
 the point of view of the electric railways. In Chapter XX of this report I have 
 already quoted his testimony with respect to the unfairness of jitney competition 
 in Illinois and the cure that was found for it through court action, not through 
 any action by the state comtnission. At page 860 of the Proceedings, he discusses 
 the relation of the private automobile to the future of the electric railway, as 
 follows : 
 
 "Of all the factors to which the present critical condition of the electric lines has been 
 attributed there is only one against which the commissions cannot afford protection. This 
 single exception is the competition of the private automobile. 
 
 "And this factor is the one that, in my opinion, is least responsible for our critical illness. 
 
 "The automobile has fastened the riding habit on the public, has accustomed it to rapid 
 transit and thus has been rather beneficial to us than otherwise. 
 
 "The electric lines which I am connected with or have knowledge of are collecting more 
 street car fares now than ever before. 
 
 "Our gross business is very satisfactory and will continue to increase if we receive 
 enough money to restore our credit with the investors. 
 
 "The electric railways are not sick and will not die by reason of being economically or 
 evolutionarily obsolete, or superannuated; nor by reason of natural decay. If these were 
 the causes of our illness, or if we were threatend with extinction by a superior mode of 
 locomotion that can better perform our functions under the same restriction as to fares, 
 and under the same requirements as to service, taxes, etc., then in that case it would be 
 useless to ask or request for relief. For no private interests can successfully resist real 
 economic evolution. 
 
 "Electric railways are now more necessary to, and enter more intimately into the 
 social and industrial life of our urban, suburban and interurban population than ever before, 
 even if a small percentage of this population is not now as exclusively dependent upon electric 
 railway transportation as it was ten or twenty years ago. 
 
292 Electric Railway Problem 
 
 "The automobile has been a great factor in relieving congestion in cities by encouraging 
 suburban and interurban residence. 
 
 "These people loci that the automobile makes them independent of the electric lines, 
 yet they will use them habitually, using their car or our cars as their convenience or caprice 
 dictates. 
 
 "No, gentlemen, the present critical illness and the impending death of the electric lines 
 are not due to natural causes. 
 
 "W'c are ill. even unto death, entirely by reason of an artificial cause and that is: 
 insufficient financial nourishment." 
 
 Mr. Ruger W. Babson tells what he thinks of the future of the street rail- 
 way at pages 1059 and 1060 of tlie Proceedings, where the following testimony 
 occurs : 
 
 "The Chairman: What, in your judgment, is the future of the street railway industry? 
 
 "Mr. liabson : I think in some communities, in the large cities, they will be profitably 
 operated, and there will be a sound business for them. I think in other communities they 
 will be disbanded. I do not think one problem can apply to all. 
 
 "I""or instance, we assumed that candles had gone out of business when kerosene came, 
 and that kerosene went out of business when gas came, and that gas went out of business 
 when electricity came; yet, as a matter of fact, there are more candles and more kerosene 
 and more gas being sold today than ever before. 
 
 "1 think that the street railways of the future will find their function with subways and 
 elevated lines, and I think in a great many communities the street railway has come to stay. 
 For instance, you can get in from Brookline into the center of Boston more quickly by street 
 railway than you can in a taxicab. That is the test. .■Xnd I believe for that service the street 
 railway should be allowed to charge, if it wanted to. as much as the taxicab. 
 
 "On the other hand, there arc hosts of other instances where you can travel better by 
 taxicab than you can by street car. 
 
 "I think the thing ultimately is going to be solved on the basis of service, whatever 
 sy.stem we have, whether we have municipal ownership or service-at-cost plans, or what not." 
 
 That "jitneys should be regulated and their operating requirements made 
 no less onerous than those imposed on the street cars," is the opinion of Mr. 
 Beeler. expressed at page 1669 of the Proceedings. Mr. Babson speaks even 
 more emphatically. At page 1064. he says: 
 
 "I do not believe in letting Tom, Dick and Harry run these Ford cars around. I believe 
 that jitney service should be regulated, and that it should be done decently and properly, and 
 in a responsible way and by responsible people." 
 
 At page 1065. he says further: 
 
 "I think the jitney service should be under the same regulations as the street railway 
 service. 
 
 "Commissioner Sweet : You would want to have just as much guaranty of continued 
 service a.s with the street railroad? 
 
 "Mr. Babson: Yes. 
 
 "Commissioner Sweet: The public is entitled to that? 
 
 "Mr. Babson: Yes. I sympathize with the Public Service Commission in their demand 
 for service, and it seems to mc that there is the great field at the present time for work — 
 to demand service: hut we are all discussing price, and we forget all about service. I think 
 there arc a lot of street railtoad comiMnies, that, if they would only wake up and give good 
 service, they would save themselves." 
 
 Further on. at pages 1068 and 1069 of the Proceedings, Mr. Babson's idea 
 that free competition between the electric railways and the automobile bus system 
 should be permitted is elaborated and defined as follows: 
 
 "Mr. Warren: Mr. Babson, as I get your view of the situation it is either that the 
 restrictions on the street railways should Ik." removed or corresponding restrictions should be 
 imposed upon the jitneys, inchiding the motor buses, and then they should be left to see which 
 one will survive in cases where Ixith are not needed. Is that right? 
 
 "Mr. Babson: Well, I would rather remove these artificial restrictions on the street 
 railways first. 
 
 ".Mr, Warren: By that yf)u mean the taxes and burdens? 
 
Jitney Control 293 
 
 "Mr. Babson : Yes, I would not put paving taxes for instance on the jitneys. 
 
 "Mr. Warren: I was not referring to that so much as I was to what is called regulation. 
 I suppose nearly everybody would agree that those burdens which have no relation to the 
 service and that are not necessary to performing the service and amount only to a tax on 
 the car rider ought to be removed anyway. If income is needed by the community it ought 
 to be acquired tlirough some proper method of taxation and not by an indirect tax on the 
 car rider, but aside from that there is a great deal of regulation of street railways that does 
 not apply to jitneys in most places; for example, the street railways are expected to operate 
 in a snowstorm as well as in fair weather; it is expected that they will begin very early in 
 the morning and operate until midnight and in some places all night. Would you remove 
 such requirements as that? 
 
 "Mr. Babson : I should make them equal, yes, sir. 
 
 "Mr. Warren: Make them equal? 
 
 "Mr. Babson : Yes, sir. 
 
 "Mr. Warren: And then let them see who could best serve the public? 
 
 "Mr. Babson : I feel very strongly that we should insist on regulations for service and 
 we should hold up the standard of service on all forms of public utilities; and I feel that the 
 great work of public utility commissions is to see that the public has proper service and to 
 see that the jitneys and the street cars are under the same rules as to service. 
 
 "Mr. Warren: So that practically I infer that rather than remove these service regula- 
 tions from the street railways you would leave them on, but you would impose corresponding 
 requirements on the jitneys. 
 
 "Mr. Babson : So far as they refer to service, yes. 
 
 "Mr. Warren: If they were going to undertake to serve in a certain street in com- 
 petition with the street railway they should meet the same hours and same service conditions. 
 
 "Mr. Babson : Yes, sir. 
 
 "Mr. Warren: And if the fare was going to be regulated on the street railway then 
 the fare on the jitney should be, but your judgment I take it would be that as regarding the 
 fare, if they were in competition you would let them regulate that themselves? 
 
 "Mr. Babson: Yes. I would let that regulate itself. 
 
 "Mr. Warren : .\nd tlie same I presume as regards liability for accident. I do not know 
 whether you have noticed, but I happened to be in Williamstown over Sunday and in reading 
 the Republican I saw that a jitney in Holyoke, where they had just been considering a 
 regulation of jitneys, had been upset with six or seven children in it; one or two had been 
 killed and the rest were all taken to the hospital. Now, if that had happened to a street 
 car in Massachusetts it would have amounted to anywhere from twenty to fifty or sixty 
 thousand dollars damages would it not, as our juries operate? 
 
 "Mr. Babson: Including lawyers' fees. 
 
 "Mr. Warren : Well. I think with that it would be still more, but it would have been 
 a very substantial amount. How would you meet that? 
 
 "Mr. Babson : I think that same thing should apply ; yes, I should think the same thing 
 should apply. 
 
 "Mr. Warren: Most of the jitneys which are at present operating in Massachusetts 
 are individual operators, and the only way it could be reached would be by requiring some 
 sort of a bond. 
 
 "Mr. Babson: When I speak of jitneys I have more in mind the bus system. 
 
 "Mr. Warren: .^nd there you would expect a corporation with some responsibility of 
 operation ? 
 
 "Mr. Babson : Yes." 
 
 Other witnesses also laid stress upon the point that, in many parts of the 
 country at the present time, the electric railways have to meet unfair competition 
 from the jitney buses for passenger traffic, and, so far as the interurban lines 
 are concerned, unfair competition from the motor trucks for freight service. 
 
 If jitney buses are to be regulated in such a way as to meet the requirements 
 of fair competition, several questions arise. In the first place, it must be deter- 
 mined by whom the regulatory authority shall be exercised, and, in the second 
 place, what particular regulations are necessary in order to put jitney competi- 
 tion on a fair basis. The development of public control over the jitney busi- 
 ness has followed along much the same lines as the development of control over 
 electric railways, but is still a long way behind. For example, in some states 
 where the regulation of electric railway service and rates has been conferred 
 upon the state commissions, the regulation of the jitneys is still left in the hands 
 
294 Electric Railway Problem 
 
 of the individual municipalities. If both systems of local transportation are to 
 be tolerated, and if their competition is to be put upon a fair basis, it seems rea- 
 sonably clear not only that general legislation emanating from the same source 
 and applying both to the electric railways and the jitneys is necessary, but also 
 that the power of interpreting and applying such legislation in the manner char- 
 acteristic of commission regulation should be exercised in the case of both 
 utilities by the same authority. Undoubtedly, if it is to be admitted that exclu- 
 sive state regulation is an appropriate and necessary method of controlling elec- 
 tric railway service and rates, the electric railways have a just grievance so long 
 as the competition of the jitney bus is subject to no substantial restrictions 
 except those which may be imposed by the caprice of the municipal authorities, 
 or by their hostility to the street railways over which they have lost jurisdiction. 
 I am not at this point admitting that exclusive state regulation is the proper 
 method of controlling the electric railways, but merely admitting that, if this 
 system is to prevail with respect to electric railways, their demand that the jitneys 
 should be similarly controlled is a logical one. It is my own view, however, as 
 will be shown in a later section, that local transportation cannot be regulated 
 with the highest degree of success except through a carefully worked out plan 
 of cooperation between state and local authorities. 
 
 What Mr. Lucius S. Storrs thinks should be done with respect to the jitneys 
 is shown at pages 444 and 445 of the Proceedings, where the following testimony 
 is found : 
 
 "CommissloiKT Meeker: I take it that you advocate the regulation of the jitney and 
 the motor truck traffic and control of such traffic by the public, in order to put those services 
 on the same footing as the services rendered by the street railway companies? 
 
 "Mr. Storrs: .-Xhsohitcly, it seems to nic essential from the standpoint of the communities 
 and the coniinonwoalths. in the large communities, to have that character of transportation 
 thoroughly regulated, the .same as the other means of transportation arc regulated. 
 
 "Commissioner Meeker: .And if those means of traffic are able to heat the street rail- 
 ways out, if they were all subjected to the saine regulation, the same measure of control, 
 then the street railway companies would have to take a licking; but it is wholly unfair, 
 I gather from your testimony, to have these services rendered on an unfair basis? 
 
 "Mr. Storrs: Yes. sir. 
 
 "Commissioner Meeker: Which is really service rendered to the public at less than cost? 
 
 "Mr. Storrs: Without doubt. 
 
 "Commissioner Meeker : And at the expense of the established service rendered by the 
 street railway companies? 
 
 "Mr. Storrs: The communities and the states have invited investors to come in and 
 provide the essential transportation need of the communities, and have in the past guaranteed, 
 through their statutes, a transportation monopolv. In this case, this other public utilitv would 
 come in, and for the coiiuiiunity and the commonwealth to allow unregulated competition is 
 inconceivable. It should not Ih." allowed to go on." 
 
 At pages 454 and 455 Mr. Storrs continues as follows: 
 
 "Commissioner Sweet: If I understand you right, you think that jitneys, auto trucks, 
 and any conveyance that carries people for hire, ought to be regulated and controlled on the 
 same eipiitablc principles, with a view to the general interest of the public, as well as the 
 electric railways? 
 
 "Mr. Storrs: .Absolutely. 
 
 "Commissioner Sweet: You would recognize, then, the right of jitneys to exist? 
 
 "Mr. Storrs: Without question. 
 
 "Cotnmissioner Sweet : Hut I dare say that you think if they were properly regulated, 
 there would not Ik- so many of them? 
 
 "Mr. Storrs: The weather regulates them automatically at times. During periods of 
 severe rain, they get off of the streets, and during periods of snowstorms, the service is 
 entirely discontinued, or continued, perhaps, through that portion of the street that is 
 clcarcil of snow by the railway for its own needs. 
 
Jitney Control 295 
 
 "Commissioner Sweet: If the same rule were applied to these methods of conveyance 
 as is applied to electric railways, do you think it would make a very material difference in 
 the number of jitneys that would be used? 
 
 "Mr. Storrs: Oh, without doubt. 
 
 "Commissioner Gadsden : As a matter of fact, has not that been the history throughout 
 the United States already, Mr. Storrs? 
 
 "Mr. Storrs : That has been the history. 
 
 "Commissioner Sweet: Have you figures that would show that? 
 
 "Mr. Storrs: They can be prepared. We have no figures of that particular kind, 
 because in our country there has been no regulation. 
 
 "Commissioner Sweet : But it would seem reasonable that they should be regulated on 
 the same general principles as the electric railways. 
 
 "Mr. Storrs: Yes; that is true. 
 
 "Commissioner Sweet : Can you think of any reason that would be given why they 
 should not be so regulated? 
 
 "Mr. Storrs : It is inconceivable to me that there would be any reason.'' 
 
 Undoubtedly, back of the demand for efifective jitney regulation is the hope 
 and expectation on the part of the electric railway men that such regulation will 
 greatly restrict, if it does not entirely destroy the jitneys. On this point, Mr. 
 Storrs' testimony is reiterated farther on in the Proceedings. At page 460, we 
 find the following : 
 
 "Commissioner Gadsden : Well, the point I wanted to get your opinion on was this : 
 Is it not true that wherever there has been proper public regulation, the jitney has practically 
 disappeared? 
 
 "Mr. Storrs: .'Mmost entirely." 
 
 Mr. W. B. Head, Vice-President of the Dallas Railway Company, at page 
 635 of the Proceedings, tells how jitney competition was destroyed in Dallas, as 
 follows : 
 
 "It was done by creating a zone in which they were not allowed to operate, and that 
 zone comprises practically all of the business section. 
 
 "Mr. Warren; That was taken into litigation? 
 
 "Mr. Head: That was taken into litigation, and had to go through the courts. 
 
 "Mr. Warren; And it was sustained, was it? 
 
 "Mr. Head: It was sustained; yes, sir. There had been other ordinances passed, the 
 requiring of bonds, and things of that kind. There were altogether four or five lawsuits in 
 the court." 
 
 The testimony of Mr. Homer Loring with respect to jitney competition in 
 eastern Massachusetts and the proper way of handling it, and the testimony of 
 Mr. William C. Bliss about jitney control in Rhode Island have already been 
 cited at considerable length in Chapter XX of this report. One-man car opera- 
 tion as a means of meeting and overcoming jitney competition failed in Kenosha, 
 Wisconsin, in 1914. The reasons are explained by Mr. James D. Mortimer, at 
 page 781 of the Proceedings, where he says : 
 
 "In 1914. the little street railway down there, embracing about seven and a half miles of 
 track, had very severe jitney competition. Distances were very short. We undertook the 
 operation of one-man cars. That produced a very unfavorable public reaction. The tovvn 
 was not well situated for the operation of one-man cars, because there are twenty-five rail- 
 road crossings in our seven and a half miles of track, and one of the principal functions of 
 the conductor is to flag the railroad crossings. At least, that was the principal function during 
 the time when the jitneys were so active." 
 
 It appears that in 1918 the trainmen in Kenosha demanded an increase of 
 ten cents per hour in their wages, but the company told them it was not making 
 enough money to grant the increase. Then the men threatened to strike, and the 
 company "told thein that was probably the best thing for them to do under the 
 circumstances, and that there were lots of other means of employment in Kenosha 
 
296 Electric Railway Problem 
 
 that were more remunerative." The men struck and street railway service was 
 entirely stopped. What happened then is described by Mr. Mortimer at page 
 782 of the Proceedings, as follows : 
 
 "While there had been much complaint about single-truck cars and the fact that they 
 would like double-truck cars down there, opinion gradually changed, and on numerous 
 occasions the editorial writers in the local press wished the company would take a car out 
 of the station and let it stand down in Market Square, so they could see what a street car 
 looked like. 
 
 "Things developed that way for five weeks, until the Railroad Commission ordered the 
 jitneys off the streets and ordered the company to resume service. \Vc resumed service at 
 a five-cent fare, and with largely increased revenues. We are now operating that short 
 system with the smallest average sized cars and the largest earnings per car mile that we 
 have in the .State of Wisconsin." 
 
 Dr. IXigald C. Jackson discussed the relations of the street railway to the 
 jitney from the point of view of community economy. He reached the con- 
 clusion that street railway service is generally more economical than jitney serv- 
 ice, even though the direct cost to the individual rider may be greater. Upon the 
 specific subject of the apparent advantage of the jitney buses in not having a 
 big investment tied up in permanent way and tracks and power plants. Dr. Jack- 
 son says, at pages 1425 and 1426 of the Proceedings: 
 
 "Here is a thing that affects this (pustion of the drift to the buses. You must remember 
 that practically hall, or .somewhere in the neighborhood of half of the total fixed investment 
 of the street railways is in the permanent way and paving. It is fixed. It is that part that 
 is corresponding to the street surface. That proportion has slowly increa.sed during the past 
 years. The increase in proportion has not been very marked, but it has slowly increased. 
 
 "The jitney buses, whether they arc of the sporadic kind or regular system line buses, 
 which run at will on the street surfaces, are freed from this investment. That puts them in a 
 position W'here, perhaps unless the difference in circumstances is understood by the public, 
 the drift toward the buses will continue, and will actually take care of a good part of the 
 present surface hauling of the street railways. 
 
 "If the public fully understands the situation, I think the buses will not be looked upon 
 as being so favorable as they are now looked upon as being. 
 
 ******** 
 
 "Now, the jitney buses do not have this investment. True, their owners contribute by 
 taxes and license fees toward the cost of pavements, but .so do the street railways, in addition 
 to financing the investment of their own permanent way which is used jointly by other street 
 traffic. Moreover, the street railways m.ike heavy investments in power plants of the most 
 economical character, which is a conserv-ation policy as well as a policy for economy, and 
 the jitney does not. These considerations make the jitney business more like other commercial 
 enterprises in respect of the rapidity of turnover of capital, and also enable it to compete with 
 street car service operated with flat fares." 
 
 Dr. Jackson then goes on to discuss the eflfect of jitney operation upon street 
 congestion and paving costs. At page 1426, he says: 
 
 "Now, the question really is, will jitney bus lines with systematic routes and reliable 
 schedules make desirable substitutes or successors to the street railways, or at least as to a 
 part of their business, as has been asserted, more or less unthinkingly, but sometimes with 
 real, definite decisions. * • * * 
 
 "What would bo the effect on the street traffic congestion in cities such as Chicago 
 or Hallimorc or Philadelphia or Boston and a large number of others if the surface street 
 railway service was replaced by bus service of equal reliability? Many of the American 
 cities, I do not know how many, but ipiite a large numlKr, each have more than one thousand 
 cars operating on street railways during their rush hours. 
 
 "To replace such a service with buses would retpiire .several times as manv vehicles, 
 thereby adding to the welter of street traffic in the heart of each city. These vehicles would 
 cause more than a proportionate addition to the traflic confusion because they would travel 
 at will over the street, instead of In'ing confined to certain definite channels like the street 
 cars. Moreover, additional streets would have to be paved with smooth pavement at great 
 expense to support this bus traffic. Buses run very well on smooth paved streets like Fifth 
 
Jitney Control 297 
 
 Avenue, New York, and certain streets of Baltimore or Newark, but few American cities 
 pave sufficient streets with smooth pavements of the quality enabling them to stand heavy 
 traffic, and the cities would find it necessary to make enormous additions to their investments 
 in pavements before jitney buses would meet the general needs of local transportation. In 
 addition to this a large increase of annual cost for paving maintenance would follow. Given 
 equally systematic and reliable service by street cars and by jitney buses, community economy 
 stands with the street car for service in main channels." 
 
 But the public may demand jitney service anyway, not realizing how much it 
 costs. At page 1426, Dr. Jackson continues : 
 
 "I am satisfied that that opinion is correct community economy, that is, dollars and cents, 
 when you have equal physical results in the way of .service; but it may not be that which 
 satisfies the public best, and if it is not that which satisfies the public best, the jitney buses 
 must come and the rail service practically relinquish its short-haul.'' 
 
 Dr. Jackson thinks that "the jitney may be made serviceable for certain special 
 conditions," but that "it is necessary under our present cotiditions of city life 
 to maintain the rail traffic at a high degree of completeness." His conclusion is 
 reached at page 1428 of the Proceedings, where he says: 
 
 "If we allow the street railway to decline and the jitney to partially take its place, it is 
 possible that the direct transportation cost of the individuals in the community w'ill decrease 
 compared with the cost under present conditions, but the total cost, considering the sum of 
 the direct and indirect costs, will actually be increased, and the final result of allowing our 
 local transportation by street railways to decline, will lead us into a less satisfactory ultimate 
 condition, although the immediate effect may appear to be improved." 
 
 Still, Dr. Jackson is not sure that the public will agree with him, and he says 
 that it is for the public to decide whether "a sacrifice of community economy" 
 shall be made for the sake of other things. On the subject of repressive regula- 
 tion, at pages 1428 and 1429, he says : 
 
 "In my opinion no amount of repressive regulation will be adequate to do away with 
 the competition which jitney buses produce. You can make repressive legislation all you 
 choose, and then it will not do away with them, if the public believes they are right. The 
 street railway man who says: 'If they would only regulate these jitneys oflf the streets, we 
 would be all right' — that street railway man should look into his mental processes and see 
 what is the matter with his management that allows the jitney to come up; because you 
 cannot get rid of them by repressive legislation if the public believes they are necessary." 
 
 At page 1429, he continues : 
 
 "I believe that the present sporadic jitney is a scheme that will soon lose popular favor; 
 and. in fact, at one time in certain cities it was very rife — anybody would buy a Ford and 
 run it for a while, and it was in great favor; but in most of those cities where it was in the 
 greatest favor for a time, it is in much less favor now." 
 
 Dr. Jackson's point that the regulation of jitneys should be for the purpose 
 of establishing regular, definite lines and providing for systematic transportation 
 for the benefit of the community, is emphasized at page 1429 of the Proceedings, 
 as follows : 
 
 "The Chairman: The kind of legislation which you have in mind is that in the interest 
 of the public, rather than that in the interest of the street railway system? 
 
 "Mr. Jackson: Yes; and I say that regulation of the jitneys which is in the interest 
 of the public, aids the public, because it makes systematic transportation out of it. 
 
 "Legislation or regulation which is in favor of the street railway company, which is 
 repressive on the jitneys, will never put the jitneys out of business, because the public will 
 have them if the public thinks they want tliem. 
 
 "The one way to put the jitneys out of business, I am satisfied, is for the street railway 
 people to make their service satisfactory, and their prices so reasonable that the public are 
 satisfied to ride. * ♦ * ♦ 
 
 "If the street railway service cannot be made complete and adequate to the needs, some 
 other service, such as jitney service, w-ill come in as a competitor. In fact, it ought to come 
 
298 Electric Railway Problem 
 
 in and be encouraged unless means can be provided to make the street railway service adequate 
 to the needs, and the necessities of the present are to find the best ways of making the street 
 railway service adequate, in view of the fact that it is ultimately the cheaper service." 
 
 Mr. Charles L. Henry, of the Indianapolis and Cincinnati Traction Com- 
 pany, called attention to competition of the motor truck for interurban freight 
 business. In the development of the motor truck business during the war period 
 the Highways Transport Committee of the Council of National Defense ran up 
 against the problem of "wildcatting," and issued a circular calling attention to 
 it in the following language, quoted at page 713 of the Proceedings: 
 
 "One very pertinent subject is suggested, and that is the possibility of a few individuals 
 who might attempt to haul freight from a large city to towns 30 or 40 miles away for a 
 sum per hundred weight which would make it impossible for one oiierating a route regularly 
 and on fixed schedule to meet such competition. The suggestion made is that a continuation 
 of sucli practices, wildcatting, as it were, in the motor transportation field tends to dis- 
 courage the entrance into this field of those who would seek to serve the public regularly and 
 satisfactorily, and at a cost to the shipper of just enough to make a venture financially 
 profitable." 
 
 Mr. Henry's comment is found at pages 713 and 714 of the Proceedings, as 
 follows : 
 
 "Now, take that and apply it to the interurbans. It tells its own story. It is rather 
 remarkable that at this early day in the development of trucking they should have to issue 
 such a circular as that. We do not ask you to do away with the truck hauling by motors, 
 but we do think they ought to be under the same kind of regulation and restrictions that we 
 are under. 
 
 "Mr. Warren: They are like the jitneys, I suppose, arc they not? 
 
 "Mr. Henry: They are worse; that is all. The jitneys are lice, and these are full 
 grown animals. 
 
 "There is no reason why this sort of wildcatting, as this gentleman calls it here, should 
 be permitted to go on uncontrolled, and I am glad to know that some fellow going into the 
 truck business has seen fit to call attention to it. It may bring about important results. It 
 is one of the things that you gentlemen ought to take into consideration, and take such 
 action as you may think is best in regard to it, liecause it amounts to a great deal.'" 
 
 The conclusion ot the whole matter of the control or abolishment of jitney 
 competition may be summed up, perhaps, in a few words. .Ml transportation 
 service is for the public. Jitneys and automobile buses cannot be repressed 
 merely for the sake of compelling people to ride on the street cars, particularly 
 if the car fares are higher than the jitney fares and the car service less convenient 
 than the jitney service, and if the electric railways are to continue in the position 
 of a more or less speculative business in which the private owners stand to reap 
 the principal advantages from the restriction of competition. However, it is 
 clearly in the public interest that all common carriers engaged in local transpor- 
 tation service should be required to render adequate and safe service, and that 
 local transportation facilities should be develo])f(l in the most economical and 
 effective way from the point of view of the comnnmity. L'nnecessary and de- 
 structive competition in such services ought not to be permitted, and the com- 
 ninnity at large should conserve the established facility that still is and (jromises 
 to continue for an indetinite period the principal means of local transportation. 
 The problem is in considerable measure a local one, but in every case is should be 
 solved with intelligent regard to the permanent interests and oliligations of the 
 community. If the street railways are to be allowed the benefits of even a quali- 
 fied monopoly, they should be required to fulfill its obligations. They nnist 
 
Jitney Control 299 
 
 render service that is adequate and convenient at rates that are attractive. The 
 community can afford to go a long way to preserve street railway service ; but 
 the question constantly forces itself to the front whether it could not adopt the 
 necessary protective measures with a better conscience if it were prepared in 
 fact to deal with local transportation as a full-fledged public function. We are 
 still discussing primarily the problem of restoring electric railway credit. Jitney 
 repression will not do that effectively, if it leaves the riding public in a crotchety 
 mood. 
 
Chapter XXXIII 
 
 COOPERATIVE RELATIONS BETWEEN MANAGEMENT 
 
 AND MEN 
 
 An important leak in electric railway revenue in various places and at dif- 
 ferent times has resulted from the "knocking down" of fares by conductors. In 
 other cases, as a result of overcrowding or carelessness, the conductors have 
 failed to collect from all the passengers. Obviously, it is impossible to measure 
 accurately these unrecorded losses. The Indiana Public Service Commission 
 found a very serious condition existing in this respect on the Indianapolis lines. 
 Mr. Carl H. Mote, then secretary of the Indiana Commission, testifies in regard 
 to it at page 1118 of the Proceedings, as follows: 
 
 "W'c found by a survey made in Indianapolis, that the companies there were losing 13.8 
 per cent of their total revenue by failure to collect the fares. 
 
 "Mr. Warren: How much? 
 
 "Mr. Mote: 13.8 per cent of the total revenue. That revenue is now being collected. 
 
 "Commissioner Bcall : Was that due to war conditions — the different class of labor that 
 you had during the war conditions? 
 
 "Mr. Mote: Incidentally to that, but that was not the fundamental thing. 
 
 "Commissioner Gadsden : You mean knocking down. 
 
 "Commissioner Beall : You think that was a condition that had endured for a number 
 of years? 
 
 "Mr. Mote: Yes. 
 
 "Commissioner Beall : I know a great many companies had that trouble during the war 
 period, due to the different class of lal)or that they had to use. How do you account for it 
 in that case? Did they have lower grade of labor than most other cities or was their system 
 incorrect ? 
 
 "Mr. Mote: Well, during the rush hours it was shown to be a physical impossibility for 
 the conductor to collect the fares. 
 
 "Commissioner Bcall: Have they corrected it? What did they do? 
 
 "Mr. Mote: By the installation of the pay-as-you-enter cars. 
 
 "The Chairman: Has that increased the revenue? 
 
 "Mr. Mote: Absolutely. I'or instance, a 16 per cent increase in rate has given the 
 company a 25 per cent increase in revenue." 
 
 Mr. Mote stated that in his opinion the pay-as-you-enter system had not 
 slowed down the operation of the cars to an appreciable extent, and the cost of 
 adopting it had been slight. At page 1119 of the Proceedings, he says: 
 
 "Another objection that the company raised to introducing the pay-as-you-enter car was 
 the expense. They had the old type car. We worked out a very simple modification, how- 
 ever, of their old type car, which, I think, did not cost them to exceed $50 or $6(1 per car to 
 convert their old type cars into pay-as-you-enter cars. The gain has been treinendous, and I 
 think the company itself would never go back to the old type of car now." 
 
 This backwardness of the Indianapolis street railway companv with respect 
 to the conservation of its revenues was only one of the evidences of {xjor managc- 
 incnt found by the Indiana Commission in its contact with the street railways of 
 the state. Mr. Mote stated that a good many cases of bad conditions of opera- 
 tion had been found. He spoke particularly of costly wrecks on intcrurban lines 
 
 300 
 
Cooperation with Labor 301 
 
 that should have been avoided. In one case, where the block signals were out 
 of repair, he estimated that the wreck would cost the company $150,000. He 
 pointed out that the predecessor of the Ft. Wayne & Northern Indiana Traction 
 Company, the one electric railway of the state now in receivers' hands, had a tre- 
 mendous disaster a few years ago which resulted in a receivership. The present 
 company, he said, was going through a friendly reorganization to reduce its 
 securities. Mr. Mote did not state to what extent the bad operating conditions 
 in Indiana were due to a failure of the employes to cooperate fully with the 
 management, but he indicated that in general the street railway employes were 
 not well organized. 
 
 I have cited the conditions described by Mr. Mote to give something of a 
 background to the suggestion of Mr. Thomas E. Mitten that the real cure for the 
 financial problem of the street railways is to be found in his scheme of coopera- 
 tive management. In Indiana the economies and improvements suggested by the 
 Public Service Commission enabled the companies to get along without raising the 
 fares above five cents. In Philadelphia the necessary economies and efficiencies 
 were developed by the company as a matter of policy initiated long before the 
 war. While the Indiana Commission was insisting on the adoption of the pay- 
 as-you-enter plan for getting all the fares collected and paid into the street rail- 
 way treasury, the Philadelphia Rapid Transit Company was appealing to the 
 self-interest of its employes under the "Cooperative Plan" and refusing to adopt 
 the fare-box method of collection. Mr. Mitten's prepared statement was read 
 into the Proceedings by Mr. C. J. Joyce. At page 1515 we find the following: 
 
 "Results here secured are thrown into bold relief by comparison with conditions existing 
 elsewhere. Philadelphia Rapid Transit, with almost 5 per cent fewer employes than in 1910. 
 is now producing over 98 per cent more effective traffic units per employe, this as against 
 results secured on the Pennsylvania Railroad contained in a speech by Vice-President W. W. 
 Atterbury as reported in the public press, wherein the number of employes is said to have 
 been increased 14 per cent, the output (or effective traffic units) being 11 per cent less than in 
 pre-war days. The case of the Pennsylvania Railroad, showing decreased production, is but 
 one of the many instances, wherein the effort to increase production has given way to the 
 great struggle upon the part of labor to secure a larger wage for a smaller amount of work. 
 "Aside from the urgent necessity of helping to make up for the shortage of necessaries 
 occasioned by the war in Europe, it stands to reason that capital and labor cannot divide that 
 which does not exist and that more of everything essential must now be produced in order 
 that there may be more with which to supply our needs. If the forces of labor and manage- 
 ment will combine so effectively as to produce almost 100 per cent more per man, as we are 
 doing here through cooperative effort, much, if not all, that is required to overcome the 
 higher cost of living will have been accomplished. 
 
 "The keystone of all success as between Man and Management is confidence. Distrust 
 breeds discontent. Confidence begets confidence and cooperative effort then becomes possible. 
 The confidence of the Men in the Management and likewise the confidence of the Manage- 
 ment in the Men is what makes Philadelphia stand out in accomplishment. 
 
 "Philadelphia is almost alone in its position of antagonism to 'cash box fare collection' 
 or any system which tends to show a lack of confidence in the conductor. It can hardly 
 be expected that a self-respecting employe will take seriously the statement that he is our 
 partner if we require the action of the passenger to assure us that the fare collections are 
 being properly made." 
 
 Here we have two quite distinct phenomena — efficiency and honesty imposed 
 by a state commission and efficiency and honesty developed through a coiubined 
 appeal to honor and self-interest. Which is the better? As shown by Table II, 
 in Chapter XXVIII of this report, the gross passenger revenues of the Phila- 
 delphia Rapid Transit Company, without any change in the fare, showed an in- 
 
302 Electric Railway Problem 
 
 crease of 20.3 per cent for the first nine months of 1919 as compared with the 
 first nine months of 1917. The increase in the passenger revenues of the Indian- 
 apolis Traction and Terminal Company during the same period was 29.48 per 
 cent, but the average rate of fare had increased 17.37 per cent in the meantime. 
 Philadelphia appears to have a little the better of it, but, as the saying goes, one 
 swallow does not make a summer, and very little can be proven decisively as 
 to the superiority of methods by the comparison of a single city where good 
 results have been obtained with another city where the results have been almost 
 as good. Yet, it does not take figures to prove the impossibility of attaining 
 and permanently maintaining any very liigh degree of etticiency in an industry 
 where the characteristic attitude of the men toward the management is one of 
 distrust and hostility. There can be no doubt that if the Philadelphia Coopera- 
 tive Plan or something similar to it, or at least something that produces the same 
 degree of loyalty and zeal in the employes as appears to have been developed 
 in Philadelphia, could be applied to the electric railways everywhere, a very long 
 step would have been taken towards the restoration of the financial health and 
 credit of the industry. A plan that would do away with absentee ownership 
 and absent-minded operation would surely open the way for the restoration of 
 the good will of the people, and that means money. 
 
Chapter XXXIV 
 PUBLIC SUBSIDIES 
 
 If electric railway service, that is deemed essential to the public welfare, 
 cannot be made self-sustaining out of its earnings ; or if the community for other 
 reasons deems it necessary to maintain street railway fares at a point so low that 
 the revenues will not cover the entire cost of the service, it becomes necessary 
 to make supplementary provision for the support of local transportation, either 
 directly or indirectly, through contributions from other sources. In one way or 
 another the cost of the service must be paid, and this is true whether the policy 
 of private ownership and operation is continued or not. At the same time it is 
 obviously more difticult from the political standpoint — and I use the term "poli- 
 tical" in its broad, fundamental sense — to justify public subsidies for private 
 companies operating for profit than to justify the subsidizing of a public function 
 operated directly for the service of the community. If public subsidies are neces- 
 sary, that fact constitutes a powerful argument for the complete elimination of 
 private investments and private management from the electric railway industry. 
 Indeed, in some of the states constitutional provisions have been adopted designed 
 to prevent the state or the municipalities from subsidizing or lending their credit 
 to any private corporation operating for profit. Nevertheless, the electric rail- 
 way industry has fallen into such a condition that the question of adopting the 
 policy of public subsidies is being widely discussed and seriously considered. 
 The testimony of the witnesses before the Commission is full of the subject. 
 
 At the outset we need to determine what, in the case of the electric rail- 
 ways, constitutes being self-sustaining and what different forms public subsidies 
 may take. It is not necessary at this point in the discussion to enter into the 
 niceties of economics, finance and statecraft for the determination of the precise 
 boundary line between a condition of self-support and a condition of public de- 
 pendence in the case of a local transportation service. It will perhaps come close 
 enough to scientific accuracy if we say that in order to be self-sustaining a street 
 railway system must earn, in the form of compensation for definite services ren- 
 dered, a sum sufficient to pay the entire cost of the service, including operating 
 expenses, with proper reserves for depreciation, accidents, and other deferred 
 liabilities ; taxes and other public charges proportional, as nearly as may be, to the 
 taxes and public charges imposed upon other industries : and the necessary cost 
 of the capital actually and necessarily invested in the business. Stated in dif- 
 ferent words, this qost of service includes the maintenance of the complete in- 
 tegrity of the physical property, the provision for all operating costs attributable 
 to the period of service, whether payment thereof is immediate or deferred, and 
 the return upon capital which, under the conditions of the investment, will be 
 
304 Electric Railway Problem 
 
 sufficient to maintain the necessary supply of capital. Perhaps the most elusive 
 portion of this definition is that which relates to the compensation of the investors. 
 To be a little more specific, the cost of service must include a sufficient return 
 upon the capital already tied up in the business to satisfy the legitimate obliga- 
 tions incurred at the time such capital was secured, and also the offer of a suffi- 
 cient return upon new capital to induce it to make itself available in adequate 
 quantities to enable the street railway system to expand and improve its facilities 
 as rapidly as public necessity and the obligations of public service may require. 
 In connection with our analysis of the various forms which a subsidy may 
 take, we must distinguish public exemptions and cash contributions based upon 
 a general consideration of the advantage to the community at large of main- 
 taining local transportation service, from public appropriations made in pay- 
 ment for specific and measurable services rendered by the transportation 
 systems. For example, a cash payment by the city for transportation furnished 
 to policemen and firemen while on duty would not be in the nature of a subsidy, 
 unless it was entirely out of proportion to the cost of the service rendered. In 
 the same way, a cash payment to the street railway for hauling and delivering 
 street construction materials, or for removing garbage and ashes, is not a subsidy, 
 but a payment for definite services performed. It might even be maintained 
 that a special tax or assessment upon improved real estate readily accessible to 
 local transportation service and based upon the cost of readiness to serve might 
 be levied by the munici])ality and the proceeds paid into the street railway treasury 
 without our getting quite over the line into the field of subsidies. That would 
 depend largely upon the definiteness of the computations of cost upon which the 
 special levy was based. Indeed, if special assessments were levied to provide 
 the capital cost of street railway extensions, on the same theory upon which pave- 
 ments and other street improvements are often paid for by assessments for bene- 
 fits, this could not he regarded as subsidizing the street railways, unless they 
 were permitted to claim ownership of the property paid for by the assessments 
 and include it in tiie capital account upon which they are entitled to earn a fair 
 return from the rates. In a certain .sense, it might be said that the electric rail- 
 ways are subsidized to the extent that they are given free rights of way in the 
 public streets, but in another sense the street car may be regarded merely as a 
 type of public conveyance well-suited to public needs and having as much right 
 in the highway as any other vehicle. (Ine's point of view with respect to this 
 particular angle of the problem will determine what he thinks about the policy 
 of exacting compensation for street railway franchises. If the street railways 
 are not recjuired to pay for the use of the streets, the privilege of using public 
 property without giving specific compensation for it would be reg^arded by some 
 as the i'(|uivalent of a subsidy. The same rules will apply to the use of free 
 pui)lic bridges, viaducts, subways and other special stnictures that are a part of 
 the iiighway, except that where streets have to be widened, bridges made stronger 
 or other street imi)n)vements made more expensive for the specific purpose of 
 accommodating street car traffic, many hold the opinion that the street railway 
 company should either carry the extra investment in its own capital account or 
 else pay an amiual rental sufficient to cover the city's fixed charges on the extra 
 
Public Subsidies 305 
 
 investment. For the purposes of this discussion I shall assume that the free use 
 by the street cars of public streets, bridges, viaducts, subways, etc., where their 
 use is free to the general public in common with their use by other vehicles and 
 by pedestrians, does not constitute a public subsidy and, therefore, is not incon- 
 sistent with a condition of honorable self-support so far as the street railways 
 are concerned. I shall assume that in paying the cost of the tracks and their 
 special foundations and of the pavement in and about the tracks, the street rail- 
 ways are contributing everything that can be equitably required of them as a 
 condition precedent to their free use of the streets. As we have already seen, 
 many of the witnesses before the Commission went so far as to hold that the 
 companies should be relieved of their paving obligations, not as a matter of special 
 favor or emergency concession, but as a matter of right. Indeed, I am inclined 
 to the opinion that theoretically the street railways ought not to be compelled 
 to install the original paving except where paving in and about the tracks is made 
 necessary by the presence of the rails, but that they should be compelled to pay 
 a portion of the cost of maintaining and replacing the pavement to the extent 
 of their use or abuse of it. This distinction leads to the remark that we here 
 have a double-headed proposition. In some cases, no doubt, the street railway 
 companies have been subsidizing the cities ; in other cases, the tables have been 
 turned or in the future may be turned. In brief, it may be said that a public 
 subsidy is a special exemption or a direct or indirect cash payment for services 
 that are not specific or definitely measurable. 
 
 In the proper sense of the term, therefore, a public subsidy may take the 
 form of special exemptions from taxation or other public burdens, of a free con- 
 tribution of capital, or of specific payments in the form of public cash or public 
 services for general or cominunity benefits derived from the availability of ade- 
 quate transportation service furnished by the electric railways at their own 
 expense. 
 
 The definite forms of subsidy usually suggested are: (1 j relief from taxation, 
 (2) a gift or loan of capital or credit, and (3) an appropriation from taxes or 
 other public funds to make up current deficiencies in revenues below the cost of 
 the service. In general, under a carefully worked out and thoroughly consistent 
 service-at-cost plan, or even under the policy of unrestricted public regulation 
 continuously and strictly applied, there can be no such thing as a subsidy to the 
 electric railway companies, except where it is impossible for them at any rate 
 of fare to be self-sustaining. With the exception noted, any subsidies granted 
 and any contributions exacted by the public authorities will be passed on to the 
 car riders, and the companies will neither be benefited nor hurt by them. (Jf 
 course, this does not follow under any form of contractual relations not based 
 upon the service-at-cost principle, and does not follow with any degree of exacti- 
 tude where public regulation is applied intermittently or spasmodically. 
 
 The question as to whether or not, under existing constitutional restrictions, 
 a real public subsidy can be granted to a privately owned or privately operated 
 street railway is, in each particular case a question for the lawyers and the 
 courts ; but the question of the elimination or modification of constitutional re- 
 strictions is a matter of public policy to which we may address ourselves. Con- 
 
306 Electric Railway Problem 
 
 stitutional restrictions have a certain fixity which makes it necessary that emer- 
 gency plans should be accommodated to them, though permanent plans may be 
 postulated upon their removal in due course. As we shall see, the way to public 
 ownership is obstructed and progress in that direction is impeded, in many juris- 
 dictions, by constitutional limitations upon municipal authority. Yet these limi- 
 tations may not be as deeply intrenched in the political science of the /Vmerican 
 people as the restrictions that stand in the way of the adoption of the policy 
 of granting public subsidies. It may not be practicable to remove these latter 
 restrictions. In fact, while the undoubted tendency of constitutional and statu- 
 tory development in the states is toward an enlargement of the powers of muni- 
 cipalities to undertake as public functions the standard modern utility services, 
 there is no marked tendency toward the removal of the restrictions on public 
 subsidies to private enterprises. I shall refer to the constitutional status of sub- 
 sidies in New York and Massachusetts as illustrative, without having attempted 
 to make a general survey of the states with respect to this subject. Section 9, 
 of Article VIII, of the New York State Constitution provides that "neither the 
 credit nor the money of the State shall be given or loaned to or in aid of any 
 association, corporation or private undertaking." Section 10 of the same article 
 provides that "no county, city, town or village shall hereafter give any money 
 or property, or loan its money or credit to or in aid of any individual, association 
 or corporation, or become directly or indirectly the owner of stock in, or bonds 
 of, any association or corporation ; nor shall any such county, city, town or village 
 be allowed to incur any indebtedness except for county, city, town or village pur- 
 poses." These rather sweeping prohibitions have not prevented the City of New 
 York from entering into contracts under which hundreds of millions of dollars 
 have been or are being spent in the construction of rapid transit lines leased to 
 private companies for o])eration. Even though, in certain cases, the companies 
 are furnishing a portion of the cost of construction and in all cases are required 
 to supply the equipment at their own expense, and even though the city's invest- 
 ment in the new subways has to stand aside until the operating companies have 
 been fully taken care of, the New York Court of .Appeals has upheld these rapid 
 transit agreements as not violative of the constitutional restrictions cited above. 
 In New York, however, the subways are city-owned. 
 
 As indicative of the trend of public opinion on the constitutional aspects of 
 the subsidy question, it is noteworthy that Massachusetts, as recently as 1918, 
 adopted the following new constitutional provision : 
 
 "The credit of the ComiTKmwcalth shall not in any manner he piven or loaned to or in 
 aid of any in(livi(hial, or of any private association, or of any con>oration which is privately 
 owned or managed." 
 
 Anent this new factor in the situation, the Massachusetts Public Service 
 Commission, in its Sixth Annual Report, issued in Jaiuiary, 1919. at page xxxi, 
 makes the following comment: 
 
 "The lanKiiaRC of this amendment is very broad. It is at least a question whether the' 
 expression "credit of the commonwealth" would not include the credit of intcRral parts, like 
 the cities and towns, and no douht it would cover financial aid provided throuRh taxation 
 as well as the actual InirrowiiiK of money. It would seem, also, that the lanRuaRe applies to 
 indirect as well as to direct use of credit. If a portion of the cost of street railway service. 
 
Public Subsidies 307 
 
 then, is to be borne by the community as a whole, or if community credit is to be used in 
 the furnishing of capital, it would seem to follow that the companies must either be publicly 
 owned or publicly managed, and perhaps both." 
 
 What the Massachusetts Commission thought of the need for subsidizing the 
 car riders is clearly shown in the discussion leading up to the above. At pages 
 xxix and xxx of this most notable report, the situation is summarized as follows : 
 
 "Sumining up the matter, no one can view the present situation with optimism, or believe 
 that the policies and methods now pursued are likely, unless general conditions change 
 radically, to bring either good service or good credit, or to further the healthy growth and 
 development of the community. 
 
 "It is far easier, however, to fix upon the goal to be reached than to point the way to 
 it. much less difficult to know what ought to be done than how to do it. Briefly stated, 
 the essential needs, from the standpoint of the future welfare of the state, are: 
 
 "(1) Restoration of credit, or some other means of providing the capital necessary 
 to place the street railway properties in condition for first-class service. 
 
 "(2) Return to a basis of fares which will enable the railways to play their proper 
 part in community life. 
 
 "The prime necessity is good service, and it cannot be had without rehabilitation and 
 improvement. Next to good service is a system of fares which will make the service as 
 useful as possible, and help rather than hamper the development of the community on health- 
 ful and economically sound lines. Massachusetts is not blessed with much natural wealth 
 or with many geographical advantages, and other parts of the country are beginning to 
 challenge her place in the commercial world. If it is to be retained, it will require the best 
 possible use of her resources, foremost among which are her industries and her people. This 
 means, among other things, the maintenance of good living and labor conditions. In this 
 connection nothing is more important than cheap and good transportation facilities which 
 will spread population, encourage living in the country districts, and give labor the mobility 
 which the welfare of our industries demands. 
 
 ".\s we view it, present conditions in street railway transportation, and still more the 
 conditions which are in sight, both as to service and as to rates, are opposed to the best 
 interests of the state. The only alternative, however, is some plan by which a portion of the 
 cost of service will be taken from the shoulders of the car rider and be met by some form 
 of general ta.xation. This suggestion is radical, but, as above indicated, not wholly unprece- 
 dented. In the long run, poor transportation at high rates will damage the mill owner, the 
 merchant and the land holder. In the long run. good transportation at low rates will operate 
 greatly to their advantage. This fact lies at the root of our policy of state highway con- 
 struction, and years ago it received clear recognition in the early days of steam railroad 
 building, when both state aid and municipal aid were freely granted. 
 
 "It is necessarv' to look beyond today and into tomorrow, to balance future benefits 
 against present burdens. What we are now suggesting is not very different from what the 
 steam railroads for a long time have actually been doing. They sell commutation tickets at 
 verv low rates, not because there is any direct profit, but because they believe that it is good 
 policy to do so, in the public interest and ultimately in their own. The burden is borne by 
 freight and other forms of traffic. In the present instance, the street railways have no other 
 business which can carry the load and, if a portion of it is shifted from the car riders, it 
 must be borne by the community as a whole." 
 
 It will be remembered that Professor Charles J. Bullock, in his testimony, 
 urged strongly the doctrine of "equal taxation," but admitted that in the present 
 street railway emergency it might be proper to exempt the companies entirely 
 from the property tax for a period of years, and depend on a net income tax to 
 catch the lucky ones, if there were any such, which might be making money when 
 the industr}' as a whole was in deep distress. Professor Bullock's views on the 
 relative rights of the car rider and the taxpayer are set forth at pages 642 and 
 643 of the Proceedings, where he says : 
 
 "Under normal conditions it would seem that street car riders ought to pay just what the 
 service costs, and not more nor less. If you exempt public utilities from taxation and give 
 the riders untaxed service, yon increase by so much the taxes that owners of property have 
 to pay. and that is something that a city ought not to do and cannot afford to do under normal 
 conditions. 
 
 "There are many demands for city expenditure. To fritter away your source of revenue 
 by giving untaxed service, by granting exemptions which benefit the rider, is bad municipal 
 
308 Electric Railway Problem 
 
 finance and it is not fair as between the car riders and taxpayers who arc not necessarily the 
 same people, or, if they are the same people, do not use the cars in the same proportion that 
 they pay taxes. Our municipal taxes fall very largely upon real property, and that may be 
 very largely owned by non-residents who get no benefit from the street railroad service 
 whatever and never patronize it. Then even those that own property in the city and pay 
 taxes there do not use the street railways in precise proportion to their ownership of property. 
 Putting part of the cost of furnishing street railway service into the tax levy is not under 
 normal conditions good finance. The proper theory would seem to Ik- that of equal treatment 
 of the industry with other property. It .should not be burdened beyond other property in 
 business; it should not pay tax less than other property in business. If you levT upon the 
 industry of the electric railways taxes precisely like those levied upon other similar objects 
 of taxation, you hold the lialance level between the taxpayers and the car riders and you do 
 substantial justice to all parties in interest and the correct theory seems to be that of equal 
 taxation of public utilities under normal conditions. 
 
 "Now every general theory has of course certain limitations. The limitations to this 
 theory of equal taxation are implied in the expression 'normal conditions' that I have used. 
 In time of war when revenue is the paramount need, the Govenmient may very properly levy 
 a tax on transportation, as it has just recently done during the war. .\nd similarly, in times 
 when transportation facilities are needed and it is not practicable to get them in any other 
 way, governments mav properly ofTer exemptions from taxation, as they have often done. 
 The exemption policy has been abused. Perpetual grants of exemption have l>een given which 
 were never justified, but exemption for a limited numlier of years of companies undertaking 
 public .service enterprises which it is not likely can prove immediately profitable may be 
 justified under special conditions." 
 
 At page 646 of the Proceetlings. Mr. Warren asked Professor Bullock 
 whether in his opinion, the present emergency is so great as to warrant extend- 
 ing to the companies at tliis lime temporary relief from ordinary ta.xation. He 
 got the following answer : 
 
 "Well, there are companies that are not earning operating expenses, and if a proper 
 allowance for depreciation is made, of course, vast numbers of companies are not earning their 
 o|K'rating expenses, and conditions are getting worse. That is, wages are rising and costs 
 of materials and suiiplies have not Iwgnn to decline. • * ♦ * 
 
 "Now, under those conditions we are likely to reach a point in Massachusetts where 
 we have got not only to alx.ilish taxes, hut we have got to go down into our pockets and 
 make up deficits if we are going to have street railway service." 
 
 Professor Bullock's view that a non-resident land owner who never comes 
 around to ride on the cars gets no benefit from them and ought not, under normal 
 conditions, to be taxed for their support is quite at variance with the views ex- 
 pressed by the Massachusetts Public Service Commission in its Sixth Annual 
 Report from which I have already quoted. Its detailed comparison of the street 
 railways to the public roads, and its argument to show the taxj)ayer's interest 
 in ade(|uate transportation facilities is full of significance. At pages xxiii to xxv 
 of the report, it says: 
 
 "Primarily Massachusetts is a manufacturing state, and the percentage of mill and factory 
 workers in its comparatively den.se population is very large. The importance to such a com- 
 munity of an elVicient and cheap means of local transportation is obvious. There is no other 
 way of preventing congestion, maintaining gotxl living cimditions, developing the country 
 districts, and adjusting the supply of labor iiuickly to fluctuating needs in tlie various centers. 
 This is stating the matter laldly atid inadequately, but a moment's thought will make it 
 unnecessary to amplify. 
 
 "The conununity interest in Inm.sportation has alrc.idy been recognized, in part. There 
 was a time when private enlcrpri.se was relied upon in the case of ordinary highways. During 
 the first half of the last century a multitude of turnpike corpor.ations were chartered by the 
 Legislature, with power to build roads tx-twcen specified points and to collect tolls. Such 
 turnpikes were constructed from Hoston in straight lines to all the principal surrounding 
 towns, and even He.ic.in Sirect was a toll mad until 1S<>S Gradually, however, the collection 
 of tolls was discontinued :ind the care of these tunv)i!:es was taken over by the towns and 
 counties .\t the present time, our streets and highways are all built and maintained by 
 public authorities, and the cost is carried by the comnmnity generally and is not assessed in 
 propiirli.in Ici the use whiih i^ inidi- ,if tliein \m fii-iiro^ of total investment or total main- 
 
Public Subsidies 309 
 
 tenance expense are available, but the original cost of state highways alone has been more 
 than $14,t)tK.),000. and the aggregate cost of city and town streets must be far greater. 
 
 "As yet, this principle has not been applied to the steel highways which the street rail- 
 ways use, although many more persons must be carried in cars over these highways than are 
 carried in other vehicles over the public streets, and although the general community interest 
 is in other respects very clear. Broadly speaking, street railways are just as important 
 to merchants, to mill, factory and land owners, although they may never ride in the cars, 
 as they are to the people who use them every day. It will help in realizing this to think of 
 the situation w'hich would arise if the railways should cease operation, unless some equivalent 
 form of transportation were substituted. The fact has. indeed, been given an indirect recog- 
 nition in practice, for there is little doubt that, when the railways were originally built, real 
 estate owners and business men at times took their securities with little hope of direct profit, 
 but in anticipation of the indirect benefits which would accrue from their construction. 
 
 "If street railways are a public necessity, like the highways, the schools and the drainage 
 system — and they clearly are — street railway fares may be regarded as a form of taxation. 
 In other words, it is now the policy to levy the cost of this public service upon the car riders 
 alone through the fares which they pay, rather than upon the community as a whole through 
 general taxation. Precisely the same principle might be followed in the other cases. For 
 example, a road tax might be levied upon vehicles in proportion to size and mileage operated, 
 or a school tax upon families in proportion to children in attendance ; but it has come to be 
 settled practice and belief that it is in the public interest not to assess the cost of these 
 enterprises in such a manner, but to allow it to be borne by the entire community. 
 
 "There is no inherent reason why street railway service should not be regarded in the 
 same light and treated in a similar way. If the streets are a benefit to the man who owns 
 no vehicle, or the schools to the man who has no children, so are the street railways to the 
 citizen who never uses them. The problem is really one of taxation, to be dealt with, not 
 in accordance with mere custom or tradition, but in the manner which will produce the best 
 results for Massachusetts. If the greatest good to the greatest number can be secured by 
 continuing — in theory at least — to place the entire burden of the cost of street railway service 
 upon car riders, objections are not in order; but, if this is not the case, the Commonwealth 
 ought not to be deterred by mere prejudice or conservatism from following a different course." 
 
 Mr. Ralph S. Bauer, of Lynn, advocated free street car service on the theory, 
 first, that the ehmination of the machinery of fare collection and accounting 
 would greatly reduce the total cost of the service, and, second, that local trans- 
 portation benefits the business men and property owners to such an extent that 
 they can aftord to support it out of taxation. Mr. Frederick F. Ingram, a 
 Detroit manufacturer, formerly a member of the Public Lighting Commission 
 of that city, and a member of the Michigan Constitutional Convention of 1907, 
 in which he was a leader of the movement for municipal home rule and municipal 
 ownership, advanced the opinion that street railway fares should be kept down 
 to a low figure and that the resulting deficiency should be made up bv a tax on 
 land values. At page 1124 of the Proceedings, he says: 
 
 "My opinion is that if you keep on advancing fares, you are not going to increase your 
 revenue, .^t least, you will reach the point, and are probably very near to it now-, in many 
 instances, where with further increases you will not increase your revenue ; so that you 
 cannot look to that. 
 
 "The people must be transported to their work, and my idea is to charge a nominal fare 
 without reference to whether it will pay the revenue. That would be inaugurated, in my 
 mind, under municipal ownership, and I do not know whether it could be figured out under 
 private ownership, or not ; but under municipal ownership I do not see why a nominal fare 
 could not be char,ged, and then the balance, whatever deficit came, be taken out of the values 
 of the land, the site value that your street railway benefits : take a portion of that for the 
 public treasury, to support the street railway that runs into this territory that is benefited 
 by it." 
 
 A little further on, at pages 1125 to 1127 of the Proceedings, this suggestion 
 is elaborated as follows: 
 
 "Mr. Ingram: My suggestion was that the passengers be charged a nominal fare without 
 pretense of covering the cost of the service. 
 
 "The Chairman: What should that fare be? 
 "Mr. Ingram : Well, 3 cents or 4 cents. 
 
310 Electric Railway Problem 
 
 "The Chairman: With or without transfers? 
 
 "Mr. Ingram: With the transfer. We are accustomed to transfers. Tliat would make 
 for tremendous trouble, to educate the people out of the transfer idea, at least in Detroit. 
 Then the deficit, whatever it may be, should be assessed against the land that is affected by 
 the service. 
 
 "The Chairman: How would you apply that to existing street car lines? 
 
 "Mr. Ingram: By simply passing the money over to the treasury of the street car 
 company and assessing it. In our city we' are constitutionally compelled to assess our land 
 separate from our improvements, buildings, and so forth. 
 
 "The Chairman: Vou mean the lands that are benefited by the street car lines? 
 
 "Mr. Ingram: Yes. 
 
 "The Chairman: They are to be assessed each year to make up the deficit? 
 
 "Mr. Ingram: For the preceding or following year; that is a twokkeeping proposition, 
 what that deficit takes care of, either on an estimate or hook showing. That would satisfy 
 the street car riders, and values arc created at both ends of the line and along the line by 
 this public service and it is taking a portion of it to pay for the service. 
 
 "The Chairman: Then you believe that this deficit should be borne by property that is 
 Ijenefited rather than by the general public through taxation? 
 
 "Mr. Ingram: Yes. I do. That is the general public so far as they own that land. 
 That would not apply to the buildings, you know, the buildings are not benefited by the 
 facility of travel, but the land is, and why should not it bear some of the burdens as well 
 as the passengers on the cars ? It would not create any great apprehension among the land 
 owners, it seems to me, and it would be a satisfactory solution so far as the car rider is 
 concerned. 
 
 "The Chairman : What fare are they charging there now? 
 
 "Mr. Ingram: They are charging a straight 5-cent fare with the transfers. 
 
 "The Chairman : Under your plan with a 3-cent fare might it not be that there might 
 be a deficit of two or three or four millions of dollars in the operation? 
 
 "Mr. Ingram: There might l)e. 
 
 "The Chairman: .\nd that would all have to be applied to the benefit of the property? 
 
 "Mr. Ingram : Yes, sir. 
 
 "The Chairman: Would not that be a great burden to the property? 
 
 "Mr. Ingram: I do not think so, no. sir. I do not think so. 
 
 "The Chairman: Have you ever attempted to work out a scale for taxation based upon 
 your plan to see how it would affect property in Detroit? 
 
 "Mr. Ingram : Yes, I have. I mentioned my suggestion advisedly because I had thought 
 alwut those things. In London when they make a great improvement like opening a new 
 street or widening it they do not assess that against the property of London but against the 
 property that is benefited by extra condemnations. 
 
 "The Chairman: That is new construction? 
 
 "Mr. Ingram: Yes. excess condemnation, that is construction, yes. But I do not see 
 why the .same theory would not work as works in operation in this country. In California 
 the irrigation in dry counties is done on that basis. The cost of the irrigation waters and 
 maintaining them and operating them is assessed pro rata against the property affected by 
 it and it is very satisfactory to the property owners. .\nd that theory applied to the railroads, 
 I do not see any complications in the railroad proposition that are not equal to the California 
 exjicriment. 
 
 "The Chairman: Has your proposition l>cen discussed in Detroit? 
 
 "Mr. Ingrain: No. sir, not to any extent. I do not think. 
 
 "The Chairman: Do you know how the property owners look upon it? 
 
 "Mr. Ingram: I do not. I could not speak for them. I only speak for myself. I do 
 know that a good many I have di.scusscd it with think that is a solution, but that is not a 
 matter that has been discus.scd in a big way, you know, and l)rought out for discussion. 
 
 "The Chairman: I presume that on a referendum vote on that question the street car 
 riders who do not own property or who may own property that is remote from the street car 
 lines would all vote for that sort of a proposition, to get a 3-cent fare. 
 
 "Mr. Ingram: I think the property owners in a large measure would vote for it. 
 
 "The Chairman: You think they would? 
 
 "Mr. Ingram: I do. I don't think that that would l)e received with much dismay by 
 property owners that appreciate the value of good service, and of course primarily of the 
 line itself." 
 
 It is noteworthy in connection with Mr. Ingram's testimony that the nuini- 
 cipai ownership cliaiiter of the Detroit charter adopted oripnallv in 1913 by an 
 80 |)er cent alVirmative vote, and reaftinned as a part of the new charter in 1918 
 by a still more impressive preponderance of favorable votes, requires the street 
 
Public Subsidies 311 
 
 railway commission to proceed to acquire or establish a municipal street railway 
 system, and to fix the fares at a point where they will pay the full cost of opera- 
 tion, including taxes equivalent to what a private company would pay, and also 
 interest on the bonds and amortization charges sufficient to pay them off within 
 30 years. This charter provision was first adopted in the pre-war days, but 
 unless it is changed, Mr. Ingram's idea of charging a nominal fare and making 
 up the deficiency of taxes cannot be caried out there even under municipal 
 ownership.^ 
 
 In Massachusetts the subsidy idea has received formal recognition in the 
 statutes of the state, though not to the full extent advocated by a number of the 
 Massacliusetts witnesses who appeared before the Commission. The Boston El- 
 evated Railway Act, passed in 1918, brought the Boston street railway lines under 
 the plan of public operation on a service-at-cost basis for a minimum period of 
 ten years. The public trustees in charge are required to fix the fares at a point 
 where they will pay the full cost of service, but in case deficiencies occur these 
 are to be made up temporarily out of taxes and the payment of dividends is to go 
 right on. In the first twelve months of trustee operation, from July 1, 1918, to 
 July 1, 1919, the Boston Elevated Railway piled up a deficiency of $4,980,151 
 of which $3,980J51 had to be made up out of taxes. The other $1,000,000 was 
 supplied by the reserve fund. The next eight months, running through Feb- 
 ruar}', 1920, added about $448,000 more to the deficit. Meanwhile the fare went 
 to 7 cents on August 1, 1918; to 8 cents December 1, 1918, and to 10 cents July 10, 
 1919. The system earned a surplus during the months of October, November 
 and December, 1919, and January, 1920, but in February it sufifered a severe 
 relapse into its monthly-deficit habit. The great dissatisfaction of the Boston 
 public with the high fares led to a pronounced agitation for a law restoring the 
 5-cent fare and placing upon the tax rolls permanently the burden of any defi- 
 ciencies that might arise under that rate. Upon the recommendation of Governor 
 Coolidge, in a message dated July 23, 1919, the Massachusetts legislature estab- 
 lished a special Street Railway Commission, with duties described as follows : 
 
 "It shall be the duty of the commission to make an investigation and study of the street 
 railway situation in this commonwealth, with a view to determining what action may be 
 required to promote the public welfare and convenience in relation thereto, what action should 
 be taken for the purpose of securing lower fares, what portion of the expenses of operation, 
 if any, should be borne by the public treasury and what means should be used for the purpose 
 of providing adequate and low-priced transportation, and whether and to what extent public 
 ownership is the proper solution of the street railway problem. The commission shall also 
 consider the advisability of establishing fare districts on street railway lines, with a basic 
 fare of five cents for each fare district established." 
 
 This Street Railway Commission, reporting on November 15, 1919." recom- 
 mends that the Boston Elevated Railway Service-at-Cost Act be amended so as 
 to give the trustees more freedom in adjusting fares, and then goes on to say, 
 at pages 32 and 33 of its report : 
 
 "If, then, the trustees are relieved from these conditions and are given a free hand in 
 fixing fares, it should be provided that if a fare so fixed by them as adequate to meet the 
 cost of the service is deemed by the communities to be higher than the best interests of the 
 area served requires, then, for the purpose of securing lower fares, the cities and towns 
 served may, with the approval of the Public Service Commission, contribute to the income 
 of the road a sum that shall not exceed $2 per thousand upon the assessed valuation of said 
 cities and towns. The desire of said cities and towns thus to contribute shall be expressed 
 
312 Electric Railway Problem 
 
 through a petition addressed to the Public Service Commission, said petition from cities being 
 authorized by a vote of the city council, approved by the mayor, and said petition from towns 
 being approved by a vote of the selectmen in each town. If any city or town in the community 
 served shall fail within sixty days of the filing of the first petition to file a similar petition, 
 then, upon conditions named in the bill suggested, a referendum vote shall be taken of all 
 the people in the communities served. 
 
 "If the trustees continue to oi)erate the road under existing conditions, and the measures 
 of relief we recommend are adopted, it will result in relieving the road of subway rentals 
 (including the Cambridge subway) amounting to a little less than $1.91KUKK), and of bridge 
 and paving burdens to the amount of $250.lHKt. This relief, aided by an increased use of 
 the system, which accompanies a growing population, might enable the trustees to reduce the 
 fare, but it must not be forgotten that under the terms of the act of 1918 the reserve fund 
 of $1,(IO().00(), provided in section 5, must be made good if in any way depleted. The fund 
 has not only all been used to meet the deficits in running the road, but a further sum of 
 $3,980,151 has been supplied by the Common wealth and assessed upon the cities and towns in 
 which the railway operates, so that before fares can be reduced, more than S5.()00,000 must 
 be accumulated out of surplus earnings, to make good the SI.OlXl.fXH) of the reserve fund, with 
 30 per cent additional as provided for in the act, and to reimburse the cities and towns in 
 which the road operates for the $3,980,151 advanced by them. It must be concluded that 
 this would make it extremely unlikely that fares can be materially reduced for some years 
 if labor and materials remain at present prices." 
 
 It will be noted that these reconinietidations include the release of the Boston 
 Elevated Railway Company, for the time being, from its obligation to pay ren- 
 tals for the municipally-owned subways. This release would be equivalent to a 
 subsidy, as the subways were built especially for electric railway operation, and 
 they are not highways in the sense of being free for the use of other vehicles 
 besides the street cars and rapid transit trains. The provision for a direct sub- 
 .sidy, from the communities served, for the purpose of keeping fares down is 
 even more radical. Indeed, a similar provision is already in force in the Bay 
 State Street Railway Service-at-Cost Act of 1918. Mr. Homer Loring. Chairman 
 of the Board of Public Trustees now operating the Eastern Massachusetts Street 
 Railway (the old Bay State system), explained this act to tiie Commission at 
 page KAO of the Proceedings. Among the features of the aet is a provision 
 by which the state guaranteed and thus made salable an issue of 6 per cent serial 
 bonds up to :f4,0(X),000. of which $2,500,000 have been sold at par. The act 
 also authorizes any municipality served by the Bay State lines to come forward 
 with a contribution "for the purpose of preventing increases in fares or of re- 
 ducing fares or of avoiding discontinuance or reduction of service." The sum 
 contributed for the expenses of any one year may not be more than fifty cents on 
 each $1000 of assessed valution in a city or $1 per $10(X) in a town. Within 
 these limitations, the amount contributed may be "any part or all of the increase 
 in the cost of operation due to increased wages or the cost of supplies or coal in 
 excess of the average cost for the year ending July first, nineteen hundred and 
 fourteen, as determined aiul apportioned by the trustees." These contributions 
 were authorized for the period of the war and for two years thereafter. But the 
 Bay State lines were given no actual guaranty by the state like the guaranty 
 given to the Boston F.levated Railway Company. .\t pages 1651 and 1652 of the 
 Proceedings, Mr. Loring says: 
 
 "I am a believer in the F.levated plan, in many instances. I believe in all large cities 
 it is an admirable plan. Where the fare can. with reasonable certainty, pnxluce receipts 
 which will c<|ual the cost of ^erviie. the guaranty should not be a serious matter, and of 
 course. 1 am a Ixliever in the fact ihat the taxpayer should properly conlrihiite to a certain 
 extent. 1 think in the Bay Slate that is going to be done generally by our cities there. 
 
Public Subsidies 313 
 
 "I had the mayor and a committee wait on me the other day from one of our cities, asking 
 whether there was anything to permit them to decide what fare they would pay, and then 
 have the general taxpayer pay the balance; and they proposed to go before the legislature 
 and ask for special legislation to do that. There is a feeling that has grown most rapidly. 
 
 "Commissioner (iadsden : 1 thought you had an act in Massachusetts along that line? 
 
 "Mr. Loring : We have an act. Mr. Commissioner, which is a good start, but all that 
 they can contribute is fifty cents per thousand for cities and a dollar a thousand for towns. 
 The amount is enough to contribute enough to keep us from abandoning the lines, but it is 
 not enough to affect the fares. 
 
 "Commissioner Meeker : What is this SO cents a thousand and a dollar a thousand — 
 what does it mean ? 
 
 "Mr. Loring : On the assessed valuation. Let me show you : It will mean, in Fall River, 
 seventy-five to one hundred thousand dollars. Of course, that would not have a great influence 
 on Fall River's fare. 
 
 "Commissioner Meeker: It means 50 cents per thousand dollars of taxable valuation? 
 
 "Mr. Loring: Of taxable property, yes. 
 
 "Commissioner Gadsden: It really recognizes the principle, does it not? 
 
 "Mr. Loring: They have recognized the principle and it has grown very rapidly in the 
 last tw'O years. Where you seldom met a man among thinking people, the taxpayers them- 
 selves, who felt it ought to be done, only a short time ago, now you find them everywhere. 
 
 "The trustees introduced in the last legislature a bill that we called the 'fifty-fifty' bill. 
 It recognized the principle that the taxpayer ought to contribute, but it also tried to get 
 away from what I think is a great mistake, to tell the car rider: 'You will pay five cents or 
 six cents and then whatever additional expense there is the taxpayer will pay.' 
 
 "The fifty-fifty bill divided fifty-fifty the cost of service in excess of five cents. So that 
 if it were ten cents the car rider would pay equal to 7^ cents and the taxpayer the balance. 
 
 "I would anticipate great trouble with the car riding public if it was guaranteed that its 
 fare would be this amount and no more notwithstanding what the company spent. I think 
 that is a great error; although I believe there is a strong feeling, particularly over in our 
 community, that that should be done. 
 
 "That fifty-fifty bill had the support of some of the largest ta.xpaying corporations in the 
 .'-tate of Massachusetts who believed that it w-as in the interest of their employes that fares 
 'hould be kept down, and they were willing to pay something in addition." 
 
 At page 1653, Mr. Loring gives the sequel : 
 
 "Of course, the fifty-fifty bill was not pas.sed by the legislature. They did not pass it. 
 They turned it down. Since that time, however, people who argued against it there in the 
 committees have come to me and said they felt that it was the only way that it could be 
 done in cities of moderate size where it is perfectly evident you cannot get the cost of service 
 out of the car rider." 
 
 The 1919 Street Railway Commission recommended a change in the Bay 
 State law increasing the maximum amount which could be contributed by a muni- 
 cipality to $2 per $1000 of assessed valuation in any one year. The Street Rail- 
 way Commission also recommended a provision for the creation of transporta- 
 tion areas for the public operation of electric railway service, in case the other 
 measures of relief recommended should prove to be inadequate. The plan of 
 control is described at pages 46 and 47 of the report as follows : 
 
 "When a transportation area is created, with the approval of the Public Service Com- 
 mission, it will be operated under public control, which, in the draft bill we submit, will be 
 exercised by the Public Service Commission through a local manager of the system. The 
 Public Service Commission may fix such rates as it deems proper, subject to review upon 
 hearing to be given upon petition, .^ny deficit arising in the administration of the road, 
 including in the cost of service reasonable dividends upon stock at a rate to be determined 
 by the Public Service Commission, shall be made up through the tax levy upon the com- 
 munities served." 
 
 With respect to the indirect subsidies involved in tax exemptions the Street 
 Railway Commission said : 
 
 "We believe that the principle underlying any recommendations of relief .should be that 
 
 no just tax upon street railway corporations should be removed merelv for the purpose of an 
 
 indirect subsidy. Subsidies should be paid as such and their true character should not be 
 obscured." 
 
314 Electric Railway Problem 
 
 State Senator John J. Walsh, a member of the Street Railway Commission, 
 at page 1472 of the Proceedings, gives the Commission his idea of the benefits 
 which would accrue from the adoption of a proper subsidy policy, as follows : 
 
 "As a matter of practical politics. I would have in all tax bills in the cities and towns 
 affected an item called, for example, 'transportation subsidy.' so that the people would know 
 just what they were paying for this service. This new item, representing a daily actual 
 saving to each citizen, may be used to justify economy in other municipal expenditures, and 
 make municipal administrators keen against waste and inefficiency. It will force economies 
 in operation to keep down the tax rate. 
 
 "There are now no cheery riders on the Elevated, no cheery employes and no cheery 
 managers. Ever>body is sore and vindictive and they rail in vain against the wrongs of the 
 irretrievable past. 
 
 "This has been commented on in your inquiries of Commissioner MacLeod. 
 
 "The S-cent fare liill with the subsidy takes nothing from anybody and gives much to 
 everybody. The soundest fare for metropolitan areas is the limit the public, mostly fairly 
 disposed, will pay without reluctance." 
 
 We must not overlook the fact that all these Massachusetts subsidy schemes 
 are based upon the assumption either of public operation or else of public owner- 
 ship and operation." 
 
 Mr. Lucius S. Storrs, President of the Connecticut Company, told of the 
 voting of a subsidy by the town meeting to prevent the discontinuance of opera- 
 tion on one of his company's lines. Following the discussion in which Commis- 
 sioner Sweet brought out the possibility of serious conflict of interest between 
 communities fundamentally benefited by the uniform flat fare system and com- 
 panies whose financial salvation depended upon the adoption of the zone system. 
 Conmiissioner Gadsden asked Mr. Storrs if the solution of such a conflict of in- 
 terest was not found in subsidies. The testiniony at page 458 of the Proceedings 
 follows : 
 
 "Commissioner Gadsden : Mr. Storrs, on this matter of the difference between a flat 
 rate and the zone system, Mr. Commissioner Sweet wanted to know whether there was any 
 compromise. Don't you think you have worked out the answer to it, or they have worked 
 it out in Massachusetts that where the community prefers a flat rate of 5 cents, it agrees to 
 subsidize the company for the difference? 
 
 "Mr. Storrs: There is no question about that. 
 
 "Commissioner Gadsden: That is the answer, is it not? 
 
 "Mr. Storrs: The complete answer is the subsidizing of the property. There is no 
 question about that. 
 
 "Commissioner G.idsden : If the necessary revenue for a given piece of property had 
 been properly ascertained, a community could very well decide, for sociological reasons, to 
 keep a 5-ccnt fare, and enter into a contract with the company to put up the difference out 
 of general taxation, could it not? 
 
 "Mr. Storrs: There is no question alxjut it. 
 
 "Commissioner Gadsden: .Xnd in that way solve the question of the flat rate, if it be 
 thought desirable to keep the flat rate? 
 
 "Mr. Storrs: Yes. If the theory on which so many cities have been developed has been 
 a proper theory from the standpoint of the communities, the only way to get that is by proper 
 taxation. 
 
 "Commissioner Gad.sden : .^s a matter of fact, Mr. Storrs. is it not vour observation 
 that this solution of the community problem of .America has been worked oiit by the electric 
 railways at their own expense so far? 
 
 "Mr. .Storrs: .-Xhsolutely. There is no question about that. 
 
 "Commissioner G.idsdcn : Therefore, if the .Vmerican people are wedded to this system, 
 would it not be proper that they should at least come in and pav the difference? 
 
 "Mr. Storrs: I'nqucstionably." 
 
 Further on, at page 463 of the Proceedings, Mr. Storrs discusses the pos- 
 sible eflfect of subsidies upon the movement for public ownership. Chairman 
 Flmquist and Mr. Storrs have the following colloquy: 
 
Public Subsidies 315 
 
 "The Chairman : * * * * Now, what will be the ultimate effect on the street car 
 industry if this automobile industry expands as rapidly as it has in the past.' 
 
 "Mr. Storrs : Recognition by the community of the need of transportation and the 
 subsidizing of it to meet that need. They are subsidizing the automobile utility now by 
 paving and things of that sort, which they are offering them free. 
 
 "The Chairman: If you reach that point, will private capital be interested in investing 
 in the street car industry? 
 
 "Mr. Storrs : With a guaranteed return, I imagine it would. 
 
 "The Chairman: Well, if there is not a guaranteed return? 
 
 "Mr. Storrs; No; certainly not. 
 
 "The Chairman: Suppose the communities are obliged to guarantee a return to the 
 street car industry. Do you think that will conduce to the continuance of private ownership 
 and operation of the utility? 
 
 "Mr. Storrs: It is conceivable that there would be some method of recognizing that 
 subsidy that would still give to the management of the industry and the investor a method 
 of compensating them for their initiative and ownership. 
 
 "The Chairman : Do you believe it would create a very pronounced agitation for 
 municipal ownership and operation? 
 
 "Mr. Storrs: Conceivably so. 
 
 "The Chairman : Suppose we reached a point where communities must guarantee, or, 
 rather, subsidize, this industry, do you believe that private owiiership and operation or 
 municipal ownership and operation should be preferred? 
 
 "Mr. Storrs : I think that private ownership and operation would be preferable from 
 all standpoints — from the standpoint of the investor, because it will recognize his energy and 
 initiative in the constantly increasing return, and from the standpoint of the community in the 
 certainly declining rate of fare, as compared with what would result if the municipality itself 
 were tn operate the property. 
 
 "The Chairman: Is there any experience in this country which would help this Commis- 
 sion to reach a conclusion upon that question? 
 
 "Mr. Storrs: That I am not thoroughly advised of." 
 
 While Mr. Storrs seems to favor the subsidy policy, Dr. Thomas Conway, 
 who has done cotisiderable work with him on the Connecticut fare problems, is 
 strongly opposed to it on principle. But both men shy at public ownership as a 
 remedy. Dr. Conway's testimony on this point is found at page 964 of the 
 Proceedings, as follows : 
 
 "The Chairman : Now, assuming that a great many commissions do raise rates, and 
 that the people refuse to travel, and it does not bring in revenue enough to pay the operating 
 expenses and fixed charges, then what have you got to do? 
 
 "Mr. Conway: Then you have pretty nearly reached the end of private ownership and 
 private operation of the business. 
 
 "The Chairman: Do you believe in public subsidy of a private corporation? 
 
 "Mr. Conway : I do not. I think, in principle, it is vicious. 
 
 "The Chairman : Then, if these public utilities cannot maintain themselves, the solution 
 is government ownership? 
 
 "Mr. Conway : I would not go that far, but I do say we ought to give the matter of 
 private ownership a thorough trial, and private operation. Let the initiative of the operator 
 have free play. If he cannot work out a problem, tlien he has a property for sale. I do not 
 think it makes any difference to him whether the buyer is to be the junkman, or whether it 
 is going to be the municipality, if he is satisfied he is through and he cannot work it out; 
 but that is the last resort, in my opinion, public ownership. I think a subsidy, in general 
 principle, is bad, because I am a believer in individual initiative, and in giving a reward 
 for efficiency, and in giving the railroads freedom to work out the best methods. 
 
 "Mr. Warren: But don't you think it may be of such importance to maintain the service 
 that the company cannot work out its problem, and yet it is a case where the road ought 
 not to be discontinued, and that in the interest of the public a subsidy might be advisable 
 pending a determination of whether the public would in some way take over the property? 
 
 "Mr. Conway: I think that is true; yes. In other words, during these critical days, in 
 which, perhaps, discouragement may come, because a solution has not yet been found, it 
 would pay the public to support the companies, at least for a sufficient period of time, that 
 the entire problem be understood by all parties, and the most advantageous solution found, 
 no matter what may be the solution determined upon." 
 
316 Electric Railway Problem 
 
 In this testimony Dr. Conway seems to be looking at the problem exclusively 
 from the point of view of the private investor. If the stockholders cannot make 
 a go of the street railway business, then his interest ceases, and he sees no choice 
 between the junkman and the municipality as a successor in ownership. Mean- 
 while, we'll swallow our scruples and take a subsidy ! 
 
 Mr. James D. Mortimer brought to the Commission some important news 
 from Wisconsin. Massachusetts, wiih all of its street railway investigating com- 
 missions, its extraordinary experiments and its radical predictions, has held the 
 center of the stage so much during the last few years that the street railway policies 
 of other states may have received less general consideration than ihey deserve. 
 At any rate, what Mr. Mortimer describes as the legislative outcome of the transit 
 situation in Kenosha, Wisconsin, appears to be a matter of unusual significance. 
 At pages 782 and 7i<3 of the Proceedings, he says : 
 
 "The Wisconsin Gas and Electric Company had indicated that it was unable to provide 
 any additional facilities under the revenues and under the type of regulation which it had 
 been experiencing. 
 
 "Local discussion arose as to the desirability of purchasing the electric railway. We 
 never indicated any opposition to that, because we thought that would be a very good dis- 
 position of it. They called me to Kenosha to give them a price on it. I told them, in 
 substance, that we had no objection to their buying it, and thought it would be a good thing, 
 and then went on to try to sell it to them, but my efforts at salesmanship were very poor, 
 because the more I talked in favor of the advantages of their buying it. the less they seemed 
 to want it. The result was that they asked if there was not any kind of a proposition that 
 we could make that would permit us to provide additional railway facilities in Kenosha 
 by the investment of private capital. 
 
 "Wc then outlined the necessity of a municipal guaranty, and that led to the enactment 
 in the closing days of the legislature of a municipal guaranty law. whereby municipalities 
 can contract with utilities for extensions, for the loaning of municipal capital to public utility 
 corporations, or for the guaranty of return, and i)rofit sharing. 
 
 "I had indicated that, as a starter, we would require a guaranty of six per cent annual 
 return upon the then investment of approximately $S(X),0OO. plus the additional investment 
 of $.S()().(KK). roughly : that any returns earned in excess of six per cent should be divided 
 forty per cent to the municipality, ten per cent to the employes, and fifty per cent to the 
 company; that all restrictions witli respect to the rates of fare should be eliminated: that the 
 property should tie operated to produce the maximum return by whatever scheme of fares 
 was deemed to tie advisable, and that the company should have the right to initiate the fares. 
 The fundamental ideas were accepted. The original bill as drafted contemi)Iated that this 
 law should be applicable to all the cities of the state, which would have included Milwaukee; 
 but the Tiovernor limited it to cities of the third class, which included Kenosha and one other 
 of our municipalities, Kacine." 
 
 Referring to the guaranty contained in the Boston Elevated act and to the 
 provisions of this Wisconsin law, Commissioner Sweet asked Mr. L. R. Nash, 
 Stone &• Webster's service-at-cost expert, certain significant questions about the 
 effect of public guaranties upon credit. At page 690 of the Proceedings, the 
 following discussion occurs: 
 
 "Commissioner Sweet: Where that can be done. Mr. Nash. I take it that the investment 
 would Ik' more certain than it would under the service-at-cost plan? 
 
 "Mr. Nash: Undoubtedly. 
 
 "Commissioner Sweet: if it is backed up by an organization, state or otherwise, that 
 is solvent, so that investments would he more re.idily made and perhaps would be made at 
 a lower rate somewhat by reason of the extra certainty. 
 
 "Mr. Nash: .V materially lower rate. I think. 
 
 "Commissioner Sweet: If so guaranteed. So that if states had the authority, or com- 
 munities, til make such a guaranty that would secure the investment more certainly than any 
 ether way that has tieen proposed, would it not ? 
 
 "Mr. Nash: 1 think that is undoubtedly the case; the securitv would be greater, and 
 the return demanded would lie lower." 
 
Public Subsidies 317 
 
 Evidently, the kind of a guaranty referred to in this discussion is the promise 
 of a subsidy, if one is needed. 
 
 Before concluding this subject of subsidies, something must be said with 
 respect to the contributions of capital made by property owners who put up the 
 money for the construction of street railway extensions into new territory. 
 Mr. John J. Stanley, president of the Cleveland Railway Company, refers to this 
 practice in Cleveland as one of the causes for his company's comparative im- 
 munity from financial difficulties during the years when most other companies 
 have been in trouble. At page 606 of the Proceedings, he says : 
 
 "Another thing; for the past five or six years, a great many of our extensions have been 
 paid by the real estate men. 
 
 "Commissioner Sweet: Abutting owners? 
 
 "Mr. Stanley : Yes. They have assessed the real estate men. the abutting owners, one 
 dollar to two dollars a ruiming foot. That money goes to the railway company so as to 
 make that extension, or help to make it. 
 
 "Commissioner Sweet : You mean where new extensions have been ordered by the 
 council ? 
 
 "Mr. Stanley : Exactly. Out in the country, where they want an extension to develop 
 a certain part of the city, they come to us and say, 'We would like to have a road out there.' 
 We will say. '.-Ml right: how much can you afford to pay toward it?' And in five e.xtensions 
 that I can name we have been paid for it. 
 
 ******** 
 
 "Commissioner Gadsden: How much did the company put up? 
 
 "Mr. Stanley : Well, we have taken these extensions and put, probably, a single track 
 through it. Mr. Gadsden. * * * where we were developing the territory, so as to have 
 the traffic there when the time comes to lay the second track." 
 
 Mr. John A. Beeler indicated that in his experience it was not always ad- 
 vantageous for the company to accept lines constructed by the property owners. 
 At page 1677 of the Proceedings, we find the following: 
 
 "The Chairman : There has been a good deal said here about credit, and you also have 
 touched on that. Do you believe that it would be possible to inaugurate a system by which 
 the benefited property and the public generally should pay for new construction of street 
 car properties, or for e.xtensions? 
 
 "Mr. Beeler : There is no doubt but what property values have been immensely in- 
 creased by the construction and operation of street railways, and the property owner has been 
 almost the sole beneficiary, except that the community is benefited by increased taxes on 
 account of the rise in value of the property served. 
 
 "That is a very large question, as to who should pay for extensions and improvements. 
 A great many lines have been built with subsidies, where in the past, they were subsidized 
 by property owners, in order to build out in this district, and generally the property owners 
 put the price of the property up so high that the development was so slow that the railway 
 had been much better off had it never built the line. I know of a great many instances of 
 that kind, myself.'' 
 
 Dr. Milo R. Maltbie, formerly one of the public service commissioners in the 
 first New York district, discussed at some length this matter of the use of special 
 assessments for the building of street railway extensions. At page 2099 of the 
 Proceedings, he says : 
 
 "Whether there is anything in the special as.sessment idea which will immediately help 
 out in this situation I am not entirely sure, but if I may suggest it, it seems to me it would 
 be wise for you to call attention to this method of building extensions. 
 
 "Now. I know that is not the thing that street railway men are talking about at the 
 present time very much. It is more a desire to make a return on what they have got rather 
 than to make a lot more of what they do not like. But that is particularly apropos if there 
 is going to be municipal ow-nership of the street railway lines with private operation or if 
 there is going to be municipal ownership and municipal operation. 
 
 "Of course, the fundamental idea is that the special assessment idea, which has been 
 applied to sewers and in some cases to water-works and laying out of streets and so forth. 
 
318 Electric Railway Problem 
 
 should be applied to the building of new lines, and the justification of it is in my opinion 
 particularly strong in the case of a transportation line because there is not anything that will 
 develop the value of property if the lines are properly selected — there is not anything that 
 will develop the value of the property so much as the transportation system." 
 
 Dr. Maltbie then called attention to the fact that the construction of the 
 original subway in New York had apparently caused a much larger increase in 
 the value of the land adjacent to its two northern branches than the entire cost 
 of its construction. At page 2100 of the Proceedings he calls attention to the 
 fact that the underlying principle of special assessments had been recognized 
 in the building of the railroads in the west. On this point, he says: 
 
 "Of course, you all recall that when the railroads were built in the west many of them 
 were built not on the same plan, hut under a plan which recognized the same ideas. Those 
 towns voluntarily issued bonds to provide money to build the lines. Why? Because in those 
 rural communities they foresaw the value of their farms would go up, so they could issue 
 these bonds and pay for them and still have a profit left. There were some unfortunate 
 instances where they tried to evade payment of those bonds afterwards, but the idea was 
 recognized nevertheless." 
 
 This special assessment plan is particularly adapted to conditions under 
 public ownership. At pages 2101 and 2102 of the Proceedings, the question of 
 its adaptability to conditions under private ownership is discussed as follows: 
 
 "Commissioner Wehle : Do you not think such a plan as that could be put into operation 
 also when the public utility is under proper regulation in a case where you have private 
 ownership and private operation? 
 
 "Mr. Maltbie: Well, there is a sentimental factor there which is pretty important, even 
 though it may lx> sentiment. Property owners or people generally do not like to contribute 
 to something the ownership of which is going to pass to a private corporation. Now, if you 
 could keep the ownership of that line in the municipality or something of that sort, you 
 might meet that objection. But whether it works out well or not there is that feeling that 
 they do not like to contribute to something which is going to be turned over to a private 
 corporation. 
 
 "Commissioner Wehle: Well, if you made it clear that the title to the improvement 
 remained in the city and that the full right to use and operate over the improvement was in 
 the street railway company luider regulation, do you not think that by a camjiaign of education 
 in which you would specially emphasize the fact that this arrangement enables the car rider 
 to ride much more cheaply than he otherwise would, that such a plan as that could be put 
 into use even where you have private ownership and private operation? 
 
 "Mr. Maltbie: I think it is possible to work out a plan which would cover that point 
 as well. f)f course, you know many gas and electric companies have done very much tin- 
 same thing with land companies where they own large tracts of land; they have made tin 
 land companies pay for the pipes and the wires, although the private company has kept the 
 ownership and control of them. But. of course, that is dealing with a few men of large 
 business interests and not with a multitude of taxpayers and voters." 
 
 New York City has led the way in the direction of preserving the five-cent 
 fare on its rapid transit lines through an indirect subsidy to the two operating 
 companies. In the Dual .Subway Contracts executed in March. 1913. after vears 
 of laborious and painful negotiations, tlie city established a partnership scheme 
 under which both tiic city and the companies contributed large amounts of capital 
 to rapid transit development. These contracts were based upon the theory that 
 the new rapid transit lines should be owned by the city but operated bv private 
 companies. As the city did not have sufficient credit available under the consti- 
 tutional debt limit to provide ail of the required capital, it felt compelled to give 
 the companies a preferred position in order to induce them to "piece out" the 
 capital supplied by the city. In advance of their construction, the new rapid 
 transit lines were leased to the companies for operation for a period of 49 vears. 
 Under these lea.ses the comjianies were permitted to pay out of earnings all op- 
 
Public Subsidies 319 
 
 crating expenses, rentals and taxes, and then to take for themselves preferentials 
 based upon the amount of their previous profits, as well as a fixed return to cover 
 interest and amortization charges on the new capital supplied by them to the joint 
 enterprise, before the city would receive any return whatever upon the capital 
 which it supplied for the construction of the new lines. The practical efiect of 
 this arrangement was to put approximately $250,000,000 of public capital be- 
 tween the operating companies and loss, the principal consideration for this in- 
 direct guaranty being the agreement of the companies to supplement the city's 
 capital with some of their own and to operate the city's rapid transit lines as 
 extended at a uniform five-cent fare in conjunction with existing rapid transit 
 lines, part of w-hich were privately owned. At the time the Dual Contracts were 
 executed it was thought that, barring the possibility of a few lean years imme- 
 diately after the immense new system of rapid transit came into operation, the 
 companies would be absolutely sure to earn their preferentials. In order to give 
 them what both sides believed to be complete protection, these preferentials were 
 made cumulative, with annual interest at 6 per cent on temporary deficiencies, 
 compounded semi-annually. 
 
 After the contracts were executed and the new lines partly built, the war 
 came on, with its enormous increase in the cost of construction and of operation. 
 The estimated amount of capital required for the construction and equipment 
 of the new lines has been largely overrun, and the increase in wages and in the 
 price of coal and other materials and supplies has made a great difference in the 
 operating ratio, with the result that even before the rapid transit lines covered 
 by the contracts have been fully completed and put into operation, it is apparent 
 that the companies cannot, at least for a long time to come, earn their preferen- 
 tials, and that the city may not get anything whatever before the expiration of 
 the contracts in 1968 or later, when the new rapid transit lines with their equip- 
 ment viill come into the possession of the city without further payment except 
 for unamortized additions and extensions. 
 
 New York City, in spite of its enormous wealth, nearly broke its back finan- 
 cially by its pledges to rapid transit construction. This policy was undertaken 
 after long deliberation as a part of the city plan to relieve congestion and, con- 
 versely, to promote suburban development and a better distribution of popula- 
 tion. Now, at the very beginning of the period, under the changed conditions, 
 the rapid transit companies are demanding an increase in the unit fare at least 
 to eight cents. It is recognized that so long as the uniform-fare system is in 
 effect, it would probably be futile to increase fares on the surface lines unless 
 there was a corresponding increase on the rapid transit lines. The city has no 
 financial interest in the surface lines, and the companies have no preferential 
 privileges there based upon the use of city capital. As a part of the argument in 
 favor of an eight-cent fare on the rapid transit lines, the companies are urging 
 that this rate would make the city's investment self-sustaining and relieve the 
 taxpayers from the burden which they now bear in the payment of interest and 
 amortization charges on rapid transit bonds. Indeed, the bill prepared by the 
 New York Electric Railways Association and introduced in the Legislature April 
 1, 1920, authorized the execution of service-at-cost contracts between the muni- 
 
320 Electric Railway Problem 
 
 cipalities of the state and the electric railway companies, based upon the require- 
 ment that the fares should be sufficient to make the total investment fully self- 
 sustaining.* 
 
 At the time the Dual Subway Contracts were executed in 1913, they were 
 criticised by some of those who opposed them on the jjround that the scheme of 
 preferential payments to the companies would destroy the incentive to efficiency 
 and economy on the part of the private management, and. in short, that the 
 scheme combined the most important disadvantages of private operation and the 
 most important disadvantages of public operation, without preserving the advan- 
 tages of either. In the sequel, as a result of the entirely unexpected change in 
 economic conditions growing out of the war. the rapid transit companies found 
 themselves in a straitened condition even under these contracts, which at the 
 time of their execution were regarded as very favorable to them. On the other 
 hand, the city has thus far been able to retain the advantages of the five-cent fare 
 but faces the certainty that if the contracts are unclianged the taxpayers will 
 have to continue to pay the interest and the sinking fund charges on the city's 
 rapid transit investment other than tlie investment in the original subway, as a 
 means of preserving the benefits of the uniform low fare. 
 
 It is noteworthy that the New York Kajjid Transit Contracts do not con- 
 tain an absolute guaranty to the companies but merely a fixed contribution of 
 capital upon which the city contents itself with a contingent return. The change 
 in economic conditions has restored the companies' motive for economy in opera- 
 tion even under these contracts because even with the city's free contribution of 
 capital the companies are hard put to earn the profits upon which their financial 
 structures are based. It will be seen, however, that as soon as the companies 
 felt the revival of the motives that are supposed to characterize private manage- 
 ment they became dissatisfied because the subsidies they enjoyed were no longer 
 effectual to relieve them of the fear of want. This situation tends to prove that 
 under any plan of ])rivate operation with complete or partial private ownership 
 the subsidy policy will not satisfy the companies unless it includes an effective 
 guaranty of profits, and if it includes that, then it seems clear that the public can 
 no longer depend u])i>n private management to supply of its own volition the 
 initiative for economy and efiiciency which is claimed to be the characteristic 
 advantage of private as compared with public operation ; and the community 
 under such an arrangtinent will have to depend upon the power of public regu- 
 lation operating directly and from the outside to make a dead motive act like a 
 live one. 
 
 It is clear that subsidies in one form or another will be necessarv in many 
 ca.ses if the maximum usefulness of the street railways is to be preserved. And 
 yet tiicre are very serious objections to the policy of granting public subsidies to 
 private corporations engaged in public service, especially where they take the 
 form of making up tlelicits. There is no particular virtue in private manage- 
 ment as such when the risks of loss are gone. Of course, in a pinch a private 
 company might be granted certain exem])tions or be given certain fi*;e(l contribu- 
 tions without its motive for economy and efficiency being entirely destroyed. 
 In other words, the policy of giving limited assistance may be permissible, if care 
 
Public Subsidies 321 
 
 is taken not to give enough assistance to put the companies on "Easy Street," 
 or to guarantee them the return upon their investment. But this is merely saying 
 that the public should be extremely watchful, exceedingly temporary and judi- 
 ciously niggardly in the help it gives by way of subsidy under private ownership. 
 But a niggardly and uncertain reward is not calculated to reduce the cost of capi- 
 tal, to stimulate efficiency or to insure adequate service. The subsidy plan is 
 dangerous. The trouble with it is that it means clinging to the fetish of the 
 superiority of private initiative after the motive for private efficiency is paralyzed 
 or killed. At the Commission's very first public hearing. Ex-President Taft 
 indicated in a direct and simple way the logical results of the subsidy policy. I 
 quote again what he says at page 5 of the Proceedings : 
 
 "The public spends a great deal of money in keeping roads in condition, and those who 
 do not have vehicles do not use the roads. It is contended that these electric railways only 
 fulfil a function of the same kind, and that therefore the public ought to meet the deficit 
 by taxation; and if it does, it ivill naturally take over the management." (Italics are mine.) 
 
 In my judgment, public subsidies under private management are not the big' 
 remedy. Public subsidies may be necessary to the preservation of electric rail- 
 way service in many cases, but if so, public management is also necessary, as 
 Massachusetts has determined. I do not mean that certain minor helps which 
 are really in the nature of subsidies may not properly be extended to the electric 
 railways in an emergency even under private ownership and operation, but as 
 for the policy of saying to the companies : "You go ahead and run the roads, and 
 if a deficit occurs we'll pay it," there is no statesmanship in it. 
 
Chapter XXXV 
 ABANDONMENT OF UNPROFITABLE LINES 
 
 It is probably true that the one subject with respect to which the greatest 
 number of American cities have had prolonged and bitter controversies with the 
 electric railway companies is the construction of adequate extensions to meet 
 what the public considered the legitimate needs of the growing community. Un- 
 doubtedly some of these controversies have been stimulated on the side of the 
 public by speculative real estate interests. It is obvious that the strongest com- 
 pany in the most favorable times might be bankrupted by an unlimited program 
 of extensions dictated by groups of real estate owners. The extent to which 
 overbuilding in certain parts of the country has been responsible for the low earn- 
 ing power and weakened credit of the electric railways has already been dis- 
 cussed in Chapter XIII of this report. It is also a well-known fact that in 
 American cities generally the amount of street railway trackage is nnich greater 
 in proportion to the population than it is in British cities. On the face of the 
 matter, therefore, taking the country as a whole, it is doubtful w^hether the com- 
 panies in this country could properly be charged with having been unduly dilatory 
 in the building of extensions. Nevertheless the long series of fights in practically 
 all the chief American cities over the construction of extensions proves beyond 
 a doubt that the control of extensions and of the policy governing their con- 
 struction has been and still is one of the chief bones of contention between the 
 companies struggling to preserve and develop the earning power of their property 
 and the municipalities struggling to satisfy the demands of their expanding popu- 
 lation for adequate local transportation facilities according to American stand- 
 ards. These troubles have been in i)art due to the limited-term franchise policy 
 that has prevailed in many parts of the coiuitry. When a companv's franchise 
 conies within a few years of expiration and it has no assurance as to what will 
 happen to its property when the day of expiration arrives, conservatism in the 
 construction of new lines is inevitable. Conditions like this have caused an in- 
 finite amount of trouble. 
 
 It may be that the exaggerated notions of the profitableness of the street 
 railway business, shared alike, in former times, by the promoters, the investors 
 and the ])iiblic, have developed in the American urban mind an extraxagant stand- 
 ard of public convenience. The tardy development of the city planning move- 
 ment in this country and the rapid expansion of cities under the spur of an 
 almost riotous individualism has, no doubt, resulted in many cases in an un- 
 economical development of cities. The failure to control urb.m development 
 from the point of view of the general imblic welfare has resulted sometimes in 
 the most extraordinary congestion of population and business, and again in a 
 
 322 
 
Abandonment of Lines 323 
 
 patchy development that is very expensive, very ugly and sometimes not even 
 conducive to public health. The electric railway is the city's handmaiden ; its 
 job is to wait on the public and to minister to its needs and caprices so far as they 
 relate to facilities for "getting around." While the electric railway company 
 no longer enjoys the advantages of a monopoly of transportation service to the 
 same extent as formerly, it still has a monopoly of that particular means of ren- 
 dering service. Monopoly in a public service undoubtedly carries with it public 
 obligations. In the case of urban transportation service, the primary obligation 
 of monopoly is to serve the community's needs not by giving a service restricted 
 to lines that are individually profitable, but by serving the entire community and 
 "taking the lean with the fat." 
 
 The American Electric Railway Association presented statistics to show 
 that up to May 31, 1919, no less than 534.12 miles of single track had been dis- 
 mantled and junked since 1915 by an aggregate of sixty-one companies, and 
 service had been abandoned on no less than 256.58 miles of single track. Thus 
 it was shown that during the war period 790.7 miles of track, or approximately • 
 1.75 per cent of the total electric railway mileage of the country, had gone out of 
 service. Undoubtedly, these abandoned tracks represented, on the whole, rela- 
 tively cheap construction and scant equipment, and no doubt also they represented 
 much less service than the average for a like amount of mileage. It can hardly 
 be said that these abandonments were sufficient in themselves to prove the finan- 
 cial distress of the industry as a whole or that the suspension of the service on 
 these few lines could effect much in the way of financial relief to the industry. 
 Still, the right to abandon the operation of unprofitable lines has been suggested 
 as one of the means of enabling the electric railways to survive. Even those 
 who propose this policy recognize that in most cases its adoption would conflict 
 with the public interest, and that it should be applied with caution. That the 
 cutting off of unprofitable suburban service might prove the financial salvation 
 of the companies in many cases was brought out in the testimony of Mr. Francis 
 H. Sisson. At the same time, because of the predominant public interest in- 
 volved, Mr. Sisson did not give this policy his unqualified approval. At pages 
 346 and 347 of the Proceedings, we find the following : 
 
 "Mr. Warren : You were asked something about abandoned lines, and I think you 
 intimated that if a h'ne was unsuccessful the people who invested the money ought to take 
 the consequence, which I think as a business proposition is no doubt true. Is it not. however, 
 a fact that there are a great many lines which are not earning even their operating expenses 
 but the abandonment of which would work a very real hardship upon a considerable portion 
 of the public? 
 
 "Mr. Sisson: Yes. In answering that question I made that reservation, that unless the 
 public interest was involved clearly. * * * * y^pj j think that is a very important reserva- 
 tion which must be made there. 
 
 "Mr. Warren : And in such cases probably some method of public ownership or public 
 support such as has been worked out in Massachusetts to a certain extent ought to be 
 resorted to? 
 
 "Mr. Sisson : Yes. it is entirely possible that the operation of that line creates tax values 
 which are a' distinct source of profit to the municipality which it could well afford to provide 
 for through the maintenance of the line. 
 
 "Commissioner Gad.sden : In that connection, is it not true that most of these lines that 
 are unproductive lines that we refer to are tied in with existing systems? 
 
 "Mr. Sisson : Yes. 
 
 "Commissioner Gadsden: .^nd if the system could lop off the unproductive suburban 
 lines in many cases the road could probably take care of itself? 
 
324 Electric Railway Problem 
 
 "Mr. Sisson : Yes, that is true in a good many instances. 
 
 "Commissioner Gadsden : And under the law they are not permitted to cut off those 
 unproductive and unremunerative lines? 
 
 "Mr. Sisson: Yes, that is true in New York City today. 
 
 "Commissioner Gadsden: If they could get rid of their extensions they probably could 
 get along in many cases. 
 
 "Mr. Sisson : Yes, but it would be opposed to the public interest. 
 
 "Commissioner Sweet: Those extensions are maintained for the benefit of the public 
 residing in those outlying districts? 
 
 "Mr. Sisson: Yes. 
 
 "Mr. Warren: That situation exists in a great many places and it is a very important 
 public question, and not one that affects the street railways alone. In some jurisdictions, in 
 Massachusetts, for instance, the companies can abandon lines, but that does not change the 
 public question of whetlier those lines ought to be abandoned and the public dependent on 
 them left hi^h and dry, and the industrial centers dependent on them be deprived of the 
 support comini; from those lines. 
 
 "Commissioner Sweet: Is it not true, Mr. Sisson. * * * * that street railway com- 
 panies have reached out into districts that are not directly profitable and are performing now 
 and have been for years a sort of public service for which the companies have received no 
 coinpensation or not adequate compensation? 
 
 "Mr. Sisson; That is entirely true; yes, sir. 
 
 "Commissioner Sweet : And is not that an additional reason for the public and the 
 comi)anies getting together now ui)on some general basis which will be fair and just? 
 
 "Mr. Sisson: It certainly is. The public interest is greater than that of the corporation 
 in many of those instances." 
 
 At page 16 of the Proceedings, Ex-President Taft suggests reorganization 
 and the abandonment of non-paying lines as a remedy for the financial embar- 
 rassments of tile companies. lie says: 
 
 "To say the truth, I think one step is a reorganization of alt the companies, and the power 
 to give up unprofitable lines that ought never to have been built. That is going on in 
 Massachusetts. There was a furore at one time in building all sorts of lines that never 
 ought to have been built, and if the street railway systems of this country are to t)e saved, 
 1 tiiink they have got to cut to the quick witli reference to many lines that were unwise in 
 their projecting, and that it is now unwise to continue, so that they may get down to a solid 
 foundation, and then, from that on, make contracts with the public which shall secure a fair 
 return on one side and proper service on the other; but of course that will inconvenience 
 quarters where there is not the business to justify the railway, and will affect the price of 
 property there ; but I do not see how that result can be avoided." 
 
 At page 436 of the Proceedings, Mr. Lwcius S. Storrs presented a tabulation 
 to illustrate "the difTerencc in the facilities afforded to .Xmerican and European 
 cities by electric railways." In this tabulation certain unnamed cities of Cireat 
 Britain, with a total population of 965.000, were compared with the same num- 
 ber of cities in New F.ngland. having a total population of 1,0S3,000. The tabu- 
 lation showed for the luiglish cities 156 miles of track, and for the New England 
 cities 695 miles of track. This gave a population per mile of track of 6,187 and 
 1.560. respectively. This tabulation showed that in spite of the low fares preva- 
 lent in the Ivigli.sh cities their revenue per mile of track was $16,707 as com- 
 pared with $13,314 per mile of track for the New England cities with which they 
 were compared. Commenting upon this tabulation at page 436 of the Proceed- 
 ings, Mr. Storrs says: 
 
 "The most significant part of that comparison is the fact of the population per mile of 
 track. It is a picture of the whole British tramway conditions, slender accommodations, 
 deniic congestion, slow service, low fares and high earnings per mile." 
 
 At page 437 Mr. Storrs explained that his detailed experience was in con- 
 nection with New England iiroperties and that he could not testify as to whether 
 or not the intcrurban systems in Illinois, Indiana and Ohio have been over- 
 
Abandonment of Lines 325 
 
 developed. In his comparison with the British cities he had taken New England 
 where the development is "between the small village and the small town into a 
 larger city," and where population is more dense and the cities and towns closer 
 together than in the Middle West. Commissioner Wehle brought out the fact that 
 the English have no electric railway development similar to our interurban sys- 
 tems. From this point on the testimony at page 437 of the Proceedings is as 
 follows : 
 
 "Mr. Storrs : No, that is true. And I was trying to bring out that very point, that 
 had we not developed beyond the area of dense population we would not have reached the 
 difficulties we have, but it was in the effort to serve the large community interest rather than 
 the local civic interest that we have come upon these rocks, and that by a system of abandon- 
 ment of lines and discontinuance of service we can find that measure of supplying the pedes- 
 trians which we can meet. 
 
 "Commissioner Wehle : The point is that the electric railway systems in New England 
 by reason of their initiative have contributed a real social service to the cities bv preventing 
 congestion. 
 
 "Mr. Storrs. Yes. Take a great many small country communities, they are made up 
 entirely of operatives in the mills in the larger cities and they are given that opportunity 
 for a free life and the owning of little homes and going out into the country which would 
 not have been possible if there had been no transportation facility of this kind. 
 
 "Commissioner Wehle: Has there been any indication that popular sentiment would 
 permit of the discontinuance of the service? 
 
 "Mr. Storrs : I am afraid it is a question of necessity rather than popular sentiment 
 when we get down to the point of income and outgo not meeting." 
 
 Mr. W. D. George, one of the receivers of the Pittsburgh Railways Com- 
 pany, expressed the opinion that it would be much better to increase fares on the 
 system as a whole than to abandon the unprofitable lines, and that, in his opinion, 
 the people would pay the increased fares when they were faced with the alterna- 
 tive of an interruption of service that is necessary to the communal life. At 
 pages 303 and 304 of the Proceedings, he testifies as follows: 
 
 Commissioner Meeker ; * * * * Would it be possible, or, is it advisable, to discontinue 
 some of these outlying lines? You say that you serve eighty distinct boroughs, townships, 
 and so forth. Would it be possible to economize in the service by cutting out some of these 
 places, for instance? 
 
 "Mr. George: That, of course, is what we will have to do. We will have to reduce the 
 service to the point where it will support itself, and that will no doubt result in some com- 
 munities being without any service at all, but that would be an e.xtreme case, it would seem 
 to me, and it would be very unfortunate if we would have to resort to that. 
 
 "Commissioner Meeker: Well, it is a matter that we have to face. Some communities 
 cannot support any street car service, and if service has been extended to that kind of com- 
 munities, it would seem essential to cut it out, would it not? 
 
 "Mr. George : Oh, there is no doubt about that ; but there is a certain amount of 
 expansion and growth which is going on in a large community all the time, and what is taken 
 in one year as a unit as unprofitable business may be developed within a short time to be 
 the profitable business, and the question is whether it is not the duty of the company so to 
 conduct itself that it will cooperate with the growth and development of the community. 
 That is only possible if they can secure cooperation of the community in support of the 
 public utility, and I cannot conceive of the people of any community being so blind that 
 they are going to destroy a needed public service, and in the end they will have to respond 
 in some way to the necessities of the public service. These street car companies are at- 
 tempting to give that service. 
 
 "Commissioner Meeker: Do you think if you had an increased fare it would not be 
 necessary to cut out the service in any community? 
 
 "Mr. George : I would far rather increase the fare than I would cut off that service, 
 which is the lifeblood of the community. Why should we as administrators of a public 
 service corporation move in the direction of destruction of property, in the direction of 
 destpjction of property values, and handicap community life? Can we not bring the lesson 
 home to them rather by increasing the fare and telling the people what the situation is. 
 and trying to get them to respond to it ? That is my thought, and it is the thought that the 
 receivers of the railway company are acting on. If the rate is 7j4 and 10 cents, and we can 
 
326 Electric Railwav Problem 
 
 justify ourselves by the necessities of the situation, we need to offer no apology for making 
 the attempt, and I believe the people will respond. I think this idea that you are going to 
 destroy the revenues of the company by increasing the rate of fare is to a degree fallacious, 
 and I think we ought to move in that direction, that we ought to move towards an increase 
 in the rates of fare and towards the education of the public that they have to pay a fair 
 return for the service which they are getting from the transportation companies. 
 
 "Commissioner Gadsden : And you believe that in the long run the people will pay 
 the increased fare, do you not? 
 
 "Mr. George : I do. 
 
 "Commissioner Gadsden: And it is simply a question of waiting? Can you keep going 
 a long time? 
 
 "Mr. George : You have to ask them to do it before they will do it. They won't say 
 voluntarily, 'We would like to pay 10 cents rather than 5 cents.' but if they can be shown 
 that the necessity of the situation is so great that there is no alternative, that they are face 
 to face with a crisis, cither the interruption of service which is necessary to the communal 
 life, or pay the fare. I think they will pay the fare. 
 
 "Commissioner W'ohlc : Mr. George, you have been discussing this now from a public 
 policy point of view? 
 
 "Mr. George : Yes. sir." 
 
 Mr. James D. Mortimer, in response to a question by Commission Sweet as 
 to whether he saw any means of awarding immediate relief to the companies 
 other than an increase in fares, makes the following reply at page 816 of the 
 Proceedings : 
 
 "Well, as emergency measures, it would be highly advantageous to the railway industn,', 
 if, first, the unrcmunerativc capital and operating expense expenditures could be eliminated. 
 I refer primarily to paving and the other contributions which street railway utilities indi- 
 rectly make to ta.xes, sprinkling, etc. 
 
 "The second thing is to abandon the operation of the service over lines which cannot 
 be made remunerative, or which cannot otherwise he supported. 
 
 "The third would be to impose a distance tariff plan on the outlying sections of long 
 lines or lines of modest length, so as to increase the revenues and minimize the losses; and the 
 fourth thing would be an immediate and large increase in the flat rate of fare. • « » »" 
 
 In Mr. John A. Beeler's program of possible operating economies, at page 
 1666 of the Proceedings, the following paragraph appears: 
 
 "Some non-essential, non-paying lines, especially those closely paralleled by other service, 
 may be abandoned profitably. Frequently, however, such lines can he made to carry their 
 operating expenses when run as shuttle lines or with one-man cars, .\fter a line has been 
 built and ef|uipped it should not t)o ahandnned except when it is impossible to earn operating 
 expenses alone, as the interest on the investment will be lost in abandonment anyway." 
 
 \'icwed purely from the standpoint of the companies, the wholesale abandon- 
 ment of unprofitable lines might hold out some promise of immediate financial 
 relief. Rut, as Mr. George and Mr. Heeler point out, the policy of abandonment 
 needs to be applied sparingly. It is said that during the war the scrap value of 
 rails was in some cases as great as their full original cost. When such conditions 
 prevail a company can recover a considerable part of its investment in unprofit- 
 able extensions if the tracks are torn up. Under ordinary conditions, however, 
 when a street railway is junked the investment is almost wholly lost. It is clear 
 from the evidence before the Commission that the abandomiient of electric rail- 
 way lines on a large tnough scale to make any material dilYcrcnce with the finan- 
 cial condition of the industry as a whole would entail great hardships upon the 
 public, and, in fact, would involve the abandonment of the theory that the electric 
 railways are to be relied upon as the principal means of local transportation in 
 urban communities. \\ hen the abandonment of track means also the abandon- 
 ment of an idea, it is necessary to consider the importance of the idea before 
 suspending the ser\'ice. 
 
 i 
 
Chapter XXXVI 
 FINANCIAL REORGANIZATION 
 
 As a part of its case to prove the deplorable financial condition of a great 
 industry, the American Electric Railway Association presented testimony show- 
 ing that nearly 6,CK)0 miles of electric railway track out of a total of 44,000 in 
 the country were in the hands of receivers on May 31. 1919. Indeed, the letter 
 addressed to the President by the Secretary of Commerce and the Secretary of 
 Labor, under date of May 15, 1919, which resulted in the appointment of this 
 Commission, called particular attention to the fact that already fifty or more 
 urban electric railway systems were in the hands of receivers, and that the com- 
 munities affected were among the most important. The Secretaries mentioned 
 "New York, Providence, Buffalo, New Orleans, Denver, St. Louis, Birmingham, 
 Montgomery-, Pittsburgh, Memphis, Ft. Wayne, Des Moines, St. Paul, Spokane, 
 Chattanooga,"' although it does not appear that the principal railway systems in 
 all of these places were in receivers' hands. In their letter the Secretaries went 
 on to say : 
 
 "Other large systems are on the verge of insolvency, for the industry as a whole is 
 virtually bankrupt. The continued shrinkage in the value of hundreds of millions of electric 
 railway securities held by savings banks, national banks, life insurance companies and by 
 the public at large threatens to embarrass the nation's financial operations. Furthermore, 
 the withdrawal of this industry's buying power, which is said to rank third in magnitude, 
 involves the unsettlement of collateral industries, naturally entailing labor dislocation that 
 will affect hundreds of thousands of employes." 
 
 During the period of active warfare, when no one could foresee with cer- 
 tainty the duration or even the final outcome of the struggle, it was clearly of the 
 utmost importance that the nation's financial operations should not be embar- 
 rassed by the collapse of so enormous an industry as the electric railways. Dur- 
 ing that period many regulatory authorities felt that they were justified in grant- 
 ing to the companies emergency relief to an extent at least sufficient to enable 
 them to meet their fixed charges and keep going without reorganization. It was 
 recognized, however, that notwithstanding the changes in the cost of service the 
 public could not aftord to accept as a permanent policy of regulation the granting 
 of increased fares or other forms of financial relief to meet the increased cost of 
 operation and the increased cost of capital without reference to the relation be- 
 tween revenues and cost of service prior to the era of high prices. If the in- 
 creases in prices had come at one time and had been entirely uniform, so that 
 they could have been measured accurately in terms of the decreased purchasing 
 power of the dollar, some uniform plan of temporary readjustment without too 
 close an inquiry into the status of the industry in the past might have been feasible. 
 It is a fact, however, that prior to the war the electric railways as a whole, at 
 least so far as their rates were concerned, had not come to be a regulated indus- 
 
328 Electric Railway Problem 
 
 try in the ordinary sense of that term. In general, though not quite universally, 
 their rates had been established directly or indirectly as a result of bargaining 
 and contract, affected in great measure by the standards of custom. Therefore 
 it could hardly be maintained, except in a great public emergency where the re- 
 organization of an industry would be a general calamity, that it would be proper to 
 act upon the presumption that the rates charged for the service rendered prior to 
 the era of high prices were just and reasonable rates, and that, therefore, during the 
 era of high prices the rates should be increased to meet the proven increase in the 
 cost of service. The adoption of such a policy would in effect be putting the 
 seal of public approval and jnihlic guaranty upon the financial structure of an 
 industry without a critical examination of it. In the case of the electric railways, 
 it would be equivalent to the approval and guaranty of a financial structure 
 notoriously built up through .-ipcculative manipulation that has occasioned one of 
 the greatest civic scandals of American urban life. 
 
 Unless it be conceded that it is the duty of the public through the regulating 
 authorities to keep the street railway companies out of receivers' hands and to 
 save them from the necessity of reorganization, the whole question of over- 
 capitalization, excessive fixed charges and past earning power has to be opened 
 up. Indeed, it is clear that in some cases reorganizations and the scaling down 
 of fixed charges would be inevitable even though all the public authorities con- 
 cerned were to cooperate to the fullest extent in permitting the companies to in- 
 crease their rates and to decrease their expenses. In other words, there are un- 
 doubtedly cases where it is not economically possible for the electric railways, 
 at least on the basis of the present cost of service, to become self-sustaining. 
 This is clearly shown by the testimony of various witnesses representing cntirclv 
 different points of view. The matter has already been discussed to some extent 
 in preceding chapters of this report. 
 
 The claim is often made on behalf of the public that in the aggregate the electric 
 railways earned too much from the nickel fare in the pre-war days. The experi- 
 ence of Geveland, Columbus, Detroit and certain other cities where the average 
 fare paid per revenue passenger was far below 5 cents is cited as proof of this 
 contention. The fact that electric railway companies were so generally over- 
 capitalized and that in the process of consolidation in many cities extraordinary 
 rental obligations were assumed practically in perpetuity is also cited in proof. 
 The local authorities of New York City point to the extraordinary dividend paid 
 by the Interborough Rapid Transit Company for a series of years up to 191.S — 
 even in that war year the dividend paid was Uj, per cent — and maintain that 
 as the company is operating under a contract covering a long period of time the 
 surplus earned durini; its years of unusual prosperity should be used to make up 
 the deficits accruing at the ])rcscnt time. The conipany in rejoinder admits the 
 fat profits of the past, but calls attention to the fact that a man cannot work on 
 the strength of "last year's beefsteak." and alleges that no more can a transit com- 
 pany operate on a past sur])lus that has been distrilnited to its stoi-kholders or 
 otherwise dissipated. The issue raised is really a double one. In cases like that 
 of the Interborough Rapid Transit Conii)any very high dividends have been paid 
 to the stockholders. In other cases, the operating companies, representing a con- 
 
Financial Reorganization 329 
 
 solidation of many properties, have paid out their earnings from year to year in 
 bond interest and guaranteed rentals claimed by those representing the public to 
 have been excessive. The Philadelphia Rapid Transit Company, the Public Serv- 
 ice Railway Company of New Jersey, and the New York Railways Company and 
 its predecessor, the Metropolitan Street Railway Company, are noteworthy illus- 
 trations of this contention. 
 
 Where earnings alleged to have been e.xcessive have been accumulated in the 
 form of a cash surplus or where they have been paid out in the form of cash 
 dividends to the common stockholders, it may be quite possible for the public 
 authorities to enforce the terms of their contracts, or, as one of the witnesses 
 before the Commission put it, "insist upon their pound of flesh," and in such 
 cases the companies may be able to weather the emergency, if it does not last 
 too long, without going into bankruptcy. On the other hand, where the alleged 
 excessive earnings have been distributed by the operating company from year to 
 year in the form of bond interest and guaranteed rentals, the company is not in 
 a position to withstand for any great length of time a shrinkage in its net income 
 without defaulting on its private contracts, and perhaps submitting to the disin- 
 tegration of its system. In a case of this kind, the question to be determined 
 by the public authorities responsible for the enforcement of contracts or the fixing 
 of rates is as to whether the disadvantages of the financial disturbance and of 
 the possible disintegration of a unified electric railway system into its underlying 
 constituent parts more than offset the advantages to be derived from the enforce- 
 ment of the contracts or the preservation of a low unit fare. I am assuming in 
 both of these cases that the potential earning power of the electric railway sys- 
 tems under consideration, if they are permitted to increase their fares and re- 
 leased from other public obligations, is sufficient to enable them to maintain their 
 solvency without a financial reorganization and without a scaling down of their 
 capitalization or fixed charges. In those cases where this assumption is incor- 
 rect, a reorganization is inevitable unless the public authorities are legally and 
 politically able and willing to support the existing financial structure directly 
 or indirectly by public subsidies. It is hardly worth while to discuss this latter 
 possibility in cases where the railways fail to be self-supporting by rea.son of 
 overcapitalization or excessive fixed charges. 
 
 To the extent, therefore, that electric railway systems have been financed 
 beyond the possibility of self-support, it may be taken for granted that public 
 policy will not step in to interfere with their reorganization, but the issue remains 
 to be determined as a question of public policy with respect to the other com- 
 panies. The public may insist that the companies draw upon the surplus of past 
 years to help pay the current cost of service, or it may insist merely that the rates 
 charged for the service be fixed at a point where they will cover the legitimate 
 present cost of service without necessarily providing for the excessive fixed 
 charges which the companies have voluntarily assumed. It may be urged with 
 considerable force that where an electric railway company deems it necessary 
 to break its contract with the municipality or the state, the public ought not to 
 be required to dig down into its pockets to enable the company to perform its 
 private contracts entered into in the processes of consolidation and financing, 
 
330 Electric Railway Problem 
 
 particularly where those contracts run for 999 years, and were based upon con- 
 ditions that have entirely changed. The problem is not without its difficulties, 
 for it seems to be a generally accepted fact that disadvantageous contracts with 
 the public authorities can be broken more easily, and with a better show of equity, 
 than equally disadvantageous contracts with other corporations or private in- 
 dividuals. 
 
 In spite of the considerations advanced by the utilities in their ajjpeal to the 
 Federal Government for help in securing higher rates, and in spite of the con- 
 siderations mentioned by the two Secretaries in their letter to the President, the 
 witnesses for the American Electric Railway Association in most cases made no 
 claim that the readjustment of the relations of the electric railway industry to the 
 public should be based upon the ])rotection of the outstanding securities. True, 
 evidence was presented to show that these securities are widely held by just 
 ordinary folks, as well as by insurance companies and other fiduciary institu- 
 tions ; but when it came to the suggestion of a definite basis for the fi.xing of 
 electric railway rates, and the determination of the measure of public relief to be 
 granted to the electric railways, very little was said about the par value of stocks 
 and bonds. 
 
 It will be recalled that according to the special census report for 1917 the 
 net capitalization of the electric railways in that year, including floating debt and 
 real estate mortgages, amounted to $5,056,554,324, made up as follows : 
 
 Common capital stock $2,01 2.1 89,2?M 
 
 Preferred capital stock -161,657.357 
 
 I'undcd debt 3,051,179,272 
 
 Real estate mortgages 7,197,895 
 
 rioating debt 166,592,228 
 
 Total $5,698,816,046 
 
 Less stocks and bonds of other electric railway companies and 
 
 treasury securities 390,489,091 
 
 Net capitalization $5,308,326,955 
 
 Less investments in other securities and non-railway properties.. 251.772.631 
 
 Net capitalization based on electric railways $5,056,554,324 
 
 The census report shows that the road and equipment account amounted to 
 $5,1.^6,441,599, or an ai)i)arent excess of SSO. 000,000 over the net capitalization. 
 It shows also that dividends amounting to S<>0.772.290 were paid at the average 
 rate of 6.3 per cent upon $958,305,905 of common stock, leaving $1,053,S83,389 
 of common stock ujion which no dividends were paid. It also shows that divi- 
 dends amounting to $12,490,851 were paid at an average rate of 4.8 per cent upon 
 $260,055,512 of preferred stock, leaving $201.(i01,845 of preferred stock upon 
 which no dividends were paid. These two items together make a total of 
 $1.255,485,2,54 of capital stock which received no return. The census sum- 
 maries do not show what proportion of the dividends and interest was paid upon 
 the "stocks and bonds of other electric railway companies and treasury secur- 
 ities," so that wc are unable to gel the exact amount of the net capitalization ui)on 
 which a return in the form of interest or dividends was paid. However, deduct- 
 ing the $1,255,485.2.U of stock from the total capitalization we get $4.44.5. .^.SO.Sl 2 
 as the gross capiialization, including real estate mortgages and floating debt, upon 
 
Financial Reorganization 331 
 
 which a return was paid. The year 1917 may be regarded as a fairly normal 
 year in the street railway business. The preceding year had been one of unusual 
 prosperity, and the increase of traffic and revenues from 1916 to 1917 appears 
 to have been about normal, while it was not until well along in 1917 that the 
 street railways began to feel seriously the effects of the increase in wages and 
 in the prices of materials due to our getting into the war. It would help materi- 
 ally in the determination of a just public policy with respect to the electric rail- 
 way industry if the relation between the earnings and the true investment for the 
 year 1917 could be ascertained. 
 
 In a loose way the capitalization of the industry, or its road and equipment 
 account, or, in the case of Mr. Henry G. Bradlee. its gross capitalization and 
 current liabilities, are referred to as a measure of the importance of the industry 
 and of the capital invested in it. The figures of capitalization and true invest- 
 ment made available for some of the most important street railway systems of 
 the country through official investigations of one kind or another seem to indi- 
 cate that a total capitalization double the true investment value of the existing 
 property cannot be regarded as anything extraordinary outside of the state of 
 Massachusetts, where capitalization has been regulated for a great many years. 
 A comparison of the figures representing capitalization per mile of track in 
 Massachusetts with the corresponding figures for the country at large, points to 
 the same conclusion. The figures are cited at page 14 of the Argument and Brief 
 submitted by Mr. W. Jett Lauck on behalf of the employes, where he shows 
 that the capitalization per mile of single track for the country at large, according 
 to the Federal Census of 1912. was 82 per cent in excess of the capitalization 
 per mile of track in Massachusetts. Upon the assumption that the Massachu- 
 setts capitalization is correct, Mr. Lauck reaches the conclusion that the aggre- 
 gate overcapitalization of the electric railways of the United States in 1912 was 
 approximately $2,119,000,000. In our effort to fix upon an equitable public 
 policy with respect to this problem of financial reorganization, the question as to 
 whether or not this estimate of overcapitalization is reasonably close to the truth 
 is one of tremendous importance. Mr. Lauck's analysis of the figures would 
 mean a cutting down of the capital stock and funded debt of the electric railways 
 in the aggregate to a 55 per cent basis. It will be remembered that 55 per cent 
 was the basis upon which the capital stock of the Cleveland Electric Railway 
 Company was recognized in the valuation used in the Tayler grant, inaugurating 
 the service-at-cost experiment, and even at that the value of the company's un- 
 expired franchises was put in at several million dollars. 
 
 Mr. James D. Mortimer, of the North American Company, and Mr. Francis 
 H. Sisson, of the Guaranty Trust Company, witnesses for the American Electric 
 Railway Association, expressed certain opinions with respect to the bearing of 
 the "watered stock" argument upon the present problems of the electric railway 
 industry. At page 813 of the Proceedings, Mr. Mortimer makes the following 
 statement : 
 
 "Commissioner Meeker: What would you say in answer to the accusation that the 
 street railways have been addicted to issuing watered stock, and that they have been trying 
 to pay dividends upon water? 
 
 "Mr. Mortimer: I would say. in the first place, speaking generally, it is an attack that 
 
332 Electric Railway Problem 
 
 is made primarily for the purpose of confusing the issues. The figures that I have presented 
 to you applicable to the Milwaukee Electric Railway and Light Company have no bearing 
 whatever with respect to capital stock and bonded debt, but represent only the appraised 
 value of the physical property, and if any one of such persons to whom you refer should 
 say that the system can be satisfactorily operated and produce an 8 per cent return, a reason- 
 able return upon the fair measure of utility capital, whereas we are only to operate it at 
 a 2 or 3 per cent return on the present rate of fare, then I should tell him that he _is losing 
 his time, that he should be in the street railway business, and I have a job for him." 
 
 Mr. Sisson took the position that overcapitalization has not been at all re- 
 sponsible for the present situation, except as it has furnished a handle for hostile 
 agitation. His testimony at pages 341 and 342 of the Proceedings is as follows: 
 
 "Commissioner Gadsden : Do you consider that the present condition of the electric 
 railways in this country has been brought about by watered stock? 
 
 "Mr. Sisson: No, I do not think it has had anything to do with it. 
 
 "Commissioner Gadsden : Can you conceive how the present economic situation which 
 faces electric railways could have been produced by their issuing watered stock in times past? 
 
 "Mr. Sisson; I do not think it has had the slightest effect on the present situation. 
 If they had no stock issues at all the situation would be the same. 
 
 "Commissioner Gadsden : Exactly. .-Xs a matter of fact is not the situation which faces 
 electric railways a question of getting enough revenue to operate? 
 
 "Mr. Sisson : Absolutely, to pay their costs and pay the money charges, unquestioiiably. 
 
 "Commissioner Gadsden : Are not they faced with a situation which has practically 
 for the moment wiped out all the value? 
 
 "Mr. Sisson: Absolutely. 
 
 "Commissioner Gadsden: Bonds and stocks? 
 
 "Mr. Sisson: In many instances. 
 
 "Commissioner Gadsden: Many instances of it? 
 
 "Mr. Sisson : Vcs. 
 
 "Commissioner Gadsden: So that the bad financial practices, if we choose to so char- 
 acterize them, in the past cannot lie held responsible for the present situation, in your 
 judgment? 
 
 "Mr. Sisson : Only in .so far as they have been used as a te.vt for the opponents of 
 street railways to create agitation and public prejudice. 
 
 "Commissioner Gadsden: To prejudice the public mind? 
 
 "Mr. Sisson : Yes, which has l)ccn done very extensively in certain communities. 
 
 "Commissioner Gadsden: Hut economically they have not had any eflfect? 
 
 "Mr. Sisson: .^s a matter of economics, not at all." 
 
 That the position taken by Mr. Sisson in this particular matter is not alto- 
 gether correct seems to be clearly established by the experience of the Indiana 
 Public Service Commission, which was explained by Mr. Carl H. Mote, at that 
 time its secretary, at pages 10S6 and 10S7 of the Proceedings, as follows: 
 
 "The Public Service Commission of Indiana has granted no increases in electric railway 
 rates without a tentative valuation of the property involved. In some cases, we have had to 
 face situations when- fixed charges exceeded the normal return that would attach to the 
 valuation as made by the Commission. In every case of this character we have been rather 
 explicit in suggestions that financial reorganizations were necessary. The roads themselves, 
 in a good many instances, have responded to these suggestions. We have reached a few 
 properties also in merger proceedings and accomplished the same end. In the reorganization 
 of the street railwav companies of Indianapolis, the fixed charges were reduced more than 
 $,W().(KK) annually, and the securities from $2.\(KI0.000 to less than $I9.(KX),000. One of our 
 larger internrhan companies is now going through a friendlv receivership, as a consequence 
 of which outstanding ,-ecnrilies will be reduced from $18.(XX».(X)0 to $12,000,000. This is the 
 only receivership we have had in Indiana. 
 
 "The Chairman: What is the process of reducing these securities? 
 
 "Mr. Mole: If it is bonds, an agreement with the iKindholdcrs is obtained through 
 the tru.stcc and through an actual canvass of the Ixindholders to accept in lieu of securities 
 which they bold at the present time securities of a new issue in a lesser amount than those 
 previously outstanding. 
 
 "The Chairman: How about stock? 
 
 "Mr. Mote: Th.if sanic way. In the Indianapolis case some of the stock of the Indian- 
 apolis Traction and Terminal Company, which was the operating company in Indianapolis, 
 was held by the Terre Ilaulc. Indianapolis &■ Eastern Traction Company, which was an 
 interurlan property sjiecifically and strictly speaking. The Terre Haute. Indianapolis & 
 
Financial Reorganization 333 
 
 Eastern had pledged this stock under a mortgage and there was an agreement reached by 
 which that stock should be surrendered, within the company itself, and it was wholly volun- 
 tary, brought about at the suggestion of our Commission but nevertheless and finally it was 
 voluntarv. . . 
 
 "Mr. Warren : Mr. Mote, was that reduction to a figure that the Commission felt was 
 appro.ximately the value of the property? 
 
 "Mr. Mote: In the case of the Indianapolis Traction & Terminal Company, or rather 
 the Indianapolis Street Railway properties, we made a tentative valuation of the property 
 and found that the value was anywhere between $14,000,000 and $16,000,000. We brought 
 the securities down to $19.000.(XX) and actually they will be subsequently reduced to about 
 $18,000,000, so that will answer your question, 1 think. 
 
 "The Chairman: Just one further question. If you fixed the value which you regard 
 as the true value of the property at $14,000,000, how do you permit a capitalization to be 
 rewritten to $19,000,000? 
 
 "Mr. Mote: Well, this v\'as in a merger proceeding and the law of our state provides 
 that the securities issued in case of a merger shall not exceed the total of the securities out- 
 standing, and anyway the law of our state does not permit us except in an incidental way 
 to consider securities as a basis for rate-making. 
 
 "Mr. Warren: You consider the value? 
 
 "Mr. Mote : We consider the value of the property." 
 
 The Indianapolis case appears even more striking, when we refer to the text 
 of the Indiana commission's orders and to the reports of the three directors of 
 the Indianapolis Traction and Terminal Company, who were designated to rep- 
 resent the public in working out a satisfactory financial program for the company. 
 These three were selected, one by the Governor of the state, one by the Mayor 
 of the city, and one by the Indianapolis Chamber of Commerce. After a few 
 weeks of service, they resigned and submitted to the Public Service Commission 
 individual reports of the reasons why they were unable to accomplish anything to 
 help the company. The director designated by the Governor was Mr. Alfred F. 
 Potts, Vice-President of the Citizens Gas Company of Indianapolis. Mr. Potts, 
 in his report, stated that the street railway was burdened with fixed charges, and 
 sinking fund payments amounted to 31.57 per cent of its gross earnings. With 
 respect to these charges, he said : 
 
 "As these fixed charges are about double what they would be if the company were 
 soundly financed, we have been unable to suggest any method of financing the company's 
 needs." 
 
 He then described the operation of the sinking funds as follows : 
 
 "This plan, which takes $120,000 a year from the company's income which should have 
 gone into improvements and better service, was obviously devised for the benefit of the 
 speculators in its stocks and bonds. These payments of $120,000 per year must continue 
 until 1933, while the company must pay interest on the full face value of the bonds. In 
 other words, the city has to pay a rate of fare to enable the Traction Terminal Company 
 to pay off $11,000,000 of bonds and thereby enhance the value of its stock. These payments 
 are made through the income received from fares. This means that the people of the city 
 will in time pay off $11,000,000 of the company's bonded indebtedness, leaving the stock freed 
 therefrom." 
 
 Mr. Potts describes in some detail the deals through which the street railway 
 capitalization was built up, and, in a supplementar>- memorandum filed with his 
 report, makes the following statement : 
 
 "The men who did this organization work fifteen years ago paid no attention to real 
 values. They calculated that the growth of the city would enable the company to earn certain 
 profits. This prospective 'earning power' or 'franchise value' was capitalized and stocks 
 and bonds issued against it for all they, through the market, would absorb. At the beginning 
 it was a stock-jobbing rather than a street car enterprise, and has distributed several millions 
 of dollars in interest and dividends on bonds and stocks which were founded chiefly on 
 'prospective earnings.' 
 
334 Electric Railway Problem 
 
 "Now, my contention is that as the people in those days permitted this form of financing 
 to go on and authorized the issuance of "watered stocks' that they must now pay the price 
 up to the real value of the property, even when it has been increased from the earnings. 
 The holders of the stocks have the right to the profits if they can be made under the terms 
 of the franchise as to rates and after a strict compliance with all its terms as to service 
 to the public. But that under no circumstances of stress or emergency from war or other 
 cause should the public be asked to pay a farthing beyond the franchise rate to any public 
 utility to enable it to make good the 'prospectus' of its promoters who speculated in its stocks." 
 
 The Indiana commission had already acted under the emergency section of 
 the state utilities law to suspend temporarily the rates of fare prescribed by the 
 Indianapolis street railway franchise, and to permit the company to charge a 
 straight 5-cent fare in place of the reduced-rate ticket fare stipulated by the 
 contract. The company was now applying for a 6-cent fare, following the resig- 
 nation of the public directors. The Indiana commission, in its order of Decem- 
 ber 28, 1918, refused to grant a further increase, and stated thai the continuance 
 of the emergency relief previously granted "is predicated upon innnediate steps 
 being taken for readjustments on a basis of reasonable fixed charges at least 
 during the emergency period, and the re-building and re-equipment of the prop- 
 erties." The Indiana commission used strong language in describing the causes 
 leading up to the company's financial troubles.- It said : 
 
 "The evidence shows conclusively that the present crisis in the affairs of this company 
 has been caused directly by the diversion of its revenues for purposes hurtful of its well- 
 being — the annual draining out of the treasury to meet excessive and parasitical fixed charges 
 placed upon the company by early promoters. .Mways the goal under these obligations has 
 iiccn to i)ay excessive fixed charges that can not be justified by the evidence. Property and 
 equipment have been permitted to depreciate — maintenance has been deferred, and service has 
 been neglected, all in order that there should be no default in the payment of these excessive 
 charges. These have been held .sacred, while the fundamental obligation of service has rested 
 lightly on petitioner." 
 
 Referring to the emergency section of the law imder which it was acting, 
 the conmiission said : 
 
 "It is inconceivable that the Legislature, in the enactment of Section 122, contemplated 
 that the State should (1) guarantee, in times of emergency, x-alues which never existed; 
 (2) protect excess securities: (.?) make good losses caused by negligence in collection of 
 revenues; or (4) reward a lack of thrift in times of prosperity." 
 
 Its order, continuing the straight five-cent fare as emergency relief, is con- 
 cluded as follows: 
 
 "// is I'nrthcr Ordered. That, as soon as possible, special meetings shall tie held of the 
 several groups of t>ond and stockholders of petitioner and allied and underlying companies, 
 for the purpose of considering and voluntarily acting in the matters of: (1) the emergency 
 that faces all of these individually and collectively; (2t their several lease, rentals, and 
 franchise otiligations : {i) reduction of underlying indebtedness by retirement of bonds 
 already purchased and held in sinking funds, thus reducing fixed charges, suspension of 
 future payments into sinking funds, and the use of thus suspended payments for purchase 
 of modern e(|uipment and rehaliilitation of their individual and collective properties so that 
 these companies may meet and discharge their francliise and lease obligations as to main- 
 tenance of property and .service; (4) reduction — at least during periods of emergency — (5f 
 excessive fixed charges tending to impair the service which all are obligated to render the 
 city and its people: and (5) all other matters that should come before said groups of bond 
 and stockhiildcrs in order to meet new, and more or less permanent, conditions created by 
 the war; and it is suggested that the.se several meetings tie called for the same dates and 
 same city so tlial general conferences, if such may be found by the diversified interests to 
 be desiratile. may Ih' held. 
 
 "// i.f 1-urther Ordered. That continuance of relief herein granted shall tie contingent on 
 .substantially improved service, collection of earned revenues, reduction of overhe.id and 
 general expenses, discontinuance or re<luction of present sinking fund demands and read- 
 justment of interests and affairs of all parties having interest and franchise obligations in 
 
Financial Reorganization 335 
 
 the matter of street railway operation in the city of IndianapoHs, to the end that, at least 
 during periods of emergency, fixed charges and other such obligations shall not continue to 
 make unreasonable demand on the revenues yielded by the traveling public in consideration 
 of good and adequate street railway service." 
 
 I have cited the Indianapolis street railway case at considerable length be- 
 cause of its importance in connection with the testimony before the Commission 
 with respect to this matter of financial reorganization as a suggested remedy for 
 the troubles of the electric railways. In this connection, also, reference should 
 be made to Mr. Roger \V. Babson's testimony already quoted in Chapter XXII 
 of this report, where in response to questions by Commissioner Gadsden, he states 
 that the shrinkage in the values of street railway securities has been for all of 
 the street railway bond issues of the country about 25 per cent and for all the 
 stock issues about 75 per cent, and further states that this shrinkage in the value 
 of securities "amounts to over a billion dollars." While Mr. Babson does not 
 state specifically the period within which this shrinkage has taken place, it is 
 apparent from the context that he refers to a shrinkage that has taken place 
 within the past five or six years. It will be noted that in the total capitalization 
 of the electric railway companies reported by the Census Bureau for the year 
 1917 the ratio of stock to funded debt was approximately as 5 to 6. If we con- 
 fine ourselves to securities upon which a return was paid, the amount of stock 
 drawing dividends to the funded debt was approximately as 2 to 5. On this 
 basis the total shrinkage of value described by Mr. Babson would figure out 
 about 40 per cent on stock and bonds together, and assuming that the shrinkage 
 amounted to one billion dollars, this would mean that the market value of all 
 electric railway stocks and bonds at the time of Mr. Babson's testimony was ap- 
 proximately one billion five hundred million dollars as compared with two billion 
 five hundred million dollars before the shrinkage began. These figures would 
 be increased in proportion to the extent to which the shrinkage was "over" a 
 billion dollars. 
 
 The Proceedings do not disclose the extent of the investigation referred to by 
 Commissioner Gadsden at page 1067 of the Proceedings upon the basis of which 
 Mr. Babson testified, and when the significance of the testimony was subsequently 
 called to Mr. Babson's attention in a letter from the Executive Secretary, he 
 threw no further light on the subject. Suffice it to say that the figure two billion 
 five hundred million dollars as representing the market value of all electric rail- 
 way stocks and bonds before the shrinkage began is a long way from the claimed 
 investment in the industry with respect to which figures from five billions to 
 seven billions were used by various witnesses before the Commission. Upon this 
 point as to the relation between capitalization and value, I call attention to the 
 testimony of Mr. Francis H. Sisson, at pages 333 and 334 of the Proceedings, 
 where, in answer to questions by Commissioner Meeker, he discusses the matter 
 of investment out of earnings and the extent to which the physical property of 
 the electric railways may have been built up to absorb the admitted overcapitali- 
 zation of the early days. His testimony follows : 
 
 "Commissioner Meeker : You spoke of the practice in financing street railways in 
 times past whereby stock was issued, not for a money payment, but as an inducement, as 
 a bonus, to bond buyers. Do you think the street railways now represent in their physical 
 properties value equivalent to the outstanding bonded debt and stock? 
 
336 Electric Railway Problem 
 
 "Mr. Sisson : Well, I cannot speak accurately about that. ♦ ♦ ♦ * I should be sur- 
 prised, if under their present earning power — because earning power determines value — I 
 should be surprised it their value equaled their capitalization. I do not believe it does, in- 
 cluding stocks and bonds. 
 
 "Commissioner Meeker: When you speak of value, do you mean the value of the 
 physical property? 
 
 "Mr. Sisson: No; I was speaking broadly of their whole value, because it is the entire 
 value that is capitalized. l""or instance, franchise values are capitalized, and are ta.\ed in 
 New York State definitely as property, and in other places, I have no doubt, and are distinct 
 value, provided there is earning power to warrant it. The taxation of franchises in New 
 York State was based upon the theory that earning power derived from franchises was a 
 legitimate source of public ta.xation. Now, if that earning power does not e.\ist, the value 
 does not exist. In other words, common stock values in most street railways were based 
 upon franchise values and earning power, and not upon physical values. I do not believe 
 the pliysical value of the railways, while I am sure it is greater than the bond obligations, 
 has yet reached the point where it absorbs stock obligations. 
 
 "Perhaps 1 can give you a better analogy of it in the railroad field. One of the great 
 public fetishes today is that railroad stocks are watered, but the sot)er fact is, as any student 
 of the situation can determine, that the probabilities are that the physical value of the 
 railroads today is sometliing like $1,500,000,000 in excess of the capitalization. That was 
 not true twenty-five or thirty years ago, but out of earning power the railroads have put 
 back into the property, year after year and year after year. For instance, the Pennsylvania 
 has put back something over three hundred million dollars out of earnings into property 
 values. The New York Central Lines built their Chicago terminals out of the surplus 
 earnings on the Lake Shore, and that has been true of many of the big railroad lines. To 
 a lesser degree, that is true of the street car lines, but tliey have not yet reached the point 
 where they have absorbed their overcapitalization, if you may call it such. 
 
 "Commissioner Meeker: What, in your opinion, sliould be done with investments out 
 of earnings in that fashion? .\re they the property of the street railway companies upon 
 which they are entitled to a reasonable return? 
 
 "Mr. Sisson: In my judgment, yes, because that is the practice in every business in 
 the world, and I do not know any reason why investors in street railway securities should 
 be discriminated against. It is true of every industrial activity. Henrj- Ford starts a 
 factory with a few thousand dollars, and today he is worth hundreds of millions out of 
 earnings, and we all pat him on the back and say 'A wonderful job.' 
 
 "Mr. Warren: .\nd buy h'ord cars without any protest. 
 
 "Mr. Sisson: Yes, sir; and pay the price that enables him to make those profits, and 
 I do not know of any reason why we should discriminate against our public service corpora- 
 tions for having, in their limited way, done what the industrial corporations and financial 
 institutions and every other class of business do without protest. In other words, it is the 
 legitimate reward that comes to business venture. That has been true according to all of 
 the old theories of doing business. W'e may change that in the future. 
 
 "Commissioner Meeker: You think that public opinion has not changed in reference to 
 public utilities? 
 
 "Mr. Sisson : I think it has to a certain extent. I think it has been becoming definitely 
 socialized in a great many places." 
 
 F"urther on, at pages 3^S and 339 of the Proceedings, in answer to questions 
 by Commissioner Sweet and Commissioner Meeker, Mr. Sisson takes the position 
 that the fate of outstanding securities must be determined by a valuation of the 
 property and an equitable arrangement between the companies and the public. 
 His testimony follows: 
 
 "Commissioner Sweet : Have you considered this phase of the question : In the early 
 days you said the 5-ccnt fare more than compensated, so that we will assume in most cases 
 their dividends were paid to the holders of common stock. And then the interest as agreed 
 upon was paid uiviii the Ivmds or preferred stock. Now, if the 5-cent fare named in the 
 original franchises produced more than enough to meet those requirements, so that a certain 
 part of the nickel could l>e devoted to extensions, is not that evidence to your mind that the 
 nickel as il was originally agreed ujion between the companies and the municipalities was 
 more than it ought to have Ik-cu? 
 
 "Mr. Sisson: In some instances that is undoubtedly true; yes, sir. 
 
 "Commissioner Sw^eet : Now, if in the future or under the present situation the public 
 is to be asked to provide a direct or indirect form of guaranty upon profits from this time 
 on, is it fair that the public should be asked to pay more or to allow more by reason of the 
 companies having had the advantage in the earlier stages of this proceeding? 
 
 "Mr. Sisson: I should say that is a matter of equity in which you could hardly make 
 
Financial Reorganization 337 
 
 a flat ruling. I think there are instances when the public should allow those values to accrue 
 to the stockholders. There may be instances where those values are greater than they ought 
 to be in the public interest. I do not believe you could generalize on that subject, sir. 
 
 "Commissioner Meeker: That could be taken care of in the process of valuing the 
 properties? 
 
 "Mr. Sisson : Absolutely, and that is what I have had in mind. 
 
 "Commissioner Meeker; You think that is the way it should be taken care of? 
 
 "Mr. Sisson: I do. 
 
 "Commissioner Meeker : And an equitable arrangement be made whereby this business 
 which is in a bad way now can go on without obligating the public to pay more than it 
 ought to pay? 
 
 "Mr. Sisson : Exactly, I think that is a pure matter of equitable arrangement between 
 the public and the owners, in the fixing of values." 
 
 Some of the most extraordinary testimony found in the entire Proceedings is 
 that given by Mr. J. K. Newman, a witness for the American Electric Railway Asso- 
 ciation, in his discussion of the problems of reorganization. As a street railway 
 promoter, engineer and banker, Mr. Newman appears to have had wide experi- 
 ence with street railways in the south, having been interested in the New Orleans, 
 Birmingham, Knoxville, Nashville, Little Rock, St. Louis and Dallas properties. 
 He testified that within a year he had been connected with the putting of half 
 a dozen properties into receivers' hands in the process of reorganization. As the 
 numerous quotations from his testimony already made have in part shown, Mr. 
 Newman favors a service-at-cost plan with a 10 per cent return upon the capital 
 value and with a 10-cent fare, if necessary, as the proper solution of existing 
 electric railway difficulties. He does not think that it would be wise for the 
 electric railways to complicate the issue by laying claim to exemption from taxa- 
 tion and relief from paving obligations, knowing full well that under the plan 
 he advocates, street railway taxes and paving burdens would be definitely in- 
 cluded in the cost of service and would be passed on to the public in the rates. 
 He frankly recognizes the fact of overcapitalization and takes the position that 
 the public must be convinced that the hocus-pocus methods of the past have been 
 forever discarded. His service-at-cost plan involves a valuation of the property. 
 His reasons for having an interest, notwithstanding that fact, in the amount of 
 securities to be issued are explained at pages 573 and 574 of the Proceedings, 
 as follows : 
 
 "Commissioner Meeker: The thing that I am really interested in is the outstanding 
 capital, whether bonds or stock. Are you much concerned with the control of the issuance 
 of such securities? What I mean is this, does it make much difference whether such secur- 
 ities be controlled by a commission as long as you are limited to a fair return upon invest- 
 ment ? 
 
 "Mr. Newman : That is correct, but you must put — let me explain this. It does not 
 make any difference under this plan we are discussing what the securities are out against 
 the property, whether bonds or stocks. I say ignore it absolutely and let the security holders 
 fight that out among themselves. The authorities have nothing to do with that capitalization 
 and ought to ignore it entirely, except for one reason. The roads must be financed in the 
 future, and you must have a sound financial plan by which you are going to float your 
 securities at the lowest possible rate in the future. E.xcept for that one reason the city 
 authorities are not concerned as to what amount of securities is outstanding, whether bonds 
 or stocks. 
 
 "Commissioner Meeker: You think there should be some public control of the issuance 
 of securities so as to protect the credit of the street railway company? 
 
 "Mr. Newman : .Absolutely. 
 
 "Commissioner Meeker: So it can get the capital it needs at the lowest rate of interest? 
 
 "Mr. Newman : Yes. and I go further than that. I say that before the cities make 
 these new concessions, this new franchise arrangement with the property owners, they should 
 demand that they fix up their capitalization in such shape that they will not only have secur- 
 
338 Electric Railway Problem 
 
 ities that can be sold to take care of the properties in the future, but that will take care of 
 them in a way that will do it at the lowest rate of interest. You have got to reestablish the 
 credit for these roads and in my judgment you cannot do it wtthout a complete financial 
 reconstruction, and the cities are interested that that reconstruction takes place. 
 
 "The Chairman: Which would require reorganization of the company? 
 
 "Mr. Newman : Yes. 
 
 "The Chairman: Throwing out all the old stock and reissuing new? 
 
 "Mr. Newman : Yes." 
 
 Mr. Newman hopes, however, to save something out of the wreck for the 
 common stockholders, except in the most extreme cases. He explained his plan 
 with considerable hesitation. It is this. By getting a valuation of the property 
 and by securing a 10 per cent allowed return upon it, a street railway can take 
 care of bonds and preferred stock, the par value of which will be equal or nearly 
 equal to the entire value of the property, but it will still have left out of its 10 
 per cent a handsome surplus over and above the bond interest and the preferred 
 stock dividends, with which it can reward the present common stockholders or 
 their residuary legatees in the reorganization. Mr. Newman's testimony, at 
 pages 575 to 579 of the Proceedings, is a story of absorbing interest. I quote it 
 in full as follows: 
 
 "Commissioner Gadsden: Mr. Newman, referring to what you said about the public 
 .authorities having no concern with the capitalization of these companies, do you not think 
 that consideration would probably have to be given by public authorities to the innocent , 
 holders of these securities that the bankers and street railroad people to whom you referred 
 issued some twenty years ago? What is going to become of the innocent third party, we 
 will say, who is holding some millions of these securities now? Is the public conscience 
 going to stand for just depriving these people of their property? They did not do any harm, 
 did they? They bought them from bankers, we will say, in the ordinary course of business. 
 Now, are you going to take the position before this Commission that those people's property, 
 widows, orphans, trust companies and savings I>anks — that those securities are going to be 
 sacrificed because twenty years ago a lot of bankers issued watered stock and inflated 
 securities? 
 
 "Mr. Newman : Now I am going to say yes, but with a tremendous qualification. 
 
 "Commissioner Gadsden: I want the qualification, that is what I am after. 
 
 "Mr. Newman: Yes, I am going to give you that. 
 
 "Commissioner Gadsden: Before you go ahead, here is the thought in my mind. I want 
 you to get my full thought. If this confiscation were carried out. would not that of itself 
 still further destroy credit on the part of investors in any security which the public had 
 control of? 
 
 "Mr. Newman: .Ml right. I want you to get what I am saying and get it ver>' care- 
 fully. I have taken the position in all of our reorganizations that the bondholder who wants 
 to exercise his full measure will have to work without me. I will fight him to a finish ; that 
 the securities in the first to the tenth position are all part of the system, and when the 
 reorganization comes I want all of them to be dealt with fairly so that no one security 
 holder can get ad\-antage of this new city contract to the detriment of the other. I do not 
 mind confessing to you that part of the scheme that I have in my mind is to withhold this 
 franchise right from the bankers or from any class of securities and make them adopt a 
 reorganization scheme. The basis of that is sound, because it must take care of future 
 financing and it makes them deal with all classes of securities and agree upon a reorganization. 
 Now in some instances, take the New Orleans case, where the common stock of $20.00l).000 
 is ab.solutelv worthless, there is no chance for that stock to have any intrinsic value whatever. 
 
 "The Chairman: Is that stock all water? 
 
 "Mr, Newman : Yes. It is going to work a great hardship on some people, but is 
 
 "Commissioner Gadsden : Then it is all held in New Orleans, is it not ? 
 
 "Mr. Newman : No, there is a holding company, but there is some minority interest 
 out.standing. I am very sorry for those people, hut you cannot bring that into this problem. 
 But there is another way of throwing equity to those common stockholders. Take the case 
 of .'>t. Louis. Detroit and New Orleans ; St. Louis has a 4 per cent Mnd which matures in 
 IQ.M; New Orleans has a A' j per cent l>ond maturing in lO.U. and Detroit a AYi per cent 
 liond maturing in lO.U or 19.15, all about the same peritKl. The St. Louis bond is selling at 
 about .'i.';. the New Orleans bond is selling at about 67 and the Detroit bond is selling at 76. 
 Now. if you precipitate these reorganizations these fellows who hold those bonds who have 
 made a loan for IS years arc going to come in and say, 'Give me my money now." A dollar 
 
Financial Reorganization 339 
 
 at 4 per cent payable in IS years is not worth par today. So when you get this valuation 
 of the property, take St. Louis with $12,000,000 underlying and $30,000,(XX) 4's, with $30,- 
 000.000,000 of bonds. That $30,000,000 of bonds has got to be converted, say, into a 6 per 
 cent bond which would give it ultimately 66 % per cent value, and you cut $10,000,000 out 
 of that and that $10,000,000 capitalization moves down. And the fair bankers who are in 
 this reorganization are not going to demand their pound of flesh on these strangle-hold secur- 
 ities at the top, but are going to pass the equity all the way down, and if they attempt to do 
 otherwise they are the ones you want to complain about, they are the ones who will be to 
 blame. Is that clear? 
 
 "Commissioner Gadsden : I am looking at it now and the Commission is going to look 
 at it from the standpoint of the public and not from the railroad company or the holders 
 of the first securities. I am asking you from the standpoint of the general good of this 
 great public, have we not got to take into consideration a situation where there are millions 
 of securities in the hands of innocent third parties? The same is true of the steam railroads, 
 is it not? 
 
 "Mr. Newman : Yes. 
 
 "Commissioner Gadsden : Do you think this country can face the catastrophe of wiping 
 that stock out altogether? Do you think your banking system would stand that? 
 
 "Mr. Newman : Well, you are putting a question to me that is not going to be a real 
 one. I am quite an optimist on the street railroad situation because I believe in the fairness 
 of the American public and I believe they are going to come around and straighten it up 
 for us when the time comes that we get on a right basis. 
 
 "Commissioner Gadsden : But they have to have your help and that of others to do that. 
 
 "Mr. Newman : But the bonds that are in the trust companies and insurance companies 
 and so forth will be taken care of. It is only the watered stocks in most instances that will 
 be affected and they will get some by virtue of their voting power and control, and the fair 
 banker is going to pass a little of the plum all the way down ; there are going to be several 
 bites of the plum. 
 
 "Commissioner Gadsden: That is true, but is it not true that a lot of that admittedly 
 watered stock has gone into the hands of innocent people? 
 
 "Mr. Newman : Yes. 
 
 "Commissioner Gadsden: What are you going to do about it? 
 
 "Mr. Newman : Well, it is very unfortunate, but I think some of them will have to 
 take their loss. I hate to say this, but it is necessarily true. 
 
 "Commissioner Sweet : Did you not .say that in getting the valuation of these properties 
 you thought that the question as to what it would cost now to replace them ought to be taken 
 into account? 
 
 "Mr. Newman: Yes. 
 
 "Commissioner Sw-eet : To replace rails and cars and electrical equipment at the present 
 prices would mean a tremendous addition, would it not, or produce a tremendous excess over 
 the original cost ? 
 
 "Mr. Newman: Yes, but they will never stand for it; they are not willing to look at 
 the cost when it means something for us, but they are w'illing to look at the cost when it 
 means something against us. That is the attitude of the city authority. 
 
 "Mr. Warren : The valuation has to be made on the best fair basis it can, has it not, 
 ^Ir. Newman, by agreement between the parties? 
 
 "Mr. Newman : Yes. but there are parties in line today who will determine that amount, 
 there are men who are following that as a business who will do it. 
 
 "Commissioner Sweet: My idea was this, that in fixing the valuation of these com- 
 panies the cost of replacement at present high prices ought to be a factor ; that possibly 
 enough would be derived to more than take care of the bonds and what you might call the 
 senior securities and something might be left for the common stock. 
 
 "Mr. Newman: May I explain this to you, on this problem of value? No systern has 
 been devised for getting at that value and there is never going to be any system, either. 
 There are no engineers in the country competent enough, and no group of engineers in this 
 country competent enough, to know the absolute cost of that system or its past history, which 
 is not available. It has to be a compromise situation, and every situation I have seen, it is 
 just a backward and forward trade until you get a happy compromise or an unhappy com- 
 promise for the street railroads usually. 
 
 "Commissioner Sweet: Well, it has to be on a satisfactory basis to the city anyway. 
 In other words, they have to feel that it is substantially correct and fair. 
 
 "Mr. Newman : Yes. 
 
 "Commissioner Sweet : Or else they will not agree to it. 
 
 "Mr. Newman : Yes. 
 
 "The Chairman : Perhaps we can get your idea of the reorganization of the company 
 and the actual effect which it will have upon the stockholders if I can present an illustration 
 to you. I know figures are a little misleading, but I am quite sure you will grasp this. 
 
 "Let us assume that vou own a property which has a capitalization of $10,000,000; 
 $3,000,000 is in bonds, $4,000,000 in preferred stock and $3,000,000 common stock. This 
 
340 Elf.ctric Railway Problem 
 
 common stock is water. A physical valuation is made of the property and it is determined 
 by competent tribunals that that property is worth $6,000,000 and that value is established 
 by the courts. Now your plan is to perfect a reorganization and to rewrite the securities 
 down to the value of the property. Tell me in that scheme of reorganization how the com- 
 mon stockholder is going to be given any consideration. 
 
 "Mr. Newman : In the first place, these bonds may be 2 per cent bonds due in 50 years. 
 Now what is the value of a 2 per cent bond due in SO years. Certainly not par, so those 
 $3,0(X),0(X) may be cut to SO cents on the dollar. The preferred stock may have had a 5-cent 
 franchise and been earning nothing on it, but with the new rate from the city it may be able 
 to earn .something. But the common stockholders say, "No, we will not join in this unless you 
 will share with us.' .\nd they usually do share, the common stockholders, where fair bankers 
 have got the situation in hand. Now there is another place 
 
 "The Chairman ; Well, then, the only way by which the common stockholders can 
 share in that reorganization is through their voting power? 
 
 "Mr. Newman ; No. there is another way. That is one way. 
 
 "The Chairman: What is it? 
 
 "Mr. Newman: 1 had hoped to avoid this discussion. The rate of return on that 
 property — now let us say we would get 10 per cent return on tlie property, which to my 
 mind is not excessive, knowing the business and the miseries of it as I do. I would not 
 want to live through it another 24 years for 10 per cent. The (Kinds may be 5 per cent bonds, 
 the preferred stock may be a 5 per cent preferred stock, and many of them are. 
 
 "Commissioner Meeker: This is under the reorganization? 
 
 "Mr. Newman : No, the old securities. Now it only absorbs part of that 10 per cent 
 return on your investment. You pay that 5 and 5 and you might capitalize the common stock 
 for one dollar and issue certificates of participation in that dollar and yet have a substantial 
 amount to divide without having the capitalization. You might have no par value a share. 
 Do you see that? 
 
 "The Chairman : I do not know what I see. I am asking you questions. 
 
 "Mr. Newman: Yes. Well. I have answered it, or I think I have, and I will repeat it. 
 Take your proposition of $J,0OO.0(X) Ixinds, 1 will make it concrete for you, and $4,000,000 
 preferred and $3,0(X).000 common. I will make this calculation in a hurry for you. Now 
 you have $6,000,000 value and say that ought to get 10 per cent for the risk and worry of 
 the business. That gives us $600.(XK) a vear. \\'e have to cut our capitalization to six 
 million. These $3.0(X).0tX) bonds are 4"s an'd are entitled to $2.0<X1.000 of the new 6's. The 
 preferred stock of four million will be entitled to three million of new 7 per cent preferred 
 stock. That is 120.0(X) and 210.0(X). is .WO.(XX) from 60O.(XX). and we have an equity of 
 270.0(X) to pay the one million common stock which I can issue within my capitalization, or 
 27 per cent. 
 
 "The Chairman: Of course, that is a hopeful future. I think that is an exceedingly 
 valuable contribution to the record. I may want to go into the public utility business. 
 
 "Mr. Warren: You first have to catch your 10 per cent. 
 
 "Mr. Newman: If we get the 10 per cent you had better go into it, at the present 
 value of the security." 
 
 Mv own testimony before the Coninii.ssion came later tli;iii Mr. Xcwman's. 
 and without having had my attention called to his reortjanization theories, I 
 touched upon the point the discussion of which he said he had hoped to avoid. 
 Speaking from the public point of view, at page 1244 of the Proceedings, I say: 
 
 "Public utility commissions ought, I think, to adopt the rule, in all rate cases, that where 
 the fair present value of the pro|)erty is no greater than the par value of the Ixinds and other 
 obligations outstanding upon which fixed charges are paid, the rate of return allowed upon 
 the investment shall be no greater than the rate of interest paid on such bonds, and other 
 obligations, to the end that stockholders having no capital investment represented in the 
 present value of the proix-rty shall have no share in the return on capital. 
 
 "I think that is important for this reason. We have, as I .said tixl.iy. a good many cases 
 of gross overcapitalization. The men who are now in control come forward and try to save 
 their positions in two ways : I-'ir.st. by finding all kinds of imaginary value, making the 
 property appear to lie worth a great deal more than it is; that is. that is my opinion, from 
 the public jMiint of view — trying to make it appear to Ix- worth a great deal more than it is. 
 That, of course, will tend to cover up. if they can get away with it — to cover up the over- 
 capitalization. Hut if that does not go. they .say: 'Give us an 8 per cent return'; and an 
 8 per cent return upon $SO,(XX).0(X) that is represented by $.=;0.000.(XX> of bonds, upon which 
 interest is paid at 5. or at the outside (> per cent, leaves a margin of l^ or '4. as the case 
 may Iw. of the return upon the investment to be capitalized, or to he taken by the stockholders 
 as an eciuity which, from the capital standpoint, does not exist. I do not think that where 
 the |iar value of lx)nds, obligations which must ultimately be met. is equal to the full v.ilue 
 
Financial Reorganization 341 
 
 of the property, the stockholders or the managers should be allowed anything for themselves 
 in the form of a return upon capital. They have no capital interest in the industry, and 
 their return or reward ought to be just like that of any other managers — the salaries they 
 get; or, if you adopt the system of some scheme of bonus for good management, that bonus, 
 or that reward, should not attach to capital as such, but to management as such. I think 
 that should he recognized clearly, because the trouble, when we try to come to an agreement 
 on these public utility matters, is that the companies are all the time trying to put something 
 over on the public, and the public in some cases, is trying to put something over on the 
 utility ; but to take the plan and say : 'AH right, we agree to that,' and then to fix it so that 
 the result is not the result that was intended, does not promote a final solution, and does 
 not promote good relations." 
 
 In his testimony before the Commission, Mr. Morris L. Cooke touches upon 
 the relation of capitalization to value at the beginning of the World War. At page 
 1689 of the Proceedings, he says: 
 
 "As a result of my contacts with the utility situation in nearly all the large cities of 
 the country, I estimate that on July 1, 1914, the face value of the outstanding securities of 
 these municipal undertakings represented almost twice what might be considered the fair 
 value as estimated by fair men, unschooled in the equivocations and mirages so assiduously 
 conceived by versatile lawyers and valuation experts during the last twenty years. While my 
 inquiries in the street railroad field had not been as conclusive as in the electrical field, 
 everything points to alleged value bearing to real value a ratio of at least two to one." 
 
 Further on, Mr. Cooke discusses the pros and cons of the receivership as a 
 remedy for overcapitalization, and points out that efficient management, aided 
 by war prices, may be able to absorb some of the "water" in electric railway 
 capitalization without resort to bankruptcy proceedings. At pages 1694 and 1695 
 of the Proceedings, he says : 
 
 "The question of what shall be done about the excessive valuation or watered stock 
 remains to be answered. Where there is an excessive difference to be absorbed, as is the 
 case in many cities, I suppose there is nothing to do but 'Let Nature take her course.' In any 
 such case the readjustments incident to a receivership and a reduction in the property invest- 
 ment account will come as the inevitable retribution for past mistakes. It will be found that 
 our old time friend, the 'widow and orphan,' will not suffer as much in this as we are some- 
 times led to believe. Some years ago I examined the investment lists of four of the largest 
 savings funds in Philadelphia and found that among investments totaling hundreds of 
 millions, there was not one dollar in municipal utility securities. In other words, careful 
 investors have been on notice for some time. 
 
 "But where the excessive valuation is not too great and where efficient management has 
 been installed, adjustments reasonably fair to all concerned and not involving too radical 
 readjustments should be possible. Here, again, we can turn to Philadelphia for an illustration. 
 Everyone knows that there is in the P. R. T. a large underlying layer of the purest water, 
 running into the tens of millions. I think it is a fair statement that as the result of the 
 past ten years of careful management a part of this overcapitalization may be said to have 
 been absorbed. If Mr. Mitten continues his activities and along the most promising lines, 
 I think it will be altogether possible for him to further reduce the discrepancy between real 
 and alleged value. If present prices are maintained, of course, his task will be the easier. 
 I can then conceive that at some future date there can be reached some conclusion as to what 
 the shortage is and that this can be in part validated in an open and above board manner 
 by a public which is not without some measure of responsibility for its existence, and in part 
 covered by a cancellation of outstanding securities. After all, neither the city nor the security 
 holders should advocate the revolutionary route of a receivership if the necessary adjustments 
 can be made by a more orderly process. Any such settlement is contingent upon full evidence 
 of good faith on the part of the company and the establishment of a progressive and efficient 
 management of the property. In this Philadelphia situation, unless the adjustment is reached 
 by some such method as suggested, the community will ultimately insist upon a valuation made 
 very largely for the purpose of exposing past wrongs, and without any desire to give the 
 management even a sporting chance." 
 
 This matter of the treatment of outstanding securities presents one of the 
 knottiest problems in the whole discussion of the future of the electric railways. 
 It is sometimes urged that a failure on the part of the community to protect 
 existing security holders, the so-called "innocent investors," regardless of the 
 
342 Electric Railway Problem 
 
 intrinsic value which their stocks and bonds represent, would give street railway 
 credit a worse black eve than it now has, and that, tlierefore, any scheme for the 
 rehabilitation of credit as a means of securing new capital must tirst take care 
 of the capital already in the business. Of course, any policies that tend to prove 
 bad faith on the part of the public in dealing with street railway investors cannot 
 help making future credit based upon the conununity's faith more precarious. 
 But the argument that the good faith of the community is involved in the preser- 
 vation intact of the existing financial structure of the electric railways is specious, 
 to say the least. Undoubtedly, the element of good faith may be involved to a 
 limited extent in some communities, but the usual test of good faith in business 
 relations is the scrupulous fulfillment of contracts, except to the extent that such 
 contracts are shown to be contrary to public policy. In my judgment the restor- 
 ation of street railway credit depends more upon the reorganization and re- 
 building of the financial structure of the industry on a sound basis than upon the 
 restoration to the old security holders of the values which they have already lost 
 under the terms of their contracts. In other words, while I recognize that re- 
 ceiverships are a painful remedy, I see no sufficient reason for pennitting the 
 entire policy of the public with respect to the electric railways to be dictated by 
 the fear of them. Heroic treatment is often necessary to save the life of a 
 patient. It is very doubtful whether the companies should be "coddled" along 
 with distilled water and homeopathic pills when everybody knows that a dose 
 of castor oil or the surgeon's knife is what is needed. The public can well afford 
 to do almost anything to preserve the electric railway industry as such; it has 
 much less interest in saving the present managements. If credit is to be re- 
 established and maintained, a new foundation for it will have to be laid in very 
 many cases. 
 
Chapter XXXVII 
 NO ONE REMEDY SUFFICIENT 
 
 In the discussion in the first chapters of tliis report, I pointed out the general 
 consensus of opinion that the solution of the electric railway problem depends 
 upon a restoration of the credit of the industry. After analyzing the causes that 
 led to the collapse of street railway credit, I have analyzed the most important 
 of the affirmative suggestions put forward as to means for restoring it. These 
 suggestions in the order of their discussion are: (1) an increase in unit fares, 
 (2j the adoption of the zone system or distance tarifY, (3) relief from taxation 
 and other public burdens, (4) efficiency in management and economies in opera- 
 tion, (5) control or abolishment of jitney competition, (6) cooperative relations 
 between management and men. (7) public subsidies, (8) abandonment of un- 
 profitable lines and (9) financial reorganization. 
 
 No one of these proposals necessarily implies a complete change in the public 
 relations of the industry, although some of them point in that direction. The 
 analysis of the evidence before the Commission points unerringly to the conclu- 
 sion that no one of these proposed remedies and perhaps no combination of them 
 will be sufficient to put the electric railway industry upon a sotmd basis from 
 the point of view of private ownership and management, while at the same time 
 preserving and developing its characteristics as an essential public utility. 
 
 I have not discussed in detail certain minor suggestions such as the develop- 
 ment of the freight business of the electric railways as a supplementary source 
 of revenue and for the better utilization of the existing plant. I do not wish 
 to gloss over possibilities such as this, but the evidence before the Commission 
 does not warrant a consideration of freight development as a major remedy for 
 the strictly urban lines. The fact is. as I have already pointed out, that the con- 
 sensus of opinion seems to point to an entirely new deal in the status of the 
 industry with respect to public restrictions and public control as essential to any 
 thorough-going rehabilitation of street railway credit. 
 
 In Chapter XXIV I presented the pros and cons of public ownership as set 
 forth in the testimony of numerous witnesses, for the purpose of showing 
 whether or not so radical a change in the status of the industry would be accept- 
 able as an alternative to its destruction, if the issue should come to that. I 
 pointed out that even those who oppose public ownership in theory admit in most 
 cases that it would solve the problem of credit and that as a means of avoiding 
 the complete collapse of electric railway service, it would be better than no remedy 
 at all. We have now reached the stage in the analysis of the problem of credit 
 where it is necessary to point out the essential steps to be taken before a "new 
 deal" can be put through, and to consider, from the standpoint of credit, the 
 
 343 
 
344 Electric Railway Problem 
 
 fundamental characteristics of the new relations to be established between the 
 public and the electric railways. The amount of the investment and the fair 
 rate of return are the two complementary factors that must be determined at the 
 threshold of the new dispensation. Then we shall have to consider continuous 
 public regulation and semi-automatic regulation through service-at-cost contracts 
 as the alternative methods of administering the public relations of the electric 
 railways with a view to the restoration and maintenance of their credit under 
 private ownership. After that we shall come to a further discussion of public 
 operation or of public ow-nership and operation in their relation to credit. These 
 several matters will be taken up in order in the succeeding chapters. 
 
Chapter XXXVIII 
 THE VALUATION 
 
 The determination of the amount of the investment upon which an electric 
 railway company is entitled to earn a fair return while it continues to serve the 
 public is fundamental to the establishment of the new deal about which so much 
 was said by the witnesses before the Commission. Nevertheless, it appears that 
 the American Electric Railway Association did not include definite and complete 
 testimony on the principles of valuation as a part of its case. That the policy 
 adopted by it was based upon the assumption that the Commission would not 
 pass in a definite way upon the question of valuation, is shown by a brief discus- 
 sion which took jlace near the close of the very last of the public hearings, just 
 as Mr. Bently W. Warren, counsel for the Association, was about to leave. At 
 pages 2122 and 2123 of the Proceedings, the following appears: 
 
 "Mr. Warren : As I understood, the question of valuation is not going to be passed 
 upon in any definite way by the Commission, as we did not introduce evidence on it. * * * * 
 
 "Commissioner Wehle : Excuse me, just a moment, but before you leave, lest there be any 
 misunderstanding on the question of expressions by the Commission in its report on the 
 question of valuation, I think before Mr. Warren leaves I should like to hear what the Chair- 
 man has to say about it; because, although we did not go into the discussion of valuation 
 here, it was my understanding that reference might be made to any previous investigation. 
 
 "Mr. Warren : We should welcome that. 
 
 "Commissioner Wehle : -\nd that recommendations might be made by the Commission. 
 
 "The Chairman : The Chair believes that this Commission is not in a position, from 
 this record, to undertake to make a definite pronouncement upon the kind of a valuation 
 which should be made, or the principles which should apply. Just in what form our recom- 
 mendation should be made upon that subject — and, of course, one must be made — is a matter 
 for us to dispose of in our executive sessions. 
 
 "Mr, Warren: Of course, the more fully you set out the different forms of valuation, 
 I think the more valuable the report would be." 
 
 Notwithstanding Mr. Warren's remark referring to the question of valuation 
 that "we did not introduce evidence on it," an examination of the Proceedings 
 shows that considerable testimony with respect to the general principles of valua- 
 tion was given by the witnesses, including some of the principal witnesses who 
 testified on behalf of the Association. Moreover, among the pamphlets filed by the 
 Association with the Commission was included a "Report of Conmuttee on Valua- 
 tion," approved by the Executive Committee of the American Electric Railway 
 Association, and presented at the Convention of the Association held in Atlantic 
 City in October, 1919. Mr. Philip J. Kealy, President of the Kansas City Rail- 
 ways Company, was the chairman of this committee on valuation. The other 
 members of the committee were George Weston (since deceased), W. H. Sawyer, 
 Martin Schreiber, B. E. Tilton, W. J. Harvie, J. N. Shannahan and Charles E. 
 Bailey. The report itself does not disclose the official connections and qualifi- 
 cations of the several gentlemen who participated in the preparation of the re- 
 port, but under date of February 26, 1920, the report was introduced in evidence 
 
 345 
 
346 Electric Railway Problem 
 
 in the Public Service Railway valuation case pending before the New Jersey 
 Board of Public Utility Commissioners by Mr. Martin Schreiber, chief engineer 
 of the Public Service Railway Company, who, as will be noted, was one of the 
 members of the committee. Mr. Schreiber testified that the report was prepared 
 by Mr. Kealy and that Mr. Kealy was the engineer in charge of the valuation 
 of the Metropolitan Street Railway Company of Kansas City in 1912 under 
 Bion J. .\rnold of Chicago. He described the qualifications of the other mem- 
 bers of the committee, stating that the late Mr. Weston had been for a period 
 of si.x and one half years up to January 1, 1919, the representative of the City 
 of Chicago on the Board of Supervising Engineers — Chicago Traction ; that 
 Mr. \V. J. Harvie. \'ice-Prcsident and General Manager of the Auburn and Syra- 
 cuse Electric Railway Company and a past president of the .\merican Electric 
 Railway Engineering Association, had been at one time chief engineer of the 
 Syracuse Rapid Transit Company, and later railway manager for the J. G. W'hite 
 Company; that B. E. Tilton, Vice-President and General Manager of the New 
 York State Railways Company had been at various times construction engineer 
 for the Pennsylvania Railroad, engineer of maintenance of way of the Cleveland 
 Electric Railway Company and engineer of maintenance of way of the Rochester 
 Railway and Light Company; that Mr. J. N. Shannahan was President of the 
 Peck, Shannahan, Cherr\- Com])any. which is engaged in financing, constructing 
 and operating utilities, and that in the course of his career he had been at one 
 time railway manager of the J. G. White Company; that W. H. Sawyer was Vice- 
 ]^resident and executive in charge of railway and light companies of the E. W. 
 Clark Management Corporation of Philadelphia and, among other things, had 
 served six years with the General Electric Company and four years as manager 
 of the New York office of Ford, Bacon & Davis; that Mr. Charles E. Bailey was 
 engineer in charge of the reports of the J. G. White Company ; and that the 
 witness, Mr. Martin Schreiber, was a past president of the American Electric 
 Railway Association and had been for sixteen years connected with the Public 
 Service Railway Company of New Jersey, serving successively as engineer in 
 charge of buildings and track extensions, engineer of the mechanical department, 
 engineer of maintenance of way and chief engineer. I refer to Mr. Schreiber's 
 testimony in the Public Service Railway valuation case for the purpose of show- 
 ing that the Report of the Committee on Valuation filed with this Commission 
 is a well-considered and authoritative statement of the position of the Electric 
 Railway Association, intended to be used in a definite and practical way in sup- 
 port of the contentions of individual electric railway companies in valuation cases. 
 Besides this report, which was filed with the Commission in pamphlet form, 
 though not formally introduced in evidence, the record discloses that the Com- 
 mission had the benefit of extended testimony by Professor Mortimer E. Cooley, 
 Dean of the School of Engineering and .Xrchitecture of the University of Michi- 
 gan, whose experience in valuation work extends over a period of more than 
 twenty years and includes several street railway properties of great magnitude, 
 nt)tably the Chicago, Milwaukee, Cleveland, Detroit, Michigan United Railways 
 and New Jersey properties; also that General Guy E. Tripp, chairman of the 
 Committee of One Hundred, appointed to prepare and present the case of the 
 
Valuation 347 
 
 American Electric Railway Association, Mr. Henry L. Doherty, Mr. James D. 
 Mortimer, Mr. Henry G. Bradlee, Mr. Francis H. Sisson and Mr. J. K. Newman, 
 among the leading witnesses on behalf of the Association, went into the qnestion 
 of valuation to a greater or less extent. The subject also received a certain 
 amount of attention from other witnesses. 
 
 That the valuation is the rock of stumbling in all efforts for a readjustment 
 of the public relations of the electric railways is proven by experience, by the 
 general consensus of opinion, and by the necessities inherent in the situation as 
 soon as we get away from the theory that the capital value to be recognized in 
 the adjustment of these relations is to be determined on the basis of the actual 
 amount of money furnished by private investors for use in the public service. 
 A plan for the solution of the electric railwaj- problem that does not include a 
 plan for the determination of the amount of the company's investment to be 
 recognized for all public purposes essential to such solution, lacks the spark of 
 life that distinguishes a man from a manikin. A carefully worked-out plan of 
 public relations, accepted in every detail by the public and by the companies, and 
 complete with the exception that neither the valuation nor the method of arriving 
 at it is detennined, would leave the public and the companies substantially as far 
 apart as ever. In other words, the valuation is "IT." 
 
 In view of the fact that the present status of the electric railway industry 
 and its need for relief at the hands of the public was presented affirmatively to 
 the Commission by the American Electric Railway Association, it is fitting in our 
 discussion of the valuation question to begin with a statement of the Association's 
 valuation program as it has been definitely formulated and officially promulgated. 
 The Committee on Valuation, recognizing the importance and difficulty of its 
 problem, nevertheless exhibited considerable optimism with respect to the desire 
 of everybody concerned to reach a fair and practical solution of it. At pages 3 
 and 4 of its printed report, it says : 
 
 "In view of the great importance of the item of 'fair value' in rate making negotiations, 
 the .'\ssociation has requested the Valuation Committee to prepare a report, at the earliest 
 possible date, setting forth its recommendations as to the proper procedure to follow in 
 determining 'fair value' in the hope that through the work of this Committee, representing 
 practically all of the Street Railway Companies in the United States, there could be a method 
 of valuation evolved based upon safe economic principles acceptable to the investors and to 
 the various Public Utility Commissions and other rate making bodies representing the public. 
 
 "In attacking this problem your Committee realizes the many conflicting opinions that 
 have prevailed and the many mistakes that have been incorporated in public valuations of the 
 past, but it is the unanimous opinion of the Committee that it is undoubtedly the earnest 
 desire of all interested parties, the Courts, Public Utility Commissions, Municipalities and 
 other governing bodies, as well as the companies, to evolve a method of arriving at the fair 
 amount of capital upon which to base a return and that this can be accomplished through the 
 application to the problem of common sense business methods between common sense business 
 men." 
 
 The committee lays down as its first premise that the investor is entitled to 
 a fair return upon his investment until he gets it back. Starting from this assump- 
 tion, the committee works out a general statement of principles governing the use 
 of the two leading methods of valuation, referred to as the "original investment" 
 method and the "cost to reproduce new" method, respectively. At page 4 of its 
 report, the committee says : 
 
 "There can be no question but that tlie investor in any public utility serving the public, 
 is entitled to a fair return upon his investment until it has been returned to him. 
 
348 Electric Railway Problem 
 
 "Accepting this principle as an 'axiom,' every dollar spent in creating the property, in- 
 cluding the individual effort (the equivalent of money) of the promoters and organizers and 
 builders of the property, including superseded property unamortized out of the earnings of 
 the road, should be included in 'fair value.' And in addition the investor in the company is 
 entitled to a reasonable return upon his actual original investment, plus the appreciation of 
 the property including its value as a "going concern' as compensation for the 'initial risk' or 
 'hazard' and his skill in successfully operating the property. In other words an increase 
 in capital value is the same as an increase of new capital. 
 
 "\\ ith these general premises in mind the Committee makes the following statement of 
 general principles involved : 
 
 "(1) Where 'original investment' is used upon which to base 'fair value' and full 
 complete 'original cost' data is available covering all expenditures including promotion, 
 organization, cost of financing, contingencies, etc.. there should tx; added to these original cost 
 figures any appreciation including a fair value for 'going concern' and there should be no 
 deduction for unamortized superseded property or for accrued physical depreciation in a well 
 maintained property. 
 
 "(2) That where full and complete original cost data is not available the 'cost to 
 reproduce new' method should be used. That an inventory of the existing property be made 
 at prices as of the date of the inventory, which date should coincide with the time the 
 valuation is being made and expressed herein as 'prices of today.' To this bare bones inventory 
 and unit price summation should be added the proper 'overhead' percentages, 'going value' and 
 other development costs to complete a full 'fair value' for 'rate making' purposes and there 
 should be no deduction for accrued physical depreciation in a well maintained property." 
 
 The committee enumerates the "items to be considered in estimating fair 
 value for rate making," but later on recommend.s its conclusions to the member 
 companies of the Association, to tlic state utility commissions, to the Interstate 
 Commerce Commission, and to "other national, state and municipal governing, 
 regulating and supervising bodies" in connection with the determination of fair 
 value not only for rate-making purposes but also "for sale to a municijiality, state 
 or government." In our discussion of the committee's definitions and conclu- 
 sions, therefore, we must regard them as intended to apply equally to rate making 
 and public acquisition, the two great purposes for which a valuation is required 
 in connection with the adjustment of the companies' public relations.' The 
 "items" listed by the cominittee are the following: 
 
 "(a) Promotion expense 
 
 "(b) Organization expense 
 
 "(c) Brokerage 
 
 "(d) Construction costs (based upon actual property inventory at prices as of the day 
 and date of inventory). 
 
 "(e) Overhead direct charges not included in (d) — Engineering and superintendence; 
 storeroom expenses, cost of handling materials, clerks, general office help, contingencies; 
 contractors' profit ; carrying charges during construction ; taxes during construction ; insurance 
 during construction. 
 
 "(f) Going Concern 
 
 (1) Cost of consolidation 
 
 (2) Superseded property 
 
 (3) Created value 
 
 (4) Development costs. 
 "(b) Working Capital." 
 
 The committee then takes up the definition of the terms used in this list of 
 items. It defines "promotion expense" as follows: 
 
 "The initial work necessary to start a public utility enterprise requires the time, efTort 
 and work of capable men to |)lan the proix)sed service, to show its public necessity, to estimate 
 the possible business and prepare construction costs, gross receipts and operation expense 
 statements, prepare the preliminary work necessary to procure franchises, etc. This work is 
 a service of value to the public and represents a money value properly chargeable to capital 
 account.'' 
 
Valuation 349 
 
 "Organization expense" is next defined: 
 
 "An eflicieiit organization must be carried during the formation and construction period 
 consisting of legal, financial and business experience and ability to arrange for and carry 
 on the details of company organization and the creation and construction of the property. 
 This expenditure is a proper charge to capital account." 
 
 "Brokerage" is described next: 
 
 "The money necessary to create the properties must be arranged for through sales of 
 stock and bonds, and bankers or brokers are generally engaged to place the securities and 
 collect the money as required. This means, 
 
 The payment of commissions 
 
 Preparation of mortgage 
 
 Service of registrar, corporate and individual 
 
 Service of trustees 
 
 Cost of certification 
 
 Revenue stamps 
 
 Cost of Recording Mortgage 
 
 Public Service Commission Costs for Approval 
 
 .Advertising, 
 
 and other expenses, and this brokerage cost should be included in any investment estimate 
 for rate making." 
 
 Up to this point the several items described relate to preliminary expenses. 
 The ne.xt item is "construction costs," which are defined as follows : 
 
 "A detailed inventory and classification of the existing physical property forms the 
 basis of all 'Cost to Reproduce New Valuations' to which should be applied unit prices and 
 costs or values as of the date of inventory. The value based upon present day prices is then 
 in accord with current rates of wages, current cost of material and the current value of a 
 dollar and is economically sound. To the 'bare bones' inventory at unit prices must be added 
 the direct and indirect overhead charges not included in the unit prices for rails, other con- 
 struction materials, labor costs, etc., all as enumerated.'' 
 
 The committee then states that "the items of direct overhead charges enum- 
 erated should require no further explanation" ; but, owing perhaps to its recog- 
 nition of the perversity of the public mind when overhead charges are the subject 
 of thought, the committee goes on to explain them nevertheless, as follows : 
 
 "The purchasing of the materials, their transportation, sub-delivery, accounting, inspec- 
 tion, etc.. require supervision and direction and the effort of large forces of storeroom and 
 general office help, inspectors and checkers, the cost of which is not included in unit prices. 
 
 "The general and detail design of all parts of the property require the work of engineers 
 and architects and their assistants to make drawings, bills of material, working specifications, 
 and prepare purchase contracts, the general direction of the work in the field, the making 
 of estimates of cost, progress estimates, partial payment estimates for all contracts and the 
 general supervision and progress of all parts of the construction, the cost of which could not 
 be included in unit prices. 
 
 "During the progress of the work, cash must be provided to pay the current labor, 
 material costs and partial payment contract estimates and interest must be paid upon this 
 capital as it is invested during the period of construction and before the property can earn a 
 return. The same is true of taxes, and insurance, including fire and accident. Interest, taxes 
 and insurance during the construction period are a part of construction costs and should be 
 a capital charge. 
 
 "In the building and erection of a large property many contracts are entered into for 
 specific kinds of materials in quantities, special machinery, track work, buildings, etc., and the 
 item of contractors' profit is one of the construction costs that must be included in 'fair value' 
 for rate making. 
 
 "The item of contingencies is an important one in any cost estimate whether it be to 
 furnish advance information to financiers and promoters, or in connection with any large 
 public improvement, or our own problem 'the establishment of a reasonable and just invest- 
 ment value' and covers the uncertainties, omissions, additions, extras, attendant upon any 
 construction job, large or small, and among many others, includes the following unforeseen 
 but ever present items of delay: removal of obstructions, the appearance of conglomerate. 
 
350 Electric Railway Problem 
 
 hard pan, or solid rock in excavations where earth had been estimated, slides in open cuts, 
 the removal and restorations of water pipes, gas pipes, electric wires and other underground 
 improvements, underpinning of buildings, etc. » » » * This item of contingencies 
 is a real item of cost in every job and ranges from 10 to SO per cent of the total cost and 
 in some hazardous undertakings such as under-water tunnel or foundation work the actual 
 cost is sometimes many times greater than the "bare bones' bill of material contract-specifi- 
 cation estimate of costs." 
 
 Then the Committee goes on to describe "going concern."' a term which it 
 translates, in parentheses, as "HeaUh of the Property." In this there is cause 
 for public cheer, as under the evidence presented before the Commission the 
 electric railways at the present time have very little "health" to be valued and 
 capitalized. Still, this may be a weasel word, leaving the door open to treat 
 "going concern" either as good health or as ill health. At any rate, the Com- 
 mittee says that "going concern" — 
 
 "Represents the value that exists in a completed, matured, successfully operated property 
 and embraces the items of 'readiness to serve.' a 'built up successful business.' etc., as com- 
 pared with a new property in the course of construction, or the immature condition usually 
 prevalent at the beginning of its operation and other development costs including an amount 
 equal to the deficiency of net earnings below a fair return upon the fair investment due solely 
 to the time and expenditure reasonably necessary and proper to the development of the business 
 and property to its present stage and not comprised in the valuation of the physical property." 
 
 The committee then describes and defines three of the four specified ele- 
 ments of "going concern" as follows : 
 
 "Item (f) 1. Cost of Consolidation 
 
 "In the past, competing companies were granted franchises in the same community and 
 duplication of operating organizations and other expenses resulted, and the service to the 
 public was less efficient and more expensive. Under one management the public has 
 benefited by a lower average fare, the more direct routing of cars and an extension of service 
 for a single fare. Much time, effort and expense is usually involved in bringing about a 
 consolidation. This development expense is of value to the public, and its cost is a proper 
 charge to Capital .Account. 
 "Item (f) 2. Superseded Property 
 
 "A public utility property is entitled to repayment for all of its property consumed in 
 the service of the public. 
 
 "The ordinary replacement or renewal of property actually worn out in the service is 
 charged to operating expense and is therefore amortized out of earnings. It is only when 
 large replacements of property arc mad"c necessar\- by extraordinary changes of motive power, 
 such as from horse car to cable, or electricity, or both, or wreckage due to violent storms, 
 earthquakes or other unusually destructive calamities, or when due to improvements in the 
 .■\rt, the general type of car, or other property in service is replaced in large quantities, that 
 it becomes impracticable to immediately amortize out of earnings and new capital must be 
 used, and this new capital should be included in 'fair value' upon which to base a return until 
 such time as it has been amortized. 
 "Item (i) 3. Created Value 
 
 "This item covers an important element of value that may properly he a part of 'Going 
 Concern \'aUie' and represents the value due to the utility having been brought into existence 
 and becoming alive and a vital part of the community. Having pioneered the growth of the 
 city or Commonwealth and enhanced the value of both private and public property, the utility 
 itself should be justly credited with part at least of the value it so created." 
 
 The committee gives no separate definition of "development costs," the fourth 
 sub-item under "going concern." 
 
 The last "item" in the list is "Working Capital," which the committee de- 
 fines as follows : 
 
 "Every business should have a 'Cash Reserve' or 'Working Capital' to 'cushion' the rise 
 and fall between income and expenditures, to carry materials and supplies account, and 
 especially to fortify it against any reasonable financial emergency that may arise. .-Xn ade- 
 quate allowance for this item .should be included in capitalization." 
 
Valuation 351 
 
 "Bond Discount" is referred to by the committee as an item not to be capital- 
 ized. The report says : 
 
 "This item has been set up as one of the problems to be considered in 'rate making.' 
 A new public utility seldom sells its securities at par, but bond interest is paid upon par value 
 and must be included in the rate of return. The question of 'Bond Discount' has been con- 
 sidered in many public service rate cases and has been allowed as capital in some instances, 
 but in the majority [of] cases has been considered to represent prepaid interest and is a matter 
 to be included in rate of return rather than to be capitalized." 
 
 Upon the subject of depreciation, so much mooted in all valuation proceed- 
 ings, the committee takes an unequivocal stand against making any deduction for 
 accrued depreciation in the case of a well maintained property, whether the valu- 
 ation is being made for rate purposes or for sale to "a municipality, state or gov- 
 ernment." The subject is discussed at pages 9 and 10 of the committee's report, 
 as follows : 
 
 "The prevailing practice in making valuations for rate making or upon which to apply 
 rate of return, adopted by Public Service Commissions and other public utility supervising 
 bodies in the past has been 'cost to reproduce new, less depreciation.' 
 
 "There has been little argument between the companies and those representing the public 
 about correctness of inventories. More differences have arisen with respect to proper unit 
 prices to apply and differences of opinion respecting proper overhead and 'going value' per- 
 centages, also with the method of determining the amount of depreciation to be deducted, 
 if any. 
 
 "Depreciation has been classed by all students of the subject to be an operating charge 
 and not a capital account item. The only provision that can be made to take care of deprecia- 
 tion is by making proper repairs and proper renewals when necessary, and these expenditures 
 should be charged as an operating expense : that is, in the case of renewals the original cost 
 of the thing replaced should be charged to renewals and any excess or betterment is a proper 
 charge against capital. The integrity of the capital investment is thereby maintained against 
 depreciation to the extent practicable or economically possible. An exact standard of per- 
 centage physically good to apply to any well maintained electric railway property is difficult 
 to establish because this percentage will vary in different properties influenced by different 
 types of property and equipment, the physical characteristics of soil and other local conditions 
 and usage. A property consisting of a large percentage of elevated or subway construction 
 will show a much higher percentage physically good of the total investment than a surface 
 electric railway property. 
 
 "Every public utility property should be maintained at lOO'/f operating condition, but it 
 is both impractical and uneconomical to maintain any property approximately 100% physically 
 good. This for the reason that the physical per cent good of any property will vary from 
 approximately 100%. in the case of a new property, to 80% or less, in an older property, 
 depending upon the age, the different stages of renewal cycles through which the property 
 has passed, and the amount of additions and betterments which have been added. 
 
 "There is a certain amount of total accrued depreciation that never can be taken care 
 of in any operating, growing property. In other words, as stated above, the only practicable, 
 economical expenditure that can be made to offset depreciation is to make repairs and renewals 
 w'hen physically necessary. There can be no fairness or logic in attempting to penalize a 
 company because it has not done the impossible. The full original investment remains in 
 the property and the investor is entitled to a return upon every dollar until the investment 
 is repaid to him. Where a property has not been kept in good physical condition and there 
 is unmistakable evidence of 'deferred maintenance' found in any property the subject should 
 receive special consideration and if the property being valued has been a prosperous one in 
 the past and the fact is in evidence that the money that should have been expended for 
 renewals and repairs has been diverted to other uses of benefit to the company, the company 
 should be required to make good this deferred maintenance, the cost to be charged to its 
 individual account and not to operating expense. 
 
 "If, on the other hand, it can be shown that any company carrying 'deferred' maintenance 
 has been well managed but that the income has not been sufficient to pay the increased costs 
 of operation, franchise obligations and interest and. in addition, to properly maintain the 
 property, then provision should be made in any rate adjustment to permit the company to 
 earn the amount necessary to put the property in good operating condition. 
 
 "Your committee wishes to emphasize its conclusions with respect to the subject of 
 accrued depreciation in the strongest manner possible, as follows : 
 
 "Where a property has been maintained in good operating condition and an appraisal is 
 being made to determine investment value for 'rate making' or for sale to municipality, state 
 or government, no deduction should be made for accrued depreciation." 
 
352 Electric Railway Problem 
 
 Particular attention should be called to the outstanding features of the 
 committee's recommendations so far as they relate to controversial subjects. It 
 will be observed that although the committee recognizes that the "original invest- 
 ment" method of determining fair value is a legitimate one where a complete and 
 reliable record of total actual expenditures is available, its discussion relates almost 
 exclusively to the "cost to reproduce new" method. The committee says, at 
 page 4 of its report, that "it has become the almost universal practice to inven- 
 tory the existing property and apply unit prices to the difTerent items of construc- 
 tion." The first outstanding feature of the committee's recommendations, there- 
 fore, is that the reproduction-cost method is the one to be used in almost all cases. 
 Indeed, in its general statement of principles to be applied where the "original 
 investment" method is used, it says that to the complete original cost figures 
 should be added "any appreciation including a fair value for 'going concern,' "' 
 and that no deduction should be ntade for "unamortized superseded property" 
 or for "accrued physical depreciation in a well maintained property." The in- 
 clusion of "appreciation" in an original cost appraisal tends to make this method 
 very nearly equivalent in result to the reproduction-cost-new method. 
 
 The second outstanding feature of the recommendations is that in the appli- 
 cation of the reproduction-cost-new method unit prices should be taken as of 
 the date of the appraisal, not as average prices extending over a period of years 
 nor as prices of some past time which might be regarded as more nearly normal 
 than the present. Right now, this means prices substantially at the war peak. 
 
 The third outstanding feature of the recommendations is the flat-footed and 
 emphatic declaration that accrued depreciation in a well maintained property 
 should in no case be deducted from cost new in arriving at a basis for rate making 
 or for sale to a public body. 
 
 The fourth outstanding feature of the recommendations is that "going con- 
 cern" value is interpreted to include not only deficiency of net earnings and super- 
 seded property, but also "cost of consolidation" and "created value." It is note- 
 worthy that while "developmt-nt costs" are listed as a sub-item under "going 
 concern." they are not separately defined. It must be presumed, however, that 
 this sub-item represents something different from, and in addition to, the three 
 elements of "going concern" which are separately defined. 
 
 In its discussion of overhead charges and going concern, the committee does 
 not attempt to fix percentages or amounts, on the theory that "thev will vary 
 in diflferent properties, and therefore must be separately determined for each 
 particular property." Perhaps the most striking feature of the entire program 
 of valuation recommended by the committee is the claim for "creatcil value." 
 The theory is that transportation facilities are beneficial to the community and 
 enhance the value of real estate, and that, therefore, the owners of the transpor- 
 tation lines should get not only the full rcproduction-cost-new value of their own 
 property, but also a share in the increased value of other holdings. 
 
 In view of Mr. Warren's statement that the Klectric Railway Association 
 "did not introduce evidence" on the subject of valuation, it might be considered 
 that the testimony on this subject given by the various witnesses for the Associa- 
 tion is to be regarded as incidental, personal and unauthoritative. For example. 
 
Valuation 353 
 
 General Tripp, in advocating a theory of valuation that appears to be quite dif- 
 ferent from that outlined by the Committee on \'aluation, took particular pains 
 to say that lie was speaking for himself and that his testimony should not be 
 regarded as binding the Committee of One Hundred, of which he was chairman. 
 Nevertheless, it is necessary to analyze the testimony of the individual witnesses 
 upon this all-important subject, and so far as Professor Cooley's testimony is 
 concerned, it cannot be regarded as other than a definite part of the Association's 
 case. 
 
 Mr. Warren, after he had qualified Professor Cooley as a valuation expert, 
 asked him this question : 
 
 "What would you say was the keynote of the troubles so far as you have found troubles 
 — and I assume you have — in this valuation question?" 
 
 Professor Cooley's reply, found at pages 249 and 250 of the Proceedings, indi- 
 cates that in his opinion ignorance is the keynote of valuation troubles. He 
 says: 
 
 "There is not very much trouble now in valuing a property. Valuation has been very 
 much simplified, very much organized, and it is not a dllficult matter to procure results and 
 they are reasonably accurate; but the great difficulty — and I myself think it is the keynote 
 of all our trouble today — is ignorance, sheer ignorance and lack of understanding by the 
 public, very largely, but not confined to the public — a lack of understanding by the railroads 
 themselves of the fundamental principles that are involved in all questions of valuing prop- 
 erty, and especially all questions that are involved in fi.xing rates. If we could have a 
 campaign of education which will make perfectly clear these things that are now misunder- 
 stood, I think the trouble would disappear almost wholly. 
 
 "I am convinced of that, and I have been trying to do my part in dispelling that igno- 
 rance, but it is very difficult. The attitude of the public mind is such that you cannot 
 approach them; you cannot make them listen to you; they won't believe you, and I do not 
 know that they are to be altogether blamed for it. because they have been sorely tempted 
 in the past. 1 think the public utility companies all admit today that their own conduct in 
 the past has, to some e-xtent, merited the difficulties that they now find themselves in. I 
 make no defense, and the utilities themselves make no defense, of the mistakes that they have 
 made in the past, but the utility companies, as a rule, now see what mistakes they have made, 
 and are trying their best to remedy them. But the public is not yet willing to meet them 
 anywhere near half way; and so I say it is a case of ignorance — a greater amount of igno- 
 rance on the part of the public than it is on the side of the utility." 
 
 Mr. Warren's next question is as to whether "as a general proposition the 
 factors in any valuation are the same as in other cases"; to which Professor 
 Cooley, at page 250 of the Proceedings, replies as follows: 
 
 "I think myself that the factors that enter into a valuation of any kind of a utility 
 property are just the same in the case of a steam or electric road or a gas or water-works 
 property, or a telephone or telegraph property. They are all practically the same, the same 
 fundamental principles, the same fundamental elements ; and when you have described the 
 process of valuation of one property, and have all the factors in connection with that property, 
 you have them all in connection with the other property. There are about eighteen or twenty 
 of them, depending upon how much subdivision you give all factors that you cannot fail to 
 take into consideration in every rate-making case." 
 
 As a setting to Professor Cooley's further testimony, the following ex- 
 changes at pages 250 and 251 of the Proceedings are perhaps important: 
 
 "Mr. Warren : I hesitate to ask you questions, because I know you know so much more 
 about the subject, Professor Cooley, than I do. 
 
 "Mr. Cooley: It is rather difficult to talk on this subject, because it is so easy to talk; 
 what I mean is that there is so much that can be said, and that one can talk a very long time, 
 and I would like very much to confine myself to the particular things about which the 
 information I can give would be wanted. 
 
 "Mr. Warren : Well, it has been suggested here that in case the Commission should 
 
354 Electric Railway Problem 
 
 make recommendations along certain lines, as, for instance, possibly a servicc-at-cost recom- 
 mendation, that might involve, perhaps necessitate, a basis for any such plan for any partic- 
 ular company, and the valuation question has arisen and has been discussed by some of the 
 witnesses as to what sort of a valuation and upon what basis it should be made. 
 
 "Mr. Cooley : Then, perhaps, 1 might start by discussing what we will call factors 
 determining a reasonable charge for public utility service. 
 
 "Mr. Warren: I think that would be very useful. 
 
 "Mr. Cooley: That will not involve my going into the details of valuation, unless it 
 be desired. 
 
 "The Chairman: Let me make this suggestion: Perhaps, the Commission should give 
 some consideration to the question as to whether we should enter into a very full develop- 
 ment of the proper principles of valuation. It is a question whether our Commission shall 
 make any finding, or even should make a finding, as to the proper elements which should be 
 included in the physical valuation of a plant. We are dealing with fundamental principles 
 and fundamental evils. 
 
 "Mr. Cooley: I will endeavor to take up what I understand to be your point, but what 
 I did not want to do here was to go into the detail of physical valuation and take up the 
 value of ties, rails and cars and different elements of the physical property. 
 
 "Mr. Warren : I might suggest, Mr. Chairman, that 1 suppose that is a matter which 
 the Commission will consider in executive session, as to whether they will make any recom- 
 mendation about the valuation or as to the elements entering into it or the basis upon which 
 it should be made. It might help the Commission in its consideration of that question if 
 they themselves, you and other nicmtters of the Commission, were to ask Professor Cooley 
 any questions that seem to have particular pertinence to your decision on that question. 
 
 "The Chairman: There is so much to be said on that subject of valuation that, if we 
 go into it, we can occupy a whole month in just taking that testimony alone." 
 
 Professor Cooley then undertook to describe the genesis of a railroad prop- 
 erty in order to iinpress upon the Commission the items of preliminary and over- 
 head costs which are not always apparent to the public. In the course of his 
 discussion he referred to the item of contingencies which he said might vary all 
 the way from 2 per cent up to 25 per cent or 30 per cent and would average 
 "inside of 10 per cent, 5 per cent on the inside in connection with the details and 
 5 per cent on the outside, spread over." At this point it developed that tlie 
 witness was not very familiar with the details of the Interstate Commerce Com- 
 mission's findings in the railroad valuation cases, as he did not know that the 
 item of contingencies had been ruled out in the Texas-Midland case. His testi- 
 mony at page 255 of the Proceedings is as follows: 
 
 "Mr. Warren: When you give that figure. Professor Cooley, you base it on experience 
 in actual cases, do you ? 
 
 "Mr. Cooley: Yes; I do, out of a very great deal of experience, and not only that, but 
 I base it upon actual exjienditures as the>' have been found by the vouchers. It is not a guess 
 any longer. It was a guess in the first place, but it has gotten beyond the guessing st^e. 
 
 "The Chairman: This question of contingencies has lieon argued before the Interstate 
 Commerce Commission in the railway matter for a long time. 
 
 "Mr. Cooley: Yes, sir. 
 
 "The Chairman : Are you aware of the finding which was made upon that question in 
 the Texas-Midland case? 
 
 "Mr. Cooley: No: I am not, I am sorry to say. 
 
 "The Chairman: Perhaps, it may be of interest to you to know that the Interstate 
 Commerce Commission did not fix any value for contingency in cither the Texas-Midland 
 or the A. B. & A. case." 
 
 Professor Cooley then explained that where the historical cost of the prop- 
 erty can be found, it is unnecessary to fix a contingency item, and went on to 
 say that in his opinion the complete historical cost, if it could be ascertained, 
 would be greater than the co.st of reproduction in normal times. His testimony 
 on this point is found at pages 255 and 256 of the Proceedings, as follows: 
 
 "You would not have to fix any contingency item at all if you could get the historical 
 cost of the |)ropcrly, if you knew what the property first cost, starting from the very begin- 
 
\'aluation 355 
 
 ning. You can take that cost out of the books, and that, of course, is the thing to take, 
 because it represents the money invested; but, unfortunately, you cannot do that with the 
 old properties, at least. You may do it with the newer properties. So, we proceed in the 
 best way we know how, to approximate that cost, and it is my belief that this so-called cost 
 of reproduction method is the fairest approximation to what would have been the book costs 
 if you could have had them, if you could get them. 
 
 "Commissioner Meeker: Suppose, in the meantime, the costs of labor and material have 
 advanced from 50 to lOO^'r ? 
 
 "Mr. Cooley : Yes ; I am very glad you mention that right here. I was going to speak 
 of it a little later, but right there that leads nie to say that in making the statement that I 
 just now made, I was assuming normal times, normal conditions, conditions that existed 
 well before the war, and did not have in mind the extreme costs of labor and materials that 
 we now have to bear. 
 
 "I think I should not fail to make this point, which is not usually conceded, I may also 
 say, and which has to be in the nature of an expression of opinion. I have frequently said 
 that, in my opinion, if we could have the so-called book costs, the historical costs, and have 
 all of them, going back to the very day you gentlemen thought of this project and decided 
 to go into it. it is my belief that that cost would be greater than the cost of reproduction 
 in normal times, and the common opinion is, or the common belief is, that it would be very 
 much less. I believe it would be more. 
 
 "Now. 1 do not believe I can prove that, but that is a belief that has crept in upon me, 
 in view of mj- study of this problem during all of these years. 
 
 "Commissioner Meeker : Well, it is a matter of common observation that improvements 
 in construction and all of the other items that you have mentioned have come about with 
 the passage of time; so that it would seem to be a rather foregone conclusion that the cost 
 of reproduction in normal times, barring cataclysmic world wars, would be less than the 
 cost of actual construction. 
 
 "Mr. Cooley : I am verv- glad to hear that statement. It is the most consoling thing 
 that I have heard in a long, long time. I thought I was alone." 
 
 After taking up the items of contractor's profit, taxes during construction, 
 and organization, administration and legal expenses. Professor Cooley goes on 
 to discuss, at page 257 of the Proceedings, the question of promotion costs and 
 watered stock, with respect to which he says: 
 
 "The question of the promotion of an enterprise and of promoter's profits, is another 
 red rag to the bull, and it is in connection with these promotion costs and promotion profits 
 that the public thinks tiiat a good deal of the water has gotten into the capital account. And 
 I suppose there is water there in a great many cases, but there is very, very little water in 
 recent cases, as far as my observation goes, and much less water in the older cases than 
 the public believes, because, when you write your securities, the bonds are protected by a 
 mortgage on the physical property. The face of the bonds is not equal to the cost of the 
 physical property, but some percentage of it. It may be 50, 75 or 85%. The practice was 
 to allow 85% in one case that I knew about. 
 
 "Now, that 85%, we will say, is written in the form of bonds protected by a mortgage. 
 As soon as you have' taken the precaution to get into the cost of the property all of these 
 preliminary costs and all of these other costs that I have been discussing or will discuss, 
 you are not going to have anywhere near the full cost of that property represented by the 
 mortgage and by the bonds. Now-, you must raise the rest of the capital in some other way 
 — by stock, or whatever it may be. But say it is stoclv. If we have got 75% of the cost of 
 the property in the form of bonds, protected by a mortgage, there must be at least 25% more 
 in the form of stock, as we ordinarily think of our property, that is, just the physical prop- 
 erty, as the public sees it; but, in addition to that, we have got to have another 25%r, it may 
 be, to cover all of these tilings that you gentlemen know about, expenses which you have 
 incurred, and w-hich do not appear in the valuation at all. 
 
 "So I say. to some extent, this so-called water in the capital account is fully and amply 
 justified. Remember, I say to some extent. I do not say it is all justified, for I do not think 
 it is in all cases." 
 
 The witness then goes on to discuss the "cost of money," "promoter's 
 profits" and the item of "interest during construction," and gives his view as 
 to the need for "working capital" when the construction of the physical property 
 has been completed. On this last point, at page 261 of the Proceedings, he says : 
 
 "Now, when you have this property all done * * * * you have got the tracks 
 laid and the power houses built and the cars bought, and you have at the very end bought 
 
356 Electric Railway Problem 
 
 stores and supplies, and you liave already arranged for your quarters, or you may have to 
 rent quarters at the outset, or you may build your own building, and if you rent it, the rent, 
 becomes an operating expense, and if you build it, it is a part of the property, and it becornes 
 a capital charge. Then, the very last thing you do before you turn a wheel is to provide 
 what wc call a working capital. That is another red rag. 
 
 "Now, of course, it does not need any great amount of sense to know that when you start 
 to do a thing, in which you buy materials and hire help, you have, at the end of the week or 
 at the end of the month, to have a payroll. That is going to be the working capital for that 
 payroll. That takes care of the payroll, and that working capital, gentlemen, is that fund 
 of money that lies idle in the bank, subject to check all the time. It is the amount of money 
 that the company has found necessary in order to do its business from day to day, and I 
 take that from the books. I do not estimate that. 1 just take that. We go back over a 
 period of years, and we find what has been the average amount required to do business, and 
 wc put it in. Yet everybody comes along and takes it out. I say 'everybody' ; I mean the 
 public. "Why should we pay for that?' That is cash, but it is idle money, and if it does 
 not bear interest in the banks, it earns an interest through the rate." 
 
 In order to place before the Commission the specific implications of Pro- 
 fessor Cooley's testimony up to this point, Mr. Warren asked hini this question: 
 "Could you state any general figure or limits for a general figure of those over- 
 head items?" Professor Cooley's answer appears at pages 261 and 262 of the 
 Proceedings, where he says: 
 
 '"'Yes, I can do that, and you may be surprised when I get through with you. You will 
 be very much surprised. 
 
 "VVhat the gentleman means by this overhead is something over and above the actual 
 money that you invested for materials and labor in the physical property. That is what 
 he means. 
 
 "You buy materials, and you buy labor and you put those costs into the physical property, 
 and it is what we call the base figure. Now, how much in addition to that base figure must 
 you add for organization, legal expenses, engineering, interest on the cost of money, and 
 for this thing and for that thing, all of which are overheads, and which cannot be figured 
 directly? They cannot be inventoried. 
 
 "These overheads will vary not only with the size of the property, but with the location 
 of the property. Out in my little town, or in any little town, the overhead might be very 
 small, ten or twelve per cent, perhaps; maybe not over eight or ten per cent, de|)ending upon 
 conditions. In the City of New York, they might be sixty per cent. 1 heard a gentleman, 
 a very prominent engineer, testify before Judge Tayler that, under certain conditions in the 
 City of New York, the overheads were sixty per cent. I did not know it. I was just as 
 much surprised as Judge Taylor was. 
 
 "Now. let us see how that figures out. 
 
 "Certain items of overheads today, instead of being put on overhead, are put inside in 
 connection w-ith the item. \ certain percentage for overheads comes in with grading. A 
 certain percentage for track-laying, and a certain percentage for this thing and that thing. 
 It comes into unit costs, and disappears as a part of unit costs. That is happening, and some 
 engineers arc very adroit, enough so that they can conceal a very large proportion of the 
 overhead, and nolwdy will ever know. That is being done. That is the way they keep their 
 ovcrhe.ids down; but if you will l>e honest about it and put your overheads where they belong 
 — and hy 'overheads' I mean the contingency items, the engineering item, the legal item, the 
 organization item, the interest during course of construction — and not yet consider cost of de- 
 veloping the project, costs of money, or promoters' profit, but leaving those out, thoy amount to 
 ll'/i per cent — they nm from l.S to 18 per cent up to 25 or 30 per cent. Now, if you add all 
 of these other things, they actually come up to between .W and 40 per cent, and in certain 
 instances, as high as 50 or 60 per cent, as this gentleman testified to in the Citv of New 
 York." 
 
 I have already cited and discussed in Chapter XI of this report Professor 
 
 Cooley's theories of depreciation as set forth in his testimony and so need not 
 
 describe them here. Mr. Warren's final question in his direct e.xamination 
 
 called for "just a word about the different methods of valuation." Professor 
 
 Cooley's answer is found at pages 265 and 2(V) of the Proceedings, as follows: 
 
 "In talking about the valuation we arc asked, 'What do you mean by valuation?' Well, 
 of course, we have the historical valuation or the book valuation or the cost of reproduction 
 method or the cost of rcpnKluctinn less depreciation; the cost of reproduction less depreciation 
 being frequently spoken of as the present value, a very misleading term. 
 
Valuation 357 
 
 "Now, what I have just said ahout depreciation distinguishes the difference between the 
 cost of reproduction and the cost of reproduction less depreciation, because the cost of 
 reproduction less depreciation is about 85 per cent, so I do not need to say anything more 
 about that. Now the historical method, of course, does not need any discussion, because that 
 means just what it says ; likewise the book account. Those are the different ones. 
 
 "Now, we do not have the historical value. If the property is old and the books have 
 been lost we do not have the book value. So we attempt to get at them in the only practical 
 way that we seem to know anything about, namely, by estimating the cost of reproducing 
 the property under normal conditions or under the conditions as nearly as may be which 
 existed at the time the property was built with respect to the purchasing power, of a dollar." 
 
 In his discussion of depreciation Professor Cooley had referred to the fact 
 that the Detroit United Railway scrapped its old single-truck cars when they 
 stood "at a physical condition close onto eighty per cent." At the close of his 
 direct examination, Commissioner Gadsden asked Professor Cooley to "say a 
 few words on the subject of obsolescence." This led to his testimony found at 
 pages 266 and 267 of the Proceedings, where he says: 
 
 "Take the electric street railway art as an example and compare it, if you like, with the 
 art of gas making. Now the electric street railway art represents an art which has been 
 changing very, very rapidly in the last quarter of a century, whereas the gas-making art, 
 which has existed for seventy-five or one hundred years or more, has been changing but the 
 changes have been relatively slight. In other words, the gas-making art in comparison with 
 the electric is a fi.xed art and there is not much obsolescence. Take the street railway and 
 take its history. We all of us remember horse-car days and remember how the horse-car 
 was changed into the cable road, in San Francisco, Grand Rapids, Chicago and elsewhere. 
 And then came the electric road back in the late 80's and early 90's. And perhaps as good a 
 practical illustration as any I can give is the situation in Grand Rapids, Michigan, Succeed- 
 ing the horse-car days they built there a cable road up those hills. I do not think they 
 operated that cable road more than a year, perhaps not as long as that, but a very short 
 time, when they recognized the handwriting on the wall and they then scrapped that whole 
 cable road and converted it into an electric road, the boldest and bravest bit of financing I have 
 ever known anything about. Now, there was a case of obsolescence. The property had only 
 been running a year or so. it was practically new, and yet it was scrapped for obsolescence, 
 and so far as the duct and the cable machinery was concerned it was pretty nearly 100 per 
 cent obsolescent. 
 
 "The Chariman : Did the company stand that loss or did they amortize part of it? 
 
 "Mr. Cooley: I have never heard. I have often wondered. 
 
 "Commissioner Gadsden: How ought it to be treated economically? 
 
 "Mr. Cooley : Treated economically, of course, they went into it in the best faith in 
 the world and with the knowledge and consent of everyone, and economically, or morally 
 at least, they should be permitted to earn on that investment until they could wipe it out; 
 that is, they should be permitted to earn enough so they could gradually wipe out that 
 tremendous investment. .\nd so far as my experience with commissions goes, they are per- 
 mitted to earn it and wipe it out. 
 
 "Take another case right there in Michigan — the Commonwealth Power Company built a 
 high transmission line from one of the dams up the Muskegon, I think it is, and carried the 
 current into Grand Rapids and the southern towns. They went into the market for copper. 
 They t.hought copper was going up, everybody thought copper was going up, and they paid 
 30 or 31 cents, say, for copper, and bought enough for the whole job so as to have it on 
 hand, thinking thereby to profit by the market. But before they got that line erected, copper 
 dropped to 16 or 18 cents and there was \i or 14 cents. What would we do with it? We 
 were valuing the property under the Michigan Railroad Commission, and the Commission 
 had a special hearing on it and the facts were related to them and they said, 'Gentlemen, we 
 will allow them 30 cents for the copper, what they paid for it. They invested their money 
 honestly, and it was simply one of the turns nobody could anticipate,' and it went into the 
 capital or was set up in a fund to be amortized. 
 
 "Commissioner Meeker: But if the amount paid had been subject to the suspicion that 
 not good judgment had been used in making the purchase, would the amount have been 
 allowed just the same? 
 
 "Mr. Cooley: Well, you say good judgment. In my 
 
 "Commissioner Meeker: What the courts usually term ordinary business judgment. 
 
 "Mr. Cooley: Well, I do not know just where we would draw the line there as to what 
 would be good judgment. 
 
 "Commissioner Meeker : There is a difference of principle there that I want to get at. 
 
 "Mr. Cooley : T would say this, if the contract had been carelessly made or they had 
 
358 Electric Railway Problem 
 
 not properly looked into the question and just simply went in without any foresight and did 
 it, they should stand lor it. But the investigation showed it was honestly done. 
 
 "Now take one of the best illustrations of this obsolescence — those street cars in Detroit, 
 which I cited a moment ago. splendid cars. They maintained them out of operating expenses 
 up to this very high condition, and they were maintained in that condition up to the day 
 they were scrapped and double-truck cars took their place. 
 
 "Now take the electric art, going back to the early days when we had the little high-speed 
 engine driving our belted dynamo, it was not long, it was in 1893. at the time of the World's 
 Fair, when we had the direct unit still, a small unit. It was not very long until we began to 
 build big dynamos and hook them onto slow moving engines; and in a few years, say, along 
 towards 1900, I do not rememt)cr the date, came the steam turbine and small units, first used 
 as e.xciters for the dynamos driven by steam engines, a few kilowatts capacity, now thrown 
 up to 60.000 kilowatts capacity with the steam turbine, and all that since 1890, say. 
 Now, that shows a succession of scrapping of mpchinery and street car material through 
 obsolescence." 
 
 It will be observed that up to this point Professor Cooley's testimony with 
 respect to valuation relates to the cost of construction, the preliminary and over- 
 head expenses and the provision of working capital, bringing the property up to 
 the point where operation commences. After the Professor's discussion of 
 obsolescence which I have just quoted. .Mr. Warren took up the question of de- 
 velopment cost as a possible element in the valuation. The testimony on this 
 point is found at pages 267 to 269 of the Proceedings, as follows : 
 
 "Mr. Warren : Is the cost of establishing the business a capital charge or an operating 
 charge ? 
 
 "Mr. Cooley: I think it has up to very recently been considered a capital charge. 
 
 "Mr. Warren: In that case it enters into the valuation and I want to ask you about it. 
 
 "Mr. Cooley: Yes, but I think the modern tendency is to carry the cost of establishing 
 the business as a floating debt and amortize it. In other words, it partakes more of the 
 nature of an operating expense in these days than it did a few years ago. 
 
 "Mr. Warren: How substantial is it in an ordinary case? 
 
 "Mr. Cooley: It is a very, very substantial item. It is so substantial that in a great 
 many cases it runs from 25 to 35 per cent of the cost of the physical property. It is so big an 
 item as that, so it is very, very important. I know one property in Milwaukee, for instance; 
 it is the heating property uwncd by the Milwaukee Klectric Light & Railway Com|)any. They 
 have kept the books sejiarate for that business. When 1 made the first analysis of it in 
 1907 they had ten or liftcen years of life and they must now have twenty-five or thirty 
 years' life. They were plotting the curves for those earnings and for oix^rating expenses. 
 It looked at the time as if it would take ten or fifteen years for the earnings from that 
 company to reach the operating expenses. That is. a period of twenty-five years, we will 
 say. has licen reiiuired to make the business what we call a going concern, by that meaning 
 a concern in which the earnings of the company, the income, is sufficient to meet all of the 
 outgoes. 
 
 "So I would emphasize the necessity of taking into consideration the cost of establishing 
 the business. It has several names. That I think is the clearest name. I would emphasize 
 it particularly, as the tendency today seems to be to treat it as an operating expense. 
 
 "Mr. Warren: How would you define it, Professor Cooley? 
 
 "Mr. Cooley: Well. I think the Wisconsin definition is perhaps the best or most generally 
 accepted. It is really a summation, if you like, of the early deficits, that is, a sum of the 
 losses that the company encounters up to the time its income meets its outgoes, and it is 
 very hard to obtain it. Iiecause companies until recent years have not appreciated the necessity 
 of so keeping their books that the items of loss can l)e actually taken out. So it is a vcr>- 
 difficult thing to sustain in dollars and cents. But in the future it probably will be a well 
 known factor, no doubt about it at all, because they are keeping their books now so as to 
 tell us what it is. 
 
 ******** 
 
 "Now I might .say just a word on that. Now. for example, when before luncheon we 
 had completed our physical structure and were ready to start the property into operation, we 
 had just .secured stores and supplies and working capital to cnalile us to begin to turn the 
 wheels. We start in and it may take six months or a year before we get that property 
 settled so that the machinen,- all works well and get the wrinkles ironed out. It is the same 
 kind of treatment of the property that we have to make with a locomotive. When we buy 
 it and put it on a steam railroad we have to run it a few weeks under easy conditions, 
 we will say. so as to work out the troubles, precisely the same thing you have to do on 
 iKiard a battleship after it comes from the yard; it has to be run and tuned up. All those 
 
Valuation 359 
 
 things have to he done before your property is in final shape for operation. Now that all 
 costs money, and when you start to earn you do not earn anything the first day — or the day 
 before the first day it is zero. Then as you begin to operate your business the earnings 
 begin to mount. Aicantime you are carrj'ing along as expenses all these daily operating 
 expenses of whatever character, including ta.xes and interest on the cost and — well, perhaps 
 you would not start any sinking fund or depreciation fund at that time, but if you did that 
 would also come in. And of course the earnings are almost nothing, we will say, the first 
 week or two or three weeks and the operating expenses are very large. Now the difference 
 or that deficiency is one element of this so-called cost of establishing the business. And 
 when you aggregate those losses for a period of years up to the time the gross earnings 
 line crosses the gross operating e.xpense line, and when you sum up all of those losses you 
 have the cost of establishing the business as it is ordinarily understood. 
 
 "Now, it is frequently argued, and apparently with a good deal of sense, that the 
 greater these early losses the more valuable your property, because with every loss you are 
 adding to the cost of the property, if it goes into capital. But that is fallacious, it seems 
 to me, because tlie utility when it is built is built to meet a public necessity. Now the public 
 knows that that property is not going to pay to start with, if they know anything about it at 
 all, and that property has been built and accepted by the public with full knowledge it has 
 got to grow into its business and with a full knowledge that these early losses are to be 
 there; therefore they are a proper cost of the property." 
 
 It will be noted that in Professor Cooley's earlier testimony he treats the 
 reproduction-cost-new method practically as a substitute for the historical-cost 
 method of arriving at the fair value of an electric railway property, upon the 
 assumption that in most cases complete records of historical cost are not avail- 
 able; also that in his opinion the full historical cost would be greater than the 
 reproduction cost new in normal times. It appears, however, that at the present 
 time when prices are abnormally high, primarily as a result of the depreciation 
 in the purchasing power of money. Professor Cooley thinks that the historical- 
 cost method is no longer applicable and that the reproduction-cost-new method 
 should be used. His discussion of this phase of the valuation problem is found 
 at pages 270 and 271 of the Proceedings, as follows : 
 
 "That brings up the question whether we should use present-day costs or before the war, 
 in other words, whether we should use the costs of reproduction today or the historical cost. 
 I think that is answered splendidly by comparing the purchasing power of a dollar today 
 with what it was when the property was built. I have frequently said that our dollar of today 
 was the 50-cent piece prior to the war. So if you are going to build a property today you 
 will have to build it so far as purchasing power is concerned out of SO-cent pieces. 
 
 "Mr. Warren : That has been the experience of the Boston Elevated. They have just 
 been double what they were in the past. 
 
 "Mr. Cooley : Well, as I understand it, the purchasing power of the dollar is about 
 50 cents; so if a property were valued before the war at about around $100,000,000 it would 
 today be valued around $200,000,000; if you are allowed to earn the same percentage on the 
 $200,000,000 of course it would double the income, we will say. 
 
 "Commissioner Meeker: But the answer is not quite clear to me, however. If you are 
 arriving at a fair valuation on which earnings are to be allowed, would you depend upon the 
 cost of reproduction today or would you take the historical cost or what would you do? 
 
 "Mr. Cooley: I do not think it would make any difiference, if you will keep in mind 
 the purchasing power of the dollar and let your earnings vary with the purchasing power 
 of the dollar, that is what I mean. For example 
 
 "Commissioner Meeker: It seems to me the difference between $100,000,000 and 
 $200,000,000 is quite considerable. 
 
 "Mr. Cooley: True, it is quite considerable, but the $200,000,000 is precisely equal to 
 the $100,000,000 as we are taking it. They are different figures but they are not different 
 quantities. 
 
 "Commissioner Meeker : That is, the company should be allowed to earn upon the value 
 of the property valued upon the cost of reproducing under current prices? 
 
 "Mr. Cooley : Yes. 
 
 "Commissioner Meeker: Does that exactly jibe with your statement made this forenoon 
 that the original cost should be taken as the basis? For example, the tunnel through the 
 Detroit River which eventually became the tunnel under the Detroit River; there was about 
 100 per cent, was it. of contingency or SO per cent? 
 
 "Mr. Cooley : \'ery large. 
 
360 Electric Railway Problem 
 
 "Commissioner Meeker: Very large? 
 
 "Mr. Cooley : Yes, 1 have forgotten which. 
 
 "Commissioner Meeker : $1,000,000, which was actually spent, and that should not be 
 disregarded in valuing the property today, but the original cost should be taken into account. 
 
 "Mr. Cooley: That is all right. Suppose we do take in the original cost, and I think 
 fundamentally that is of course right, there cannot be any question about that. You should 
 take in what your investment is. that is, what the proper investment is, I mean. Now prior 
 to the war that investment w-as permitted to earn say S per cent, and we got 5 per cent and 
 we were satisfied and we were able to do everything we wanted with it, everything that we 
 had to do. Now today what would that 5 per cent do? It would do only half the things 
 we have to do. So if you arc going to hang onto the original cost that we have been dis- 
 cussing, the investment cost, you have to allow twice the nicome from it or else you have 
 got to double the value and take the same rate of per cent, both being precisely equal." 
 
 Commissioner Meeker asked Professor Cooley how improvements and ex- 
 tensions made out of earnings should be treated. The witness's reply is found 
 at page 272 of the Proceedings, where he says : 
 
 "If they are made out of earnings — the answer has to be a double-barreled one — if they 
 are made out of earnings which ordinarily would go into the pockets of the people who have 
 their money invested in the property, it is equivalent to new capital. If. on the other hand, 
 the earnings have been very large, far in e.xcess of what would be regarded today as proper 
 earnings, then I do not think it ought to go into capital, except there be some legal phases 
 which would require it. 
 
 "Commissioner Meeker : You think 
 
 "Mr. Cooley: I hope I make that clear. Say an 8 per cent earning is permissible and 
 all right and suppose the earnings have been 20 per cent; if in the first case you have got 
 your 8 per cent and have taken some part of that 8 per cent and invested it in new property, 
 it belongs to capital. 
 
 "Commissioner Meeker: Some part of a reasonable return? 
 
 "Mr. Cooley : Yes, surely. 
 
 "Commissioner Meeker : But anything in excess of what might be regarded as a reason- 
 able return, you think that should not be counted as a part of the original investment upon 
 which the company is entitled to earn? 
 
 "Mr, Cooley : No, I would call that investment by the public, except there be some 
 legal requirement which of course might control." 
 
 At page 273, Commissioner Gadsden asked Professor Cooley the following 
 question : 
 
 "Take a railway — I think it is entirely a hypothetical question as applicable to street 
 railroads, because in my judgment none of them ever made a fair return on any proper 
 valuation — but do you mean to say that a railroad which had a franchise with the city and 
 a fixed fare of 5 cents — suppose such a railroad made, wc will say, 12 per cent net return 
 after operating expenses and fixed charges, amortization and depreciation — do you mean to 
 say that 4 per cent of that, say, ought to go back into the property?" 
 
 This question led to considerable discussion, in the course of which Profes- 
 sor Cooley made a distinction between the moral right of the public to the benefit 
 of property constructed out of excessive earnings and the legal right of the com- 
 pany to claim this property so long as the earnings were derived from rates 
 legally fixed or permitted by public authorities. At page 275 of the Proceedings, 
 the witness states his position as follows: 
 
 "If the net earnings have been sufficient to give what wc are speaking of as a fair 
 return, meaning by that as much of a return as would be necessary to induce capital to come 
 into the business, then 1 should think all this new property built out of gross earnings should 
 belong to the public who contributed the money for it, if it could \x done legally." 
 
 Further on, at page 277, Professor Cooley says: 
 
 "I firmly Ix-licvc that a public utility should lie permitted to earn enough to make it able 
 to serve the public in the way it wants to be served and to bring the investor a sufficient 
 amount to satisfy him and enable him to do all the things he has to do. and being a public 
 utility 1 should not want them to earn any more than that. Now that is my own view. 
 Of course, there comes the legal question as to right, and that is another matter." 
 
Valuation 361 
 
 It turned out, however, that the witness regarded the question of the treat- 
 ment of investment out of excess earnings as hypothetical so far as the electric 
 railways are concerned, as he was tmable to cite any case where an electric rail- 
 way had built up its property in that way. 
 
 It will be observed that Professor Cooky's theory of valuation as outlined 
 by him corresponds very closely with the recommendations of the Committee on 
 Valuation of the American Electric Railways Association. Like that committee, 
 he favors the reproduction-cost-new method based on the prices of today, reject- 
 ing unequivocally the idea that accrued depreciation should be deducted in the 
 case of a well-maintained property. He is also a great "booster" for overheads, 
 working capital, and development costs, although he concedes that it is now re- 
 garded as better practice to carry operating deficits as a floating debt to be amor- 
 tized out of earnings, and not permanently capitalized. He does not claim "cre- 
 ated value" as a part of railway property. He thinks that valuation is compara- 
 tively simple and valuation methods comparatively accurate, but that the public 
 is discourgingly ignorant and not disposed to be reasonable with the electric rail- 
 way companies. In the valuation of the Public Service Railway and the Public 
 Service Railroad properties in New Jersey, consisting of about 900 miles of track. 
 Professor Cooley used general overhead percentages aggregating 29.94 per cent 
 on land, 35.19 per cent on "equipment" and 46.67 per cent on "way and struc- 
 tures" exclusive of land, figured out in each case in terms of "base cost." The 
 base cost itself was built up from unit prices in which insurance, omissions, 
 specific contingencies and contractor's profit had been included. In the case of 
 land used for rights of way, the base cost was arrived at in most cases by the 
 application of the multiplier 2i/^ to the market value of the land, to cover the 
 assumed costs of acquisition for railway purposes. 
 
 Mr. J. K. Newman seems to agree substantially with Professor Cooley in 
 his fundamental theory of valuation. At page 573 of the Proceedings, he testi- 
 fies as follows : 
 
 "Commissioner Meeker: It is not quite clear to me just how you would obtain a 
 reasonable return. Do you mean a reasonable return upon moneys invested or a reasonable 
 return upon a fair valuation? 
 
 "Mr. Newman : I mean upon a fair replacement value of the property including the 
 cost of the development of that property. 
 
 "Commissioner Meeker : In the properties under your control have you followed that 
 scheme or have you depended upon physical valuation of the properties? 
 
 "Mr. Newman : You cannot take the naked physical value. There is lots that does not 
 appear in that, that goes to make up part of the value. It would appear in the cost to any 
 city which would attempt to build a new street railroad system, if it was all thrown out. 
 You cannot find certain elements of value that were there to start with, and are not there 
 today, but they have been part of the cost of the development of the system." 
 
 Mr. A. Merritt Taylor, President of the Philadelphia and West Chester 
 Traction Company, formerly Director of the Department of City Transit in 
 Philadelphia and, during the war, manager of the Division of Passenger Trans- 
 portation and Housing, United States Shipping Board, Emergency Fleet Corpor- 
 ation, prepared a brief memorandum in relation to the valuation of electric rail- 
 way properties, which Mr. Warren filed with the Commission. This memoran- 
 dum appears at pages 288 and 289 of the Proceedings. Mr. Taylor does not 
 go into the details of valuation methods but lays emphasis upon the principle 
 
362 Electric Railway Problem 
 
 that an electric railway engaged in a legitimate constructive enterprise should 
 be permitted to charge rates that will "yield a profitable return on the true cost 
 of establishing and developing its property and business." Among other things, 
 he says : 
 
 "Receiverships will in tlie near future make necessary many adjustments as between 
 companies and communities. Readjustments should be approached in a spirit of fairness by 
 both parties; and no advantage should tx: sought by communities because of the present 
 condition of the companies insofar as it has been occasioned by the European war and the 
 excessive costs resulting therefrom. 
 
 "\aluation of properties, when resorted to as a basis of fare adjustment, should be made 
 upon the then-cost of reproduction, together with the added cost of protlucing a condition of 
 readiness to serve. I have no patience with the contention that any community may now 
 properly expect a valuation to be based on pre-war prices or the cost of earlier years. The 
 only justification for such a claim would lie in the supposition that, instead of enjoying 
 increased values in common with others, the companies were to be in some way assured of a 
 continued reasonable return upon tlic invested capital. Communities did not give street rail- 
 way companies any such assurance. The companies took the same risks of profit and loss 
 as did the investor in other kinds of property, consequently in such a time of readjustment, 
 it seems only just that the communities should be willing to establish a fare sufficient to pay 
 a proper return on that sum representing the amount which it would cost the city itself to 
 reproduce the property used and usable in transporting the people." 
 
 General Tripp's testimony indicates a rather sharp divergence of thought 
 from Professor Cooley and the Committee on Valuation. At pages 161 and 
 162 of the Proceedings, we find the following significant testimony: 
 
 "Commissioner Sweet : In tr)ing to show the general public that the companies were 
 doing what was right and fair, would you consider that the capital stock of the companies 
 as it now stands throughout the country should be the basis of earnings or that the value 
 of the physical properties should be the basis for earnings? 
 
 "Gen. Tripp : I do not think you can take the stock as it now stands as a basis for 
 earnings allowed under a new relationship, if that is what you mean. 
 
 "Commissioner Sweet : Yes. 
 
 "Gen. Tripp: However obnoxious it may be to some of us who are in the business, 
 I see no other method than to base it on the investment of the property, regardless almost 
 of the securities that are outstanding. 
 
 "Commissioner Sweet : Would that mean the original honest investment or the present 
 value of the property? 
 
 "Gen. Tripp: 1 believe — and here 1 am expressing only my own personal Ijclief; I do not 
 wish to commit the Committee of One Hundred on this point — I believe that the fair method 
 is to take the money that has been honestly invested in the proiierty. 
 
 "Commissioner Sweet : Going back in many cases to the horse-car days, and then 
 through the various systems up to the present time, do you mean? 
 
 "Gen. Tripp : Well, it is not such a tremendous job as that. I do not believe that in 
 these days you would find the investirent in the horse-car lines ever put forward as a part 
 of the cost of the present system. 
 
 "Commissioner Sweet: Some of these roads, however, that are operating today started 
 as horse-car systems. 
 
 "Gen. Tripp : Yes ; that investment has prol>ably lieen written ofT and disappeared in 
 the tremendous increase in investment that has come siitce those days. I could determine 
 to my own satisfaction in any property, 1 JK'lieve. the amount of investment that was honestly 
 made in the property. 
 
 "Commissioner Sweet: Would you arrive at that by an examination of the property 
 itself, and take your own knowledge of the transitions that have been gone through, and 
 perhaps add a little sdniething to it, and fix the amount in that manner? 
 
 "Gen. Tripp: N'o; I would not do it that way. Mr. Commissioner. I would take the 
 different classes of securities that have been issued on a given proj^rty, however many there 
 might be, and it would be easily determined how much money was received for an issue of 
 iMinds and what became of the money. These men in the early days did not steal the money. 
 That is a popular fallacy. There was no money taken. The money went into the property. 
 Securities were issued, however, on 'general hopes.' They issued 'general hopes 5's,' if you 
 please, for which no cash was received. Now, it is easy to segreg.ite that class of security 
 from the class of security that was honestly sold for cash, and it does not re<|uire a valuation 
 of the property in miTuite detail to arrive in any given case at a fair investment in a given 
 property ujion which to rest a new relationship iKtween the public and tlic company." 
 
Valuation 363 
 
 General Tripp is of the opinion that the lower purchasing power of money 
 is a somewhat permanent condition not only in this country, but throughout the 
 world, and he thinks that the high prices of material, as well as the higher wages, 
 are rather permanent. Upon this point, at page 164 of the Proceedings, he says : 
 
 "I think that until these tremendous war debts are very largely liquidated there can be 
 no marked reduction in prices, or rather a resumption and a return to the old value of 
 currency. The war debts are half paid today by a depreciated dollar. In the very depreciation 
 of the dollar it pays 50 per cent of the war debts, and it may be a very wise economic law and 
 prevent great national disaster that that should happen. And until these debts have been 
 reasonably well liquidated and taken care of I see no hope for lower prices to any particular 
 extent." 
 
 In further discussion of his method of getting at the actual money put into 
 the property as the basis for the recognized investment he testifies at pages 164 
 and 165 of the Proceedings : 
 
 "I think the most feasible method would be an examination into the various classes of 
 securities that have been issued upon an electric railway property from its beginning as an 
 electric railway property and not go back into the horse-car days ; that examination to develop 
 what disposition was made of the securities, whether they were sold for cash, and if so, at 
 what price ; or, to state it another way, at what discount. I think the history of each com- 
 pany as regards to its security issues would be readily available and that that method would 
 be more feasible than an examination of the books. The books of a street railway company 
 show- on its asset side certain arbitrary items which are simply used to offset items upon the 
 credit side and do not in themselves represent in all cases investment in the property. And 
 since these systems are thirty to thirty-five years old and tnany of them have been through 
 receivers' hands and changed hands, it would be almost an impossibility to trace through the 
 books of account the investment in the property. While, on the other hand, as I have just 
 stated, evidence regarding the diflferent issues of securities is always available." 
 
 With respect to the present treatment of the money investment in the orig- 
 inal horse-car lines, at page 165, he makes the following suggestions: 
 
 "Those electric railways which began as horse railways and were equipped and developed 
 as a system starting with liorse railways, like the West End of Boston, for example, probably 
 have as clear a record in regard to their securities issued in the horse-car days as they have 
 in the electric days. I know that to be so in the case of the West End Street Railway at least 
 as far back as 1860. because in some litigation that was had in Massachusetts, the issue being 
 something I have now forgotten, I was employed to report upon tlie security issues and what 
 became of them, how they were disposed of, from 186(1 That went back into the Middlesex 
 Railway time. And I had no difficulty in securing information and getting a statement which 
 satisfied the court as to the disposition of all of those securities back to 1860. ***** 
 There are some companies, however, that started by buying up the horse railroad system. 
 That made a clean start. They usually bought the horse railroad system for less tlian it 
 cost. And I do not believe that in those cases the public would be endangered if they started 
 at that point. So where an electric raihvay started by buying up an existing horse railway 
 and made a clean start, I would make a clean start there also.'' 
 
 That he thinks this method of arriving at a fair investment value is prefer- 
 able to a physical valuation is shown by the following testimony at pages 165 
 and 166 of the Proceedings : 
 
 "Commissioner Meeker: You think it is easier and better policy to get at the invest- 
 ment ill the way that you have indicated rather than to make a physical valuation of the 
 properties now existing? 
 
 "Gen. Tripp: A physical valuation of the property, Mr. Commissioner, would not de- 
 termine the investment. It would determine the value, and that value would be figured on 
 some basis of prices. An arbitrary assumption would have to be made as to what period 
 they would take for the purpose of establishing prices on such a valuation. It would be 
 impossible to take each item of an electric railway and ascertain what the original price paid 
 for that particular piece of apparatus was. because in the first place it does not represent 
 the whole investment ; it may have been replacement of an original piece of apparatus and 
 the difference between the cost of the original piece and the new piece charged to plant 
 account, while the value of the old piece would be charged to operating expense. So that 
 there is no method of valuation which will determine the investment in the property. 
 
364 Electric Railway Problem 
 
 "Commissioner Meeker: Will it not be necessary to make assumptions and hypotheses 
 in getting at actual investment in the way you have indicated? 
 
 "Gen. Tripp: No, 1 distinguish between investment and valuation. By investment I 
 mean the money that was spent on the property. 
 
 "Commissioner Meeker: By that you mean the money that was turned back into the 
 improvement and extension of the road out of earnings? 
 
 "Gen. Tripp: That would be part of it. The other part would be the money received 
 from the sale of bonds and expended on the property ; the money received from the sale 
 of stock and expended on the property. 
 
 "Commissioner Meeker : .\nd the accounts of the railways will show alt of these 
 additions to investment, whether they are additions in the purchase of bonds and stocks or 
 whether they are additions made out of earnings? 
 
 "Gen. Tripp : \o, I do not think that the books of account of the companies generally 
 speaking are in such a condition as to show that. .\nd for that reason I have suggested that 
 the books of account be ignored ; that evidence be taken as to the securities that have been 
 issued from the beginning on this property, what they were sold for and what became of the 
 money. The mere fact only would l)e established — did the money go into the property? 
 Having established that the money went into the property, that would be sufficient evidence 
 to call it investment upon which a return is fair and just." 
 
 General Tripp is of the opinion that the books would probably show the ex- 
 tensions and improvements made out of earnings, and that such investments 
 should be included in the rate base. At page 166 of the Proceeding,';, he says : 
 
 "The earnings that have been turned back into the property were net profits that the 
 stockholders were entitled to. They chose, instead of taking those in cash to put them back 
 into the property. There is no difference between that method and a method where they had 
 collected the dividends, put them in their pockets, taken the money out of their pockets again 
 and purchased additional securities of the street railway in order to furnish it funds for the 
 necessary development." 
 
 With respect to appreciation or depreciation he testified at page 167 of the 
 Proceedings, as follows: 
 
 "Commissioner Meeker: Do you think it might be a fair way of getting at the property 
 upon which income is to be allocated to the bondholders and stockholders by taking account 
 of either appreciation or depreciation in the physical properties of the companies? 
 
 "Gen. Tripp: No, sir. My theory ecludes the question of depreciation or appreciation." 
 
 At page 172, General Tripp explains just how he would treat bond discount 
 and promotion securities. He says: 
 
 "In arriving at the investment in a property there should be included as a part of the 
 legitimate investment the discount on securities; that is to say, securities are not always 
 saleable at par and they are sold at the best price obtainable and the difference tx:twecn the 
 price so obtained and par represents a discount which is a proper investment in these prop- 
 erties upon which a return should Ik allowed. 
 
 "Commissioner Meeker: Would that apply to stocks as well as bonds? 
 
 "Gen. Tripp: Stocks are usually issued at par. 1 think in most cases and perhaps all 
 stock when it is issued is fully paid at one hundred cents on the dollar. Now it may be 
 paid cither in cash, UK1 cents on the dollar, or it may lie paid in promotion service at 100 
 cents on the dollar, and between those two classes 1 would distinguish. Where the stock is 
 sold for cash, even if it was not sold at 100 cents on the dollar, if some law permits it. but 
 if it was the best price that could be received for that stock, the discount there should go 
 into the cost of the property. 
 
 "Commissioner Meeker : Then what would be the difference between taking the total 
 bonded debt and all the stock outstanding, except such as was issued for promotion services, 
 sum them and lake that sum as the investment upon which returns must t)e paid to bond- 
 holders and .stockholders? 
 
 "den. Tripp: That is precisely what happens. Segregate the securities that arc watered 
 securities so called, prove that the rest of the securities were not watered, and if the rest 
 of the securities were not, they were honestly issued for value. That is the investment in 
 the property." 
 
 It will be observed that General Tripp disagrees with Professor Cooley and 
 the Committee on \'aluation with respect to bond discount, which he would in- 
 clude in the investnieni, and promoter's profits, wliich he would exclude. He is 
 
Valuation 365 
 
 absolutely at disagreement with them on the question of the readjustment of the 
 rate base or of the rate of return to suit the changes in the purchasing power of 
 money. He states that, in his opinion, it would not be necessary or practicable 
 either to increase the investment base or to increase the rate of return on capital 
 already in the street railway business, on account of the depreciation in the pur- 
 chasing power of money. In answer to questions by Commissioner Gadsden, he 
 testifies at some length, as shown by the following extract taken from pages 173 
 to 175 of the Proceedings : 
 
 "Commissioner Gadsden: General, in this method of arriving. at values you have been 
 talking about, is it not true, referring to the depreciation in the purchasing price of money 
 that you have referred to, that under that system all the loss would fall on the investor? 
 In other words, suppose that a property worth a million dollars, costing a million dollars 
 under your system twenty years ago, is covered by bonds at 5 per cent; under your plan that 
 property today would be, we will say, valued at a million dollars and the return is still 
 5 per cent. Now admitting that the value of money has depreciated 50 per cent, the investor 
 is getting one-half return on his property, is he not? 
 
 "Gen. Tripp : Yes. 
 
 "Commissioner Gadsden : Therefore is it not necessary, in view of this extraordinary 
 depreciation in the purchasing price of money, in order to equalize that situation, either to 
 increase the rate of return or to give the current value of the property in the value of 
 money today? 
 
 "Gen. Trigp : I do not believe so, Mr. Commissioner. It would be lifting yourself by 
 your bootstraps. Currency has depreciated. It was the operation in my opinion of a natural 
 law brought about by the tremendous war debts all over the world. Those war debts have 
 got to be paid. Now in order to do that, the natural law depreciated currency by about 50 
 per cent and paid oflt half this debt. The people who had to have immediate assistance 
 because they had no margin of safety to go on were the laborers. Ne.xt we find the landlord 
 who had less margin of safety to go on, and he searched for greater income, and he got 
 part of it, but he had trouble in doing it. Labor particularly, then, is not in a position to pay 
 any portion of this war debt. It had no margin to pay it with. It has got to be paid. The 
 people who have got to pay it are the fund owners, the owners of fixed income securities. 
 And if you adjust their incomes by the method you have suggested so they are relieved, you 
 have not done anything, you have just lifted yourself up by your bootstraps and you are 
 right where you were when you started. 
 
 "Commissioner Gadsden : Is it not true that the people by your plan would be confined 
 solely to public utilities 
 
 "Gen. Tripp: No. 
 
 "Commissioner Gadsden : Would it not be true with investors in every line of business, 
 that their property would be appreciated? 
 
 "Gen. Tripp : No, I think you are mistaken, Mr. Commissioner. There are billions of 
 fixed income bonds held by investors throughout the United States on which they cannot 
 get relief, railroad bonds. Now your theory is that the street railway company could get 
 relief — if it liad a 5 per cent bond, it ought to have an increase in return because of the 
 decreased purchasing power of the dollar. Under my theory they are exactly in the same 
 position, the owner of a railroad bond is just in the same position 
 
 "Commissioner Gadsden : Unquestionably, but getting outside of regulated properties, 
 getting to textile properties and the value of steel properties, is not the value of a steel mill 
 today based upon current prices and not what it cost? 
 
 "Gen. Tripp : Yes, but when you get into the question of return on stock in industrials, 
 the industrials are reaping a harvest in this case. 
 
 "Commissioner Gadsden : But if you were asked a similar question, what is the value of 
 a shoe factory in Massachusetts or Connecticut today, you would give it current value, would 
 you not? You would not say its value was what the investors put into it in the history 
 of the plant? 
 
 "Gen. Tripp : Well, I would not buy a shoe factory on the basis of present earnings, on 
 the same theory that I would have purchased it before the war. I would have to have a wider 
 margin. There is a distinction between regulated and unregulated industries. My theory 
 asks the public to guarantee a return upon our investment in electric railways. The in- 
 dustrials ask no one to guarantee their return. When hard times come they must take their 
 medicine. Now you cannot regard the investment in a public utility which is practically 
 guaranteed by the public on the same basis 
 
 "Commissioner Gadsden : Do you think the history of the industry as you have shown it 
 today has shown a guaranty of return? 
 
 "Gen. Tripp : No, but I am directing all my testimony here towards the theory which 
 I have promulgated 
 
366 Electric Railway Problem 
 
 "Commissioner Gadsden: Towards the future? 
 
 "Gen. Tripp: That there should be a different relation in the future. 
 
 Commissioner Gadsden: Exactly; therefore, is it not necessar>- to bring the situation up 
 to date to rectify the values of these properties from now on up to date and then keep the 
 account ? 
 
 "Gen. Tripp : No, I do not think so." 
 
 On the subject of the treatment of superseded property General Tripp "got 
 oflf the reser\-ation" again. Commissioner Sweet asked him a question based 
 upon the illustration of a countr)- merchant who erects a small frame building 
 in which to conduct his business ; he prospers and later on finds this building in- 
 sufficient for his needs and tears it down and puts up a fine brick structure in 
 its place. The question was whether the cost of the frame building and the cost 
 of the new brick structure taken together, with other moneys actually invested, 
 should constitute the capital upon which the owner ought to make a legitimate 
 profit, and if so, whether that would illustrate the way in which General Tripp's 
 theory of determining the investment in a street railway property would be ap- 
 plied. Upon this point he testified as follows, at page 175 of the Proceedings: 
 
 "If I understood your question correctly, I should not think it was quite that way. I 
 understood you to say that the cost of the wooden building would be added in its entirety 
 to the cost of the brick building and that the sum of those two constituted an investment 
 on which he is entitled to a return. Was that your question? 
 
 "Commissioner Sweet : Yes, the entire investment. 
 
 "Gen. Tripp : Now, however, in the street railway field the cost of the old wooden 
 building would be charged off against the properties and the cost of the new building would 
 be the atnount that it wouldj be entitled to a return on imder the system of bookkeeping 
 which has been adopted by the Interstate Commerce Commission, if I am correct. 
 
 "Commissioner Sweet: Then if money had been expended by a street railroad company 
 for the purchase of a horse-car system or for changing over from the horse-car system to 
 the cable system or the cable to electricity, do you mean to say all that money should be 
 crossed off entirely and only the value of the electric system taken as representing the capital 
 upon which dividends are to be paid? 
 
 "Gen. Tripp: Yes, speaking generally, because a depreciation item has or ought to 
 have been set up to care for depreciation and obsolescence. Now I would not say that that 
 rule ought to be applied arbitrarily and imjustly. But apparatus that has disappeared will 
 generally be found to have been taken care of out of the earnings of the company and it is 
 an item called depreciation or obsolescence." 
 
 General Tripp was then asked whether a physical valuation of the property 
 would be found to equal or exceed the securities outstanding other than the pro- 
 motion securities to which he had referred. He replied that in most cases he 
 thought the physical valuation would be greater, and in fact knew of no case in 
 which it would not. 
 
 Then the question came up as to what had been done with the old properties 
 and he stated that there had been, or ought to have been, set up for depreciation 
 an amount sufficient to amortize the property that had disappeared, such as the old 
 horse railroads. The matter not yet being entirely clear to the Commissioners, 
 General Tripp answered other questions put to him by Commissioners Meeker, 
 Beall, Gadsden and Sweet. His testimony in this connection is foiuid at pages 178 to 
 180 of the Proceedings, and has already been quoted almost in full in Chapter 
 XXV in connection with our discussion of the relative position of "ser\'ice" and 
 "profits" as actuating motives in the development of electric railways. .Xt this 
 point in the record. General Trijip expressed the opinion that a properlv managed 
 company would have charged off its obsolete projierty through the depreciation 
 account, so that when it came to renew its bonded obligations it would only have 
 
\'.\LUATION 367 
 
 to take care of the property then in existence. In reply to Commissioner Gads- 
 den's question as to whether, as a matter of fact, in the history of the industry, 
 the street railway companies had set up the reserves to accomplish this purpose, 
 General Tripp says: 
 
 "Some have and some have not, and those that have not are today on the verge of 
 bankruptcy, and you will have no difficulty in dealing with those." 
 
 Further on he says : 
 
 "All those companies that have come under my observation, that have changed from 
 cable to electricity, have been through the hands of a receiver, and the whole thing has 
 been wiped out." 
 
 Mr. Henry G. Bradlee, President of the Stone and Webster Corporation, 
 thought the valuation matter was less simple than General Tripp's testimony 
 would indicate. At pages 222 and 223 of the Proceedings, in response to ques- 
 tions by Commissioner Meeker, Mr. Bradlee gives the following testimony : 
 
 "Commissioner Meeker: Do you think that the value of the property is most easily 
 gotten at by the method of appraisal of physical valuation, or do you think it can be gotten 
 at easier in some other way? 
 
 "Mr. Bradlee : I do not think the problem is quite as simple as Mr. Tripp stated. The 
 Supreme Court, as I understand it, has pointed out that the money that goes into the 
 property is one element in determining a fair value ; that the cost of reproduction is another 
 element in determining a fair value; that the price paid for the property by the then owners 
 is another element in determining the fair value ; and that it is necessary to weigh those all 
 more or less and give them some consideration in arriving at a conclusion as to what is the 
 fair value. 
 
 "Now, I think it is perfectly true that there are cases in which a fair value can be 
 arrived at by taking the money that has gone into the property. I think there are other cases 
 in which that would lead to an unfair value unless a broader consideration was given to the 
 other factors. Wherever it is possible to arrive at a fair solution of the question by taking the 
 actual cash investment, I believe that that is a simpler thing to get at. I believe it is a 
 thing which is much better understood by the public. I think it makes it much easier to work 
 out a satisfactory solution with the public and I am inclined to adopt that plan and favor 
 it except with this reservation, that there are cases in which I believe that might lead to 
 injustice sometimes towards the investor, sometimes an injustice perhaps to the community. 
 
 "Commissioner Meeker : Do you believe that it is essential that we get at a fair valuation 
 of the street railway properties? 
 
 "Mr. Bradlee : I do. I see no way of working out a service-at-cost franchise or any 
 other equitable solution without arriving at some fair value." 
 
 Further on, at page 227, Mr. Warren takes the matter up, and Mr. Bradlee 
 gives the additional testimony on valuation as follows : 
 
 "Mr. Warren: On that matter of valuation, Mr. Bradlee, in cases where the securities 
 of the company have been issued under supervision by a supervisory board and with its 
 approval, the easiest method would be, would it not, to take the capitalization of the com- 
 pany as the basis rather than either a valuation or an attempt to detenuine the amount of 
 money that has gone in? 
 
 "Mr. Bradlee: I think that would be easy and that would apply to the State of Massa- 
 chusetts as a very good example 
 
 "Mr. Warren : Yes, exactly. 
 
 "Mr. Bradlee : There for twenty-five or thirty years the securities have all been issued 
 under the direction and control of the Commission and the securities represent the actual 
 cash which has gone into the property. 
 
 "Let me say just a word on that. It seems to me if you are going to take the cash that 
 has gone into the property as the measure of value, the cash to be considered and the value 
 to be considered is the entire cash value of everything that has gone in to create that prop- 
 erty from the investor or any services, and which has not been paid back. If the investor has 
 had some of his investment paid back to him. that of course cancels that part of the proposition. 
 But in so far as the investor has put in money in good faith and properly, that should be 
 recognized, whether that money has gone into a building which is there today or a building 
 which was there some time ago and has disappeared. If the investor has not got his inoney 
 back he is still entitled to a return on his monev until such time as he is reimbursed for the 
 
368 Electric Railway Problem 
 
 capital which he has furnished. So to my mind the essence of the thing is what money has 
 gone in there and not l>ceii paid back and everything that enters into that class should be a 
 proper element in the cost of the property." 
 
 At page 339 of the Proceedings, the following exchange occurs between 
 Commissioner Meeker and Mr. Francis H. Sisson. who was then on the stand 
 testifying as a witness for the American Electric Railway Association: 
 
 "Commissioner Meeker ;» * * * Xhe all-important thing, as I see it, is in the 
 arriving at a proper estimate of the value of the properties upon which the street railways 
 are entitled to earn a reasonable return. 
 
 "Mr. Sisson: Exactly. 
 
 "Commissioner Meeker: That is the all-important thing, is it not? 
 
 "Mr. Sisson: Exactly so; yes, sir." 
 
 In view of the paramount importance of the valuation, it is perhaps unfor- 
 tunate that the Commission was unable to go into the matter more fully. As we 
 have seen, the theories advanced by Professor Cooley, which agree in the main 
 with the theories officially promulgated by the Committee on \'aluation of the 
 American Electric Railway Association, differ quite radically from the theories 
 advanced by General Tripp. Mr. Bradlee, in his brief testimony on the subject, 
 seems to agree in principle with General Tripp. We have here a distinct and 
 fundamental cleavage between the original investment theon.' and the reproduc- 
 tion-cost theory of valuation. Professor Cooley expressed the opinion that the 
 full historical cost of a street railway property would, in most cases, exceed the 
 reproduction cost in normal times. The war and the abnormal prices resulting 
 from it have emphasized the difference between the results obtained by the two 
 methods. Professor Cooley and the Committee on \'aluation now discard the 
 historical cost method because it does not reflect the change in the purchasing 
 power of money. General Tripp, without denying the depreciation of the dollar, 
 nevertheless takes the view that it is not necessar)- to make the valuation in terms 
 of the present low priced dollars. The extent of the difference in the results 
 obtained from the use of the two methods of valuation is well illustrated by the 
 "Report of the Engineers Valuation Board in Re Pittsburgh Railways Company" 
 submitted to the Public Service Commission of Pennsylvania under date of 
 August 6, 1919. This board of engineers consisted of two representatives of 
 the Pittsburgh Railways Company, two representatives of the City of Pittsburgh, 
 and the chief engineer of the Pennsylvania Public Service Commission acting 
 as chairman. The board was appointed "in conformity with an agreement be- 
 tween the City of Pittsburgh, certain other municipalities, individuals and asso- 
 ciations, complainants * * * ♦ and the Pittsburgh Railways Company and 
 certain of its aHiliated, associated or underlying railway companies * * * * 
 to assist the Public Service Commission in arriving at conclusions upon the ques- 
 tions which may properly arise in a hearing to determine the value of the property 
 for rate-making purposes and reasonable return thereon, and the reasonable rates 
 of fare to be charged by the Pittsburgh Railways Company." In its report the 
 board sets forth the historical cost of the Pittsburgh Railways property and its 
 estimated cost of reproduction new on several different bases with respect to the 
 unit prices used. The board found that the historical cost as determined by the 
 records was $59,069,382. including $11,271,458 for superseded property, while 
 the estimated cost of reproduction new at prices prevailing as of April 1, 1918, 
 
Valuation 369 
 
 the date of the valuation, was $102,842,274. The general results of the board's 
 investigation are clearly set forth in the following extract taken from pages 5 
 and 6 of its printed report: 
 
 "With the purpose of providing those measures of value specified in the Public Service 
 Company Law, the Board has had prepared a statement of the historical cost as determined 
 from the records, and estimates of the reproduction costs of the physical property based upon 
 several interpretations of the fair average price of materials, property and labor. 
 
 "We find the cost of the physical property as determined from the records and if repro- 
 duced upon the various bases of pricing, to be as follows : 
 
 "Basis No. 1 — Historical cost as determined from the records, with scrutiny of engineers 
 and accountants, representing actual investment in physical property placed in the 
 
 service of the public $59,069,382 
 
 "Basis No. 2 — Estimated cost of reproduction new at prices ruling when each part of 
 the existing property was constructed and under original conditions of construc- 
 tion $49,324,791 
 
 "Basis No, 3.\ — Estimated cost of reproduction new at average prices of the period 
 
 1906 to 1915, inclusive, and under original conditions of construction.... $56,148,398 
 
 "Basis No. 3B — Estimated cost of reproduction new at prices indicated for 1918 by 
 
 the trend of prices for 20 years previous to 1916, and under original conditions of 
 
 construction $60,832,200 
 
 "Basis No. 3C — Estimated cost of reproduction new at average prices of the period 
 1914 to 1918, inclusive, and under original conditions of construction. .. .$73,560,300 
 "Basis No. 3D — Estimated cost of reproduction new at the estimated average prices 
 of the period from 1918 to 1922, inc., and under original conditions of construc- 
 tion $84,191,300 
 
 "Basis No. 4 — Estimated cost of reproduction new at prices and under the conditions 
 
 ruling at the date of valuation, viz., April 1, 1918 $102,842,274 
 
 "These figures include real estate and rights of way, organization and development cost 
 prior to construction ; engineering, legal and administrative expenses ; interest and taxes during 
 construction ; cost of financing ; materials and supplies and working capital necessary for 
 operation. 
 
 ******** 
 
 "The historical cost as found includes superseded property in the following amounts : 
 
 Horse Car System $1,542,178 
 
 Cable System 3,778,639 
 
 Early Electric Equipment and Construction 5,950,641 
 
 $11,271,458 
 
 "A large portion of this property was superseded when in good operating condition and 
 in particular the cable systems were in operation for only seven years. 
 
 "We find the accrued depreciation of parts of the physical property as of April 1, 1918, 
 to have been as follows : 
 
 Prices used in 
 
 Basis No. 2 $12,039,600 
 
 Basis No. 3A 12,733,100 
 
 Basis No. 3B 13.869,700 
 
 Basis No. 3C 16.845,200 
 
 Basis No. 3D 19,364,000 
 
 Basis No. 4 23,775,500 
 
 "These estimates are based upon detailed inspection of condition with consideration of 
 elapsed and of estimated remaining life. They include such overhead charges as enter into 
 the cost of replacements." 
 
 This quotation from the report of the Pittsburgh valuation board illustrates 
 in a striking way a fallacy that prevails in the public mind with respect to en- 
 gineering valuations. It seems to be the general opinion of laymen, to which 
 members of the engineering fraternity have undoubtedly given much encourage- 
 ment, that the value of a public service property is a fact that can be discovered 
 by a competent engineer designated for the purpose. Even Professor Cooley, 
 in his testimony, expressed the opinion that "there is not very much trouble now 
 in valuing a property" and that "valuation has been very much simplified, very 
 
370 Electric Railway Problem 
 
 much organized, and it is not a difficult matter to procure results, and they are 
 reasonably accurate." It will be recalled also that Mr. J. K. Newman, in his tes- 
 timony with respect to the basis for the valuation to be used in a reorganization, 
 remarked that "there are parties in line today who will determine that amount, 
 there are men who are following that as a business who will do it." He evidently 
 referred to the appraisal engineers and engineering firms who make a business 
 of public utility valuations. The fact is, however, that no valuation made by 
 an engineer or anybody else means anything at all unless the basis upon which 
 it is made is fully set forth, and then the value of the result will depend upon 
 the judgment of the men to whom it is presented for acceptance. From the point 
 of view of public policy and a clear understanding of the difficulties of the electric 
 railway problem nothing is more important than the recognition of the complexity 
 and elusiveness of the processes of valuation, and the uncertainty of the results 
 obtained. It is no doubt true that two competent engineers representing different 
 interests could make an appraisal of the same property and reach almost identical 
 results in terms of "base cost" if all of the hypotheses, assumptions and limita- 
 tions with respect to the methods of valuation were laid down in advance by a 
 third party. 
 
 It is noteworthy that in the Pittsburgh valuation the engineers representing 
 opposing interests were placed on the board together, and the chief engineer of 
 the Public Service Commission, a supposedly impartial body, was designated to 
 preside over their deliberations. The purpose of such an arrangement was agree- 
 ment, and as a matter of fact the board was unanimous in reporting the findings 
 above quoted, thus showing that agreement can be reached between opposing 
 interests even in valuation matters when the bases for the determination of value 
 are definitely prescribed, but it will be noted that with respect to the physical 
 property seven different results were arrived at, ranging all the way from 
 $49,324,791 to $102,842,274. In fact, both the minimum figure and the maxi- 
 mum figure were derived from an application of the reproduction-cost-new 
 theory, but in the one case it was based upon the actual prices normally prevail- 
 ing when each part of the property was installed, and in the other case it was 
 based upon the war prices jirevailing at the date of the valuation. Moreover, 
 each one of the seven different results was arrived at without the deduction of 
 accrued depreciation. The extreme range is between historical cost with super- 
 seded property and accrued depreciation deducted, and reproduction cost new at 
 the "prices of today." On this basis the comparison is between an approximate 
 low figure of $35,758,324 and $102,842,274, the high figure. 
 
 It is to be presumed that if engineers representing the city of Pittsburgh 
 and engineers rcprcseiuing the Pittsburgh Railways Company had. without col- 
 laboration, made a reproduction-cost valuation of the property on any one of the 
 reproduction bases used by the board, considerable differences would have re- 
 sulted, and these differences would have further confused the issue. For ex- 
 ample, even where the rules for a reproduction-cost valuation are carefully pre- 
 scribed in advance, there will be a wide difference of judgment among appraisers, 
 particularly with respect to structural overheads such as engineering and superin- 
 tendence, legal, administration and miscellaneous general expenses, interest dur- 
 
Valuation 371 
 
 ing construction and taxes during construction, to which are sometimes added 
 cost of financing, promoter's remuneration and preliminary expenses in connec- 
 tion with the organization and development of the project prior to construction. 
 The Pittsburgh board reported that it was "unable to agree as to development 
 value, going concern value, and other elements of value." The engineers rep- 
 resenting the city reached the conclusion "that the fair value of the property of the 
 Pittsburgh Railways System for a rate base" was $48,000,000, and the engineers 
 for the company reached the conclusion that the fair value of the property for a 
 rate base was between $65,000,000 and $70,000,000. The Public Service Com- 
 mission fixed the fair value of the company's property, considered as a going 
 concern, at $62,500,000, but in doing so looked more to the result to be obtained 
 than to the evidence presented, as will be shown by the following quotation from 
 the Pennsylvania Commission's report handed down March 22, 1920 :- 
 
 "The commission is convinced under all the testimony that even if the evidence would 
 warrant it, a valuation of $48,000,0(X) would defeat the very purpose which the city and other 
 complainants have in view, to wit, the rehabilitation of respondent's property upon a new and 
 better financial basis, and the improvement and extension of its service to properly care for 
 the present and future needs of the city and surrounding territory. 
 
 "Upon such a valuation, the receivership would no doubt continue until foreclosures of 
 mortgages disintegrated the unified system and left the city and vicinity with a number of 
 separately operated street railway companies, each charging fares, to care for the public. 
 This is unthinkable, and, by this report, we believe that we have laid the foundation for all 
 that the complainants desire, or the public may require. 
 
 "At the risk of redundancy, but with a view of retaining the emphasis of our former 
 statements, the commission again refers to the fact that the most important question now 
 alTecting the City of Pittsburgh, with respect to its transit problems, is improvement in street 
 railway service ; that improvement cannot be secured except by the expenditure of a large 
 amount of money, a part of which, at least, would represent new capital requirements and 
 a portion to be devoted to replacements of tracks, acquiring new equipment to take the place 
 of some that must be superseded. In reaching its conclusion, the commission has at all times 
 had these matters in mind, and its final determination is made with that end in view. It 
 recognized the difficulties in the way of accomplishment, and that conditions which arose in 
 former years are not easily overcome or set aside. 
 
 "A program by which the amount required might be so divided that a part would be 
 chargeable to capital and the balance amortized over a course of years would furnish a solu- 
 tion. Under all the evidence of the case, and taking into consideration all the measures of 
 value set forth in the Public Service Company Law, the commission finds that the fair value 
 of respondent's property considered as a going concern is $62,500,000." 
 
 That the determination of fair value for rate purposes is not a siinple 
 thing to be referred to and determined by an engineer without the assistance of 
 legal, accounting and economic knowledge, is, of course, well known to those 
 charged with the regulation of public utilities, although, as I have already indi- 
 cated, it is not so well known to the general public. The complexity of the prob- 
 lem is indicated by the provisions of the law under which the Pennsylvania Pub- 
 lic Service Commission acts, and to which it referred in its finding with respect 
 to the Pittsburgh valuation. The Pennsylvania Public Service Company Law 
 contains the following provision : 
 
 "In ascertaining and determining such fair value, the Commission may determine every 
 fact, matter, or thing which, in its judgment, does or may have any bearing on such value; 
 and may take into consideration, among other things, the original cost of construction, par- 
 ticularly with reference to the amount expended in the existing and useful permanent im- 
 provements ; with such consideration for the amount in market value of its bonds and stocks, 
 the probable earning capacity of the property under particular rates prescribed by statute or 
 ordinance, or other municipal contract, or fixed or proposed by the Commission, and for the 
 items of expenditures for obsolete equipment and construction, as the circumstances and the 
 historical development of the enterprise may warrant ; the reproduction costs of the property, 
 based upon the fair average price of materials, property, and labor, and the developmental 
 
372 Electric Railway Problem 
 
 and going concern value of such public service company ; and these, and any other elements 
 of value shall be given such weight by the Commission as may be just and right in each case." 
 
 It will be observed that as a result of the complex process prescribed by the 
 Pennsylvania law, the Public Service Coinmission, after having secured the 
 benefit of the report of the valuation hoard, made up in the way I have described, 
 finally reached a conclusion that represented, in its judgment, a fair basis for the 
 reorganization of the property, but clearly indicated by its report that neither 
 the considerations which it gave most weight nor the results obtained in the 
 Pittsburgh case could be regarded as setting up any specific standards applicable 
 to other individual properties. The widely difTering results reached by the board 
 of engineers from the use of different appraisal bases and the inability of the 
 board of engineers to agree on the intangible values were among the facts upon 
 which the final judgment of the commission was based. It remains to be seen 
 whether the result reached by the commission in the valuation of the Pittsburgh 
 Railways will in that particular case make possible the reorganization of the com- 
 pany and the establishment of Pittsburgh's street railway service upon a basis 
 satisfactory alike to the private investors and to the public. I have referred to 
 the Pittsburgh valuation not for the purpose of criticizing the claims of the city, 
 the claims of the company, or the final determination of the Pennsylvania Com- 
 mission, but because the Pittsburgh receivership figured largely in the testimony 
 before the Federal Electric Railways Commission, and to bring out the extraor- 
 dinary difficulty and complexity of the valuation process, and the utter impos- 
 sibility of accepting as facts the findings of value made by engineers employed 
 by the street railway companies themselves, no matter how detailed and elaborate 
 their inventories and appraisals may be. In fact, this point was brought out by 
 Mr. Gaylord C. Cummin in his testimony before the Commission at its very first 
 public hearing. At page 44 of the Proceedings, we find the following testimony: 
 
 "Commissioner Wchle : How do you think the valuation of street railway properties 
 ought to t)e made? 
 
 "Mr. Cummin: It should be made on the Iwsis of the investment if that can be dis- 
 covered. 
 
 "Commissioner Wchle: In many cases is not that absolutely impossible? 
 
 "Mr. Cummin: Yes; a valuation is always a case of getting an approximation of the 
 truth." 
 
 Further on, at page 5S of the Proceedings, Mr. Cummin s.tys: 
 
 "You face tliis situation in a valuation — securing a fair value or physical value or any- 
 thing else of that kind — that you cannot get the exact truth. If you try to get the exact 
 truth, you will spend so much time in splitting hairs over things that are matters of opinion 
 and have to be iKised on hyiMtheses, that your results arc not going to lie worth the amount 
 of time you put in. W hat you must expect to get is the closest possible approximation to the 
 truth. S'ou prol)ahly can have two thoroughly competent engineers for the .same property 
 and they will not agrer, even with the best intention in the world, both of them absolutely 
 trying to get at the truth. You cannot expect to get anything iKtter than an approximation, 
 and the thing yon must aim at is to get the licst approximation that you can get. You have 
 to start from some point in making your fares. Well. now. there is only one thing to do, 
 and that is to work out some way of agreeing upon that Ivasis. It may not be tlie truth, but 
 if it is the closest approximation of the truth you can get, it is .satisfactory as a starting point. 
 After that, with accounting control you can see that the books are kept so that you can keep 
 right on upon that liasis. 
 
 "(.'ommissioner Meeker : You think the deviation from the mean in these engineers' 
 estimates is within a suflnienlly narrow limit so that these various estimates may l)e taken 
 as the Kisis of adjusting rate^? 
 
 "Mr. Cummin: I wnuld say so in the ca.sc of engineers who are recognized as being 
 disinterested. Some of them are not." 
 
Valuation i73 
 
 The record shows an extraordinary amount of consideration given to the 
 street railway situation in Massachusetts. Reference has already been made to 
 the fact that electric railway capitalization has been under public control for a 
 much longer time in Massachusetts than in any other state and that consequently 
 the evils of overcapitalization have been minimized there. It has also been 
 shown that the higher fare policy was adopted earlier and applied more gener- 
 ally in Massachusetts than elsewhere in the country. It is of peculiar signifi- 
 cance, therefore, that the Massachusetts Public Service Commission has seen its 
 way clear to adopt a much simpler formula for the determination of electric rail- 
 way investments for rate purposes than the formula prescribed by the Pennsyl- 
 vania law or by the laws and commission practices of most other states. In cer- 
 tain respects the Middlesex and Boston Rate Case, decided by the Massachusetts 
 Commission October 24, 1914,^ just at the beginning of the W'orld War, was an 
 epoch-making case in valuation matters. It marked the definite rejection by a 
 leading state commission of reproduction cost as the principal element in the 
 determination of fair value, and the substitution of what has since been known 
 as the Massachusetts rule, which was set forth in this case in the following lan- 
 guage : 
 
 "Accordingly, we rule that under Massachusetts law capital honestly and prudently 
 invested must, under normal conditions, be taken as the controlling factor in fixing the basis 
 for computing fair and reasonable rates ; that if there is mismanagement causing loss, such 
 loss must be cliarged against the stockholders legally responsible for the mismanagement ; 
 that reproduction cost either with or without depreciation, while it may be considered, is not, 
 under our law, to be taken as the determining basis for reckoning rates." 
 
 The reasoning by which the Massachusetts Commission reached its conclu- 
 sion is illuminating. With respect to the relative merits of the reproduction-cost 
 theory and the prudent investment theory, the Middlesex and Boston report says : 
 
 "The reproduction-cost theory has during recent years become a fashionable one among 
 many attorneys and managers of public service corporations. Not very many years ago such 
 counsel and managers would have denounced it as utterly confiscatory. It is obvious that in 
 recent years the rise in prices has greatly increased the hypothetical cost of reproducing 
 much of the property used in the public service. Beyond this, particularly in the west, the 
 fair value theory involves capitalizing, as a basis for rate purposes, enormous quantities of 
 land given to the railroad corporations, besides fixing rates high enough to furnish a return 
 upon the unearned increment of land which was originally purchased at a small price. A 
 fair application of this theory to Massachusetts conditions would be to rule that the Boston 
 and Providence Railroad Company is now entitled to charge fares adequate to make a return 
 upon its right of way into Boston reckoned at the present market values of Back Bay land 
 for residential or business purposes. It would ignore the fact that the railroad originally 
 came into Boston on a right of way consisting of piles driven into a marsh and having, if 
 any, a very small market value. Indeed, in the Minnesota Rate Case (230 U. S. 352) the 
 circuit judge, following the findings of the master, held that the carriers were entitled to 
 a return upon the value of the right of way, taking as its value not only the assumed cost 
 under present conditions, but adding thereto excess values which, as was claimed, the railroad 
 ordinarily is compelled to pay whether obtaining land by purchase or under eminent domain. 
 This doctrine was not sustained by the United States Supreme Court. * * * * 
 
 "It is a matter of common knowledge that in Massachusetts during recent years this 
 reproduction-cost theory as a basis for rate-making has been urged on behalf of certain public 
 utility companies, mostly gas companies, that have accumulated out of excess earnings or 
 unearned increment upon land values, large amounts of property not represented by the 
 original capital invested or by the stocks and bonds issued under our anti-stockwatering laws. 
 
 "Undoubtedly in rate cases and other cases involving the conflicting rights of the rate- 
 paying public and the investing public, the cost of reproduction may frequently be a fact 
 desirable to be ascertained, and sometimes it illuminates important aspects of the problem 
 presented ; it is often the best method of checking up unsatisfactory accounting, particularly 
 when dealing with depreciation. But as a fundamentally controlling principle, no theory could 
 work out grosser injustice — to the rate-paying public in some cases and to the investing 
 
374 Electric Railway Problem 
 
 public in other cases — than the reproduction-cost theory. In cases where rates have for years 
 been too high, so that the companies have accumulated out of excess rates paid by the public 
 large amounts which have gone for capital purposes, this theory requires the rate-payer to 
 pay a rate adequate not only for a return upon the capital furnished by the investor or 
 stockholder, but adequate also to furnishing capital and a return upon the capital furnished ; 
 it would authorize the capitalization of excessive rates and a return upon that capitalization. 
 This is to put a premium upon extortions, past and prospective. On the other hand, this 
 tlieory is grossly unjust to prospective investors in that even when the investment is made 
 with entire honesty and with reasonable prudence — yet if. pending the building up of the 
 new business, the plant depreciates below the fair cost to the investors, rates must, under 
 this theory, be made adequate to make return only upon the reproduction cost of the property 
 in its depreciated condition. This amounts to saying that money lost during the earlier stages 
 of a public service enterprise is irretrievably lost by the stockholders; that if, perchance, rates 
 have been fixed so low that the rate-payer has for a period of years obtained a service at 
 less than cost, this is the permanent misfortune of the stockholders — and that the public should 
 never, at any time and under any circumstances, be called upon to make up a deficit thus 
 incurred. On this theory copper put into the telephone service at 25 cents a pound is now 
 to be reckoned as worth about half that sum. Every fluctuation in prices involves the ascer- 
 tainment of a new rate basis. 
 
 "This theory is as inexpedient as it is unjust. It should never be forgotten that our 
 public utility companies are not finished. They are in process; they are constantly calling 
 for new capital and of recent years in increasing amounts. They must Ix; kept on good 
 trading terms with the investing public or the whole experiment of private ownership and 
 putjlic regulation of these public utility companies will fail. It is as necessary to attract 
 capital into the public service as it is to prevent the mismanagement of these companies or 
 extortion by them. If regulation is to limit (as it should) the profits of stockholders to a 
 moderate return, not greatly in excess of an investment rate, regulation must also protect, 
 so far as it reasonably may, all investments honestly and prudently made and properly 
 managed in the public service; otherwise there will be no such investments. It is entirely 
 clear that in the long run the rate-paying |)ublic as well as the investing public will be best 
 served if regulation makes as its jundmncntally tiniilinii friiuifle an attempt to protect invest- 
 ments honestly and prudently made and wisely managed. .\ny other theory involves essential 
 injustice, tends to make the development of our public utility companies a speculation and 
 not an investment, operates as a premium upon various kinds of fraud; invites into the public 
 service undesirable manipulators instead of sound, level-headed business managers; makes 
 every rate case an almost interminable and labyrinthine inquiry into values with endless con- 
 flicts between so-called experts. 
 
 "What the public interests of this commonwealth obviously need is such regulation and 
 such management of our public utilities that the rate-payers may always feel assured that 
 their rates are based upon making only a fair and adecpiate return upon capital which has 
 been invested for their convenience and Iwnefit ; that purchasers of the securities may know 
 that within the limits of sound management and reasonable and just regulation, their invest- 
 ments are secure ; a sy.stem in which a premium is put upon good management and discour- 
 aging condemnation is visited upon had management; a .system which is simple and capable 
 of economical and efficient administration." 
 
 Ill the Bay State l^ate Case,* decided .\iignsl 31, 1916. the Massachusetts 
 Commission reaffirmed its rule liiat the controlling element in determiniiij; fair 
 value for rate purposes should be the amount of capital honestly and prudently 
 invested in the enterprise. The Bay State decision is of unusual importance, 
 not only because of the size of the property (about 'KX) miles of track), but also 
 because of the detailed treatment given to various factors of valuation such as 
 "overheads" and "intangibles" in an ajjpraisal based upon estimated original cost. 
 The company's valuation engineers claimed overhead charges incurred in the 
 course of construction to an aggregate amount of 12.74 per cent of the direct 
 property cost. Tiiis total was made up as follows : 
 
 Per cent. 
 
 "F.nginecring and superintendence .?.68 
 
 "Interest during construction 2.23 
 
 "Taxes during construction 0. 12 
 
 "Insurance during construction 0.48 
 
 "Organization and legal expenses 3.(X) 
 
 "Contingencies 3 . 23 
 
 Total 12.74" 
 
Valuation 375 
 
 The Massachusetts Commission allowed 8 per cent for the overheads. The 
 reasons for its conclusion were stated as follows : 
 
 "The Commission realizes that much overhead expense in the past, and even in more 
 recent years, has not been segregated in the records ; but it believes that the company has 
 failed to sustain the burden of proof in this matter and that its estimate (which is little more 
 than theoretical) considerably exceeds the reality. The fact that other commissions in other 
 cases have allowed a larger percentage has little significance in this case. Most of these other 
 cases have involved dissimilar properties and the overhead charges were figured upon the 
 cost of reproduction. The present Bay State system has grown slowly and a larger portion 
 of its cost represents additions and improvements to already existing property, a fact which 
 has tended to lessen interest during construction. Much of the engineering and superin- 
 tendence, especially in the past, has probably been supplied by officers whose salaries were 
 charged to operation; and this is no doubt true of other overhead expense. Nor has the 
 construction of railway lines along public ways required a large amount or a high grade 
 of engineering. In the early days, too, engineering on rolling stock and electric equipment 
 was largely supplied by the manufacturers. The item of contingencies, we think, has been 
 considerably overestimated. It is based on the theory that various items of property have 
 probably been overlooked ; but the inventory was made in great detail and, as already indicated, 
 covers much property which cannot be seen. Assumptions in regard to the depth of excava- 
 tions, the character of ballast and ties, the amount of work on the streets, etc., are likely in 
 some cases to favor rather than to prejudice the company. This is true in even greater 
 degree of the assumptions in regard to unit prices. 
 
 "After full consideration of all the evidence, the Commission is of the opinion that in 
 this case 8 per cent is a liberal allowance for overhead charges." 
 
 The Bay State Street Railway Company in this proceeding claimed an al- 
 lowance for intangibles under three headings : ( 1 ) reward for promoters' serv- 
 ices, (2) cost of securing money, and (3) cost of the development of the plant. 
 The Massachusetts Commission found no evidence to substantiate this claim, and 
 therefore made no allowance for these three items. The company also made a 
 claim for "appreciation of land," but the commission rejected it. On this point 
 it said: 
 
 "Considering this appreciation upon its own merits, car riders cannot fairly be expected 
 to pay higher fares because land has increased in value, nor ought they to pay lower fares 
 if it should decrease. If the company wishes to sell such property it is, of course, entitled 
 to whatever profit it is able to make ; but so long as land is employed in the street railway 
 business it is dedicated to a public use and held subject to the conditions fairly attaching 
 to such use. As the Commission has said in another connection (see House Document No. 
 1900 of the current year, pp. 88, 89) :— 
 
 While no fair-minded man will deny that those who put their money into public 
 service by building railroads are entitled to the opportunity to earn a fair reward, and 
 even a generous reward if they serve the public well, the notion that this reward is to 
 be determined, so long as their property is devoted to public use, not by investment or 
 by service rendered, but in large measure by the rapid e.xpansion of real estate prices 
 in the larger centers of population, is contrary to sound public policy. It would mean 
 that communities would be penalized by their own growth, and would lose all advantage 
 from the fact that their transportation facilities were created in due season under 
 favorable economic conditions. 
 
 "It should be added that, even if the doctrine of present worth were accepted, the figure 
 to be used in rate-making would clearly be present worth for street railway purposes. In 
 this case no evidence whatever has been submitted that the land has increased in value for 
 such purposes." 
 
 Valuation reports could be cited endlessly to show how the commissions and 
 the courts in different parts of the country have handled the problem, but the 
 Pittsburgh case and the two Massachusetts cases are sufficient to establish the 
 contrast between the complex valuation rules in Pennsylvania and the compara- 
 tively simple ones in Massachusetts. 
 
 The fact that the Interstate Commerce Commission has been engaged for 
 several years upon the stupendous task of valuing the railroads of the country, 
 
376 Electric Railway Problem 
 
 and in that connection has been formulating rules of appraisal which, if estab- 
 lished in the railroad field, would be applicable for the most part in the valuation 
 of the electric railways, is a matter of great significance in connection with our 
 inquiry into the street railway problem. The Interstate Commerce Commis- 
 sion's rulings in the railroad valuation cases are to be considered, next to the 
 rulings of the United States Supreme Court, as the most authoritative expres- 
 ions of public policy in valuation matters thus far made. 
 
 The Railroad Valuation Act of March 1, 1913,'* required the Interstate Com- 
 merce Commission to prepare a complete inventory and valuation of the proper- 
 ties of the railroads subject to its jurisdiction, and to ascertain the original cost 
 to date, the cost of reproduction new, and the cost of reproduction less deprecia- 
 tion of these properties. It also required the commission to "state in detail and 
 separately from improvements the original cost of all lands, rights of way, and 
 terminals owned or used for the purposes of a common carrier, and ascertained 
 as of the time of dedication to public use, and the present value of the same, 
 and separately the original and present cost of condemnation and damages or 
 of purchase in excess of such original cost or present value." The \'ahiation 
 Act also required the commission to "ascertain and report separately other values, 
 and elements of value, if any," of the property of the railroads. The principles 
 of valuation worked out by the Interstate Commerce Commission in performing 
 the work prescribed by the Valuation Act are of especial interest insofar as they 
 relate to the correct rules for the ascertainment of reproduction cost new of a 
 railroad property. The commission's treatment of overhead expenses is one of 
 the outstanding features of its valuation reports. 
 
 In the valuation of the Texas Midland Railroad (^X'aluation Docket Xo. 2), 
 dated July 31, 1918," the commission reported that the "original cost to date of 
 each piece of properly could not be found with precision." but that from an ex- 
 amination of the company's books the sum of $2,S92.3(>0.94 appeared to exceed 
 somewhat "the amoimt of money which could have been expended in the prop- 
 erty." It reported that the cost of reproduction new of property other than land 
 was $3,461,356 and that the cost of reproduction less depreciation of the same 
 property was $2,597,442. It also reported that the cost of the company's lands 
 as nearly as could be deterniined from the records was found to be $67,493.44, 
 and their present value $254,034.99. Tlie commission expressly declined to make 
 any finding as to "the present cost of acquiring, either by purchase or by con- 
 demnation, the lands of the carrier devoted to the public use." On this point it 
 cited the decision of the United Stales Supreme Court in the Miimesota Rate 
 Cases and drew the conclusion that the determination of the reproduction cost of 
 railway lands for railway purposes is "incapable of rational ascertainment." 
 Upon this point the United States Supreme Court in a decision handed down 
 March 8, 1920, has overruled the commission and directed it to comply with the 
 requirements of the Valuation Act. 
 
 In the Texas Midland case the commission did not find any values or ele- 
 ments of value in the property other than those specifically referred to in the 
 Valuation Act. 
 
 In its findings with respect to the reproduction cost new of the property 
 
Valuation Zll 
 
 it made no allowance under the head of "contingencies," with respect to which 
 Professor Cooley gave such emphatic testimony. It will be remembered that 
 he expressed the opinion that contingencies on the average will come within 10 
 per cent on base cost, 5 per cent "on the inside, in connection with the details," 
 and 5 per cent "on the outside, spread over." The 5 per cent "on the inside" 
 represents contingencies taken into account in the establishment of the unit prices 
 and does not represent a separate general overhead charge. Therefore, it is the 
 5 per cent "on the outside" to which the Interstate Commerce Commission devotes 
 itself in its discussion of the general overheads. Its treatment of this item in the 
 application of the reproduction-cost method to the valuation of property used in 
 the public service, as compared with Professor Cooley's treatment, illustrates very 
 well the great differences that arise in reproduction-cost estimates based upon the 
 different points of view of the appraisers. Professor Cooley, as was evident 
 from his testimony, belongs to the class of public utility appraisal engineers who 
 find it difficult to get a valuation high enough to satisfy their investment con- 
 science, because they are impressed with the idea that there are a great many 
 elements of cost in the production of a public service property which are likely 
 to be overlooked by the public. In the Texas Midland case the company took 
 exception to the Interstate Commerce Commission's ruling with respect to the 
 item of contingencies and contended that in "a theoretical reproduction of the 
 property" the same omissions will be made and the same unforeseen difficulties 
 will be encountered as in the case of the original construction of a railroad based 
 upon the engineering estimates. In its report the commission says : 
 
 "Experience has shown that it is practically impossible, no matter how carefully such an 
 estimate may have been made, to include all the items of expense which will be incurred in 
 the work of construction. Additional expense is caused by omissions and unforeseen diffi- 
 culties in the work of construction. Necessary materials are sometimes omitted. From 
 soundings a cut may appear to be made up entirely of earth and the estimate for excavating 
 and digging is based upon this expectation. However, when the work is performed it is 
 found that it contains a large boulder which it is necessary to cut through or entirely remove. 
 This unforeseen condition lengthens the time allowed for construction and correspondingly 
 increases the expense. Frequently quicksand is found where solid earth was expected. 
 Numerous other instances of unforeseen difficulties could be cited which occur and which add 
 to the total cost of the work. In order to provide for expenses of this kind the practice 
 of including a certain sum for contingencies in estimates of the prospective cost of construc- 
 tion has been quite generally adopted." 
 
 In the opinion of the commission, however, the situation is entirely changed 
 when it comes to a theoretical reproduction of a property already in existence, 
 as shown by the following discussion found at pages 25 and 26 of the Texas 
 Midland report : 
 
 "In our view the theoretical reproduction of a railroad, such as is assumed in valuation 
 work, is materially different from the original construction and does not justify an allowance 
 for contingencies as such. In theoretical reproduction the property to be constructed by the 
 engineer is before his eyes. The topography of the country through which the right of way 
 runs can be observed. He knows the natural difficulties which will have to be overcome. 
 If rock is found, his estimate is based upon cutting through or removing that rock. The 
 exact amount of materials above the roadbed is capable of ascertainment, and no addition 
 should be made for materials omitted. However, with respect to certain materials the carrier 
 is not limited to the amount necessan.- to duplicate what is actually in the property. This 
 is illustrated by the item of spikes. It is recognized that in laying rail a certain percentage 
 above the number of spikes required is purchased to take care of losses and imperfections, 
 and an allowance to cover these possibilities is made. It is recognized, of course, that in 
 compiling the inventory of the roadway there are certain quantities which are hidden and 
 cannot be observed. 
 
378 Electric Railway Problem 
 
 "In estimating hidden quantities the representatives of the commission rely upon the 
 statements of the carriers supplemented by such records as they may possess, tested by the 
 observations of our engineers. These statements and records are accepted unless they appear 
 to be erroneous on their face. Field notes of the commission containing the estimate of the 
 quantities to be allowed are furnished the carrier if desired, and if objected to the matter 
 is thoroughly investigated. In the application of prices to the items embraced in the inven- 
 tory, we endeavor to compensate for all expenses which will be met in connection with a 
 particular item. The item of grading furnishes a good illustration. We ascertain the price 
 per cubic yard which is proper to apply for grading, and its determination in this regard is 
 guided by prices paid under contracts for work of this character. However, it is recognized 
 that certain work is performed by the grading contractor which is not included in his contract 
 price, such as erecting temporary bridges, constructing ditches off the right of way, etc. 
 To the price per cubic yard which is obtained in the manner indicated above is added an 
 estimated amount to cover the additional expense. A similar addition is made in other cases 
 when necessary. 
 
 "The statement that no provision for contingencies has been made by us in this pro- 
 ceeding is therefore incorrect. The figure reported as cost of reproduction new is an estimate 
 of the amount of money necessary to reproduce the identical property under valuation. The 
 inventory is made with great care and the prices applied are arrived at after exhaustive study. 
 Every necessary expense is taken into consideration. 
 
 "Since reproduction new is at best an estimate, it is apparent that an estimate arrived 
 at upon a basis as outlined above is as liable to be too high as too low and that therefore 
 there is no warrant for the addition of a definite amount to cover contingencies, but that any 
 allowance of that kind which ought to lie made should be and is taken care of in connection 
 with particular items of property." 
 
 With respect to the item of engineering the Interstate Commerce Commis- 
 sion made an exhaustive study of the accounts of 121 actual railroad construction 
 projects in different sections of the country ranging from 2yi miles to 900 miles 
 in length, which cost in the aggregate $302,000,000, and found that thp weighted 
 average was approximately 3.6 per cent for engineering expenses. In view of 
 the results of this study the conmiission directed its engineers to keep their al- 
 lowances for engineering expenses within a range of from 2 per cent to 5 per 
 cent of the direct cost of the road exclusive of land. It should be observed also 
 that the term "road" does not include equipment. 
 
 With respect to several items in the classification of accounts grouped under 
 the term "general expenditures" and including organization expenses, general 
 office expenses, law expenses, taxes, etc., the Interstate Conmierce Commission 
 caused its accountants to make a study similar to that undertaken in connection 
 with engineering, with the result that general expenditures other than interest 
 during construction were found to be on the average 1.93 per cent of all road 
 accounts exclusive of land. The commission, therefore, adopted 1]!^ per cent 
 as the allowance for general cx])enditures. With respect to the "cost of obtain- 
 ing money" the commission said : 
 
 "Money with which to construct a railroad is usually obtained by the sale of stocks 
 and bonds. Sometimes the money is at first borrowed on short term paper and the bonds 
 arc issued and sold at the end of the construction pcrio<l. The bonds may be issued before 
 the beginning of construction and held as collateral for the short-term paper, or the bonds 
 may be sold in advance of construction. The latter method has seldom l)cen followed. Both 
 methods involve expense. Short-term paper carries with it a certain charge for brokerage, 
 generally not exceeding one-half per cent, while the sale of bonds involves a discount which 
 includes brokerage, dependent upon the rate of interest, the length of the term, and the 
 credit of the company. 
 
 "During the early stages of our valuation work an endeavor was made to determine the 
 cost to a carrier under valuation of obtaining money : that is to say, to ascertain the credit 
 of the particular company and the circumstances which would surround its financing. It 
 seemed necessary, however, to abandon this methotl liecause it was found to be an almost 
 impossible task, and the result was misleading. The bureau has therefore assumed for this 
 purpose that the rcconstniclion would l>c done by a company the credit of which was good 
 and which could purchase supplies at advantageous prices. This policy having been adopted, 
 
 I 
 
Valuation 379 
 
 it was necessary to determine the rate of interest. Since a railroad with good credit has 
 no difficulty during normal times in borrowing money at Ayi per cent, it was felt that the 
 rate of 6 per cent would be ample to cover all incidental items of. e.xpense in connection 
 therewith. 
 
 "The carrier objects to this method and states that the assumption that its credit is good 
 enough to enable it to borrow money to build its railroad upon a 6 per cent basis is without 
 foundation in fact, but that should an assumption such as above indicated be correct, 6 per 
 cent is too low to cover the entire cost, which would include commissions, syndicating, and 
 other e.xpenses. Eight per cent is suggested as proper in the present case. 
 
 "There are undoubtedly instances where it will be found that should the carriers be left 
 entirely to their own resources they probably could not borrow money at any rate of interest 
 in a sufficient amount to cover the entire cost of construction. Assuming that reconstruction 
 would be done by a company the credit of which was good, the cost of reproducing properties 
 on the basis here assumed will be fairly comparable in all cases." 
 
 The commission's rule for estimating interest during construction is found 
 at pages 32 and 33 of the Texas Midland report, as follows: 
 
 "The rate of 6 per cent interest having been approved, it remains to consider the length 
 of time for which this rate should be applied. Interest for one-half of the construction 
 period has been generally allowed in the valuation of public utilities. Since, however, in 
 determining the construction period in the instant case no time has been considered for 
 preliminary work as such, the question arises whether or not one-half of the construction 
 period is sufficient. It is assumed by us that a railroad company would have a sufficient 
 amount of money on hand at the beginning of each six months to cover construction e.xpen- 
 ditures for that period. A study of the active construction of certain roads shows that when 
 expenditures begin they continue at about an even rate to the end of the construction period; 
 that is, for the total number of months during which construction continues, the outgo per 
 month is about uniform. Therefore, if the assumption that the money required for each six 
 months is on hand at the beginning of that six months is reasonable, and we find that it is, 
 the time for which interest should be allowed is one-half the construction period plus three 
 months, which will be ample to cover the relatively small amount of money which is e.xpended 
 prior to construction. This is the method which has been adopted by the bureau, and interest 
 is computed upon the total amount of the road and general expenditures accounts with the 
 exception of land and interest during construction. 
 
 "A considerable part of the cost of a railroad is in its equipment. While it is true that 
 as a general rule equipment is not purchased until the road is practically completed, and but 
 little interest is paid on money expended for equipment before operation begins, nevertheless 
 it is necessary to have the equipment some little time prior thereto. For this reason some 
 provision for interest should be made. It is believed that an allowance of three months on 
 the money expended for exquipment is equitable. This rule has been adopted." 
 
 The commission, following its interpretation of the Minnesota Rate Cases, 
 refused to allow any overhead percentages upon the present value of the land. 
 
 The upshot of the matter was that the Interstate Commerce Commission 
 in its reproduction-cost appraisal of the Texas Midland Railroad made an allow- 
 ance of only 7.6 per cent upon the total base reproduction cost of the property, 
 exclusive of land, for the general overheads. 
 
 It is not advisable in this report to enter further into the discussion of the 
 details of valuation, either for the purpose of showing the extraordinary dis- 
 crepancies that develop in the effort to apply the reproduction-cost theory to the 
 valuation of a public utility property, particularly with respect to the determina- 
 tion of the overhead expenses, land values, and intangibles such as going con- 
 cern value and development cost, or for the purpose of showing the vast differ- 
 ences in the results obtained, especially in these abnormal times, where different 
 methods of valuation are used. 
 
 The appraisals submitted by the companies and those prepared on behalf 
 of the public are often as far apart as the East is from the West, and even where 
 the companies employ half a dozen appraisal experts to swear to their theories 
 of valuation where one is employed by the public, that fact does not make the 
 
380 Electric Railway Problem 
 
 appraisals submitted by the companies half a dozen times as reliable as those 
 for which the public contends. The problem of the valuation is not made simple 
 by long discussion and analysis. The courts and the commissions are still quot- 
 ing the language of Justice Harlan in the epoch-making decision of the United 
 States Supreme Court in the case of Smyth vs. Ames,'' where he says: 
 
 "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 being used by it for the convenience of the public. .\nd in order 
 to ascertain that value, the original cost of construction, the amount e.\pendcd in permanent 
 improvements, the amount and market value of its bonds and stock, the present as cofnpared 
 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. 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 e.xacted from it for the use of a public 
 highway than the services rendered by it are reasonably worth." 
 
 Subsequent to the decision in Smyth z's. Ames, and quite contrary to the 
 comprehensive language used by the court in that case, the reproduction-cost 
 method acquired such vogue in valuation matters that it was regarded as almost 
 the exclusive method of determining fair present value. In fact, many public 
 utility men still speak of "present value" as being synonymous with reproduction 
 cost, either new or less depreciation. But even prior to the present period of 
 extraordinary prices, the reproduction-cost method was coming into disrepute 
 with the public service commissions. This method is so highly theoretical and 
 lends itself so readily to the vagaries of the engineering imagination in that un- 
 happy borderland where scientific attainments submit themselves to the uses of 
 financial exploitation for a price, that it has been unable to escape the well-nigh 
 unanimous condemnation of thoughtful men who have been given the responsi- 
 bility for determining the fair value of public utility properties. As an illustra- 
 tion of the present trend of thought in public service commission circles, I quote 
 a resolution submitted by Mr. Paul P. Ilaynes, at that time a member of the 
 Indiana Public Service Commission, to the National Association of Railway and 
 Utilities Commissioners, at their national convention held in Indianapolis, Octo- 
 ber 16, 1919, and now under consideration by the valuation conuuittee of the asso- 
 ciation. This resolution represents a right-about-face in the application of the 
 "fair value" rule, declaring as it does that "the honest and prudent investment" 
 should be given the greater weight in the valuation of public utility properties. 
 The following is the resolution : 
 
 "Whereas, in recent years the cost-of-roproduction method of evaluation has in many 
 instances become the controlling factor in determining the fair value of the property of public 
 utilities; and 
 
 "WiiERE.\s. during the past few years, there has tiecn an unprecedented increase in the 
 cost of materials and supplies entering into the construction of utility properties; and 
 
 "Whereas, the cost-of-reproduction methcxi of evaluation, although applied with moder- 
 ating averages, arbitrarily attaches to properties con.structcd before the high price period, 
 values greatly in excess of the actual prudent investment therein, in many instances from 
 25 to 1(10 per cent greater than such investment ; and 
 
 "WiiFJtEAS. under present abnormal conditions, the cost-of-reproduction theory has ceased 
 to perform the service which it was designed to perform, and now leads to unwarranted and 
 unreasonable values which offer little guidance in determining the fair value of the property 
 of public utilities; and 
 
 "Whkreas, the continuance of the cost-of-reproduction theory as the controlling factor 
 
Valuation 381 
 
 in public utility valuations will in the future undoubtedly cast a burden upon those utilities 
 which were required by public necessity to make substantial plant investments during the 
 high price period, 
 
 "Therefore be it Resolved, by the National Association of Railway anu Utilities 
 Commissioners, that a continued disposition on the part of commissions and courts to consider 
 cost of reproduction or cost of reproduction less depreciation as the controlling factor in 
 determining the value of the property of utilities will tend to impair scientific and equitable 
 regulation, to permit the establishment of unwarranted and unreasonable values, and ulti- 
 mately to diminish public confidence in commissions and courts, and thereby impair their 
 usefulness. 
 
 "Be it further Resolved, that one of the obligations of commissions and regulatory 
 bodies is to protect and preserve, insofar as it lies within their power, honest and prudent 
 investment in utility properties, and that in view of abnormal price conditions now prevailing, 
 equity, justice and a proper regard for the interests of utilities as well as the public, seem 
 to demand that in the valuation of public utility property greater weight should be given to 
 the honest and prudent investment therein. 
 
 "Be it further Resolved, that it is not intended by this resolution to hold that the fair 
 value rule should be abandoned or impaired, but rather that under the fair value rule and in 
 view of abnormal conditions prevailing, a greater measure of justice and equity will be 
 secured by giving greater weight to the honest and prudent investment, and less weight to 
 the cost of reproduction or cost of reproduction less depreciation." 
 
 The issue between the historical cost method and the reproduction-cost 
 method was discussed at the last of the public hearings by Dr. Edward \V. 
 Bemis, economist and valuation expert, who appeared as a witness representing 
 the general public. Dr. Bemis considers the valuation as even more fundamental 
 than the rate of return. He refers to the efforts of the street railway companies 
 "before this Commission and elsewhere to generalize and to excite universal pub- 
 lic sympathy for all railway companies," and expresses the opinion that each 
 street railway must be considered separately, as "conditions vastly differ." At 
 pages 2105 to 2107 of the Proceedings, he says : 
 
 "The great question before the country w'ith regard to these matters in general has been 
 whether they have been getting and are getting a fair return. 
 
 "The problem has not been so much what constituted a fair return in the shape of a 
 percentage — that figure running anywhere, usually, from six to seven per cent, as to the 
 whole property, recognizing that part of it is usually in five per cent bonds — but the test has 
 been the valuation on which the return is to be estimated. 
 
 "There are two tests, it seems to me, and practically only two tests, of a fair return. 
 There are variations of those two tests, but there are fundamentally only two; and the great 
 problem before the country is the war between those two tests. 
 
 "One is the reproduction valuation and the other the historical valuation. 
 
 "The reproduction theory is the estimated cost of the reproduction new today, on the 
 basis either of existing prices or the prices of two or three years just past, either with or 
 without depreciation from all causes, physical obsolescence and inadequacy. That is a minor 
 conflict as to the application of the reproduction theory, whether depreciation shall be taken 
 off or not. But the fundamental proposition is the estimated cost of reproduction on prices 
 that exist today and have existed for two or three years, and may, to a large degree, exist 
 for the next two or three years. 
 
 "The great opposing test is whether a company is earning a fair return on the actual 
 cost of the property now in use, less depreciation, and with due regard to the history of the 
 investment. If a company has not earned enough in the past to take care of depreciation, 
 an allowance under this theory must be made for it in some form. If a company has not 
 earned enough to take care of depreciation, that does not prevent depreciation having oc- 
 curred. Depreciation is not a factor of profit. It is a result of physical and functional 
 causes : but the ability of the company to take care of depreciation through its earnings may 
 greatly affect our treatment of it in a rate case, and may cause us to set up a counterbalancing 
 figure in the shape of a going value or something of that kind, if the company has not been 
 able to take care of depreciation. 
 
 "On the other hand, if the company has earned much more than a fair rate of return 
 on the actual investment, weight must be given, under this tlieory, to that fact. I do not say 
 how much weight, but some weight will have to be given to it, I believe. 
 
 "Under the first theory, which I call the reproduction theory, the companies do make 
 large claims, and they can properly make large claims, because the results, honestly, carefully 
 
382 Electric Railway Problem 
 
 applied, will result in much larger figures than the historical cost. To be sure, I believe 
 they are exaggerated in the minds of many engineers by fanciful estimates, extremely large 
 overhead charges allowed, and development charges, but still, under any application of the 
 theory there will be a very large valuation secured by that method. 
 
 "Under the second, which for short I will call the historical theon-. which is adopted 
 to a large degree by some State Public Service Commissions, notably in Massachusetts, New 
 Hampshire, Indiana and Illinois, a valuation is reached which is usually much below the 
 outstanding securities — not necessarily in Massachusetts, because there they have kept down 
 the issuance of securities, but in other states that usually is the case. ' 
 
 "This theory, however, in my judgment is not only a popular theory among the great 
 mass of citizens, but I believe it is an e(|uitable theory. It is the theory that had been largely 
 controlling in the United States Supremo Court until the Nebraska Kate Case." when the 
 mistaken effort was made by the attorneys lor Nebraska to introduce the reproduction theory, 
 because it was thought the public would gain somewhat by that theory in the valuation of 
 the Pacific railroads which had been built under war prices ; and the courts very largely swung 
 around afterwards to that theory; but they have now split with it in three vital respects, and 
 the Supreme Court now has no definite theory. 
 
 "The three respects in which they have broken from the reproduction theory are, first. 
 with respect to paving over mains and conduits. That is no longer allowed by most courts 
 if the paving was put there after the mains or conduits were laid ; but it is an absolute logical 
 split from the reproduction theory, not to allow it. 
 
 ".•\gain, there has been a split from that theory with respect to the matter of land. In 
 the Minnesota Rate Cases;" Justice Hughes emphasized a position which is neither the histor- 
 ical theory nor the reproduction theory, but takes the value of the adjacent land at the time 
 of valuation, and refuses to put on any costs of acquisition, any overhead, such as interest 
 on the land while the railroad is being built, or engineering or any other charges, although 
 they are always incurred both in the historical theory and in the reproduction tlicory ; but the 
 Supreme Court, perhaps thinking that, even applying that value of adjoining land, you got 
 something nearer to justice than if you took the reproduction theory and then added the 
 overheads on that, adopted a theory which has no logic in it. as I can see it, but nevertheless 
 is interesting because it is a break from the reproduction theory. 
 
 "The third break has been in the case of going value. The reproduction theon- of going 
 value is based on the cost of reproducing the business. The courts have split from that, and 
 have taken the historical, early losses not made up by later gains, as in the Kings County 
 Gas Case, and in the Des Moines Gas Case."'" 
 
 It is often assumed that a "big valuation" is to the advantage of the present 
 investors, but the electric railway business has evidently now reached a stage 
 where its salvation as an industry depends u])on a conservative capitalization, 
 with security both as to the investment itself and as to its earning power, rather 
 than upon a large theoretical value which in itself stands in the way of a solution 
 of the problem of street railway credit and street railway prospcritv. It is un- 
 questionably important from every point of view that the rate base should not 
 be fixed at so high a figure as to prove the essential and necessar}' bankruptcy 
 of the industry. From the point of view of public policy, so far as it involves 
 the possibility of a change from private to public ownership and operation, it 
 cannot be denied that with respect to the valuation there is a sharp conflict of 
 interest between the present Owners and the future purchasers of street railway 
 property. It is clearly to the interest of the owners to get the valuation of their 
 property fixed at as high a ligure as practicable without destroying the possibility 
 of sale. On the other hand, the public has a directly contrary interest in that 
 a low valuation as the basis for public purchase is always desirable from the 
 public point of view and in many cases may be essential to the financial success 
 of public ownership and operation. 
 
 This discussion of the valuation has not led us to a definite, final result, 
 cither with respect to tlie fundametUal method to be employed in arriving at 
 fair value as a basis for the readjustment of the public relations of the electric 
 
Valuation 383 
 
 railways, or as to the specific and detailed rules for the application of the method 
 chosen. It has shown, however, beyond a doubt that the electric railways can- 
 not come into the court of public opinion claiming in equity a valuation of their 
 property, either for rate purposes or for public purchase, arrived at in strict ac- 
 cordance with the recommendations of the Committee on Valuation of the Ameri- 
 can Electric Railway Association or in strict accordance with the rules laid down 
 by Professor Cooley. The "ignorance" of the public is too profound to enable 
 it to appreciate the equity of a method that would, at this stage of the business, 
 make good to the present owners of street railway securities all the losses that 
 they or their predecessors may have heretofore incurred in the street railway 
 business, from the inception of horse-car transportation down to the present 
 time, and that would make up to the common stockholders of the operating 
 companies the losses that the bondholders and the guaranteed stockholders 
 have incurred through the depreciation in the purchasing power of the dol- 
 lar. In the opinion of many of the witnesses who appeared before the 
 Commission, the American public is "fair-minded" and will give the electric 
 railways a "square deal" when the facts are thoroughly understood. It seems 
 perfectly obvious that the extreme claims presented by the electric railway com- 
 panies, and by the engineering experts employed by them in most valuation 
 cases, do not have the effect of making the public "understand" ; but on the con- 
 trary tend to accentuate the distrust and hatred that have already long been 
 characteristic of the relations between urban communities and the street railway 
 corporations. In other words, the electric railways, if they follow the lead of the 
 Committee on Valuation and of the school of appraisal engineers represented in 
 the testimony by Professor Cooley will, in my judgment, be "riding for a fall." 
 Any valuations that may be established in accordance with this leadership in 
 these abnormal times are likely to cause a "backfire," if we may be permitted to 
 use Mr. Babson's expression where he was giving voice to his fear of the results 
 of either public ownership or the service-at-cost plan. 
 
 There is something about the prevalent theories of utility service under 
 public regulation that makes it hard for public utility men to conceive of the pos- 
 sibility of ultimate loss to investors in street railway securities. The broad 
 mantle of public interest and public guaranty is expected even to reach back over 
 the generations that are past and to make good luiiic pro tunc the investments 
 then made on a frankly speculative basis. The public is even expected to ignore 
 the losses attendant upon receiverships and reorganizations in the past and to 
 make good to the present investors the long- forgotten losses which their less 
 fortunate forebears underwent in the earlier days of street railway development. 
 The utility men are not entirely unanimous in making these claims. General 
 Tripp proved to be a notable exception, but the orthodox school of street railway 
 appraisers insists on getting the ancient losses in. whether the historical cost 
 method or the reproduction-cost method is used. The public generally is inclined 
 to approve the actual investment theory without the frills of promoter's profits 
 and hypothetical deficiencies cumulated at compound interest. On this basis, the 
 public will even be lenient with respect to accrued depreciation where it can be 
 clearly shown that the electric railways, under prescribed rates, were in fact 
 
384 Electric Railway Problem 
 
 well managed and well maintained and still were unable to earn the depreciation 
 as it accrued. If the experience of the electric railway industry has proven any- 
 thing, it is the fundamental importance of conservatism in capitalization and the 
 capital account, and the fatal danger inherent in the perpetuation of a load of 
 dead investment. Surely, in these critical times, the electric railways cannot 
 except to repair their broken fortunes on the theory that all things — profits and 
 losses alike — have worked together to enhance the value of their property. 
 
Chapter XXXIX 
 THE RATE OF RETURN 
 
 The valuation is fundamental because it is the basis for rate-fixing and also 
 the basis for the purchase price in case the property is to be transferred from 
 private to public ownership. The rate of return does not affect the purchase 
 price, except as the latter is left indeterminate. In that case a high rate of 
 return will undoubtedly tend to enhance the purchase price when that comes to 
 be fixed at some future time. In connection with the discussion of a readjust- 
 ment of the public relations of the electric railways it would not be safe to 
 leave out of consideration the possibility of future public purchase, and this is 
 particularly true where any sort of a service-at-cost plan or any kind of a public 
 subsidy or public guaranty is to be provided. We cannot assume that private owner- 
 ship is to be continued indefinitely. Therefore, we must discuss the rate of return 
 not merely as a complementary factor to the valuation for the purpose of provid- 
 ing a fair return to the investors from the rates, but also as a factor affecting 
 future public policy with respect to purchase. From the public point of view, a 
 low valuation and a low rate of return are doubly advantageous, as they keep 
 the cost of the service down while the railways remain in private ownership, 
 and put the city in a position to undertake municipal ownership with relative ease 
 and with a relatively good prospect of financial success. For the facilitation of a 
 public ownership program a low valuation is advantageous even though the 
 present owners of the property be given a compensating high rate of return. 
 On the other hand, a high vaulation with a high rate of return is doubly dis- 
 advantageous to the public, as this combination enhances the cost of service 
 under private ownership and at the same time makes it difficult to inaugurate or 
 succeed in public ownership. Furthermore, while a low valuation even though 
 coupled with a high rate of return is advantageous to the public from the point 
 of view of ultimate purchase, this combination may prove quite disadvantageous 
 to the public in case the policy of private ownership is continued for a long time ; 
 for it means a high cost of all new capital brought into the business for exten- 
 sions and betterments. 
 
 This discussion seems to be based on the assumption that the valuation and 
 the fair rate of return are not facts to be ascertained separately, but correlated 
 factors to be juggled with. In fact, the resettlement of the public relations of 
 any given street railway is likely to be a matter of negotiation between opposing 
 interests, a give-and-take process. In these negotiations we cannot expect the 
 present owners of the railways to do other than look out for their own interests, 
 and likewise the public must not be expected to assume an entirely judicial atti- 
 tude, but it must always be borne in mind that local transportation is a public 
 
386 Electric Railway Problem 
 
 function, that it exists for service primarily, and that in the broad sense the 
 pubhc interest is predominant. 
 
 With these considerations before us, what is the test o£ the rate of return 
 to be allowed on property invested in electric railways under private ownership? 
 Is it to be a non-confiscatory rate, a "fair" rate or an effective rate? Where it 
 is a case of reducing charges or of keeping them down by the exercise of the 
 police power, the regulatory authorities are limited by the inhibitions of the 
 Federal Constitution as interpreted by the United States Supreme Court. The 
 rate of return allowed upon the fair value of the property must not be so low as 
 to be confiscatory. Indeed, there is a tendency in the decisions of the Supreme 
 Court to treat the term "fair" w-hen applied to the rate of return as identical 
 with "non-confiscatory." In a broad sense, and subject to many qualifications, 
 six per cent came to be regarded, in normal times, as marking the "dead line" 
 between a fair return and confiscation. It is noteworthy, however, that the 
 Supreme Court, in the case of Lincoln Gas & Electric Lit/lit Company z: Lincoln, 
 decided June 2, 1919,' modified a decree of the district court entered on Sep- 
 tember 23, 1915, wherein the company's complaint against the validity of a 1906 
 regulatory ordinance was dismissed, by stipulating that such dismissal "shall be 
 without prejudice to the commencement of a new action to restrain the enforce- 
 ment of said ordinance hereafter." In rendering the opinion for the court, Mr. 
 Justice Pitney used the following significant, but somewhat inconclusive lan- 
 guage (Supreme Court Reports, I^w Edition 63, page 582) : 
 
 "We cannot approve the finding that no rate yielding as much as 6 per cent upon the 
 invested capital could be regarded as confiscatory, in view of the undisputed evidence, accepted 
 by the master, that 8 per cent was the lowest rate sought and generally obtained as a return 
 upon capital invested in banking, merchandising, and other businesses in the vicinity ; 7 per 
 cent Iteing the 'legal rate' of interest in Nebraska. Complainant had not such a monopoly 
 nor were its profits 'virtually guaranteed' in such a sense as to permit the public authorities 
 to restrict it to a return of 6 per cent upon its invested capital. It is not entirely clear, 
 however, that the rate ordinance did so restrict it. 
 
 ******** 
 
 "Perhaps it would go without saying, but in our opinion the decree ought to be modified 
 so as to permit complainant to make another application to the courts for relief against the 
 operation of the ordinance hereafter, if it can show, as a result of its practical test of the 
 dollar rate since May 1. 1915, or upon evidence respecting values, costs of operation, and the 
 current rates of return upon capital as they stand at the time of bringing suit and are likely 
 to continue thereafter, that the rale ordinance is confiscatory in its effect under the new 
 conditions. It is a matter of common knowledge that, owing principally to the World War, 
 the costs of labor and supplies of every kind have greatly advanced since the ordinance was 
 adopted, and largely since this cause was last heard in the court below. .\nd it is equally 
 well known that annual returns upon capital and enterprise the world over have materially 
 increased, so that what would have been a proper rate of return for capital invested in gas 
 plants and similar public utilities a few years ago furnishes no .safe criterion for the present 
 or for the future." 
 
 This language of Justice Pitney 's opinion is clearly dictum, but its intima- 
 tions as to the probable attitude of the Supreme Court with respect to the rate of 
 return in cases that may come before it under the abnormal conditions now pre- 
 vailing are very significant. Clearly, verj' little reliance can now be placed upon 
 the assumption that the United States Supreme Court will sustain as non-confis- 
 catory any regulatory- act that does not reduce the rate of return upon invested 
 capital below six per cent. 
 
 Moreover, the public utility commissions of the several states generally act 
 
Rate of Return 387 
 
 under a somewhat different rule from that laid down by the United States courts 
 in confiscation cases. The commissions aim to reach a result that will be "fair" 
 to the investors and that will be adequate to induce new capital to flow into the 
 enterprise in sufficient quantities to take care of expanding service. They aim 
 to keep well above the "dead line." In the rather celebrated Passaic Gas Case, 
 the New Jersey Board of Public Utility Commissioners allowed 8 per cent upon 
 the value of the property. The valuation was hotly contested in the courts, by 
 the company because the commission had not included a separate item for the 
 alleged value of the franchises, and by the municipalities because the commission 
 had included an allowance of 30 per cent of the physical valuation for going 
 concern. The New Jersey courts upheld the commission on both points. In 
 rendering the opinion in the State Supreme Court, which was later adopted by the 
 Court of Errors and Appeals, Mr. Justice Swayze discussed the just and reason- 
 able rate for service, in its relation to the rights of the consumer on the one side 
 and to those of the investor on the other, in the following manner : ^ 
 
 "On the one hand a just and reasonable rate can never exceed, perhaps can rarely equal, 
 the value of the service to the consumer. On the other hand, it can never be made by com- 
 pulsion of public authority so low as to amount to confiscation. A just and reasonable rate 
 must ordinarily fall somewhere between these two extremes, so as to allow both sides to 
 profit by the conduct of the business and the improvements of methods and increase of 
 efficiency. Justice to the consumer ordinarily would require a rate somewhat less than the 
 full value of the service to him; and justice to the company would ordinarily require a rate 
 above the point at which it would become confiscatory. To induce the investment and con- 
 tinuance of capital there must be some hope of gain commensurate with that realizable in 
 other business; the mere assurance that the investment will not be confiscated would not 
 suffice.'' 
 
 Justice Swayze clearly assumed that the value of the service to the consumer 
 will always be more than enough to yield a profit to the company. The value 
 of the service is regarded as the ceiling in the room of regulation and the non- 
 confiscaton,' base line is the floor, and naturally it is assumed that the ceiling 
 cannot sink below the floor or the floor rise above the ceiling. But the analogy 
 breaks down and the figure of speech fails in cases where as a matter of fact 
 the cost of the service including a fair return to the investor exceeds the value 
 of the service. Obviously, the constitutional limitations enforced by the Federal 
 courts are designed to prevent certain types of injustice being done by the affirma- 
 tive act of public regulatory bodies, while the public service laws of the states are 
 designed to promote justice affirmatively, as well as to restrain private corpora- 
 tions engaged in rendering public service from doing injustice to the people who 
 are dependent upon them for the service. It cannot be doubted, in the light of 
 the evidence produced before the Commission, that some electric railway enter- 
 prises fall within the category where the value of the service to the individual 
 patrons of the line is less than the cost necessarily incurred by the company 
 under present conditions in rendering the service. In such cases it is a futile 
 act for the regulating authority to fix the fair rate of return to the investors 
 unless it be for the purpose of definitely putting the enterprise beyond the pale 
 of regulation. 
 
 But our entire discussion up to this point hinges upon the acknowledged 
 necessity for a restoration of electric railway credit in order that new capital may 
 become available for necessary extensions, additions and improvements of trans- 
 
388 Electric Railway Problem 
 
 portation facilities. From this point of view, whether under private or under 
 pubhc ownership, the test of the rate of return is its persuasiveness to new in- 
 vestors, not primarily its justice to the investors whose money is already in the 
 enterprise. It is doubtless true that under certain conditions a policy of justice 
 to the old investors will tend to attract new ones; but, on the other hand, it is 
 unquestionably true that a policy of leniency toward existing security-holders, 
 without much regard to the past financial policies upon which their claims de- 
 pend, will in many cases tend to discourage new investors from coming in. 
 Obviously, if all the losses of the past, whether the result of original bad judg- 
 ment, poor management, manipulation or outside economic causes, are now to be 
 capitalized and given a perpetual preference in the distribution of the earnings, 
 the new investor cannot see much in the enterprise for him. and he will not come 
 in at all or else will demand a very high rate of return for his speculative risk. 
 Under such conditions receiver's certificates would be infinitely more attractive 
 than junior securities. 
 
 It is agreed that the rate of return must be sufficient to attract new capital 
 to the extent that new capital is essential, but what rate will be sufficient depends 
 both upon the conditions of the market and upon the conditions of the invest- 
 ment. We must consider, therefore, both sets of conditions. The unprece- 
 dented destructiveness of the World War and the heavy demand for new capi- 
 tal in industrial enterprises in the present reconstruction period have united to 
 produce a relative scarcity of free capital which tends to increase the cost of 
 money. Apparently, it was tiiese things that Justice Pitney had in mind in the 
 Lincoln Gas Case decision. It is not clear from the language he used whether 
 he also had in mind the thought that the decrease in the purchasing power of 
 money affects the rate of return demanded by capital. That this thought is in 
 the minds of a great many who have given attention to the problems of public 
 utility regulation is clear not only from the testimony before the Conmiission, but 
 from other sources. For instance, very recently in a letter discussing the ad- 
 vantages of the actual-investment theory over the reproduction-cost theory in 
 valuation, a state public service commissioner expressed himself as follows: 
 
 ".Miiiost all commissioner.s, I believe, have made the mistake of holding the rate of 
 return down almost to pre-war levels. If in 1915 or 191(), a Kencral policy had been adopted 
 in which rates of return were increased in measurable degrees relating to the increased cost 
 of money and to the decreased purchasing power of money, I am convinced that there would 
 not now Ik a gemral demand for values based on hi^h war prices. 
 
 "It .seems fundamental to me that there should be stability to utility values. The most 
 equitable and the most practical method of securing such stability is to follow closely the 
 actual investment. This done, thereafter the rate of return would fluctuate to compensate 
 for constantly changing conditions. Such a policy would go far in attracting capital and 
 maintaining credit." 
 
 As we have already seen, Professor Cooley also suggested an increase in the 
 
 rate of return corresponding to the decrease in the purchasing power of money 
 
 as an acceptable alternative to the use of war prices in the valuation. Professor 
 
 Irving Fisher also stressed this point. At pages 1332 and 13.^ of the Proceedings, 
 
 referring to the testimony given by Corjjoration Counsel William P. Burr, of 
 
 New York City, Professor Fisher says: 
 
 "He spoke about the income which the investor in street railways was getting today 
 iiiid tried to make out that he was getting a fair return on his investment. Now if 6 per cent 
 
Rate of Retlkn 389 
 
 was a fair return on a company which was capitalized before the war at a certain amount, 
 12 per cent is a fair return today on that same capitalization, because the price level has 
 doubled. Twelve per cent today is only 6 per cent on the basis of a recapitalization in terms 
 of our present cheaper dollar, our fifty-cent dollar. That is, he made the mistake of counting 
 — suppose a concern was capitalized at $100,000,000 before the war and is earning $6,000,000 
 today, he says that is 6 per cent ; but it is not 6 per cent, it is only 3 per cent. Si.x million 
 dollars today are si.x millitjn little dollars, and he is taking the ratio of six million little dollars 
 to one hundred million big dollars. He either ought to recapitalize in terms of present prices, 
 which one of the members of the Commission suggested, calling the capitalization two hundred 
 millions in terms of modern purchasing power, in which case he is getting six millions at 
 three per cent, or he ought to transplant his six million little dollars today into the big dollars 
 of the pre-war period, and they would be only three millions of those big dollars. 
 
 "To show clearly this shift, suppose you go back to an ordinary case of a stockholder 
 and bondholder in a corporation that does adjust the price of its product quickly and easily, 
 an ordinary industrial corporation, suppose it was incorporated for $2,000,000, one million 
 in stock and one million in bonds, before the war. And suppose, to take simple figures, that the 
 income is 5 per cent on both of those, that would be an income of $50,000 to the bondholder and 
 $50,000 to the stockholder. Today if the prices of this concern have been doubled, as other 
 prices have been, and the cost of producing labor and materials has also doubled, the profits of 
 the concern will also be doubled, and the total income will be, instead of $100,000. $200,000; but 
 the bondholder of this $200,000 will no longer get half. He will still get the $50,000 which 
 he is entitled to under the terms of his contract, and that leaves $150,000 to the stockholder, 
 who gets therefore three times as much, the bondholder getting one-half of his value, getting 
 nominally the same value, and the stockholder getting three times the nominal value that he had 
 before. $150,000 instead of $50,000. And if the stocks were sold on that new basis the stocks 
 ought to go up three times, they ought to be selling at three times what they were. 
 
 "Now, that is called profiteering. It is a necessary consequence of the change in the 
 price level, but it is not the cause of the change in the price level." 
 
 In reply to a question by Commissioner Gadsden, Professor Fisher then went 
 on to apply this reasoning to the nickel fare. He had shown that the general 
 prices at the time he was testifying (August, 1919) were about double the prices 
 of the period just before the war and three times the prices of 1896. He said 
 that if the fare of 5 cents was right in 1896, and if the prices of street railway 
 labor and materials on the average have kept pace with the general rise of prices, 
 "then the corresponding fare today would be 15 cents." However, he did not 
 profess any knowledge with respect to the street railway business in particular. 
 At page 1334 of the Proceedings, he says: 
 
 "Now, I do not know anything about the labor and materials. You men. of course, are 
 going into that and will inform yourselves whether there have been improvements justifying 
 a lowering in fares or not, and whether the fare was excessive in 1896. But there would 
 be naturally a triple adjustment to put one's self in the same position, if this industry is 
 typical of industries in general." 
 
 In all this discussion. Professor Fisher had been treating the return on 
 capital as if it were affected by the change in the purchasing power of money in 
 just the same way that other elements of cost had been so affected. At this 
 point. Commissioner Meeker took up the question as tft the relation of interest 
 rates to general prices, and Professor Fisher admitted that interest rates are 
 determined by factors that are more or less independent of price levels. This 
 testimony is also found at page 1334 of the Proceedings: 
 
 "Commissioner Meeker : Just there, Professor Fisher, in regard to a 6 per cent return 
 and a 12 per cent return, the interest upon capital, of course, is determined by factors that 
 are more or less independent of price levels, is not that true? 
 
 "Mr. Fisher: Yes. 
 
 "Commissioner Meeker : That is, we might have a decrease in interest rates with an 
 increase in the level of prices. 
 
 "Mr. Fisher: Yes. 
 
 "Commissioner Meeker : That has occurred ? 
 
390 Electric Railway Problem 
 
 "Mr. Fisher: Yes. 
 
 "Commissioner Meeker: At certain times, historically? 
 
 "Mr. Fisher: Yes." 
 
 The discussion then went to the point of the effect of contracts and fare 
 limitations upon the adjustment of the rate of return to meet changes in the 
 purchasing power of money. The testimony, at pages 1334 and 1335 of the 
 Proceedings, follows: 
 
 "Commissioner Meeker: If we were going to give a 12 per cent return upon a bonded 
 debt — will you explain how you would bring about a readjustment, granting that the pur- 
 chasing power of the income of a bondholder has been cut in half, how would you bring 
 about a readjustment so that its purchasing power might be preserved and also the capital 
 investment preserved? Because, if you double the income that he is to receive — well, will 
 you e.xpand on that? 
 
 "Mr. Fisher: Are you referring to the bondholder or stockholder? 
 
 "Commissioner Meeker: I mean the bondholder now. 
 
 "Mr. Fisher: I do not think anything could be done for the bondholder now. You 
 have to keep your contracts and get your pound of flesh and 
 
 "Commissioner Meeker: I misunderstood the reference which you made. 
 
 "Mr. Fisher: But with the nickel fan- unchanged, which is now worth one-third in 
 purchasing power of what it was in 1896 or one-half of what it was before the war, I 
 sui)pose you have the chief explanation for the bankruptcy that has been going on and the 
 fact that the stock of these public service corporations, according to Mr. Babson, has gone 
 down to a quarter on the average, of various stocks of this country, of what they were 
 before the war, and the natural remedy I should suppose would be a raise of fare. 
 
 "Mr. Warren: In other words, the stock of a public utility with a limited income is 
 very much like the bond? 
 
 "Mr. l-'isher: Yes, the stockholders in a public service corporation are really in the 
 same position as the bondholders in an ordinary corporation. I am so accustomed to express 
 it in terms of the bondholder, because 1 am thinking of the typical corporation, that this 
 exceptional case that you have to deal with is not perhaps adequately emphasized. 
 
 "Commissioner Gadsden: On a larger scale is not your position proved and substantiated 
 by the fact that of all the phases of human effort, all lines of activity, commercial, industrial, 
 and otherwise, the only ones which apparently have suffered during the war, we will say, 
 are those the prices of who.se product have been fixed by law? 
 
 "Mr. Fisher: Yes, fixed by law or contract. 
 
 "Commissioner Gadsden : Steam railroads, telephones, telegraphs, gas, electricity, and 
 street railways; everybody else has profiteered, if you want to put it that way. 
 
 "Mr. Fisher: Bondholders, teachers, clerks, and to some extent wage earners. 
 
 "Commissioner Gadsden : Yes. 
 
 "Mr. Fisher: Now, this produces a kind of social injustice. While, of course, we have 
 to keep our contracts literally, you cannot make an adjustment after you have made a contract, 
 it remains true that there is a grave social injustice done where money has depreciated, to 
 the salaried man. the bondholder and the investor in street railway industries, where the fare 
 is fixed by law, franchise, custom or contract." 
 
 It will he noted that street railway hondholdcrs arc hound to a fixed rate 
 of return hy contract, and that street railway stockhoKlers have not realized an 
 increase in their rate of return, for the reason that street railway earnings are 
 limited "by law, franchise, custom or contract." This goes to show that street 
 railway bondholders are "in the same box" with all otlier bondholders, and that 
 street railway stockholders are in a different position from the stockholders in 
 unregulated private industries. Therefore, if the existing security-holders of the 
 street r.iilways are to have their rates of return adjusted to the changing value 
 of the dollar by aftirmative action of regulatory bodies, it means that they are 
 to be picked out as a special class of security-holders and have the values they 
 have lost returned to tluiu through governmental favor. This would mean that 
 every public service commission or other body vested with power to regulate 
 electric railway rates would be setting itself up in place of the general govern- 
 ment to guarantee in its own little field the purchasing power of the dollar. 
 
Rate of Return 391 
 
 Such a policy would necessarily lead to intolerable confusion and unthinkable 
 favoritism. For the regulatory authorities either to double the valuation or to 
 double the rate of return, as suggested by Professor Cooley, without at the same 
 time insisting upon a corresponding readjustment of the obligations of the com- 
 panies to the bondholders and guaranteed stockholders of the leased lines, would 
 result in shifting the stockholders of the operating companies into the industrial 
 profiteering class, while leaving the bondholders and the stockholders of the 
 leased lines to take their losses. Nothing could be further than this from the 
 legitimate exercise of regulatory power for the stabilization of public utility 
 investments. 
 
 All this relates to the investors whose money is already in the electric rail- 
 way business under contractual and regulatory conditions that were well under- 
 stood at the time when the investments were made. When it comes to the new 
 investors, an increase in the rate of return to correspond with the decrease in the 
 purchasing power of the dollar would be sheer and absolutely inexcusable gratu- 
 ity; for the capital supplied by the new investors will be measured in terms of 
 the same depreciated dollars in which the interest upon it is paid. The fallacy 
 that because labor is getting higher wages and the prices of materials have gone 
 up, capital too should receive a higher wage, was well brought out in the Cleveland 
 Railway arbitration undertaken in September and October, 1919, and referred to 
 in the testimony. Mr. John J. Stanley, president of the Cleveland Railway Com- 
 pany, testified before the Commission on July 22, 1919, that during the entire 
 time since the Tayler service-at-cost plan went into effect in 1910 the fixed 
 charges on the investment, including the interest on the company's capital stock, 
 had been paid. When asked whether any extensions and improvements had 
 been made during this period he replied that "we are making five extensions 
 this year." He explained that these extensions would aggregate from five to 
 seven miles of new track at a cost of from $50,000 to $60,000 per mile. It will 
 be remembered that, up to the time Mr. Stanley was testifying, the rate of return 
 on the Cleveland Railway stock was 6 per cent. The following testimony, at 
 page 595 of the Proceedings, relates to the cost of the extensions above referred to : 
 
 "The Chairman : Where did you get the money ? 
 "Mr. Stanley: From our stockholders. 
 "The Chairman: You sold new stock? 
 "Mr. Stanley : We sold new stock. 
 "The Chairman : What was that stock sold at ? 
 "Mr. Stanley: At par. We cannot sell it at any less. 
 "The Chairman: Was there any trouble in disposing of it? 
 
 "Mr. Stanley : We have not had any trouble. We had trouble when we first started 
 the grant." 
 
 The Tayler grant went into effect in 1910, and the trouble the company had 
 at that time in selling its stock at par was due to the fact that the original fran- 
 chise contract was thought by the investing public not to give adequate security 
 to the stockholders. The contract was thereupon amended to increase the se- 
 curity, and after that the six per cent stock was salable at par even down to 
 1918. In his testimony, Mr. Stanley explained that after the trainmen's wages 
 had been increased to 60 cents in Detroit, the Cleveland Railway employes came 
 forward with a demand for the same rate. The matter was referred to the 
 
392 Electric Railway Problem 
 
 City Council, with the result that the increase in wages was granted and the 
 company got an increase in its operating and maintenance allowances, and also 
 got the permanent maximum rate of fare changed from 4 cents and a penny 
 for a transfer to 6 cents and a penny for a transfer. Also the city was induced 
 to submit to arbitration the question as to whether the company should have 7 
 per cent on its stock instead of 6 per cent. Mr. Stanley's testimony, at page 597 
 of the Proceedings, is as follows : 
 
 "The Chairman : And what return on the capital does the contract fi.x ? 
 "Mr. Stanley : Six per cent. 
 
 ******** 
 
 "The Chairman: In this negotiation, you say the union wanted 60 cents an hour? 
 
 "Mr. Stanley : Yes. 
 
 "The Chairman: And then the stockholders came along and wanted 7 per cent? 
 
 "Mr. Stanley: Yes. 
 
 "The Chairman : What difference did it make to the stockholders if the union got 40 
 or 50 or 60 cents an hour, so long as the stockholders got their return? 
 
 "Mr. Stanley : Well, the stockholders used the same argument that the men were using, 
 that the high cost of living was so that they had to have more wages, and if that applied 
 to the union, it certainly applied to the stockholders." 
 
 Further on, at page 608 of the Proceedings, Mr. Stanley expressed the 
 opinion that the Cleveland Railway stock could not any longer be sold at par on 
 a six per cent basis. He says : 
 
 "I doubt very must ; in fact, I am satisfied that we could not today sell any of our stock 
 at 6 per cent. We would have to put our stock on the market below par. Now, if that 
 is so, the city should give us a higher rate of interest and allow us to sell our stock at par, 
 or above par." 
 
 A few weeks after Mr. Stanley's appearance before the Commission, the 
 arbitration proceeding came on, and considerable testimony was offered both by 
 the company and by the city. The majority of the board of arbitration, in a 
 report signed December 4, 1919, recommended that the franchise rate of return 
 on the capital stock be increased from six per cent to seven per cent.' It is sig- 
 nificant that before the decision was rendered the Cleveland Railway Company 
 withdrew its claim that the rate of return should be increased because of the 
 decrease in the purchasing power of money, as will appear from the following 
 extract from the arbitration report : 
 
 "The Railway Company, in the first instance, presented two general reasons why the rate 
 of interest should be raised. 
 
 "(1) That si.x per cent was not a fair return, meaning that the existent stockholders 
 and others who might ac<|uire stock ought to have a larger return upon their investment, due 
 to the decrease in the purchasing power of money. 
 
 "(2) That the Kailway Company had a certain necessary program of extension and 
 enlargement to meet the requirements of public necessity, and that conditions were now 
 such that they could not finance this program on a six per cent basis. 
 
 "The first of these reasons has been eliminated from our consideration, as the Railway 
 Company now disclaims reliance upon it. and furthermore, the evidence discloses that a six 
 per cent return is not yet discarded in this market as a fair return. 
 
 "The finding in this hearing must, therefore, rest wholly upon the second reason urged." 
 
 The majority of the arbitrators found that a large amount of new capital 
 would be required in the near future to finance necessary extensions and im- 
 provements, and upon this basis they proceeded to discuss the is.sue before them 
 as follows : 
 
 "The exact question is, therefore, will the Railway Company be able to finance this 
 program at six per cent? 
 
Rate of Return 393 
 
 "The evidence shows that this railway property has been maintained at a high standard ; 
 that it justly enjoys the reputation of being the best managed, best equipped and most suc- 
 cessful street car enterprise in the country. We have been shown that a higher percentage 
 of expenditure for maintenance and upkeep has been in force here than in other cities. 
 Experts have analyzed the situation and presented the conclusion to us that by reason of 
 efficient and intelligent executive management, and by reason of the high rate of upkeep and 
 maintenance, a large appreciation in the value of the property has resulted. 
 
 "The most important result of this hearing is the full and complete illumination of the 
 question of the safety of the Cleveland Railway stock as an investment. A right under- 
 standing of the franchise discloses that the stock of the Cleveland Railway Company is 
 safeguarded and protected so as to become a quasi-municipal investment. 
 
 "The city does not guarantee the stock, and that term should never have been employed 
 in respect to it, but the franchise does protect the stock in a way equivalent in effect to a 
 guaranty. 
 
 "The protective features of the stock which were developed in this hearing are the 
 conservative valuation originally fixed upon the physical property, and the subsequent appre- 
 ciation of value due to liberal expenditures for upkeep. The automatic increase of fare, 
 the provisions for arbitration, the semi-public control preventing exploitation by stockholders, 
 the provisions for purchase at 110 in the event of municipal ownership, the power in the city 
 to renew the franchise and the strong probability that the grant will be renewed and so 
 become practically perpetual, and the opportunity for liquidation of the stock by operation 
 at the maximum rate of fare in the event the city does not renew the franchise. 
 
 "We have no difficulty in reaching the conclusion that this stock is protected and safe 
 to the investor. 
 
 "It does not necessarily follow, however, that because Cleveland Railway stock is safe, 
 sound and dependable as an investment, and a quasi-municipal security, it can be sold in this 
 market on a six per cent basis. The fact that certain industrial securities sell readily on 
 a six per cent basis in this market is not conclusive, and, in fact, has very little, if any, 
 relation to this problem. ' 
 
 "We had before us bankers and financiers whose judgment must be respected, who testify 
 that in their opinion Cleveland Railway will not sell in this market on a six per cent basis. 
 
 "None of these witnesses disclosed that they had any very definite and certain knowledge 
 of the protective features of this stock, or that they had interpreted this franchise with the 
 same care and study as the witnesses called by the city. Presumably they have not gone 
 thus deeply into the question. What they had in mind and what they undertook to say was 
 that this is a street railway stock, and suflfers from the generally bad reputation of street 
 railway securities. That this railway is in part controlled by the city, and visions of politics 
 are stalking before the public mind. That there is a limit in the franchise on the amount 
 of dividends which can be distributed. That the purchase feature of the stock by the city 
 and the renewals which the city may grant are merely options and not obligations. These 
 impressions which they find in the public mind and which they partly endorse, together with 
 the fact that numerous seven per cent safe offerings are coming into the market, turns the 
 scale in their opinion, against the Cleveland Railway security. 
 
 ".'\ny of the financial experts could easily be convinced on close study of the franchise 
 provisions, that the views of the public about the stock are wrong, but their testimony relates 
 merely to the view of the public and not to whether it is right or wrong, and they very well 
 understand, as does everyone, that no campaign of education with interpretations from 
 experts could be carried out as to convince the public of its error. The public mind engaged 
 in buying securities does not operate in that way. Hence they testify that the stock will 
 not be sold on a six per cent basis, and no one testifies that it will. 
 
 "If it be accepted as the only opinion before us that Cleveland Railway stock will not 
 sell in competition with other seven per cent securities unless it also earns seven per cent, 
 then the interest rate must be raised if the Cleveland Railway is to continue to serve the 
 public." 
 
 It is sipiificant that the arbitrators, while finding that the Cleveland Railway 
 stock was "protected and safe" to the investor, were of the opinion that it suf- 
 fered from the bad name of street railway securities generally, and based their 
 final recommendation upon what they thought, in the light of the evidence pre- 
 sented, the investing public would do. Mr. Henry J. Davies, Secretary and 
 Treasurer of the company, testified in the proceedings that in his opinion the 
 company could continue to finance itself upon a six per cent basis if the fran- 
 chise were amended so as to provide for the amortization of accrued depreciation 
 and capital not represented by physical property. In this connection it should be 
 said that the physical property in existence in 1909 was put into the capital ac- 
 
394 Electric Railway Problem 
 
 count on a depreciated basis, but that no provision was made in the franchise for 
 the accruing depreciation on additions and extensions, except that the entire 
 physical property, old and new, was to be maintained at a condition equivalent to 
 70 per cent of reproduction cost new. Furthermore, property withdrawn from 
 service was to be charged against maintenance at the full cost of replacement for 
 identical property at the date of the withdrawal. It was shown that this last 
 provision, as a result of the era of rising prices, had added from $3,000,000 to 
 $5,000,000 taken out of earnings to the value of the property. At the same time 
 no provision was made in the franchise for the amortization of $3,615,000 of 
 commuted franchise value, $1,158,000 of unpaid rentals and about $2,000,000 of 
 pavement which were capitalized under the Tayler grant. The net additions to 
 capital value during the nine years from March 1, 1910, to March 1, 1919, 
 amounted to $10,124,055. It appears, therefore, that the maximum unprovided 
 for depreciation, namely 30 per cent on the new investment, must have been 
 fully offset by the operation of the peculiar replacement rule of the Cleveland 
 franchise. This would leave the old capital account intact as it was in 1910. 
 In considering the rate of return upon the Cleveland stock it must be remembered 
 that of the total capital value on March 1, 1919, $28,720,055 was represented 
 by capital stock, a junior security, and only $5,495,000 by first-mortgage 5 per 
 cent bonds, a senior security. Attention should also be called to the fact that 
 the stock of Ohio corporations — and the Cleveland Railway Company is one — 
 is exempt from state, county, city and school taxes when held by residents of 
 Ohio, though subject to Federal taxes. This point was brought out by Com- 
 missioner Beall in connection with my own testimony with relation to the Cleve- 
 land rate of return. 
 
 I have discussed the Cleveland rate of return at some length primarily for 
 the purpose of disposing of the contention that the rate of rctuni on electric 
 railway investments should be readjusted on account of fluctuations in the pur- 
 chasing power of money and also for the purpose of showing how large a part 
 security and good reputation have to play in holding the rate of return down 
 even in times like these. We may now turn to the testimony to see what claims 
 are made as to the rate of return necessary to attract new capital under past and 
 present conditions. Mr. Halford Erickson. of the firm of Hagenah & Erickson, 
 consulting public utility statisticians, and for many years an influential member 
 of the Wisconsin Railroad Commission, appeared as a witness for the American 
 Electric Railway .Vssociation, and testified as to the cost of capital for public 
 utility ijuqjoses. At pages 971 and 972 of the Proceedings, Mr. Erickson says: 
 
 "Utilities before the war had to earn alxiut 8% on the full value of the physical property, 
 incUuliiiK the RoiuR value, in order to attract the necessary capital. Bonds, for instance, 
 if they Ixire O^'r. would not sell at par, unless there was nmre property hy a (?oo<l deal behind 
 them than their par value, and unless tliey were protected by net earninRS that amounted 
 to at least twice as much as the interest charges. Stocks were in the same p<isition. They 
 had to have projierty behind them. Six per cent stock, to sell at par, had to have net earnings 
 behind them that amounted to 10 or 12 or 14%. If they did not have those earnings behind 
 them, neither bonds nor stock would sell at par; that is, on. say, a 6% basis. 
 
 "That means this, that the cost of capital in the utility field is measured not by the 
 income basis upon which the securities arc selling, but the cost is measured by what you 
 must have in the way of net earnings behind the securities, in order that they may sell 
 on a normal iKisis. 
 
 "I investigated also from time to time, and particularly in 1914, 1915 and 1916, the income 
 
Rate of Return 395 
 
 basis on which mortgages were selUng in some of our leading citjes. A farm mortgage 
 on a good farm, well located, could not cover more than one-half of a good farm, in order 
 to sell on 6% income basis. That may be likened to the bonds covering half of the property. 
 .\ second farm mortgage, covering at least the investment, would not sell on a 6% basis, 
 unless it received 10 or 12% as interest. In other words, the security was not good, and 
 demanded compensation for the risk. That may be likened to the stocks that come on top 
 of the bonds. 
 
 "The result was that the cost of money on a farm, up to the full value of the farm, was 
 over 8% on the full value, the same as the cost of money or capital in the public utility field 
 amounted to over 8%." 
 
 In connection with Mr. Erickson's testimony reference should be made to 
 what Mr. James D. Mortimer said with respect to the rate of return allowed 
 by the Wisconsin Railroad Commission, of which Mr. Erickson was then a 
 member, in the Milwaukee fare case decided in 1912.* This Milwaukee case 
 was the first one in the country where a public service commission made a com- 
 plete valuation ahd fixed the fares on a big electric railway system without regard 
 ■ to the franchise rates prescribed by municipal contracts. It was an outstanding 
 pioneer case in the development of commission regulation in the electric railway 
 field. At pages 774 and 775 of the Proceedings, Mr. Mortimer says : 
 
 "The commission in its decision of August, 1912, held that the railway utility was entitled 
 to a reasonable return upon the fair measure of the utility capital, that that reasonable return 
 was seven and a half per cent per annum, and based upon that assurance I authorized the 
 expenditure in our Wisconsin properties, during the succeeding years, of, roughly, fifteen 
 million dollars. I feel quite sure that we have never earned any seven and a half per cent 
 return in the railway business during the intfervening period of time, and the Railroad Com- 
 mission, in its decision of .\pril 4. 1919. in response to our petition of August, 1918. held 
 that the Commission had never said that the companies were to get a reasonable return 
 during good times and bad times. 
 
 "Now, if a reasonable return limited to seven and a half per cent means anything it 
 means that you are going to get it both in good times and bad times. Otherwise, there is 
 no justification for limiting the return to a figure as low as seven and a half per cent. The 
 theory of the computation of seven and a half per cent is that there shall be an allowance 
 for interest approximately six per cent, plus a profit on that for the compensation of the 
 enterpriser of one and a half per cent.'' 
 
 Further on, at page 780, Mr. Mortimer takes up the discussion again : 
 
 "Now, regulation by the Wisconsin Commission is presumed to embrace the theory of 
 cost of service. The rates of fare are intended to produce sufficient revenues which will 
 provide all current ordinary operating expenses, taxes and an allowance to insure the future 
 replacement of physical property, and a reasonable return, and in our railway utility the 
 commission has held that a 7.5 per cent return is a reasonable return, and that has been 
 adjudicated by the Supreme Court of the state as fair and proper. .\t no time during the 
 last two years have we earned any such return. 
 
 "The year 1916 was our best year, because our expenditures for maintenance were rather 
 low, but even then the commission held that, during 1916, after making adjustments and 
 operating expenses, charging to depreciation reserve the things that this commission thouglit 
 should be charged, and things that the previous commission thought should be charged to 
 operating expenses, they found that our return never exceeded 7.6 per cent. 
 
 "Now. our experience with the investment of capital in a railway business is such that 
 I would feel no justification in recommending to investors that they put any additional 
 money into the railway business in Wisconsin. I have frequently told the commission that, 
 and it is pretty well understood that some important change has to take place." 
 
 Mr. Harold L. Stuart, president of Halsey, Stuart & Company, of Chicago, 
 investment bankers, testified as to the need for a rate of return that will attract 
 capital. At pages 192 and 193 of the Proceedings, he says: 
 
 "As an investment banker my idea as to credit on which a street railway company can 
 borrow money in the future is that it will have to be on some plan where the street railway 
 company will be permitted to earn all its operating expenses, proper maintenance, proper 
 depreciation, and a rate of interest on the capital invested which will attract capital. 
 
396 Electric Railway Problem 
 
 "Commissioner Sweet: What would that rate be, in your judgment, now? 
 
 "Mr. Stuart: That is a rather difficult question to answer, because the street railways 
 are in such bad repute, but assuming that they were brought to the same standard in public 
 estimation that we will say first-class electric companies are in 
 
 "Commissioner Sweet: Do you mean lighting companies now? 
 
 "Mr. Stuart : I mean lighting and iKjwer companies. 
 
 "Commissioner Sweet: Yes. 
 
 "Mr. Stuart: The rate, I should say, would be from six to six and a half per cent 
 on senior securities. By "senior securities' 1 mean first mortgage bonds. 
 
 "Commissioner Sweet : Yes. 
 
 "Mr. Stuart: Further, my idea of the financial arrangement of the future, assummg 
 street railway companies arc going to be privately owned, and give first-class service and 
 make extensions when needed, is that the relationship between the municipality and the 
 railwav company will have to be such that it will be attractive for a stockholder, or for a 
 man who buys stock, to invest in stocks, because it is bad finance, and will never work out 
 for any corporation to keep on borrowing money, always putting out senior securities. It 
 must have a senior security, which will ncces.sarily bear a comparatively low rate of interest, 
 and a junior security furnishing the margin, which would bear a higher rate of interest. 
 In other words, the first mortgage bonds and stock. Unless some plan for safe credit is 
 worked out, it is hopeless for street railway companies to expect to get money, in my 
 judgment." 
 
 I^-iter on. Mr. Warren took the matter up for the purpose of getting Mr. 
 Stuart to elucidate the relations between junior and senior securities. At pages 
 197 and 198 of the Proceedings, we find the following testimony : 
 
 "Mr. Warren: You spoke of a rate from 6 to 6^^% on senior securities of street rail- 
 ways, if the street railways were now enjoying the .same position in public confidence that 
 the electric lighting companies enjoy, and of » higher rate for the junior securities, which, 
 I suppose, is ordinarily stock. 
 
 "Mr. Stuart : Ordinarily I assume to be stock. 
 
 "Mr. Warren: How much higher? 
 
 "Mr. Stuart : Well. I should say from 1 to 2%. 
 
 "Mr. Warren: Higher than 
 
 "Mr. Stuart: Higher than the senior securities. 
 
 "Mr. Warren: Is there any general rule or practice in investment banking houses 
 respecting the earnings which a utility should show in excess of the interest required on 
 the bond issues? 
 
 "Mr. Stuart: There is not any general rule, but, as I said in the beginning, the invest- 
 ment banker has no control over money of his clients, and unless you present a street railway 
 security, or any other .security with a proper value and proper earning restriction, proper 
 earnings statement, proper depreciation fund, or proper sinking fund, proper escrow provisions 
 in the mortgage, the investor won't buy it. Unless he thinks he is well protected, the buyer 
 of bonds would not buy bonds. He is conservative, and unless he thinks he is well protected, 
 he won't buy bonds. 
 
 "Mr. Warren : .\s far as the earnings are concerned, he would expect the company to 
 show considerable earnings in excess of the money necessary to pay the interest on the bonds? 
 
 "Mr, Stuart: The general rule, without however being a rule, is that the senior security, 
 the first mortgage bond, to be considered a safe security and to be in good standing, should 
 earn twice its interest charges or more." 
 
 With respect to the relation between the two classes of securities under a 
 service-at-cost franchise, Mr. Stuart testifies at page 198, as follows: 
 
 "Commissioner Sweet : Under the service-at-cost plan, would not the senior securities, 
 the stock and everything, l>e substantially on the same basis, and all practically guaranteed by 
 the public? 
 
 "Mr. Stuart : No. They would, to some extent, but there might be conditions that would 
 come up in any one year that wiuild make the showing for the junior securities a little less 
 favorable, perhaps, than it should be. Then, another thing: The buyer of the senior 
 securities, if he has a big c(iuity behind him, is going to buy those .securities at a good deal 
 less rate of interest than be would were he furnishing all the money, and at times of panic 
 or times of stringent money, when the .street railway company finds it necessary to borrow, 
 if they have a senior security which has a big ecjuity behind it in the shape of junior securities, 
 they can always raise the money on those senior securities, either by selling the securities, 
 or by hypothecation, until snrh time as money conditions ease up. For instance, the average 
 rate of interest — suppose that it should be, we will say, 7 per cent. Now, if you paid eight 
 
Rate of Return 397 
 
 on your junior securities and six on your senior securities, the average, you will see, would 
 be 7 per cent, a very much better financial set-up, and if a corporation is always in a position 
 to borrow money, it is always sure of serving the public properly." 
 
 In Chapter XXIII of this report, I have already quoted Mr. Francis H. 
 Sisson to the effect that 5 per cent electric railway securities guaranteed by the 
 City of New York or by the State of New York would be attractive to investors. 
 Further along, at pages 344 and 345 of the Proceedings, Mr. Warren takes up 
 with Mr. Sisson the rate of return that would be necessary under a service-at- 
 cost arrangement without a public guaranty. The testimony on this point is as 
 follows : 
 
 "Mr. Warren : When you speak of 5 per cent under a service-at-cost, that was predi- 
 cated on an absolute guaranty of 5 per cent? 
 
 "Mr. Sisson : Exactly. 
 
 "Mr. Warren : Now suppose that the allowable return under the service-at-cost arrange- 
 ment, which included all the proper elements, included finally a return on the investment 
 value, whatever that was determined to be, dependent upon the ability of the road at the 
 various rates under the sliding scale to earn the return, what then should you say the return 
 under present money conditions ought probably to be in order to induce new capital to 
 come in? That is rather a long question, but perhaps you see the point. 
 
 "Mr. Sisson: Yes. When you speak of return, it depends whether you treat the 
 capitalization as a whole or distinguish between bonds and stock. 
 
 "Mr. Warren: I treat it both as a whole and in part, and I would like to know your 
 opinion as to the wisdom of those two methods, too. 
 
 "Mr. Sisson : I think that on that basis 
 
 "Mr. Warren: This is without any guaranty other than what the business would insure. 
 
 "Mr. Sisson : Viewed from the standpoint of the paying public I should say that a bond 
 would have to bear an interest rate of at least 5J^ per cent to be salable and that a stock 
 would have to have a reasonably assured return of not less than 8 per cent to be salable. 
 
 "Mr. Warren: .\nd I suppose it follows from that, that if the return were going to 
 be a flat return on the entire investment value, it would be a combination of those two? 
 
 "Mr. Sisson : Yes. 
 
 "Mr. Warren: An average of those two? 
 
 "Mr. Sisson: Yes." 
 
 At pages 348 to 350 of the Proceedings, in response to questions by Com- 
 missioner Sweet, Mr. Sisson goes into further detail with respect to the neces- 
 sary rate of return upon stocks and bonds under a service-at-cost plan, as appears 
 from the following: 
 
 "Commissioner Sweet : There is one point that is not quite clear to me, Mr. Sisson. 
 You have stated that you think there should be a qualified guaranty, as we speak of it, 
 of at least S^ per cent on bonds in order to enable the companies to get their needed capital, 
 and 8 per cent or thereabouts on stock. Have you not reference, when you say that, to the 
 conditions that have prevailed heretofore in the relation between common stock and bonds? 
 
 "Mr. Sisson : Well, no. I was speaking broadly about what I conceived to be a sound 
 
 "Commissioner Sweet : There never has heretofore been any guaranty upon common 
 stock whatever. 
 
 "Mr. Sisson : No. 
 
 "Commissioner Sweet : And the purchasers of common stock have realized there was 
 more of a speculative feature in their purchase and ownership of stock than the holder of 
 the bonds. 
 
 "Mr. Sisson : Yes. 
 
 "Commissioner Sweet : They might get one or two per cent or they might get ten or 
 fifteen per cent on the common stock. 
 
 "Mr. Sisson : Yes. 
 
 "Commissioner Sweet: Now if the public was to stand behind this matter and so adjust 
 the rates, the fares that could be charged, that it would produce an income that would make 
 the return upon common stock just as certain as the return upon the bonds, why should 
 there be any difference between the rate that should be obtainable by the holder of the 
 common stock and the holder of the bonds? 
 
 "Mr. Sisson: I had not assumed that the public would make any such definite assurance. 
 I dealt particularly with the cost of capital and answered the question broadly, that in order 
 to sell bonds to the public and stock to the public in a proper financial structure of 60 
 
398 Electric Railway Problem 
 
 per cent bonds and 40 per cent stock, the return ought to be about S'/i per cent on the bonds 
 and 8 per cent on the stock; or a reasonable assurance of it. A return upon stock ought 
 to provide for years in which no dividend would be paid, perhaps, and earnings would be 
 accumulated for extensions and betterments and perhaps sinking funds and depreciation. It 
 might not always be possible to declare an 8 per cent dividend annually. It might be greater 
 some years and less others, but a reasonable assurance of an earning of 8 per cent would 
 sell common stock at par, which was the problem I faced in Mr. Warren's question. 
 
 "Commissioner Sweet : In your mind would the assurance given by the public to the 
 holders of stock be different and less than the assurance given to the holders of bonds? 
 
 "Mr. Sisson: Well, I assume so; of course, if you are to have an unqualified and positive 
 guaranty, there would be no difference between the two classes of obligation. 
 
 "Commissioner Sweet : Suppose it were not a guaranty, but if the matter were left 
 entirely to a state commission to adjust these rates so as to produce enough to pay interest 
 upon the bonds oi S'/i per cent and 5 J/, per cent upon the common stock, if the adjustment 
 of rates were to be such as to enable that to be done, while taking care of the other necessities 
 of the company; would not that be as fair an arrangement as could be made? 
 
 "Mr. Sisson: That does not quite cover the question, because bear in mind 
 
 "Mr. Warren: Without any definite guaranty? 
 
 "Mr. Sisson : Yes. 
 
 "Commissioner Sweet : Without any guaranty except that the rate would be changed 
 from time to time so as to as near as possible bring about that result. 
 
 "Mr. Sisson : That does not quite cover the question, because, bear in mind, the bonds 
 are a first obligation on the property and the stock does not come in until after that is met. 
 
 "Commissioner Sweet : The stock only has an equity. 
 
 "Mr. Sisson: That is all, and a man ought to be entitled to a larger return on an equity 
 above the mortgage than the fellow below it, and you could not get the people to take an 
 equity. 
 
 "Commissioner Sweet: Would that be the case if the arrangement with the public were 
 such that the amount which would be received by the stockholders in proportion to their 
 holdings would be as great as the amount received by holders of bonds? 
 
 "Mr. Sisson: I think it would. tx;cau.<^e I think there is no definite assurance of per- 
 manency of such an arrangement indefinitely. Political conditions and public sentiment 
 change, and a man who has an underlying mortgage upon physical property is in much 
 stronger position and has greater protection in the courts than a man who has an equity 
 which might be greater or less in accordance wfth the fluctuation of public sentiment and 
 conditions. 
 
 "Mr. Warren: In other words, the fluctuating conditions might affect the possibility of 
 the scale yielding a return on stock, although yielding sufficient to cover the bonds? 
 
 "Mr. Sisson : Yes. 
 
 "Commissioner Sweet : In other words, the bonds would come in first for their share ? 
 
 "Mr. Sisson : Yes. 
 
 "Commissioner Sweet : The holders of stock would have to take what was left after 
 providing for the other needs of the company? 
 
 "Mr. Sisson : Yes. both in earnings and ownership. 
 
 "Commissioner Sweet : .\nd under your plan there would be some variation in what 
 the holders of stock would receive? 
 
 "Mr. Sisson: There must necessarily be so; yes, sir. 
 
 "Commissioner Sweet: .And consequently you think it would be just that the maximum 
 would be somewhat larger than the ma.ximum provided for the holders of bonds? 
 
 "Mr. Sisson : Yes. 
 
 "Commissioner Sweet: .And that is your reason for it? 
 
 "Mr. Sisson : I think it not only fair but the practical question is that it would be 
 necessary in order to sell stock to the public." 
 
 At the close of Mr. Sisson's examination. Commissioner Meeker asked Mr. 
 Warren about the prospects of the Boston Elevated stock under the present 
 10-year guaranty of dividends. The colloquy, at pages 352 and 353 of the Pro- 
 ceedings, follows : 
 
 "Commissioner Meeker: You spoke of the absolute guaranty accorded to the Boston 
 Elevated for ten years. Is there any likelihood that the stocks will sell above 70 with such 
 a limited guaranty as that? 
 
 "Mr. VN'arren: Well, considering, Mr. Meeker, that a few years ago the stock sold 
 at 150 without any guaranty whatever, it would seem as if they ought to sell higher than 
 that. 
 
 "Commissioner Meeker: Well, there is not any possibility, is there, of the stock being 
 rehabilitated so as to sell at par or above under a guaranty limited to ten years, because 
 Heaven only knows what will happen when the ten years is up. 
 
Rate of Return 399 
 
 "Mr. Warren : Apart from the guaranty, of course, the company has the right to charge 
 on this sliding scale whatever is necessary to pay the cost of the service including that return. 
 The guaranty is additional to the service-at-cost principle. At the end of the ten years, 
 in other words, the service-at-cost principle involved in that settlement continues. 
 
 "Commissioner Meeker: After ten years the service-at-cost principle goes into effect? 
 
 "Mr. Warren : It is in effect now. 
 
 "Commissioner Sweet: It is continued? 
 
 "Mr. \\ arren : Yes. 
 
 "Commissioner Meeker : But, Mr. Warren, under that system there never could be any 
 justification for the common stock of the cojripany to go up to such figures as you mention. 
 
 "Mr. Warren: No. not with the absolute guaranty. 
 
 "Commissioner Meeker : No, whether it was an absolute guaranty or an assurance of 
 rates being changed in accordance with needs, there never could be the possibility of what we 
 might call the gambling advantages which have been looked upon as being connected with 
 common stock under the old system. There would not be the possibilities of great profits. 
 
 "Mr. Warren: No, there would not be. You mean under the service-at-cost system? 
 
 "Commissioner Meeker: Certainly. 
 
 "Mr. Warren: No, there would not. I assume that there would be some limit fixed. 
 I was asking Mr. Sisson only to get his idea as a banker of where that limit ought approxi- 
 mately to be placed to insure a market for the stock, and I referred to the Boston Elevated 
 stock only as in my judgment confirming his opinion of where the stock ought to be placed. 
 A few years ago street railway stocks in Massachusetts sold on a 4 per cent basis. If their 
 dividends were 6 per cent they sold at around 140 to 130. and some of them earning 8 per cent, 
 of which there were a few, sold for 200 to 220. But that was under our very strict regula- 
 tion system, so that everybody knew that not only $100 had been paid in but in the case 
 of the Boston Elevated I think the stock averages the stockholders, not in the market, but 
 in buying it from the company on the original issue, I think it is around $119 or $120 a share. 
 
 "Commissioner Meeker: Actually paid in? 
 
 "Mr. Warren : Actually paid in. The street railways of Massachusetts — and those 
 figures I have referred to I must put in and will try not to forget it — the Massachusetts 
 street railways, as a whole, with $102,000,000 par capital show in their balance sheet some- 
 thing like six and a half million dollars paid into their treasuries in addition to par value as 
 premiums, and they really have paid in considerably more, because when that law first went 
 into effect the premium was not set up in the balance sheet as it is now and as the Interstate 
 Commerce Commission's method of accounting requires, but the premium would be paid in 
 and carried to profit and loss and all charged off again. In other words, the property would 
 be marked down by the amount of premium paid in, and my impression is there were two 
 or three million dollars paid in in that way which are not reflected on the balance sheet. 
 
 "Commissioner Beall : Mr. Warren, was not one reason for the high price of street 
 railway stock in Massachusetts and also in Ohio, where the Cleveland property is located, the 
 fact that they were legal investment for trustees and had certain exemptions from taxation? 
 
 "Mr. Warren : Yes, and 
 
 "Commissioner Beall : What I want to bring out is under exactly the same conditions 
 and same earning power and same rate of return in certain other states they would not sell 
 for anything like as much, due to peculiar local conditions. 
 
 "Mr. Warren : I think you are quite right. In Massachusetts until recently the bonds 
 of all corporations, and which made it impossible for trustees to buy bonds to any great 
 extent, and the stock of all corporations not organized under the Massachusetts law were 
 taxed on their principal value at the local rate, so that a 5 per cent bond selling for par 
 would have to pay a tax in most towns and cities of approximately $20, reducing the yield 
 to 3 per cent. And the same would be true of the stock of a New York corporation selling 
 in Massachusetts. That made a very marked differential in favor of the Massachusetts 
 stocks." 
 
 The efifect of an absolute state guaranty on the bonds of a financially weak 
 company is seen in the fact that the Board of Public Trustees operating the 
 Eastern Massachusetts Street Railway Company under the special service-at- 
 cost act of the Massachusetts legislature applicable to that company was able in 
 1919 to dispose of $2,500,000 of the company's 6 per cent serial bonds at par 
 because these bonds were guaranteed by the state of Massachusetts. It will be 
 remembered that the common stock of this company is entitled to earn six per 
 cent dividends if it can, but that these dividends are not guaranteed. On the 
 other hand, as explained by Mr. Warren, the Boston Elevated Railway Com- 
 pany, also operated by a board of public trustees under a special service-at-cost 
 
400 Electric Railway Problem 
 
 act, has a state guaranty of the dividends on its common and preferred stock 
 extending over a period of ten years from 1918. The common stock is to draw 
 5 per cent for each of the first two years, 5^ per cent for each of the next two 
 years, and six per cent for each of the six years thereafter. If the state chooses 
 to continue to operate the road after the ten-year period expires, the six per cent 
 dividend will continue under the state's guaranty ; otherwise, the road will be 
 turned back to the company with the promise of the right to charge any rate of 
 fare that may be required to enable the company to earn the six per cent divi- 
 dends, but with no guaranty of its ability to earn the dividends, and no contrac- 
 tual guaranty that the state will not repeal its promise with respect to the com- 
 pany's freedom to control its own fares. The company's bonds are, of course, 
 a first lien on its property and earnings. The company's capitalization is about 
 evenly divided between stock and bonds. Under these conditions, the trustees 
 were able to sell in 1919 one and one-half million dollars of one-year six per cent 
 bonds at 98.73 and another one and one-half million dollars of five-year six per 
 cent bonds at 93.79. In either case, the bonds were sold on about a 7^ per cent 
 interest basis. In September, 1919, the Boston Elevated 7 per cent preferred 
 stock was quoted at about 88 and the common stock at about 64. It is apparent 
 from these figures that the high rates now demanded by new investors in most 
 street railway stocks and bonds are the result primarily of risk, not of the scar- 
 city of capital or the low purchasing power of money. If the rate of return upon 
 new capital is to be kept within reasonable limits, the credit of the electric rail- 
 ways must be restored and this can only be done by giving both the investment 
 and the annual return thereon a degree of security which neither enjoys at 
 present. 
 
 The program advanced by witnesses for the Electric Railway Association 
 is to increase the rate of return until the investors are willing to bite. At page 
 859 of the Proceedings, Mr. Richard Schaddelee says: 
 
 "I am sure the American people desire that utilities serving them shall be empowered 
 to collect a charge or fare that will enable them to earn their lair and reasonable operating 
 expenses, taxes, depreciation, etc., and in addition a sufficient rate of net return on their 
 investment to make the investment in street railways attractive to the investor. The people 
 know that only on that basis will the street railways be able to t-xtend and improve their 
 properties, and have them keep pace with, or abreast of. the growth of the communities, and 
 the increasing demands of the public for more adequate and superior service." 
 
 Says Dr. Thomas Conway, Jr., at page 956 of the Proceedings: 
 
 "Now, I want to make it clear before I begin this discussion that I am absolutely con- 
 vinced, as I feel anyone must be. that, with private ownership and operation, the electric 
 railway business must, in some fashion, get suflicicnt revenue to equal its operating expenses, 
 to set up a proper amount for maintenance and depreciation, and to give a fair return upon 
 the value of the property, because as one of you said this morning, these properties are never 
 finished, new capital is required from day to day and from year to year. To get that new 
 capital and to provide the facilities which the public demand and have a right to expect, it is 
 necessary to give these companies a fair return. It is not a matter necessarily of equity, 
 as I see it, from the public standpoint. It is a matter of self-interest. The average man 
 will have to realize that the giving to the owner of the street railways a fair return is not a 
 gratuity or charity, but is just as much to his interest as it is to the owner's interest, if he 
 wants to get gixxl car service, or indeed, for any length of time, any car service worthy 
 of the name. He lias to do that. The ordinary man thinks to give the owner a raise of fare 
 is the same thing as giving a beggar a quarter. .\t least, many people feel that way. They 
 do not realize that their interest is fully as great as that of the security holder." 
 
Rate of Return 401 
 
 In his enthusiasm for the processes of reorganization, Mr. J. K. Newman 
 even suggested ten per cent as a compensatory rate, in view of the miseries the 
 electric railway men have had to go through. But Mr. Newman's plan to give 
 the bondholders and preferred stockholders, representing the actual investment, 
 from 5 per cent to 7 per cent on their money, and keep the balance of the 10 per 
 cent return on the valuation for the common stockholders, is still on paper. As 
 Mr. Warren wisely remarked: "You first have to catch your ten per cent." 
 Nevertheless, this 10 per cent rate is being taken seriously by some of the electric 
 railway men at least. The so-called Jenks service-at-cost bill, prepared by the 
 New York Electric Railways Association and introduced in the legislature on 
 April 1, 1920, about three weeks before final adjournment of the session, con- 
 tained the following provision applicable to service-at-cost agreements entered 
 into between municipalities and electric railway companies: 
 
 "d. Return upon investment. The company shall receive in quarterly payments out of 
 gross revenues a sum equal to ten per centum of its investment value as agreed upon or 
 fixed by arbitration. Until such investment vakie shall have been determined, such return 
 shall be at a rate sufficient to pay at least all existing fixed charges, rentals and all other 
 compulsory obligations necessary to prevent mortgage foreclosure or the disintegration of 
 the system of the company as operated at the time of the passage of this act." 
 
 This bill was pressed very seriously by the electric railway companies dur- 
 ing the closing days of the 1920 legislative session and failed of passage in the 
 assembly only by a narow vote. It seems reasonably clear that salvation does not 
 lie in ten per cent. Now, of all times, it is essential to keep the cost of local 
 transportation service down at every point where it is reasonably possible. This 
 is absolutely essential from the public point of view, and almost equally essential 
 from the point of view of the electric railway companies. Ten per cent as a 
 standard rate of return in the electric railway field is a prohibitive rate, and if 
 such a rate is necessary to attract capital under private ownership, there will be 
 no choice left but to go to public ownership. 
 
 Certain additional points must be considered before we leave the discussion 
 of the rate of return. To what extent shall the rate of return provide for the 
 amortization of capital on account of accruing depreciation? To what extent 
 shall the rate of return provide for a surplus to be accumulated against a rainy 
 day ? Shall the rate of return be based on some sliding-scale theory designed 
 to encourage and reward efficient management ? Shall the rate of return be 
 applied unifomily to the entire investment, old and new, whether represented by 
 capital stock or by bonds? Shall the rate of return be flexible so as to adjust 
 itself to changing market conditions? 
 
 To my mind, the best treatment of accruing depreciation requires that it be 
 returned to the investors up to the full amount of the difference between the 
 original cost of the property and its cost less normal, or permanent depreciation: 
 or else that it be put back into the property out of earnings for the benefit of 
 the investor. Upon this theory the rate of return should include an element for 
 the amortization of accrued depreciation, or else this accrued depreciation should 
 be set up separately. Every effort should be made to hold the recognized capital 
 value down to the actual cost of the property less the subsequently accrued de- 
 
402 Electric Railway Problem 
 
 preciation. If this is to be done, the permanent depreciation will have to be pro- 
 vided for in some way, either through a depreciation reserve that belongs to the 
 property, whether invested in additions and extensions or not, or through the 
 repayment of a part of the investment and a corresponding reduction in capital 
 value. It is better to keep the rate of return entirely distinct from the allow- 
 ance lor a return of the investment or a portion of it to the investors. 
 
 It is also essential that an electric railway should accumulate an indivisible 
 surplus to serve as a sort of equalizer. This may take the form of a contingent 
 reser\'e fund which is permitted to pile up until it reaches a fixed sum, after 
 which the accumulation ceases. If the rate of return is fixed to cover the sur- 
 plus, then the regulatory authority should take the necessary- steps to protect the 
 surplus against misappropriation. If this provision for a surplus is included in 
 the allowed rate of return, then the average return actually paid out to the stock- 
 holders and bondholders will not be equal to the allowed rate of return upon the 
 investment as a whole. The discussion in this section has been directed mainly 
 to the rate of return that actually becomes available for the security holders. 
 
 It is almost universally recognized that a service-at-cost plan, whether based 
 upon continuous public regulation or upon semi-automatic contracts, strikes a 
 blow at the initiative which is supposed to characterize private management where 
 profits are neither definitely limited nor definitely assured. This point was 
 brought out by Mr. Gaylord C. Cummin in his testimony advocating a sliding 
 scale arrangement. At pages 32 and 35 of the Proceedings, he says: 
 
 "In the cities where a change of fare promises relief, it seems to me, from what I have 
 seen on both sides, that no form of agreement which has been made at present is satisfactor>'. 
 Perhaps the nearest approach to it is the strvice-at-cost plan. That, I think, has in it a 
 fundamental weakness, which was touched upon briefly this morning, but was not brought out, 
 and that is, 1 do not beheve that by making a fixed return, which a utility cannot exceed, 
 you can keep that utility up to efficient operation or that you can keep its executives and 
 managers interested in cutting its costs and cutting corners and keeping things as low as 
 possible. That simply is not human nature. You have got to give some incentive to do the 
 thing you want to do, if you want to do it for any length of time. 
 
 "Commissioner Beall : Suppose the maximum is not fixed, how then? Suppose there 
 is no maximum there fixed, but that the rates as in Montreal, rise to whatever height is 
 necessary to produce a given revenue on a given investment. -Vre you referring to a case of 
 that kind? 
 
 "Mr. Cummin: If you give the utility a fixed return only, that is. if it is allowed, say, 
 seven per cent on its invested capital, or six per cent on its invested capital, when it once gets 
 up to six per cent, it is not going to exert itself to cut its costs, Iwcause it does not make 
 any difference, then, what the earnings are. it can only get its six per cent, or its seven 
 per cent as the case m.iy he. Vou are taking the incentive away from the utility. That it 
 actually has that effect I have seen in other cases not connected with street railroads, but one 
 case I think of, particularly, where an electric power plant in a small town had an opportunity 
 to buy current from a big central station plant at quite .idvantageous terms, and they were 
 earning, at that time, the maximum allowed by that State Public Service Commission, the 
 maximum percentage; and when they signed up the contract with the Central Station Plant, a 
 rate controversy was inaugurated by some citizens and taken up by the Public Service Com- 
 mission, and they lost all the adv.intagc they had gotten by signing the contract, and came 
 back to whatever it was- — 7'j per cent. I think — that they were allowed. 
 
 "The man that owned that utility and a group of utilities besides, told me shortly after- 
 wards that that had cured hiin of ever trying to save anytKKly any money; and you can see 
 how that would happen. 
 
 "I have heard one other manager of another group of utilities that have specialized on 
 efficient operation and that are in states where they arc governed by commissions, and where 
 tiny have a fixed rate of return, and I have heard him explain, on several occasions, that he 
 could not see any reason why they should continue exerting theinselves to hold the grade 
 of efficiency which they had prided themselves on, because they absolutely got nothing out 
 of it." 
 
Rate of Return 403 
 
 To meet this weakness, some service-at-cost plans provide for a sliding scale 
 in the rate of return, dependent upon fluctuations in the fares charged, the re- 
 turn being highest when fares are lowest. This is characteristic of the Dallas 
 plan. The Cincinnati plan also embodies the sliding scale principle in connec- 
 tion with the distribution of the surplus. The Alontreal plan, as well as some 
 plans that are not based on the service-at-cost principle, such as the Chicago 
 settlement ordinances of 1907, the New York subway contracts of 1913 and the 
 Kansas City settlement franchise of 1914, provide for a share in the surplus 
 profits in addition to the fixed or basic rate of return upon the investment. The 
 Montreal plan, and the New York Electric Railways Association plan as em- 
 bodied in the 1920 Jenks bill, provide for an operating bonus to encourage the 
 company to keep down expenditures. 
 
 It is obvious that however necessary it may be to adopt some artificial 
 scheme for revivifying motive under a service-at-cost plan, the bonus reward, 
 or other stimulus does not properly attach to capital, but to the management. 
 Capital is inert and cannot respond to such stimuli. All it wants is its security, 
 its return, and peace. The bonus for good management ought to be included 
 in operating expense, and surely has no logical relation to the rate of return 
 upon the investment, except as some rate may be used as a measure of reward 
 corresponding to the magnitude of the enterprise. The idea that an extra frac- 
 tion of a per cent on the capital invested is a proper form for an operating bonus 
 to take, undoubtedly arises from the fact that theoretically the stockholders are 
 responsible for and control the management. In actual practice the reverse is 
 quite likely to be true. At any rate, the bonus is not a reward that attaches to 
 capital as such. It is designed to stimulate efficiency, and to accomplish that 
 purpose it must reach the management. 
 
 There is no good reason for the adoption of a sliding scale arrangement in 
 the electric railway business by which the cost of capital will be made to slide 
 up as the cost of labor slides down, and z'ice versa. Cheap capital never inter- 
 feres with good service. Expensive capital always increases the cost of service, 
 whether the latter is good or bad. Cheap management, on the other hand, may 
 seriously impair the efficiency of service. Therefore, cheap capital is always a 
 desideratum, while cheap management and operation are a desideratum only to 
 the extent that they do not impair the efficiency, safety, adequacy and continuity 
 of service. The problem of motive in electric railway management is too com- 
 plex and too elusive to be solved by any automatic device affecting the rate of 
 return upon capital. The human element of constant watchfulness and respon- 
 sibility to public opinion cannot be eliminated without seriously endangering the 
 public welfare. 
 
 It is not at all necessary that the rate of return should be applied uniformly 
 to the entire investment. For example, in Cleveland the rate on the stock is 
 fixed at a certain amount, and the rate on the bonds is to be whatever the money 
 costs within a prescribed maximum. The recommendation of the arbitration 
 board in the 7 per cent proceeding is a clumsy and very expensive way of meet- 
 ing a temporary increase in the "cost of money" for needed extensions. To per- 
 petuate an additional burden of annual cost applicable to the entire capital when 
 
404 Electric Railway Problem 
 
 the necessary result could be obtained by the sale of securities below par for the 
 lime being with provision for the amortization of the discount seems to be very 
 poor finance; almost as bad, in fact, as consenting to a higher rate of return to 
 cover risk, instead of removing the risk. The Cincinnati plan is similar to the 
 Cleveland plan so far as bonds are concerned, except that no arbitrary limit is 
 set up within which the interest rate on bonds is to be kept. It seems clear to me 
 that the rate of return should be fixed by contract when the investment is made, 
 and that flexibility in the rate should apply to new capital. Of course, in the 
 case of bonds and notes the rate may have to be readjusted whenever they are 
 refunded, and so far as capital stock is concerned provision might be made for a 
 reconsideration of the rate of return at stated intervals, and possibly for arbitra- 
 tion if the two parties fail to agree on the rate for the ensuing period. 
 
 Capital is attracted by security. It is surely important that the effective 
 rate of return should be kept down, and that capital should not be paid more 
 than it asks for when risk is reduced to a minimum. 
 
 The valuation and the rate of return must be considered together. It is 
 fundamental that both should be kept as low as possible, without injustice to 
 investors or impairment of function, in order that the cost of local transporta- 
 tion may be kept at a minimum. 
 
Chapter XL 
 UNRESTRICTED STATE REGULATION 
 
 Prior to 1907 the public regulation of electric railways was almost exclu- 
 sively a matter of franchise contracts, local ordinances and the general state laws 
 under which the companies were incorporated. Massachusetts had a railroad 
 commission with certain powers of publicity and recommendation, but nowhere 
 in the country was there such a thing as a state public service commission with 
 the general powers of regulation and control which have characterized the com- 
 missions established in recent years. The real beginning of comprehensive regu- 
 lation came in 1907, when the powers of the Wisconsin Railroad Commission 
 were extended by the enactment of the Public L'tilities Law of that year and when 
 the Public Service Commissions Law of New York was enacted and the two New 
 York commissions established. After 1907 the development of public utility 
 regulation w-as rapid and widespread, until at the present time almost all of the 
 states, the District of Columbia, and even our insular possessions have commis- 
 sions whose jurisdiction is based largely upon the pioneer legislation of Wiscon- 
 sin and New York. It is seldom that a new idea in state administration has 
 spread so rapidly and taken such deep root in so short a time. Yet, the present 
 condition of the electric railways, as shown by the testimony before the commis- 
 sion, is in itself prima facie evidence that commission regulation, as applied to 
 the electric railways, has failed. 
 
 The establishment of state commissions was at first bitterly opposed by the 
 public utilities, because they were unwilling to be subjected to the intimate public 
 control contemplated by the proposed regulatory laws. Later, after the com- 
 mission movement got well under way, the public service corporations took a 
 new tack and from that time on have generally favored the establishment of 
 state commissions and the extension of their powers, especially where the juris- 
 diction given to them has been such as to exclude the municipalities from the 
 exercise of local control over the utilities. 
 
 The development of commission jurisdiction over the rates of electric rail- 
 ways has been more recent than any other feature of commission regulation, due 
 to the fact that almost universally the unit fare on street railways was fixed by 
 franchise contract, by statute or by custom at 5 cents. However, during the past 
 10 years the power of the state commissions to fix street railway fares, without 
 reference to the provisions of franchise contracts, has been rapidly gaining recog- 
 nition, until at the present time a limitation of the jurisdiction of a state com- 
 mission in this respect is the exception rather than the rule. In spite of past 
 failures some of the witnesses before the Commission suggested the possibility 
 of finding a remedy for the present plight of the electric railway industry in the 
 
 405 
 
406 Electric Railway Problem 
 
 establishment of unrestricted commission regulation, and in fact the record is 
 full of discussion as to the relative merits of state and local regulation, and 
 particularly as to the merits of unrestricted state regulation as an alternative to 
 a semi-automatic service-at-cost plan based upon contract. 
 
 We cannot properly appraise the value of this proposed remedy for the ex- 
 isting ditticulties without analyzing the results of past experience. Three ques- 
 tions present themselves : 
 
 (1) To what extent has the failure of state commission regulation been real, not 
 imaginary ? 
 
 (2) To what extent has any failure of state commission regulation been due to its 
 incompleteness ? 
 
 (3) To what extent has any failure of state commission regulation been due to inherent 
 difficulties in its administration? 
 
 In Massachusetts, full-fledged state regulation of the electric railways came 
 in with the establishment of the Public Service Commission in 1913, but back 
 of that the Board of Railroad Commissioners, with limited jurisdiction over 
 street railways, had been in existence for upwards of forty years. It is perfectly 
 obvious that legislative and commission regulation, whether running tandem or 
 abreast, although at no time seriously embarrassed by restrictions of local fran- 
 chise contracts, failed to keep the electric railways of Massachusetts in such a 
 condition, either physically or financially, as to give the investors full protection 
 or to assure the public of the continuance of adequate service at attractive rates. 
 The Public Service Commission of Massachusetts itself recognizes this failure, 
 and has officially pointed to public ownership as probably the only policy by which 
 the credit of the electric railways of Massachusetts can be restored. In fact, 
 regulation by the commission has already been superseded, with respect to the 
 Boston Elevated Railway and the Bay State Lines, together comprising about 
 45 per cent of the total electric railway mileage of the state, by public operation 
 through boards of trustees appointed by the chief executive. Ex-Governor 
 luigene N. Foss refers in his testimony to the disasters that have befallen the 
 owners of railroad and street railway stocks in Massachusetts, in spite of the 
 protection which they were supposed to be receiving under the laws of the state. 
 At pages 792 and 793 of the Proceedings, he says : 
 
 "Again, we tried in Massachusetts everything. We were the first state in the union to 
 have a public service commission, or a railroad commission, right there in Massachusetts. 
 And (lur railroad stocks there, you know, for years have bi-en sold by the companies at a prict- 
 fixed l)y the Kailroad Commission, and our investors have bought those securities. Widows 
 and orphans and trustees have put their money into thc-i' niilro.ul seciiritie"; and i|uasi-publio 
 corporation securities in Massachusetts because they thought they were the next thing to 
 government bonds, because they considered that nothing could happen to them, since the state 
 fixed the price at which the stock should tte p\it out and also fixed the tariffs on the railroads. 
 But we saw New York. New Haven & Hartford stock go from 250 to 25. while the Com- 
 mission could .say the New Haven stock should not be put out at less than S200 a share, 
 which it was worth, and I'.ostnn Klevated. selling at 155. some of it. and rcallv $135 today 
 represents every dollar put in the property, still this stock sold down to 27 or 28. Thousands 
 of people were ruined. I know of women in Massachusetts who are working today who 
 had a small competence put away in these stocks which has all been wiped out. 
 
 "Now this thing has got to stop. The state is morally responsible for that condition 
 today and ought to Ix- responsible in equity and the people are going to see to it that they are. 
 These nuasi-public con>on(tion stocks have eot to cease being speculative footballs. That is 
 my judgment atiout it." 
 
 Ciovernor Foss. himself an .idvocatc of public ownership, readily assented 
 to the suggestion by Commissioner Sweet that wages and the cost of materials 
 
 ( 
 
State Regulation 407 
 
 entering into street railway service have greatly advanced, and that the situation 
 of the electric railways today, without an increase in their income, is "one which 
 any intelligent man would expect it to be," and that "it could not be otherwise." 
 However, Governor Foss went on to say that in his opinion the street railways 
 have brought their troubles upon themselves by alienating public opinion to such 
 an extent as to make it politically difficult for state commissions to grant rate 
 increases. His testimony on this point is found at pages 797 and 798 of the 
 Proceedings, as follows: 
 
 "You see, these public service commissions in the states and in the nation have not got 
 courage enough to advance these fares. They are honest men, I appointed some of them 
 
 "Commissioner Sweet: Are they not prevented by law in many cases? 
 
 "Mr. Foss: They may be to some e.xtent but they are not in Massachusetts. I appointed 
 tlie Railroad Commission in Massachusetts, most of them who are serving today ; five splendid 
 men, who have not courage enough to do it. Why haven't they courage enough to do it? 
 Because the railroads have grafted and they have stolen and have wrecked their properties 
 and have lost the confidence of the public to that extent that there is no railroad commission 
 that can stand up for a single moment against the public and do what they ought to do 
 and what they know they ought to do. You talk with any one of these public service 
 commissioners in that state or in the nation and they will tell you these fares ought to be 
 doubled; if these roads go back to private ownership the rates have to go up, not 25 per cent, 
 but SO per cent. 
 
 "Commissioner Sweet : .'\re you not aware in most states the right to raise fares is 
 under the control of the state commissions? 
 
 "Mr. Foss : Certainly. 
 
 "Commissioner Sweet : Are they not under governmental orders ? 
 
 "Mr. Foss : Certainly. 
 
 "Commissioner Sweet: Are they not under governmental officials? 
 
 "Mr. Foss : Yes. 
 
 "Commissioner Sweet : Just the same as they would be if the whole thing was under 
 the control and operation of the Government ? 
 
 "Mr. Foss : Yes. 
 
 "Commissioner Sweet : Are not the companies as a rule anxious to raise fares and are 
 they not in many cases obstructed by these public service commissions? 
 
 "Mr. Foss: I think the public service commissions are ready if they felt that public 
 sentiment was behind them, but the public will not stand for it, because they feel that they 
 do not know the whole truth, they have not been treated right. That is the condition in 
 Massachusetts. I have talked with the public service commissioners and they openly say so. 
 
 "Commissioner Sweet : Is not this condition of not having been treated right rather a 
 tradition from years ago rather than a condition that e.xists at the present time? 
 
 "Mr. Foss : Well, I think that is true. I think the condition in the country today is 
 better than it ever has been as to integrity and honesty." 
 
 However, it was in Wisconsin, not in Massachusetts, that regulation of 
 street railway rates by a state commission first became eflfective, and without 
 doubt the work of the Wisconsin Railroad Commission in the years following 
 1907 had more to do with the conversion of the public service companies through- 
 out the country to the theory of state regulation than any other one thing. Cer- 
 tainly, if unrestricted commission regulation has had a fair trial in any state over 
 a considerable period of years, that state is Wisconsin. For this reason the tes- 
 timony offered by Mr. James D. Mortimer, on behalf of the Milwaukee Electric 
 Railway & Light Company and affiliated concerns, has unusual interest and sig- 
 nificance. At pages 765 to 77i of the Proceedings, he describes in considerable 
 detail the course of regulation in Wisconsin as it has affected the Milwaukee 
 street railways. He tells the story of the attempt of the Milwaukee company to 
 secure rate increases during the war period, particularly on two occasions when 
 the conductors and motormen demanded higher wages. The theory of regula- 
 tion was put to the test in Wisconsin, for the power of the state commission 
 
408 Electric Railway Problem 
 
 either to increase or decrease fares without respect to the hmitations imposed by 
 local franchise contracts had been fully established by the courts. The issue had 
 been carried even to the United States Supreme Court and decided in favor of 
 the commission. The Milwaukee Street Railway property had been valued by 
 the commission and rates fixed as early as 1912. With the value of the com- 
 pany's property already established and with complete facilities at all times for 
 the ascertainment of the facts relating to the company's expense and profits, the 
 commission was in a better position, perhaps, than any other public service com- 
 mission in the United States to act promptly and intelligently in adjusting the 
 income of the Milwaukee street railways to the increasing cost of the service. 
 Mr. Mortimer points out that an application was filed by the company in Novem- 
 ber, 1915, asking for higher fares. Late in 1916. while this application was 
 pending, the company filed a new petition with the railroad commission, asking 
 for emergency relief on account of the necessity of making large increases in 
 wages in order to attract the labor necessary to operate the railway system, and 
 also in order to enable it to make an eight-hour day effective throughout the 
 railway department. This petition was denied on the ground that the emergency 
 was not such as to justify the granting of relief under the statute. The revalua- 
 tion under the company's application of November, 1915, was finally completed 
 in August, 1917, but still no decision was forthcoming. The resulting situation 
 is described by Mr. Mortimer at page 768 of the Proceedings, as follows: 
 
 "The cost of living began to very rapidly increase, and it became necessary for the com- 
 pany to consider making substantial increases in wages; first, to keep the men on the cars; 
 and, second, to keep the service going, that is, to keep a sufficient number of trainmen to 
 operate the cars. 
 
 "The matter finally came to a head in a demand made in the latter part of .\pril. 1918, 
 by the employes for an increase of 15 cents an liour and for an 8-hour day. The company 
 told the men that they had no dispute with them on the matter of wages, but since wages 
 were so intimately related to fares that the proper place to make the application was at the 
 office of the Railroad Coininission in Madison. The committee went there and received very 
 attentive treatment, and were assured that hy the first of May there would be an order 
 granting an increase in fares. 
 
 "Based upon the assurance given by all three members of the Railroad Commission to 
 the committee, I entered into a contract whereby the wages of the men were increased 10 
 cents per hour, or approximately SI per day. .■>[ strike h.id been threatened. The cessation 
 of service had been threatened, and this assured the continuity of service for the time being. 
 The Railroad Commission of Wisconsin told a committee that an order would be forthcoming 
 from the 15th of May, and not later than the 19th. The 15th came by, and there was no 
 order, and the 19th came by and there was no order, and the employes naturally wanted to 
 know when the case was going to In? determined. I found it necessary to tell the committee 
 that if there was no order forthcoming by the time the payroll for the last half of the month 
 of May. 1918. was inade up. w^e would be unable to pay the increase in wages for the last 
 half of the month of May. because the increase had Ix^cn predicated upon the granting of 
 relief hy the Railroad Commission." 
 
 The employes comnumicatcd with the comminission and an order directing 
 the company to discontinue the sale of tickets and to substitute therefor a straight 
 5-cent fare was finally handed down on June 1, 1918. Rut the company found 
 that the results of this increase in rates "were not suflficient to compensate for 
 the increase in expenses and produce a reasonable return upon any measure of 
 utility capital," and so, in August, 1918, it filed an application for a further in- 
 crease in fares. The commission appeared to be quite displeased that a new 
 application from the company should have followed so closely upon the heels 
 of the order of June 1 ; and the time set for a hearing was not until the latter 
 
State Regulation 409 
 
 part of October. Meanwhile, the employes had become restive again because 
 their wage scale, notwithstanding the increase given in the preceding May, was 
 lower than the scale fixed by the National War Labor Board in its awards in 
 other cities. What the company then did and what the employes did is explained 
 by Mr. Mortimer at pages 769 and 770 of the Proceedings: 
 
 "When the employes asked for further adjustments in order to bring their scales into 
 line with what they called the Government wage, we told the employes that it was a question 
 of revenues, and that it was up to them to get an increase in revenues, and that we would 
 cooperate to whatever e.xtent we could, and that we had already had this petition filed. 
 
 "The employes employed an accountant to make an examination of our books of account 
 to ascertain whether or not we were telling them the facts, and the accountants reported to 
 them that the facts were substantially in accordance with what the company had stated. 
 Based upon this examination, the employes again presented themselves at the Railroad 
 Commission. ***** 
 
 "Then, the situation began to become more active. The company indicated its helpless- 
 ness. It showed that the earnings on the railway property were only three per cent per 
 annum on the appraised value of the physical property, stripped of all considerations of stocks 
 and bonds and bond discounts, and with only very modest allowances for overhead, engineer- 
 ing overhead. 
 
 "The employes made a number of trips to the Railroad Commission, and they finally 
 went to the Governor of the State. It thus became more or less of a political issue. Then 
 the employes finally decided that they would have to cease service on the first of January, 
 1919, after serving notice on the public, ***** and service was ceased for one day. 
 
 "The service was resumed on the night of January 1st, upon the agreement of the com- 
 pany to pay to the employes an increase in wages of approximately four and a half cents an 
 hour, predicated upon the organization using its influence to get out of the Railroad Com- 
 mission a prompt decision upon the company's application of August, 1918." 
 
 The fact that the company and the men appeared to be on friendly terms 
 caused the city attorney of Milwaukee to claim that a conspiracy existed between 
 them. As a result, the railroad commission started an investigation, and later a 
 special legislative committee was appointed to look into the matter. Mr. Mor- 
 timer read into the record a portion of the findings of the committee, showing 
 the nature of the deadlock between the company and the commission. At pages 
 770 and 771 of the Proceedings, we find the following taken from the committee's 
 report : 
 
 "The Railroad Commission in the negotiations with the men always took the position 
 that the company should first raise the wages of the men and that the Commission would 
 consider such raise as an operating expense in its decision. It was on this basis that the 
 raise of May 1st was granted, but it was claimed on the part of the company that the Railroad 
 Commission did not at that time give sufficient consideration to the increase in wage cost. 
 The cornpany, therefore, took the position that no further raise should be made until the 
 commission first acted on the proposed increased wage and provided revenues therefor. There 
 is a sharp difference of opinion between the company and the Railroad Commission as to 
 the power and duties of the Railroad Commission with reference to wages. The company 
 contends that the commission has the power and duty to pass on the question of wages 
 as a factor in the administration of the Railroad Commission Law, and that where the 
 increased wage is determined upon by the commission it is its duty, as a condition precedent 
 to the payment thereof, to furnish the revenues lawfully required for that purpose. The 
 commission contends that it has no power and no duties in regard to wages, except to con- 
 sider them when paid as an operating expense. It is the opinion of the committee that the 
 Railroad Commission takes too narrow construction of the law and that it has the power 
 to consider wages the same as it has the power to consider any other factor in ordering 
 service, and if this power is not sufficiently specific in the statutes as now provided the 
 commission should be given that power. In other words, the commission should have full 
 and comprehensive administrative jurisdiction to keep the wheels going and prevent cessation 
 of service. 
 
 "The company e.xpressed its dissatisfaction with the delav of the commission in its 
 decision on the case pending from November, 1915, to June, 1918, and seemed determined 
 not again to take any chances on a delay of that character by advancing wages and waiting 
 for a subsequent recognition of the outlay. It is not only sought to bring pressure on the 
 
410 Electric Railway Problem 
 
 commission to decide the pending application of August. 1918. by encouraging the men to 
 bring pressure upon the commission to act. but it sought to influence public sentiment against 
 the commission and in its favor by various means. This was partly done through publications 
 which it issued from the Public Service Building and had distributed to the patrons of the 
 road by its employes, and it was done by paid advertisements in the public press." 
 
 Extracts from an advertisement published by the company in a Milwaukee 
 newspaper in December, 1918, are given at pages 771 and 772 of the Proceedings : 
 
 "The Electric Company has no dispute with its employes over wages, hours or working 
 conditions. Our relations have been and are mo.'^t friendly. The company deeply appreciates, 
 and we believe the community does, the fact that Milwaukee Street Railway employes have 
 shown a high degree of loyalty and forbearance in keeping the cars moving during the war 
 year notwithstanding the wage was less than that established by the National War Labor 
 Board for cities of Milwaukee's class. * * * » 
 
 "The Railroad Commission well know and our men through their own accountants' 
 investigation learned that the street railway systems oi these companies entered the year 
 1918 earning much less than the reasonable return assured them by state law. * » • » 
 It is in view of the foregoing facts that our men demanded of the Railroad Commission car 
 revenue increases which as they know are the only means of giving them adequate wages. 
 They share the company's belief that the people of Milwaukee are able and willing to pay 
 the fair going price for the services they render and that the commission will fearlessly 
 execute the plain intent of the state utility regulation. 
 
 ******** 
 
 "Punishing Milwaukee. * * * * Wisconsin Railroad Commission's refusal to main- 
 tain the State's good faith by executing the plain intent of the utility regulation law robs 
 street railway employes and investors and injures the whole community. 
 
 "Milwaukee and surrounding cities are threatened with a strike stopping street railway 
 and electric service on January 1st. because the Railroad Commission for over two years has 
 failed and refused to allow the Milwaukee Electric Railway and Light Company and the 
 Milwaukee Light, Heat and Traction Company earnings enough to pay living wages. 
 * * * * It is because our men through tlieir own accountants' investigation know the 
 above facts that they address their demands for higher wages primarily to the Railroad 
 Commission rather than to the companies. 
 
 "As a direct and unavoidable result of this gross violation of the State's good faith, the 
 employes of these utilities have been underpaid; the owners will be robbed of a large share of 
 return on the investment which they should have received for the year 1918; the companies 
 are being compelled to pay a higher price for new capital urgently needed to finance plant 
 growth, and service Ijetterments desired by the public could not be provided. 
 
 ******** 
 
 "These companies and their employes do not for a minute doubt the good faith of the 
 people of Wisconsin nor of the State of Wisconsin. We feel sure that when the facts are 
 known public opinion will compel action by the Governor and the Railroad Commission to 
 maintain the State's good faith and do justice to this community and to the employes of and 
 investors in Milwaukee's electric service. 
 
 "For more than two years last past these companies have lieen quietly pleading with the 
 Railroad Commission to do its plaui duty under the stale law. The commission, in pos- 
 session of all the facts, has failed and refused to do its duty. 
 
 "As a result our employes arc now prepared to tie up the system unless the companies 
 give them wage increases which they need and should get. but which cannot be given them 
 without robbing our creditors. 
 
 "There is just one way out. That is for the Railroad Commission to fix fares that will 
 let the companies pay the wages demanded and pay their investors a fair yearly return which 
 the State assured them when it assumed nMitrol of iluir nites, services, finances and 
 accounting." 
 
 The committee's conclusion, awarding blame both to the company and to 
 the Railroad Commission, is found at page 772 of the Proceedings: 
 
 "The committee finds that the cessation of service on the street car lines in the City of 
 Milwaukee on the first day of January, 1919, was the result of the company's failure to meet 
 the just wage demands of the trainmen on the one hand, and the failure of the Railroad 
 Commission to expeditiously function on the other hand. 
 
 "The commission is subject to reasonable criticism through the press or otherwise, but 
 in no case should it Ix- coerced into a decision by a party litigant." 
 
State Regulation 411 
 
 Mr. Mortimer points out that under the Wisconsin law a company can obtain 
 a rate increase only by filing a petition with the commission, and securing an 
 affirmative order authorizing the new rate. The companies are absolutely de- 
 pendent, therefore, upon the commission's diligence and good faith in deciding 
 issues promptly. At the close of such a story, it was a crucial question that 
 Mr. Warren put to Mr. Mortimer. At page 771 of the Proceedings, we find 
 the following: 
 
 "Mr. Warren : Are you a believer or not in the theory of commission regulation, state 
 regulation through commissions? 
 
 "Mr. Mortimer: I am a behever in the theory of regulation by commission, and believe 
 it is the most satisfactory way of taking care of the many corriplicated relationships that 
 exist between the public utility and the community served, the state, and the employes.'' 
 
 "Though he slay me, yet will I trust in him; but I will maintain mine own 
 ways before him," as Job says. Commissioner Sweet elicited from Mr. Mor- 
 timer certain constructive criticisms of state regulation as practiced in Wisconsin. 
 These appear at pages 77i and 774 of the Proceedings : 
 
 "Commissioner Sweet : But you think there should be coupled with it a requirement for 
 prompt action? 
 
 "Mr. Mortimer: Yes; I would even go further than that and suggest that the laws be 
 materially changed, so that there should be no shifting bases for commission regulation. 
 That is one of the hazards of commission regulation. 
 
 '"Commissioner Sweet: What do you mean by "shifting bases'? 
 
 "Mr. Mortimer: A commission may shift its basis on three principal things: first, the 
 item of valuation. One commission may have one viewpoint as to what elements of value are 
 to be considered, and another commission, a subsequent commission, appointed under the same 
 law, may have an entirely different opinion. It is important that that hazard of shifting 
 valuation be eliminated ; first, so that the utility may know where it stands with respect to 
 earning ; and, second, so that the investors may be assured when capital is put into the 
 property, when the property is sold or subsequently regulated for rate-making purposes, it 
 will be considered at the par value of its original investment. 
 
 ******** 
 
 "Then, the second element is the amount to be allowed to insure future replacements. 
 
 '"The commission that had the job in August, 1912. when it ordered a discontinuance 
 of twenty-five tickets for a dollar and thirteen tickets for SO cents, used a depreciation 
 allowance of 4.46 per cent. 
 
 "The commission, in June, 1918, with a different personnel, used an allowance of 2.82 
 per cent, a difference of 1^ per cent. One and a half per cent on the valuation of twenty 
 million dollars nms into a substantial sum each year." 
 
 The third point raised by Mr. Mortimer relates to some definite determina- 
 tion with respect to permanency in the rate of return, which has already been 
 discussed in the preceding section of this report. 
 
 Again, at page 780 of the Proceedings, Mr. Mortimer says : 
 
 "Now, regulation by the Wisconsin Commission is presumed to embrace the theory of cost 
 of service. The rates of fare are intended to produce sufficient revenues which will provide 
 all current ordinary operating expenses, taxes, and an allowance to insure the future replace- 
 ment of physical property, and a reasonable return, and in our railway utility, the commission 
 has held that a 7.5 per cent return is a reasonable return, and that has been adjudicated 
 by the Supreme Court of the State as fair and proper. .\t no time during the last two years 
 have we earned any such return.'' 
 
 A little further on follows the statement already quoted in our discussion 
 of the rate of return : "Now, our experience with the investment of capital in 
 a railway business is such that I would feel no justification in recommending 
 to investors that they put any additional money into the railway business in 
 Wisconsin." This, certainly, does not speak well for state regulation, although 
 
412 Electric Railway Problem 
 
 Mr. Mortimer's lugubrious outlook for the electric railways is only partly due to 
 the sins of the state commissions. In discussing the relation of state regulation 
 to the cost of service, at page 780 of the Proceedings, he says: 
 
 '•Commission regulation, as I said before, contemplates cost of service, but it does not 
 work out that way in practice, because, first, of the shifting bases of subsequent commissions, 
 and, second, because of the long period of time required by the commission to act upon 
 applications of utilities for readjustments in rates. There may even be a valuation required, 
 or a revaluation, or accountants may have to have an examination. There can be any number 
 of things developed as reasons for delay if the commission desires to cause delay." 
 
 Further on, at page 781 of the Proceedings, he offers certain suggestions cal- 
 culated to overcome some of the defects of state regulation, but still he is unable 
 to become optimistic about the future : 
 
 "A proper state utility law would provide something to this effect : 
 
 "That all utilities shall be valued, and the utility capital shall be ditcrmincd by the com- 
 mission ; that before there are any capital expenditures made the utility shall apply to the 
 commission for authorization to make the expenditures, and the commission shall, at the 
 same time, fix the return to be allowed upon the capital expenditure. If the commission fixes 
 too low a return, the company can say, 'You get the money, Mr. Commission.' If the com- 
 mission fixes too high a return, that fact can be corrected in the next application of the 
 utility, .\uthorizations of capital expenditures shall be cumulative, .\uthorizations of annual 
 return shall likewise be cumulative, and neither shall be changed, except, in the first case, 
 when property is removed, taken out of service, and abandoned, and then it shall be taken 
 out of capital account, and the amount of annual return that is fixed in this manner shall 
 not be changed, except in the event of refinancing, which may cause some subsequent change 
 in the cost of money. 
 
 "Some such arrangement as that would be fair to both parties. There is only one defect 
 in it, and that is the defect of all cost-of-service franchises, and that is you may not be able 
 to collect suflicient revenues to pay the annual return. Operating expenses are rising so 
 rapidly ; the demands of labor in all lines of industry are increasing so fast, that the electric 
 railway business is fast going into the position of the British coal mines, and it is not at all 
 sure that we are going to be able to collect sufficient revenues out of the railway business 
 to keep it going. We already have situations, as I will instance, where I am unable to see, 
 with substantial improvements to the railway system and the addition of a large amount of 
 rolling stock for the size of the community, that we could, under any system of fares which 
 we can devise, collect sufficient revenues to pay the operating expenses and pay a reasonable 
 return upon the utility capital." 
 
 Later he comes back to his pessimistic outlook and mentions ovcrregulation 
 as one of the causes of the unhappy situation into which the electric railways 
 have fallen. Obviously, there is nothing in the following statement, found at 
 pages 808 and 809 of the Proceedings, to indicate that unrestricted state regu- 
 lation is the solution of the problem : 
 
 "The electric railway industry for a great many years past has been gradually losing its 
 commercial aspects. It has become an industry that is regulated in the extreme by the 
 governmental authorities, and it, of course, has Ixrcn one where the net earnings have been 
 declining. 
 
 "It appears that the railway industry has not been increasing its volume of business as 
 rapidly as has Ix-cn the general business in community life of the territory served. The 
 causes for that are comparatively well known. They have found themselves unable to attract 
 additional capital to expand facilities, to keep the railway utilities in line with the growth of 
 business and expansion of territory, partly because of the imposition of unremunerative 
 expenditures, both for capital and for operating expenses, and partly because the business 
 has been regarded as an exceedingly hazardous one. Expenses have risen so rapidly in the 
 last two years that it is not at all clear that there is any uniform solution for the problem. In 
 fact, as t indicated in my earlier testimony, there are a great many of the smaller communities 
 served by track mileages nuining up ten or fifteen, or possibly as high as twenty, and 
 in places with population as high as .SO.OOO, where it is doubtful at present wage levels and 
 commodity prices, that the business can be made remunerative at all." 
 
 The Proceedings do not disclose what the Wisconsin public thinks of state regu- 
 lation, but it was only a few years ago tiiat in the neighboring state of Minnu- 
 
State Regulation 413 
 
 sota the Home Rule League published a vitriolic pamphlet reviewing the work 
 of the Wisconsin Commission from the public point of view and elaborating the 
 many reasons why municipal regulation in Minnesota was to be preferred to 
 regulation by a public service commission. This brochure was answered by the 
 Wisconsin Commission or some of its friends, but the home rule sentiment in 
 Minnesota cities has thus far prevented the enactment of a state public utilities 
 commission law.^ In Illinois, another neighboring state, a utilities commission 
 was established a few years ago, and the famous Chicago settlement ordinances, 
 which, in 1907, when they were adopted, regfistered the high water mark of street 
 railway regulation in this country, have been superseded in some of their most 
 vital aspects, and a chronic state of political and administrative warfare between 
 the City of Chicago and the State of Illinois with respect to the control of public 
 utilities has supervened.- Unrestricted state regulation was a part of "the Wis- 
 consin idea" about which we used to hear so much a few years ago, but now 
 apparently it would have to go begging for unqualified friends either in the camp 
 of the public utilities or in the camp of the municipalities. 
 
 Let us now turn to the State of New York, where Governor Hughes won a 
 great part of his prestige by being a pioneer in the enactment of a public service 
 commission law. The electric railway companies of New York are undoubtedly 
 very strongly in favor of state regulation as opposed to local regulation. And 
 yet Mr. James L. Quackenbush, general counsel for the Interborough Rapid 
 Transit Company and the New York Railways Company or its predecessor ever 
 since before the establishment of the Hughes commissions, takes a very dis- 
 couraging view of public service commission regulation, particular in New York 
 City, from the companies' point of view. Testifying on July 24, 1919, twelve 
 years after the first district (New York City) commission was established, he 
 certainly made a sweeping indictment, from his point of view, of the commis- 
 sion's activities. I have already quoted from him in Chapter XVII of this report 
 in connection with our discussion of the part played by public regulation in the 
 impairment of electric railway credit. It will be remembered that he said, at 
 page 817 of the Proceedings: 
 
 "The first time that anything has been done by the Public Service Commission in the 
 first district * * * * of the sHghtest benefit to the railroads was done last week by 
 Commissioner Nixon." 
 
 Mr. Quackenbush referred to the order establishing a charge of two cents 
 for transfers except at points where free transfers are required by contract. 
 From the point of view of the electric railways, it might be said that state regu- 
 lation in New York is unsatisfactory because of its incompleteness, inasmuch as 
 the highest court of the state has held that the legislature has not conferred upon 
 the public service commissions authority to set aside street railway rates of fare 
 which are fi.xed by franchise contract, and has even left it open to question 
 whether the legislature could constitutionally grant this power to the commis- 
 sions.^ But Mr. Quackenbush's complaint against the first district commission 
 is not based on the incompleteness of its authority. At page 817 of the Pro- 
 ceedings, he says : 
 
 "Fundamentally, I think the laws of New York are satisfactory. The trouble in New 
 York has not been with the law but with its administration." 
 
I 
 
 414 Electric Railway Problem 
 
 It seems that in New York the public service commissions are like the 
 prophet who "is not without honor save in his own country"; for Mr. Quacken- 
 bush admits that the up-state commission, with which his companies have not 
 been concerned, has administered the law more to his liking than the first district 
 commission before which he has been appearing continually for twelve years past. 
 Of his home commission, Mr. Quackenbush says at pages 819 and 820 of the 
 Proceedings : 
 
 "Now, the New York City commission took office in July. 1907. when the surface lines 
 were tottering towards bankruptcy, and became bankrupt in September. They were getting 
 an inadequate fare there at that time. Through excessive use of free transfers, the average 
 fare had been descending until, at the time of the insolvency in September, 1907, it was roughly 
 3.5 cents. 
 
 "The receivers of the New York City Railway Company, which then operated all the 
 lines on Manhattan Island, found the leases of the Third ."V venue and many of the others 
 unprofitable, and returned them to their owners, under the instructions of the United States 
 Court. That meant that the duty to exchange transfers ceased, because the law of New York 
 did not require transfers from otherwise independent and competing lines. 
 
 "The Public Service Commission knew what the rate of fare was. but the public service 
 commissioners made speeches in various portions of the city, announcing that they would 
 restore the transfers, and during the years 1907, 1908, 1909, 1910 and 1911 wc were engaged 
 in efforts to persuade them not to do that." 
 
 After telling how the commissioners went to the legislature in 1912 and 
 succeeded in getting a bill through both houses reestablishing free transfers be- 
 tween the independent lines, Mr. Quackenbush goes on at pages 820 to 822 of 
 the Proceedings: 
 
 "They knew, of course, as I knew, that the order could not be sustained, because it was 
 confiscatory, and instead of leaving it as a judicial question, it was sought to make it a 
 legislative one. Former Governor John A. Di.x vetoed that bill. 
 
 "Then, in the latter part of 1912, the independent companies and the commission arranged 
 a modification of the transfer free across S9th Street, and they waived the others, and that 
 is the situation down to the pre.sent time. 
 
 "Now, I mention that as proof of the correctness of my indictment. They knew better. 
 They knew that they were not' protecting the property or the service ia doing that. 
 
 "Now. let us pass that and come to the la.st few years. 
 
 "h was apparent in 1917. early in 1917. as soon as we pot into the war — it was apparent 
 before we got into the war, that wc were going onto a new price level. It was perfectly 
 apparent that the 5-cent fare, with free transfers on the surface lines, would be inadequate 
 to keep them going. I am not talking now about return. I am talking about keeping them 
 going in the interest of the public, keeping the c(|uipmcnt up. so that it could render that 
 safe and adequate service that the statute requires; and transfers having been the principal 
 cause of the lowering of the average rate of fare, rather than to ask for a flat increase of fare 
 in the first instance, the surface companies made application to the commission, in May. 
 1917, for the privilege of abandoning the transfers, as the commission might direct. 
 
 "Those proceedings were begun in May. 1917. and when Commissioner Nixon took office 
 on the 8th day of May. 1919. he found them pending undecided. 
 
 "In the meaTitinie. the New N'ork Railways Company had gone into the hands of a receiver. 
 
 "The Second .\vcnuc Railway Company in New York has never come out of the hands 
 of a receiver since it started there in 1*>07. and now the receiver is unable to earn interest 
 on the certificates issued by him under the orders of the court, and. rather faceitously, he is 
 considering whether there won't be a receivership of the receiver. 
 
 "Now, that condition confronting that particular line of railway on Second Avenue alone 
 condemns the action of the gentlemen that held those positions during those years. 
 
 ******** 
 
 "In 1917, when the transfer hearing was started, it was only necessary to show the 
 diflFcrence Iwtween operating expenses and income to show that some emergency relief was 
 needed. The facts were there, but they wanted a valuation, and the thing went along, exam- 
 ination upon examination of the accounts, and all the various things. 
 
 "Coiuisel for the commission was nominated for district attorney that fall, and among 
 the reasons that he gave the people why he should be elected district attorney was that he 
 
State Regulation 415 
 
 had prevented the abolition of the transfers, or any charge for the transfers. He did not get 
 elected on that issue, but he ran on it. 
 
 "I am speaking of facts as they are, because I suppose that is what you want to know. 
 These gentlemen are all friends of mine. I have gotten along with them pleasantly. I do 
 not enjoy stating what I do, but the truth is the truth, and it was about time it should be told 
 somewhere by somebody, and I propose to tell it as long as you want to listen to it. 
 
 "Now. I say that for the commission, for one day, to keep Judge Ransom in office after 
 he made that a campaign issue — and it is in the public prints that he did it — they convicted 
 themselves of an utter lack of appreciation of their duties under the law. 
 
 "That has been the trouble in New York." 
 
 In passing, it should perhaps be mentioned that Judge Ransom was subse- 
 quently so highly regarded by the public utility interests of New York that upon 
 his resignation as counsel for the Public Service Commission he received retainers 
 both from the Interborough Rapid Transit Company and from the Consolidated 
 Gas Company, and it is not apparent why Mr. Ouackenbush in July, 1919, should 
 have seen fit to criticize his fellow-counsel ! 
 
 The next thing, he takes up the subways, and condemns the Public Service 
 Commission for its policies in the rapid transit field. After referring to the fact 
 that the need of stibway extensions had become apparent, Mr. Qtiackenbtish, at 
 page 823 of the Proceedings, says : 
 
 "The fundamental theory of the public service commission law in New York, and of 
 course throughout the United States, is, as Governor Foss has said, monopoly, not com- 
 petition, but regulation and monopoly. It was the commission's duty to regulate it. It had 
 all the powers of regulation. 
 
 "Instead of undertaking to accept any one of the several offers that the Interborough 
 Rapid Transit Company made to the city to build those natural extensions that I have 
 mentioned, with their own money, the commission thought they had to have competition, 
 they had to have public operation, and they proceeded with a plan of building an independent 
 subway, and that was to have another 'Z,' coming down Lexington Avenue and crossing 
 below 42nd Street, and then coming down the west side. They called that the Triboroug;^ 
 Subway, and they spent several million dollars in actually constructing it. That had no 
 justification in finance, economics, railroading, or common sen.se. 
 
 "It was not the fault of the law." 
 
 Mr. Ouackenbush was quite vehement in his denunciation of the public 
 authorities in New York City for not permitting an increase in the fare to eight 
 cents. He showed that, without any new legislation, the fares could be raised 
 at once by joint action of the Public Service Commissioner, the Transit Construc- 
 tion Commissioner and the Board of Estimate and Apportionment. We cannot go 
 fully, in this analysis, into the details of the rapid transit situation as sketched 
 out by Mr. Quackenbush in his testimony, but we ought, perhaps, to take par- 
 ticular note of what he said as to the moral obligation of the public officials of 
 New York to sustain the credit of the Interborough Consolidated Corporation, 
 the holding company for the Interborough Rapid Transit Company and the New 
 York Railways Company. When the new subway contracts of 1913 were nego- 
 tiated, the Interborough Rapid Transit Company came into the deal only upon 
 condition that the city would give it a qualified guaranty of its past rate of sub- 
 wa)' profits in the form of a preferential payment out of the pooled receipts of 
 the old and the new subways. This preferential, representing a charge upon 
 gross earnings in advance of any return to the city on its capital invested in 
 new subways, amounted to $6,335,000 per annum. There was another preferen- 
 tial of $1,590,000 based on the past profits from the operation of the Manhattan 
 elevated lines. At page 832 of the Proceedings, Mr. Quackenbush outlines the 
 
416 Electric Railway Problem 
 
 facts and states his view of the moral obligations assumed by the city with re- 
 spect to the holding company's securities. He says: 
 
 "In 1906, the Intcrborous'i Kapid Transit Company, the operating company of the sulv 
 way and the elevated, and the New York City Railway Company, the lessee of all the lines 
 on Manhattan Island and the lines in the Bronx, formed a consolidation, not a merger, turned 
 in their respective stocks in exchange for proportions of stock and bonds of the Interborough- 
 Metropolitan Company, as it was then called, since by reorganization and now called the 
 Interborough Consolidated Corporation, which, by the way, went into the hands of a receiver 
 on the 21st day of March, 1919. 
 
 "Now, the Interborough Consolidated Con'oration took the thirty-five millions of capital 
 stock of the Interborough Rapid Transit Company and for that exchanged seventy millions 
 of its 4^',f bonds. That was equivalent to a 9% annual dividend upon the Interborough 
 Rapid Transit Company's stock. At the time we made the contract with the city in 1913 the 
 Interborough-Metropolitan Company was in existence, and through its ownership of this 
 stock controlled through voting power the action of the operating company in making^ the 
 contract. It was known by everybody at the time that the Interborough-Metropolitan Com- 
 pany had in addition to the $70,000,000 of bonds $45,000,000 of preferred stock. Now, the 
 $6,335,000, which has come to be called a preferential that we arc entitled to take out of the 
 subway earnings, represented our average net profits of the years 1910 and 1911. They were 
 taken as a fair test and agreed to. 
 
 "I have not said anything so far alxiut the Elevated features of the contract, because the 
 city did not have any investment there. I wanted to impress upon you first the fact that the 
 city's own investment is not being taken care of intelligently or faithfully by anybody. 
 
 "Now. we put many millions of doll.irs in the improvements of the Elevated lines and 
 added and extended the lines and third tracked them and made an agreement with the city 
 by which it shared in the profits above our average profits of 1910 and 1911. which in that 
 case were $1,590,000. Now, the sum of those two which have been called prelereiitials was 
 known to everybody to be sufficient, with other non-operating income which we had, to pay 
 a dividend on our preferred stock. 
 
 "Now, I ."iay tliat when those facts were known and when it was known to the people 
 with whom we were in daily conference for three years of time that the Interborough-Metro- 
 politan Company permitted the Intcrlvirough Rapid Transit Company to make this contract, 
 and they knew that that was done on the strength of these preferentials, and that those pref- 
 erential were sufficient to pay the interest on the ^'/''''r bonds plus a return on the preferred 
 stock, that it is wicked, immoral and unjust and nothing but simple repudiation morally for 
 anybody who took part in that transaction or who succeeded those who did take part in it 
 to starve us now into the destruction of the values of that preferred stock and of those bonds." 
 
 Mr. Quackenbush also maintains that the public authorities of New York 
 were morally bound to sustain the securities of the New York Railways Com- 
 pany, issued at the time of the reortjanization of the old Metropolitan Street 
 Railway Company. He says that the physical valuations made by the Public 
 Service Commission in 1910 indicated at least $50,000,000 of tangible property, 
 and that now with only $48,000,000 underlying and general first mortgage bonds 
 ahead of $30,000,000 of income bonds, the surface lines went into the hands of 
 a receiver on March 20, 1919. Commenting upon this condition of affairs, at 
 page 834 of the Proceedings, he says: 
 
 "Now. there is .something wrong when that situation arises and when under such condi- 
 tions there is any talk about water. I never have mentioned the question of the securities, 
 except as 1 have mentioned them here, on the theory that everybixly knew they were out and 
 made a Kirgain knowing that they were out, and when people make bargains under those 
 conditions they or their successors ought to be ashamed of themselves to repudiate them " 
 
 Mr. Quackenbush recognized, to a certain extent, the apparent inconsistency 
 
 of the position taken by electric railway companies which seek relief from the 
 
 fulfilment of their rate contracts, but be outlined a bold policv for the relief of 
 
 the embarrassment, and in doing so stated most emphatically his belief that the 
 
 states should not hesitate to override the municipal authorities in such matters. 
 
 At pages S37 to S.^S of the Proceedings, he says: 
 
 "Now as to the other thing, and I think that I will mention this because at a meeting at 
 which I was present among some of the gentlemen who are here in this room, one of the 
 
State Regulation 417 
 
 members said that what troubled him in dealing with this whole matter was how to meet the 
 constant statement that you are seeking to repudiate your contracts, and of course that view 
 does prevail. And I think there this body may do a service if you will get the public to see 
 that after all it is the public that is interested in the question of rate, it is their business, and 
 that no matter if twenty years ago with conditions entirely different the local authorities of 
 some little village or some big city and some well-intentioned but ill-advised corporation 
 managers made contracts that no longer fit the case, that the interest of the people is the 
 supreme law and that if the time comes that the interest of the people requires a modification 
 of the rate and the carrier is ready on its part to modify them and the people, represented by 
 their sovereign representatives in the legislature, for instance, or their delegated bodies are 
 ready to do it, and the local authorities of the little town or the village or small city or 
 medium sized city or the big city come up and say, 'We made a contract,' the answer is that 
 the sovereign people, represented by the legislature or its delegated commission, will say 
 to the local authorities. 'That contract was all right as between you and that carrier, that 
 contract probably today will be recognized in the courts as a judicial matter, but now the 
 principals are dealing face to face, and I, the people of the state, do not any longer need 
 your services, Mr. Agent, city, town or village; now you just step aside and you forget your 
 little petty and shortsighted vision of this question and I will make a bargain with the carrier 
 that will be in the interest of the general public, whose interest after all is the only concern 
 of anybody.' " 
 
 Mr. Quackenbush referred to the fact that the salaries of the public commis- 
 sioners under the original Hughes law of 1907 were $15,000 apiece, or $150,000 
 a year for the ten members of the two New York commissions.* At the time, 
 a judge of the Court of Appeals was paid only $12,000 a year, but it was ex- 
 plained that "Governor Hughes would appoint to the commissions men of such 
 standing and ability that their decisions would be accepted by the carriers, the 
 utilities and by the public as final and it would be unnecessary to go into court 
 to review them ; he was going to get men of the highest grade." Mr. Quacken- 
 bush adds : 
 
 "I have no doubt the Governor intended to do so, and as I have said, so far as character, 
 integrity and intelligence, he succeeded, but he did not succeed in getting men who held the 
 scales even." 
 
 I have cited Mr. Quackenbush's statements at some length, not because his 
 inferences against the good morals of the civic authorities are unchallenged, but 
 to show that from his point of view public regulation in New York has been a 
 failure, and that, also from his point of view, the Public Service Commission in 
 the past and the city authorities in the present have been equally recreant to 
 their moral obligations to the investors. Moreover, Mr. Warren stated that the 
 American Electric Railway Association was on record as favoring state regula- 
 tion ; yet Mr. Mortimer and Mr. Quackenbush, two of the Association's leading 
 witnesses, testified as I have shown. 
 
 The case for state regulation brightens up a little when we come to the testi- 
 mony of Mr. James O. Carr, of Pittsburgh, who was a member of the up-state 
 Public Service Commission of New York from 1915 to 1918. Prior to that, 
 according to his own statement, Mr. Carr had been for about twenty years "very 
 actively engaged in the operation, construction and reorganization of public util- 
 ities, street railroads, electric light and gas companies." In his testimony, Mr. 
 Carr touched upon the fact that the New York commissions were restricted in 
 their power to deal with rates which had been fixed by franchise contracts. At 
 pages 846 and 847 of the Proceedings, he says : 
 
 "I believe that if public service corporations are to be regulated by regulating commis- 
 sions, they should have full power to regulate them. I have in mind particularly the New 
 York law under which we were operating, which gave the commission every power that a 
 
418 Electric Railway Problem 
 
 regulating body could possibly have, so far as service was concerned. There was no 
 limit, practicallv, to what could be required, but going along with that there was not the same 
 power to provide the means lor the corporation to get the money to make those improve- 
 ments, if improvements were required, or to provide such other expenses as might be neces- 
 sary to give the service that the public was entitled to and which it demanded. 
 
 "Mr. Warren: That, in your judgment, is just as essential— the possession of that power 
 is just as essential as the power over service; that one without the other 
 
 "Mr. Carr; One without the other makes it absolutely incomplete. 
 
 "Mr. Warren: Yes. . . 
 
 "Mr. Carr: That law, as it now stands, gives every power to the commission to reduce 
 fares, but it does not give them power to increase fares when increases are^ necessary and 
 absolutely required in order to enable the corporation to perform its functions." 
 
 Asked whether the state commissions in the existing emergency would be 
 justified in furnishing temporarj' relief, Mr. Carr said, at page 849 of the Pro- 
 ceedings : 
 
 "With respect to those commissions of which I have any knowledge, I have no doubt that 
 every one of them would give relief today if a plain statement of facts was furnished them, 
 if they thought it correct, without waiting for any great length of time to get a mass of evi- 
 dence in front of them that they would have to pour over and spend their nights and Sun- 
 days in digesting. The purpose of every one of these commissions today is to aid the cor- 
 poration that needs help, but where they are bound around with statutes and with constitu- 
 tional provisions and other things that prevent them from giving that aid. they are absolutely 
 helpless, no matter how much they may desire to help the corporation, and the best evidence 
 of that is what has happened in New York." 
 
 Mr. Carr took issue with some things said by Governor Foss of Massachu- 
 setts with respect to the pernicious political activities of public service corpora- 
 tions in trying to influence appointments on the public service commissions. His 
 own view of the trouble with respect to these appointments is set forth at pages 
 850 and 851 of the Proceedings, where he says: 
 
 "The trouble is that the appointing power, as a rule, where the commissions are ap- 
 pointed — in many ol the states they are elected — but where they are ai)|>ointed. 1 believe the 
 public service corporations are more interested than anyone else to have clean, able, upright 
 men on the commission, liecause it is to their liest interests to have men of that character, 
 yet in all cases the trouble with the appointing power is the politician. He is always there 
 to sec that a politician or someone who is selected by the politician is put on the commission, 
 because it is considered a political plum. 
 
 "Now. that is the fact as distinguished from what the Govenior said, and I think you 
 will find that, if you keep the politician away from the appointing power, you will have no 
 trouble' in getting goo<l men. 
 
 "But there is this further fact to be considered: it is difficult to get a competent man, 
 unless he happens to be of independent means, to be willing to assume the burdens of public 
 service commissioner because he docs not like to be hounded and blackmailed, if you please- 
 accused of everything in the calendar, and work himself night and day to do the best he 
 can for his state, with the knowledge all the time that a change in the political power or 
 the e.\piratioii of his term of office means that he goes forth without honor. 
 
 "And what is the result? His innermost pride is affected, because he feels that if he 
 has done his duty well the least reward that he could have would be a reappointment to that 
 office, and you will find that that is very seldom done I did not have an op])ortunity to meet 
 that experience, but I presume 1 might have had it, just the same as many other men have 
 had it; and that is the reason why it shcnild be eliminated from politics. H you have a 
 competent man there, keep him on the job." 
 
 Mr. Carr does not believe that public ownership would be successful in this 
 country under our i)rcsi-in form of government, but he seems to have a good 
 deal of faith in public regtilation. On this point he speaks, at pages 855 and 856 
 of the I^rocccdings, as follows: 
 
 "Commissioner Meeker: How at>out public regulation under our present sy.stem? Is it 
 possible to work that ? 
 
 "Mr. Carr: I think public regulation can work, and it has worked very well. Of course, 
 it has its evils. 
 
State Regulation 419 
 
 "Commissioner Meeker : We have heard some pretty severe bumps handed to it today. 
 
 "Mr. Carr: Of course, you have always to consider that some of the people that do the 
 bumping also liave their grievances. 
 
 "In 1907, when the New York commission was formed, I might say that a great many 
 people with whom I was associated were opposed to it, but I was very much in favor of it, 
 because I felt I saw what was coming, and I tried all I could to help make it a law in my 
 feeble way, and I believe if you would put it to a vote of the public service companies in 
 the state and ask them whether they would go back to the old days they would tell you 
 that they would prefer to have the regulation exactly as they are having it today. Now, I 
 may be wrong, but that is what they have told me. 
 
 "Commissioner Meeker : What is the difference between the politics that affects the 
 public regulators today and the politics that would affect the public operators in case of 
 public ownership and operation, or the public regulators under public ownership and private 
 operation? 
 
 "Mr. Carr: Well, all I can speak for is the commission I was with. We, in the words 
 of the President, adjourned politics. We eliminated politics entirely from our operations. 
 
 "The Chairman : Is it not true, Mr. Carr, that although some of the public service 
 commissioners may be politicians, and they may be appointed for political purposes, yet when 
 it comes to the question of appointing their expert men, their expert rate men, engineers and 
 so forth, they always look for the best men in the field that can be secured? 
 
 "Mr. Carr : I think that is true. 
 
 "The Chairman : And is it not also true that these public commissioners very generally 
 respect the recommendations and follow the recommendations of their expert forces in mat- 
 ters coming before them? 
 
 "Mr. Carr: I think it is." 
 
 The Railroad Commission of California, since it was reorganized in 1912, 
 has had a very high reputation for intelligence, vigor and fairness in the applica- 
 tion of the regulatory law. The only California witness that appeared in person 
 before the Federal Electric Railways Commission was Mr. W. E. Creed, counsel 
 in rate matters for the San Francisco-Oakland Terminal Railways Company, 
 which operates as its Traction Division the local street railway lines in Oakland, 
 Berkeley, Alameda and other East Bay cities, and also operates as its Key Divi- 
 sion, in competition with the Southern Pacific Railroad, the trans-bay interurban 
 railway and ferry service to San Francisco. Mr. Creed stated that his company 
 was in very bad condition, but he blamed this condition for the most part upon 
 matters outside of the control of the state coimiiission. He cited excessive taxes, 
 assessiTients and paving obligations, the failure of the municipalities more rigidly 
 to enforce traffic regulations with regard to automobiles and thus cut down acci- 
 dents, and the deinand of the municipal authorities for "service beyond the 
 revenue" on particular lines and their refusal to permit the abandonment of 
 lines which have not been justified. With respect to the state commission, Mr. 
 Creed says, at page 887 of the Proceedings: 
 
 "Well, our commission out there has acted with commendable courage with regard to 
 the traction company and we finislied the case which involved the question of an increased 
 fare in July or about the 1st of July last year, and in August the commission granted the 
 6-cent fare, on the 14th of August. We have not yet gone to them on the 7-cent fare, but 
 we have pending an application for an increase of fares on the Key Division, and that decision 
 has not yet come down. 
 
 "Mr. Warren: How long has that been pending? 
 
 "Mr. Creed : Since July of last year. 
 
 "Commissioner Sweet : The commission you speak of is the state public utility com- 
 mission ? 
 
 "Mr. Creed: Yes, of state-wide jurisdiction. 
 
 "Mr. Warren: They have jurisdiction to do it? 
 
 "Mr. Creed: Yes. They have met the situation in California very well. Of course, 
 there are a good many complications in connection with the increase in the trans-bay fare. 
 The question is what the Southern Pacific, which is a competing service, will do, and whether 
 the Railroad Administration will go to the same figure, and also the question of whether 
 we would dare to operate at an increased fare." 
 
420 Electric Railway Problem 
 
 Later on, Mr. Creed suggests that it would be desirable for the Federal Elec- 
 tric Railways Commission to make studies and findings with respect to "the 
 future rate-fixing policies of state commissions regarding utilities in general or 
 street railways." lie expresses the opinion that it is desirable to "have compen- 
 sation and the rate of fare as low as is consistent with maintaining the credit 
 and service," but he thinks it "essential that a rate-fixing policy making adequate 
 provision for depreciation and contingencies be adopted." With respect to state 
 regulation in general, he expresses himself at page 889 of the Proceedings, as 
 follows : 
 
 "I believe very strongly in state-wide regulation. I believe the great service that that 
 has done has been to control the issuance of securities, and 1 think it was essential that that 
 be done, but I think the tendency in state-wide regulation has been to require companies to 
 give service substantially at cost. That is, when you take most of the rate cases which have 
 been decided by commissions you find they build up the operating expenses, w-hatever allow- 
 ance they make for depreciation, bond interest and the dividends to the stock which is used 
 for financing and then there is a little margin or surplus over, but that margin has not been 
 big enough to take care of fluctuations in conditions, and I feel there ought to be very care- 
 ful thought and study given to the future policy with reference to reserves and depreciation 
 reserves for public utilities and particularly street railways."' 
 
 Further on, Mr. Creed testified that in his opinion the California commis- 
 sion has been a very efficient body and that he has a very high opinion of its 
 work. He thinks that prior to the war the utilities of California enjoyed a very 
 fair measure of prosperity. Their present trouble is chiefly an outgrowth of 
 war conditions. He calls attention, however, to one limitation upon the powers 
 of the California Railroad Commission and the state commissions generally, 
 which, in his opinion, should be removed. This limitation is their lack of author- 
 ity to compel the readjustment of old capitalization in connection with their 
 approval of the issuance of new securities. His views on this point have already 
 been cited in Chapter XVIH of this report in connection with our discussion of 
 the effect of public regulation of stock and bond issues upon the credit of the 
 electric railways. 
 
 Mr. Creed also states that in California fares cannot be raised in advance 
 of an application to the state commission and a determination by it. He is of 
 the opinion that it would be "in the interest of both the company and the public" 
 to adopt the provisions of the Pemisylvania law, authorizing electric railway 
 companies to put new rates into effect subject to subsequent modification by the 
 public serv^ice conmiission upon investigation. It will be seen that on the whole, 
 Mr. Creed's testimony was very favorable to the California Railroad Commis- 
 sion and to the general plan of regulation by state commissions. At the same 
 time, it is not clear that the difiiculties of the electric railways of California would 
 be entirely overcome by the changes in the regulator}- laws suggested by him. 
 
 It is noteworthy that Mr. Paul Shoup, President of the Pacific Electric Rail- 
 way Company, which operates over ICXX) miles of interurban track in Southern 
 California, in his mcs.sage of July 19, 1919, to the president of the American 
 Electric Railway Association, which appears in full at pages 608 and 609 of the 
 Proceedings, did not voice or even suggest any criticism of state regulation in 
 California, although stating that the electric lines in that state were in a desperate 
 situation. In fact, he says: "In some California cities 6-cent fares have been 
 granted and in a number of other cities applications for that rate are pending. 
 
State Regulation 421 
 
 \'ery considerable increases in freight and passenger rates have been granted 
 interurban lines, but necessary relief has not followed." The remedial measures 
 suggested by him do not include the abandonment of state regulation or any par- 
 ticular enlargement of the functions of the state commission ; but rather the 
 enactment of legislation relieving the electric railways from the burdens of special 
 taxation, paving requirements and other franchise obligations ; the adoption of 
 operating economies and the shortening of the uniform fare zone, coupled with 
 the substitution of a 7y^-cent minimum fare for the nickel and the making of a 
 new 7j/2-cent coin.° 
 
 Mr. Charles L. Henry described the system of fares on the interurban lines 
 of Indiana. The regular rates were originally about ly^ cents per mile; then 
 came the penny zone system, with a cent for every half mile; then in January, 
 1918, the rate was put up to 2i/^ cents per mile; and finally, in February, 1919, 
 to 2^:; cents per mile. Mr. Warren asked whether there is a minimum fare. 
 Mr. Henry's reply and his comment upon the Indiana Public Service Commission 
 are found at page 701 of the Proceedings, as follows : 
 
 "Yes ; the mininiiim fare used to be 5 cents and has been made 10 cents, so that there is 
 no fare now less than 10 cents. 
 
 "The Chairman: By order of the commission or by statute? 
 
 "Mr. Henry : By order of the commission. The statute made no regulation of our fares. 
 Our rates are — it has all been done by the commission, and in that I may say that the 
 commission, since they got their faces turned towards the East and saw what was needed — 
 it was a little difficult to get them to see what was needed, but as soon as we got their faces 
 turned in the right drection and they did see what was needed, they have shown a disposition 
 to cooperate with the interurbans. 
 
 "The Chairman : I think you have a good commission in Indiana. 
 
 "Mr. Henry: Well. I second the motion. We have. But here is one of the troubles 
 about it. We were going in the hole for from six to nine months because of the losses in 
 operating expenses before we got an increase, and when we got the additional increase it 
 was the same way, it took three months to get them to issue 'the first permit for 2^ cents 
 per mile. I presented the petition for our road first, and it took us three months to get action 
 on it before we got them in the notion of really doing it. They first thought maybe the 2-cent 
 fare law affected it, and we showed them it did not, it only affected steam roads, and after 
 that they treated us. well, I will not say with liberality, but with all the justice the situation 
 demanded and required." 
 
 Mr. Richard Schaddelee, Vice-President and General Manager of the United 
 Light & Railways Company, which controls a number of street railway and other 
 utility properties in the Middle West, told about his experience with the Illinois 
 and Indiana public service commissions. He criticized both of them on the 
 ground of delay in the granting of emergency relief to sick utilities. He also 
 generalized about the failures of commission regulation. At page 859 of the 
 Proceedings, he says: 
 
 "The failure of commissions and other rate regulation bodies to adequately protect 
 utilities and grant them the relief necessary to enable them to maintain good and adequate 
 service, as exemplified by the present condition and future prospects of the electric railways, 
 is, in my opinion, due to the personnel of these commissions, their manner of appointment, 
 and the influences they are subject to much more than the laws themselves." 
 
 Mr. Schaddelee's idea of the purposes for which state regulatory commis- 
 sions were established, is set forth at pages 860 and 861 of the Proceedings, as 
 follows : 
 
 "State commissions were established because the people were dissatisfied with the results 
 of utility operation under franchise restrictions or under regulation by local municipal councils. 
 
422 Electric Railway Problem 
 
 "The people did not enjoy the spectacle of these franchises or the regulating ordinances 
 of their councils being made and dictated largely by local political and factional interests. 
 The American people, especially the .American workingmen. are intelligent and have a 
 passionate desire tor fairness, justice and fair play, and they can be depended upon to be on 
 the side of right and justice once they thorouglily understand the merits of a controversy or 
 proposition. 
 
 "They do not like to see a purely economic problem, affecting their personal and vital 
 interests, degenerate into a political problem and become a political football. 
 
 "Whatever the intent or motives were of the legislature who enacted these laws, I am 
 convinced that I have stated accurately the motives and intent of the large majority of the 
 people. 
 
 "The people knew that the political manhandling of utility problems nearly always inflicted 
 injustice upon cither the public or upon the utility and often upon both." 
 
 While admitting that all commissions have done some good work and that 
 there are "many able, conscientious, capable and fearless members on the com- 
 missions," Mr. Schaddelee is convinced that as a whole, the commissions have 
 failed to live up to the expectations and the intent of the people. At page 862 
 of the Proceedings, he says : 
 
 "The main reason for the failure of the commissions to function effectively is the fact 
 that they have not been immune from political influence as the people expected they would be." 
 
 This view is elaborated in the succeeding pages of the Proceedings. At page 
 862, Mr. Schaddelee says: 
 
 "These commissioners are but human. .As a rule they like to retain their positions, and 
 under the conditions cited they cannot be expected to make purely judicial decisions without 
 fear or favor. 
 
 "If they are to function effectively, they must be absolutely removed from political influ- 
 ence, and they must be secure in their tenure of office as long as they execute their duties 
 ably, justly and fearlessly. 
 
 "Under present conditions the commissions have no backbone, they have no courage, they 
 are not free agents. 
 
 "They are much more influenced by what the local politicians and officials are saying 
 than by what the people are thinking. 
 
 "They hear the vaporings of designing politicians, but they do not know what the people 
 
 are thinking. 
 
 ******** 
 
 "The local politicians are usually wrong in their interpretation of the people's attitude 
 on these matters, and the commissioners arc unduly influenced by the local politicians. 
 
 "The commissions show by their actions and decisions tliat they are, consciously or 
 unconsciously, dominated by the theory that their duties are much more largely toward the 
 people than toward the company, and that the people established them mainly as rate-reducing 
 bodies instead of rate-regulating bodies. 
 
 "Rate increases were practically unknown before the war and the habit of reducing rates 
 like other habits is not easy to break." 
 
 The effect of regulation upon the utilities themselves, as Mr. Schaddelee 
 observes it, is set forth at pages S62 and 863 of the Proceedings: 
 
 "These conditions have paralyzed all incentive to economy in the utility business, and no 
 stable financial conditions can be created until they are remedied. 
 
 "The biggest handicap to a utility is to ap|K-ar before a utility commission with a record 
 and data showing effective operation and careful, economical management. 
 
 "Vou will receive verbal commendation, but a lower rate than another company not so 
 well operated or managed. 
 
 "There is really now no incentive to economy, nor any incentive to spend efforts and 
 money to stimulate expansion of the business. 
 
 "If you spend money in improved et|uipnient to effect material economies in operation, 
 and thus increase your rale of return over the 6''''c or 7'^'r allowed you. the commission will 
 eventually confiscate this excess and maybe more, and will al-so confiscate part of the capital 
 you have invested to procure these economics, fixing a so-called depreciated value on the 
 proi)crty representing this capital. 
 
 "In applications for increased fares or rates the commissions examine too much in the 
 (Kist and not enough in the future or present. 
 
State Regulation / 423 
 
 "They are willing to base their decisions on anticipated decreases in tlie cost of labor 
 and material, but never on anticipated increases in the cost of these items." 
 
 That state regulation in Pennsylvania has been satisfactory, at least from 
 the point of view of the electric railways, seems to be fully borne out by the testi- 
 mony of company witnesses from that state. Mr. C. L. S. Tingley, Vice-President 
 of the American Railways Company, which controls the electric railway systems 
 centering in Scranton and Altoona, testified that his companies' experience in 
 Pennsylvania "has not been unsatisfactory." At page 375 of the Proceedings, 
 he says : 
 
 "I think the Pennsylvania law is as nearly a just and equitable law as can be drawn to 
 both the companies and the public, with possibly the exception, from the public point of view, 
 that their power over security issues is limited." 
 
 His commendation of the Pennsylvania plan is based primarily upon the 
 fact that the commission has no power to prevent a company from putting new 
 rates into efifect. At page 375, he says : 
 
 "The Pennsylvania Commission has no power to suspend a rate until after a complaint 
 and hearing, or upon its own motion and hearing, and consequently the rate may become 
 effective in thirty days after you file it." 
 
 On the other hand, Mr. Tingley criticises state regulation in New Jersey 
 because of delay in the decisions of the commission. There the companies have 
 the right to initiate rates, but the state commission has the power to suspend 
 them for three months. Mr. Tingley says, with respect to New Jersey, that the 
 commission freely exercised its power of suspension, that its calendar was 
 crowded, and that "it took you anywhere from six to nine months to get a 
 decision." He adds that "in the meantime, the patient died." However, upon 
 particular inquiry by Chairman Elmquist, it was shown that the report of the 
 patient's death was "exaggerated." 
 
 Mr. Tingley was inclined to favor state regulation on the Pennsylvania plan 
 as opposed to a service-at-cost plan, with local control. At page 377 of the Pro- 
 ceedings, he testifies : 
 
 "Commissioner Meeker: Do you think commission control as under the Pennsylvania 
 law would be a satisfactory service-at-cost plan, so far as you know it? 
 
 "Mr. Tingley : I do, sir, for the simple reason that in the service-at-cost plan the city 
 council or the city authorities, by whatever name they are called, are prosecuting attorney, 
 judge and jury, and the three offices are incompatible. 
 
 "Mr. Warren ; Mr. Tingley, would not that objection be lessened in case of the admin- 
 istration of the service-at-cost [plan] by the state commission in cases where the state com- 
 mission has sufficient jurisdiction to change this so-called contractual franchise? 
 
 "Mr. Tingley : I do ; yes, sir. 
 
 "Mr. Warren : They would be apt to administer it without that selfish purpose. 
 
 "Mr. Tingley : Yes, sir. 
 
 "Mr. Warren : That is bound to influence the other party to the contract. 
 
 "Mr. Tingley : Yes, sir ; but then you are back to state coinmission regulation." 
 
 The burden of the complaint against state regulation, voiced by the wit- 
 nesses for the American Electric Railway Association, was either politics or 
 delay. Dr. Thomas Conway, of Philadelphia, laid great stress upon the advan- 
 tages of the Pennsylvania and Connecticut laws, which are alike in that they 
 permit the companies to change their rates at will, and, in case of complaint, 
 fight the matter out afterwards before the commissions. He advocated giving 
 the companies a very wide latitude to e.xperiment with new rates. Commissioner 
 
424 Electric Railway Problem 
 
 Sweet questioned him rather closely with respect to this policy, as will appear 
 from the following testimony found at pages 965 and 966 of the Proceedings : 
 
 "Commissioner Sweet ; * * * * Dq you think it would be possible to induce the 
 public authorities of the various municipalities of the United States, or state commissions, 
 to throw the doors open as wide as you suggest and give the companies a free hand to place 
 the fares wherever they please, right off, as an immediate measure? 
 
 "Mr. Conway: It certainly will never be done unless somebody suggests it to them. 
 
 "Commissioner Sweet: Well, would it be done if it were suggested? 
 
 "Mr. Conway: Perhaps not, but this far, Mr. Commissioner, I think it will help: The 
 average commissioner, I believe, except, perhaps, where it afifects his own home town, his 
 own neighbors, wants to do the right thing. Now, if they hold these cases up, you go in 
 and talk to them in their private offices, or you meet them on the street, and they will freely 
 admit that these prolonged hearings are not fair to the company, but they will say to you, 
 'We must give evco'body in the community all the time he wants to talk himself to death, or 
 he will go out and howl that the commission sat on him and would not give him a fair hearing.' 
 
 "Commissioner Sweet: That is true, isn't it? 
 
 "Mr. Conway: V'es. sir; and it means hundreds of volumes of testimony. 
 
 "Commissioner Sweet : Yes. 
 
 "Mr. Conway: Most of which is utter nonsense. Xow, his time is frittered away en 
 these things. My observation is that the moment the rate goes in, it is a nine-day wonder if 
 it does not outrage the community, because it is so ill-advised and poorly conceived. When 
 you come to the trial of the case, the newspapers in Pennsylvania give it very little notice. 
 My observation is that most of the time is taken up with the disputes about facts, where you 
 have no guide. In one city a 6-cent fare is going to give you an 18% increase and in another 
 city an 8%. Instead of spending time on those questions, why not put it in and see what 
 it gives you? 
 
 "Commissioner Sweet : As I understand if, in Pennsylvania, where the rate can be 
 changed practically at the option, temporarily at least, of the company, * » * * there 
 has been no instance, has there, where the door has l)een thrown wide open and the company 
 allowed, at its own sweet will, to place the fare wherever it pleased? 
 
 "Mr. Conway: Yes; that is the situation. Take the case of the Pittsburgh Railways 
 Company. Before the 6-cent fare went into effect the commission held hearings and allowed 
 the 6-ccnt fare to go in, but required the company to sell two tickets for 11 cents, instead 
 of 11 tickets for 55 cents, as they wanted to do. Now, since then, the company has twice 
 changed the rate, and the matter has not yet been decided. 
 
 "Commissioner Sweet: But if I understand you right, the state commission, of its own 
 motion, could put a veto on that? 
 
 "Mr. Conway : No, except it went throu.gh the process of determining the justice of 
 the rate. What the state did was to immediately begin a valuation of the property. 
 
 "Commissioner Sweet: It goes into effect immediately? 
 
 "Mr. Conway : Yes. 
 
 "Commissioner Sweet : But could not the state commission, without waiting for a com- 
 plaint, decide against it? 
 
 "Mr. Conway: Not without getting the facts. In other words, they cannot just arbi- 
 trarily say that the rate is excessive. They have to have evidence to support it. 
 
 "Commissioner Sweet : Well, laying aside the situation in Penn.sylvania and Connecticut, 
 and taking other .states where they have no provision of that kind * * * » don't you 
 anticipate that if would be a very difficult thing, indeed, to bring about a situation that would 
 permit the companies to place their fares wherever they saw fit ? 
 
 "Mr. Conway: Mr. Commissioner, my own judgment is that the commissions themselves 
 arc coming to this view." 
 
 Dr. Conway's opinion as to the superiority of state over local regulation is 
 given at page 965 of the Proceedings : 
 
 "Generally speaking, there is no doubt in my mind that state regulation, through a utility 
 commission, is better than municipal regulation. 
 
 "In the first place, the state commission, assuming the same set of men are doing the 
 regulating, will do better work than those men would as municipal commissioners. The state 
 commissioner, if he gels in there knowing nothing alxiut the business, and unfortunately 
 many of them do come to their positions in that way, is cdiicalcd ; he cannot sit there day 
 after day and listen to cases and to witnesses dealing with these matters without getting a 
 pretty gofxl education in the course of a few years on the (lucstion. Now, you take a coun- 
 cilman or a mayor. There is only one out of three or four or a half a dozen of them that 
 ever has a rale matter to consider. They come there without very mtith knowledge, and it 
 
State Regulation 425 
 
 is certainly true that in that respect a Httle knowledge is a dangerous thing, when they have 
 any, and they have no trained advisers, such as the engineers and accountants of the com- 
 mission. The cities have no trained lawj-ers, such as counsel of the commission, that can 
 hring out the facts, and the consequence is that justice is not done, because of a lack of 
 knowledge of the judges." 
 
 Mr. W. D. George, one of the receivers for the Pittsburgh Railways Com- 
 pany, testified that "they have a very high regard for the Public Service Commis- 
 sion in the state of Pennsylvania. Public sentiment supports it." 
 
 Mr. Charles A. Fagan, another of the Pittsburgh receivers, gave very in- 
 teresting testimony with respect to the attitude of the City of Pittsburgh toward 
 the company. In answer to a question as to how the public looks upon the in- 
 creased fare in Pittsburgh, Mr. Fagan says, at page 619 of the Proceedings: 
 
 "The principal municipality, the City of Pittsburgh, consisting of the Council and the 
 Mayor, who look after such things as this, privately sympathize and commiserate with us 
 and say it has to be done, but publicly they oppose it and have filed an objection before the 
 Public Service Commission against the increase." 
 
 Mr. Fagan referred to overcapitalization and the giving of constrttction 
 contracts to favorite contractors in the old days as contributory causes to the 
 present condition of the Pittsburgh street railway system. This led Chairman 
 Elmquist to ask him further with respect to the extent of state or local control 
 prior to the receivership. The following testimony, found at page 622 of the Pro- 
 ceedings, throws light upon the past, present and future relations of the electric 
 railways to regulation : 
 
 "The Chairman : Had the city or the state commission attempted to exercise any juris- 
 diction over the operation or the construction or the letting of contracts or the expenditure 
 of money prior to the time you became receiver? 
 
 "Mr. Fagan: No, the only activity that the city has shown in relation to this railway 
 company has been to always criticize it, and since the Public Service Commission was estab- 
 lished — this Public Service Commission is a recent creation, it has only been in existence about 
 five years — is to file petitions against anything that the railway company wanted. Now, they 
 among others were anxious to have this receivership created, and we thought that when the 
 receivership was created that would probably end the antagonism of the city, but instead of 
 that they just carried it on the same as they always have. This railway company heretofore 
 has not been a very popular function in the city of Pittsburgh and politicians have always 
 taken advantage of the virtue of having a propaganda against the railway company. Now, 
 as I say, we thought that would end with the appointment of receivers, and it did end to a 
 very large extent, but when any concrete proposition is made like the increase of fares the 
 city immediately comes in and files objections to it. 
 
 "The Chairman: Were the politicians Iiolding the company up? 
 
 ******** 
 
 "Mr. Fagan ; * * * * The politicians and the promoters of street railways when 
 these affairs were going on were usually acting in concert, at least they were in our bailiwick. 
 I do not know how they were in other places, although I have heard of some other places 
 where that situation did exist. 
 
 "The Chairman: If these properties go back to private operation and control again how 
 are you going to prevent a recurrence of that old condition? 
 
 "Mr. Fagan: Well, of course — do you mean these receivers or the public? 
 
 "The Chairman : The public. 
 
 "Mr. Fagan : I do not know except by the different standards of honesty that prevail 
 now and the diflference in the publicity that is given to all these public questions. And in our 
 state by the existence of this Public Service Commission, which by the way is a very efficient 
 and capable body, which did not e.xist at the time when these corporations were put together. 
 At the time when they were put together and when these securities were exploited the only 
 test was whether you could sell them. You had to get no consent from anybody like the 
 Public Service Commission." 
 
 Mr. Morris L. Cooke, who, as Director of Public Works in Philadelphia, and 
 as Acting Director of the Utilities Bureau, had abundant opportunity to observe 
 
426 Electric Railway Problem 
 
 and study the relative merits of state and local regulation in Pennsylvania and 
 elsewhere, favors a strong state commission, as shown by his testimony at page 
 1698 of the Proceedings: 
 
 "The Chairman: In your judgment what is the best method by which to regulate these 
 corporations, the method for regulating these corporations? 
 
 "Mr. Cooke: I believe we have to have state commissions to perform two functions: 
 to be the whole thing for most of the cities of the state and for matters in which more 
 than one city is interested, and to standardize such things as accounting practice and working 
 conditions and all such things ; but I believe that where the city is large enough to retain 
 adequate technical advice a good many of the matters in connection with the regulation of 
 local utilities ought to be in the hands of municipal authorities. I would put it this way, 
 Mr. Chairman, that what can be best done by the locality ought to be done by the locality, 
 but there are many things * * • » that cannot be done efficiently by the localities, 
 as you know only too well. For that reason I believe in building up a strong state com- 
 mission." 
 
 Ohio may almost be regarded as the cradle of the service-at-cost idea. 
 Cleveland, Cincinnati, Youngstown have all adopted the plan." Ohio is one 
 of the states where the state commission has no authority to override the 
 provisions of a municipal franchise contract fixing rates. Mr. Walter A. 
 Draper, Vice-President of the Cincinnati Traction Company, testified at some 
 length respecting the service-at-cost plan in effect in Cincinnati. He was then 
 asked if he knew of any other solution of the general problem confronting the 
 electric railway industry. Upon this point, at page 507 of the Proceedings, he 
 says: 
 
 "The only other solution tliat I can see is to give the state commission such power that 
 it can regulate fares from time to time as the necessity would require. 
 
 "Commissioner Gadsden : Do you think that is going to restore the credit of this 
 industry? 
 
 "Mr. Draper: It would not immediately. It would tend very largely to do so. * * * * 
 
 "Commissioner Gadsden : Here is the thought that I wanted to bring out — whether you 
 entertained the view that some of them entertained, and testified to before the Commission, 
 that the alternative presented to the industry at this time in order to permanently restore its 
 credit is either some wcll-workcd-out service-at-cost plan or municipal ownership? 
 ******** 
 
 "Mr. Draper: I say. if you give the public utilities commission power to regulate rates 
 as the necessity would require, you would restore its credit, it you were assured that it could 
 be worked out. 
 
 "Commissioner Gadsden : Why, then, do we find companies operating in states where 
 the public service commissions have full powers, in just as bad shape as the others? 
 
 "Mr. Draper: Well, as I say, because it does not work out. The theory is all. right, 
 but it is pretty hard to get at in practice. If you fix something that is automatic, as the 
 cost-of-service plan, then you have it settled. You do not have to depend upon a human 
 agency at all." 
 
 Mr. John J. Stanley, President of the Cleveland Railway Company, took 
 the position that he was entirely satisfied with local supervision, but would not 
 object to state su])ervision. His testimony on this point appears at pages 598 
 and 599 of the Proceedings, as follows: 
 
 "The Chairman : Now. looking forward to the best sort of scheme that can be evolved, 
 do you feel that the state commission should have anything to do with the control of the 
 rates, service, extcnsiuns. betterments, expenditures and accnunting. of your company? 
 
 "Mr. .'>tanley : It surely depends entirely upon the i)crsonncl of any board that you go to. 
 
 "The Chairman : Well, should the state commission have anything to do with the things 
 that I have mentioned? 
 
 "Mr. Stanley: \'es : I think so. 
 
 "The Chairman: What should they have to do with it? 
 
 "NIr. Stanley: I think we wnuld be safer in going to the state commission than we 
 would in going to a city commission. 
 
 I 
 
State Regulation 427 
 
 "The Chairman : Well, do you believe that the state commission, then, should have that 
 supervision over jour company, which is now maintained by the city? 
 
 ■"Mr. Stanley : The tact of the matter is that they have supervision over our companv 
 today, * * * * * because when we appear before the state commission for an increase 
 in capitalization, we have to show our expenditures. 
 
 "The Chairman : Oh, that is true, but the state commission has nothing to do with the 
 service furnished by your company. 
 
 "Mr. Stanley: Not at all. 
 
 "The Chairman: Or with its construction? 
 
 "Mr. Stanley : No. 
 
 "The Chairman: Or with its operation? 
 
 "Mr. Stanley : No. 
 
 "The Chairman: Or its accounts? 
 
 "Mr. Stanley : Well, only as far as ■ 
 
 "The ChairiTian : The only supervision is as to capitalization. The city has that (super- 
 vision of rates, service, extensions, betterments, e.xpenditures and accounting) entirely. Now, 
 then should the state or city have that supervision? 
 
 "Mr. Stanley: Personally, I don't care which has it. 
 
 "The Chairman : Well, you must have an opinion. You have been in this business for 
 a long w-hile. 
 
 "Mr. Stanle\- : I know that the city has had it, and we have not had any trouble so far. 
 
 "The Chairman: Are you satisfied with the present arrangement? 
 ******** 
 
 "Mr. Stanley : Yes ; I am." 
 
 One of the greatest problems of public control over electric railways arises 
 from the fact that in so many cases the street railway lines not only extend 
 beyond the boundaries of the central municipality, but in fact reach out to serve 
 a multitude of communities. Sometimes, these communities are grouped to- 
 gether in a metropolitan area, but sometimes they are spread out through an 
 entire section of a state without anything in common except transportation 
 service. These conditions unquestionably militate against effective local control 
 and even constitute a serious obstacle to municipal ownership. The city of 
 Cleveland is comparatively well situated for local control, as the suburban muni- 
 cipalities served by the Cleveland Railway lines are few and relatively unimpor- 
 tant. That street railway transportation is essentially a local problem was 
 strongly maintained by Secretary Baker. He is not averse to regulation by state 
 commissions where the municipalities are not prepared to act for themselves, 
 but he thinks that the work of the commissions should be primarily educational, 
 to teach the municipalities self-help. His testimony, at pages 1012 to 1014 of 
 the Proceedings, is as follows : 
 
 "The Chairman : Do you believe that where a company extends through two or inore 
 villages and also out into suburban territory it would produce greater harmony and more 
 uniform service if the state itself fixed the rate and had control of the service? 
 
 "Secretary Baker: No; I think that would create a riot in Cleveland: if the State of 
 Ohio undertook to fi.x the street railroad rate in the City of Cleveland, I think it would 
 create a riot. 
 
 "The Chairman : That may be so in Cleveland, because the question has been so 
 thoroughly debated there ; but as a general proposition, do you think that would naturally 
 follow? 
 
 "Secretary Baker : No, I do not think so, as a general proposition. I think as a general 
 proposition the state commissions have won the confidence of the communities, and they are 
 adequately manned and officered to perform their duties and get the job committed to them 
 done fairly expeditiously. Many of the state commissions have had on them men of very high 
 character, statesmen. A great many of them are doubtless known to you as they are to me. 
 In states like that I think probably the state's undertaking to adjust w-ould be accepted by 
 the public generally. It would not in Cleveland, in my judgment. * * * * There has 
 been no difficulty, as a matter of fact, in Cleveland with the outlying municipalities ; no 
 serious difficulty. 
 
 "The Chairman : It has been suggested from some sources that it might be a good plan 
 
428 Electric Railway Problem 
 
 to give the city in the first instance the right to prescribe rates of fare and also service regula- 
 tions and extensions, subject to the right of appeal to the state commission, thus appealing to 
 another technical, scientific body, rather than to a court. 
 
 "Secretary Baker : I should be very much opposed to that for Cleveland. 
 
 "The Chairman : Why ? 
 
 "Secretary Baker: Because I think the responsibility for the management of its own 
 affairs is the greatest educational influence that the City of Cleveland has ; the fact that the 
 people of that city have studied and grasped and solved an intricate and complicated problem 
 like the street railroad problem, has made them a more self-conscious and a stronger, more 
 virile people than they were before that problem was put up to them; and I should be very 
 sorry indeed to see the responsibility for the management of their own affairs, in as intimate 
 and important a matter as street railroad service, taken away and transferred to a state 
 agency. 
 
 "The Chairman: Would it be taken away if there were simply a right of appeal by the 
 aggrieved party to the state? 
 
 "Secretary Baker: Oh, yes. The appeal would be control. Their original dealing with 
 the problem would not even make a prima facie case. 
 
 "The Chairman : There are a great many communities that have not made the intensive 
 study of this subject that you have at Cleveland. 
 
 "Secretary Baker : Certainly. 
 
 "The Chairman : And they are perhaps ill qualified to meet the problems in a satisfactory 
 way. Would it be well to have those people depend upon the state? 
 
 "Secretary Baker: Yes; I think as long as they are in need of that sort of assistance 
 it would be a good thing for the state to give it to them ; but the attitude of the state should 
 be constantly that of education for self-help rather than the substitution of the state agency 
 in local concerns. 
 
 "The Chairman : Then, in your judgment, the street railroad problem is one of purely 
 local concern, and there should be different conditions in the different states? 
 
 "Secretary Baker: Yes; I can imagine the cities of Cleveland and Cincinnati having 
 entirely different problems. As a matter of fact they do have — very different." 
 
 Mr. Henry L. Doherty, of New York, has had considerable trouble trying 
 to get on peaceably and profitably with the City of Toledo, another Ohio com- 
 munity where street railway transportation seems to be regarded as a local 
 problem. Mr. Doherty's difficulties with local control are set forth at page 405 
 of the Proceedings, as follows: 
 
 "The Chairman : Could the problem be solved by getting away from fixed franchise 
 rates and leaving it to the utility commissions to determine the reasonableness of a rate? 
 
 "Mr. Doherty: Yes. if the utility commissions would act promptly it would, and I think 
 utility commissions are in better shape to determine what a rate should be than the local 
 authorities. 
 
 "I have had one case where we have been trying to settle the street railway difficulty for 
 a number of years and we have had continuous negotiations I would say for nearly five 
 years with the city authorities and have never reached a settlement, and largely 1 think 
 Ix^cause the city authorities felt that they had to comply with what they believed to be the 
 wishes of the people; and yet in many ways those conditions would have iK-en something 
 under which the company could not have lived. 
 
 "In that case — I refer to Toledo — we took hold of the Toledo situation when it had been 
 a matter of controversy for a long time, and the people there were determined to have a 
 three-cent fare, and a great numlxr, perhaps a majority of the population, felt that if they 
 voted for a three-cent faro that should entitle them to a throe-cent fare, simply because 
 they had voted for a three-cent fare. They had that imbued in their minds, and when we 
 would try to tell them we could not furnish street railway service at three cents they would 
 say, 'We voted to have you do it.' 
 
 "Now we have never Ik-cu able to make the local authorities believe that the people of the 
 city understood that we must have a higher rate of fare, and yet 1 think the people as a 
 whole know that we must have a higher rate of fare, and I think they would Ix: willing 
 to pay it. 
 
 "I think in most even,' case, if the matter was laid properly before the people, without any 
 confusion from the other side, and was honestly presented from both sides, the people would 
 \x willing to pay the necessary amoimt to provide adequate and proper street railway service." 
 
 Further on, at pages 406 and 407 of the Proceedings, we find the following 
 testimony : 
 
State Regulation 429 
 
 "The Chairman: Now. it the utilities and the puhHc authorities can reach the point where 
 these properties can be properly valued and you get away from a fixed franchise rate, have 
 you not as a matter of fact got about all that a public service corporation should have? 
 
 "Mr. Doherty : Well, that is all I think that any of the public service corporations 
 should ask for, but they are asking if possible that that really be granted to them very 
 quickly. 
 
 "The Chairman: Oh, I am asking questions now with reference to a permanent policy 
 and not immediate relief. 
 
 "Mr. Doherty: 1 agree with that policy until we can find some better one, if there is a 
 better one. all right, but that is the only one I see now. 
 
 "The Chairman: If you can reach this proper value and have the state fix the rates, 
 is there any reason why you should adopt the cost-of-service plan? 
 
 ******** 
 
 "Mr. Doherty: Well, I should think it would be preferable to have the state commission 
 determine the valuation * * * * but it seems to me the matter of being able to adjust 
 yourself to new conditions without a new hearing is very valuable. Now, here is what 
 happened, Mr. Elmquist, in the matter of public service commissions. If the day ever comes 
 when the farmer must go to the public service commission or some agricultural commission 
 and get the consent of that body to plant one field in wheat and another field in corn he will 
 probably say, 'Oh, well, it is so much trouble, I will just let it go, I will not plant anything,' 
 simply on account of the delay. We have not been hurt so much by public utility commis- 
 sions, even where they have shown their teeth in many cases, because we have been able 
 to tell our story to them and get it before them. But we have often been intensely hurt by 
 delay, and the street railway companies now are in a condition where they need assistance, 
 and they need assistance at once, and if they do not get it at once their credit is going to be 
 permanently crippled. The whole industry's credit is going to be so crippled that I doubt 
 if it can be reestablished." 
 
 Mr. W. B. Head, Vice-President of the Dallas Railway Company, referred 
 to the fact that there is no public service commission in Texas and stated that 
 on the contrarj- there is "what is known as home rule — an act passed by the 
 legislature in 1913, giving to all cities of 5.000 or more practically all the powers 
 of rate regulation that the legislature itself would have." At pages 636 and 
 637 of the Proceedings, Mr. Head discusses the agitation in Texas for state regu- 
 lation, as follows : 
 
 "Commissioner Gadsden : Is there any agitation in Texas for a state commission, Mr. 
 Head? 
 
 "Mr. Head : Yes. sir, there has been a great deal of agitation for a state commission, 
 which comes from two angles. The long distance toll service in Texas is not regulated by 
 any authority. The smaller communities, in the towns of less than 5,000, have no rate 
 regulation. 
 
 "Commissioner Gadsden: What is the attitude of the public utilities towards that? 
 
 "Mr. Head: The public utilties have taken the attitude of being favorable to a state 
 commission, if the state commission has final authority. There was a bill introduced in the 
 last session of the legislature, and it passed the House, but did not get by the Senate — 
 although it did not reach a vote — that undertook to create a state commission, making the 
 commission's jurisdiction in home rule cities appellate or upon the request of the municipality. 
 That I think will really solve the situation in Te.xas." 
 
 That urban transportation is essentially a local problem was maintained by 
 Mayor E. V. Babcock of Pittsburgh. After expressing the opinion that "the 
 street railway passenger transportation problem in Pittsburgh probably is more 
 complicated than in any other large American city," and stating that "there are, 
 in Allegheny County, 57 separate municipalities served by the Pittsburgh Rail- 
 ways Company, all with diflferent municipal governments and each with its own 
 municipal ordinances," Mayor Babcock, at page 1899 of the Proceedings, goes 
 on to say : 
 
 "It must be recognized that transportation is fundamentally a local problem and yet 
 with such a large number of separate municipalities it is practically impossible, under existing 
 legislation, for all of these municipalities to act in concert in handling the problem." 
 
430 Electric Railway Problem 
 
 Further along, at page 1900 of the Proceedings, he says: 
 
 "There is no panacea for the transportation ills of the present day. Regulation by public 
 service commissions, service-at-cost plans, or municipal ownership will not usher in the day 
 of the millenium in this respect. The transportation problems will always be one of the 
 great, if not the greatest problems of our municipal life and must be handled in the same 
 manner that all other great industrial and commercial enterprises have been worked out in 
 the past. It is obvious that the state public service commissions, while satisfactory for other 
 forms of public utilities, can never comi)lctely solve the large local problems of transportation 
 in our great cities. Transportation uses the local highways and must necessarily conform 
 to all local developments. It is brought into daily touch with the life of the city in such 
 a way that there must be the closest harmony and cooperation between the local strt-et railway 
 company and the municipal authorities. This inevitably points to some operating arrange- 
 ment whereby the local municipal authorities shall be placed in a position to exercise a large 
 amount of control, giving the city government a voice as to proper standards for transporta- 
 tion service and operating conditions." 
 
 Mr. Harlow C. Clark, editor of Aera, the official organ of the American 
 Electric Railway Association, expressed the opinion that the state regulating 
 commissions, where they have control of rates were "generally sympathetic" 
 during the war period ; he thought that in a large majority of the cases they 
 granted the relief prayed for in the companies' petitions. At page 900 of the 
 Proceedings the following question and answer appear: 
 
 "The Chairman : Broadly speaking, the industry has no real complaint of the service 
 given by the state commissions during the war. has it ? 
 
 "Mr. Clark: Only so far as delays have occurred, Mr. Commissioner, in administering 
 the law. Whether those result from the perhaps unnecessarily cumbersome procedure or not, 
 I think you can only discuss in individual cases." 
 
 Mr. Clark's outline of a permanent plan for the solution of the electric 
 railway problem has already been set forth in Chapter XXIII of this report in 
 connection with the discussion of how credit can be restored. It will be remem- 
 bered that one of the features of his plan contemplates "power of regulation, 
 either by state or municipal authorities, in respect to all matters affecting con- 
 ditions and character of service, including extensions, improvements and better- 
 ments." Rates are to be adjusted automatically on the basis of the cost of 
 service. Mr. Clark is inclined to favor a combination of state and local super- 
 vision if it can be worked out on a proper cooperative basis. The relative merits 
 of state and local regulation are discussed at pages 900 and 902 of the Proceed- 
 ings, as follows : 
 
 "The Chairman: Now, in your judgment should regulation be exclusively in the 
 municipality or in the slate, or should there \x some sort of a happy middle ground whereby 
 you can work out proper cooperation between both? 
 
 "Mr. Clark : I think the advantages of the two systems might be stated in this way. that 
 when you have state regulation it is more stable, it is less likely to be aflfected by prejudice, 
 and on the whole it is perhaps fairer both to the company and to the public in the long run. 
 That when you have municipal regulation such as is extant in Cleveland, that you secure 
 perhaps a greater degree of cooperation from the public than you do when the state com- 
 missions are in charge of the regulation. I tx-lieve that your suggestion would make an ideal 
 system of regulation it it could be put into elTcct. if some way of combining tiie two could be 
 devised. 
 
 "The Chairman : Do you think that the state as such should attempt to regulate the 
 service within a village or city? 
 
 "Mr. Clark: Well, there are a great many questions entering into that, Mr. Commissioner. 
 
 "The Chairman: When T speak of service I refer to speed, stops, and to the ordinary 
 regulations which arc so closely identified with the welfare of the city itself. 
 
 "Mr. Clark : In a mo<Iern city the systems extend usually beyond the city limits, the 
 suburkin lines are part of the city system, the interurban lines arc part of the city system. 
 The authority of a city regulatory commission would cease with the city limits. 
 
 "The Chairman : Yes. 
 
 "Mr, Clark: I refer particularly to Ro'iton, where they have what I think is known 
 
 1 
 
State Regulation 431 
 
 as the Metropolitan District, where the service extends for miles beyond the city limits of 
 Boston, and while Boston City has no particular jurisdiction over those communities, it is 
 really part of the community life of Boston, and service on those properties should be 
 regulated as a whole and not allow the City of Boston to regulate the service within the well 
 defined limits of the city itself and allow the other municipalities to regulate it within their 
 limits, but that there should be some general regulation of that system which would make it 
 most efficient and the best for all the people served. 
 
 "The Chairman : Well, referring now to this Boston situation, do you think it would be 
 fair to the public as well as to the utility to permit the municipal authorities in Boston to 
 have jurisdiction over the service and extensions of street cars subject to an appeal to the 
 state commission by either party? 
 
 "Mr. Clark : I believe that in that particular instance it would not be very workable. 
 
 "The Chairman: Why not? 
 
 "Mr. Clark : For the reason that each of these other communities would also have the 
 right of appeal to the commission and that, as I say, it would be difficult to coordinate the 
 entire system of service to one wliole that would most efficiently serve all the communities. 
 I think it might be possible to create a metropolitan district which would have that right 
 of an appeal to tlie public service commission. 
 
 "The Chairman: Do you believe if the right of appeal by these different municipalities 
 to the state commission were granted it would promote confusion and delay and uncertainty 
 rather than stability? 
 
 "Mr. Qark : I am inclined to think so, yes, sir. 
 
 "The Chairman: But vou would have a final body to determine the question? 
 
 "Mr. Clark : Yes. 
 
 "The Chairman: And establish the general rules which municipalities must obey? 
 
 "Mr. Clark : Yes." 
 
 Mr. Clark gave an affirmative answer to Chairman Elmquist's question as 
 to whether he did not think that "there is a very strong sentiment throughout 
 the country in favor of home rule of these utilities." He called attention to the 
 fact, however, that Governor Smith, of New York, elected on a home rule plat- 
 form, vetoed a service-at-cost bill for the City of Buffalo on the ground that it 
 withdrew the street railways of Buffalo from the jurisdiction of the Public Service 
 Commission. With respect to the general attitude of the electric railway industry 
 on the question of state or local regulation, Mr. Clark said that he knew a very 
 large number of men who preferred state regulation and a few men who pre- 
 ferred local regulation. Personally, he believed that as a mere matter of economy 
 and efficiency state regulation is necessary in the majority of cases. It seems 
 that this particular conclusion was based upon the assumption that under a 
 scheme of local regulation on the basis of service at cost, the expense of main- 
 taining the regulatory machinery would have to be borne by the railways. So 
 far as rates are concerned, Mr. Clark was inclined to favor the automatic service- 
 at-cost plan rather than regulation by a state coinmission, even where the com- 
 mission has unrestricted authority. This is shown by the following testimony at 
 page 906 of the Proceedings : 
 
 "The Chairman : Then, don't you believe that as far as the industry is concerned, you 
 are entirely safe to have either a cost-of-service plan or a scheme of state regulation, wherein 
 the state can fix the rates? 
 
 "Mr. Clark : I think the industry as a whole would feel very much better than it does 
 now if it was possible to conduct state regulation under those conditions, but I doubt if it 
 would feel as well as it would under an automatic system, by which they were absolutely 
 assured of these increases as they came up, and in which situation the judgment of no man 
 or no set of men intervenes." 
 
 Mr. Harold L. Stuart expressed himself in favor of state regulation, as 
 will be seen from the following quotation taken from page 194 of the Pro- 
 ceedings : 
 
 "I am thoroughly in favor, from an investment banker's standpoint, of supervision of 
 public utilities. 
 
432 Electric Railway Problem 
 
 "Commissioner Sweet : Would you make a distinction there between it being done by the 
 municipality itself or by a state organization? 
 
 "Mr. Stuart : Certainly I would much rather it be done by a state public utility com- 
 mission. I believe that is freer from local prejudices, and it is in a position to render a 
 fairer judgment on any question than the local authorities would be." 
 
 Mr. Francis H. Sisson, of the Guaranty Trust Company, also expressed 
 himself as favorable to state regulation, but did not appear to be unqualifiedly 
 optimistic about it. At pages 318 and 319 of the Proceedings, he says: 
 
 "The commission form of regulation was developed largely with a view of remedying 
 the evils of the rigid franchise method, but even the commission form of regulation is losing 
 esteem among the thinking people because of the attitude many commissions have assumed 
 toward the public utility corporations." 
 
 The deadlock between the State Public Ser\ice Commission and the City 
 Board of Estimate and Apportionment in New York makes Mr. Sisson rather 
 skeptical of a plan for a combination of state and local supervision. At pages 
 335 and 336 of the Proceedings appears the following: 
 
 "Commissioner Meeker: Your opinion, then, is that an undinded, single authority is 
 to be preferred to any cooperative plan? 
 
 "Mr. Sisson: Unless the riglit of ultimate decision is clearly fi.\ed, I certainly think so. 
 
 "Mr. Warren : And made apparent. 
 
 "Mr. Sisson: I think they might work out some advisory relationship or something of 
 that sort, but I think there should be but one authority in a situation of that kind, and that 
 definitely fixed." 
 
 At page 351 of the Proceedings, Mr. Warren brings out Mr. Sisson's speci- 
 fic criticisms of state regulation in practice: 
 
 "Mr. Warren : You spoke of being in favor of public service commission regulation, 
 as the Association which I represent here is on record as favoring. 
 
 "Mr. Sisson : Yes. 
 
 "Mr. Warren: Is there any particular feature in the administration of the public service 
 laws which in this present emergency you would criticize or that you think might be improved? 
 
 "Mr. Sisson: Well, in some instances; the matter that we discussed a while ago, the 
 conflict between the public service commissions and the local authority. I think these laws 
 drawn by the states ought to give the commission the full power to regulate rates upward as 
 well as downward. 
 
 "Mr. Warren: Take cases where they have the complete power, as they have in 
 Massachusetts and in numerous jurisdictions, is there still an>-thing that you think has militated 
 against the application of a remedy in this emergency in the last year? 
 
 "Mr. Sisson: I think the fundamental thing that has militated against it has been 
 political controversy. 
 
 "Mr. Warren: How about the delay? 
 
 "Mr. Sisson : And the slowness of action which has failed to meet the crisis, as I 
 pointed out in my first statement." 
 
 Running all through the testimony, we find unrestricted state regulation 
 based upon the exercise of the police power and the service-at-cost plan based 
 upon contractual relations discussed as alternative policies for the solution of 
 the electric railway problem under continued private ownership and operation. 
 Some of the witnesses seem not to have fully grasped the fundamental differ- 
 ence between the two ])lans, while others look to a combination of them as the 
 ultimate solution. In Chapter XXIII of this report, I have already pointed out 
 the apparent inconsistency in the two positions taken by General Tripp, once in 
 favor of state regulation and control, and later in favor of a service-at-cost ar- 
 rangement locally administered. Mr. J. K. Newman and some of the other wit- 
 nesses had difficulty in seeing the distinction between the two plans. Mr. Harlow 
 C. Clark, as we have seen, favored a combination of the two, and Mr. Luther 
 
State Regulation 433 
 
 R. Nash, Stone «& Webster's service-at-cost expert, also favored a combination 
 of state and local control in the administration of the service-at-cost franchise. 
 Upon this point Mr. Nash's testimony at pages 469 and 470 of the Proceedings 
 is pertinent to our present discussion, as will be seen from the following: 
 
 "Mr. Warren: If you were recommending the supervision provision in such a franchise 
 should you stop with the absolute jurisdiction in the local authorities, or should you provide 
 an appeal, and if so, to whom? 
 
 "Mr. Nash: I do not think that the absolute local supervision would work out to the 
 best advantage. It has worked fairly satisfactorily in the cases where it has been tried, but 
 e.xperience with any of these franchises has been comparatively limited. It seems to me that 
 in the final analysis authority ought to be lodged with the state regulatory authorities. 
 
 "Now, there are all kinds of degrees of jurisdiction between local and state that might 
 be w'orked out. For example, the city might appoint a representative who would be called 
 a supervisor or he might be an e.xisting city official who would represent the city in negotia- 
 tions with the company with respect to service, extensions, changes in rates or operating 
 conditions, and in nine cases out of ten the city representative and the company representative 
 would probably agree upon what should be done. In cases where they could not agree I 
 think the logical appeal should be to the state commission, partly because of their wide ac- 
 quaintance with the conditions which have arisen in some particular locality and partly 
 because it removes the decision in the case further away from local appeal and prejudice. 
 City officials are apt to make the best kind of a trade they can for their constituents and the 
 state commissions on the other hand have a broader view and are more apt to decide the 
 question upon abstract merits and with a view to the long range interests of the community 
 rather than its immediate advantage." 
 
 The service-at-cost plan will be analyzed in the next chapter. Here we are 
 primarily concerned with the suggestion that the entire problem of keeping the 
 electric railways well-fed and well-groomed and in the harness for efficient public 
 service be referred to the state utility commissions "with power." Our review 
 of the evidence shows beyond a doubt that the electric railway companies are 
 far from satisfied with the results of state regulation thus far; that their two 
 chief complaints are "politics" and "delay" ; that in many instances the state 
 commissions have not enjoyed full powers; that where changes in the law are 
 suggested, they take the form chiefly of the elimination of municipal authority 
 and the enlargement of the powers of initiative of the companies themselves in 
 rate matters ; and that in spite of the general preference of the companies for state 
 as contrasted with local control, public opinion in many urban communities is 
 strongly in favor of home rule in the control of the electric railways on the 
 theory that urban transportation is a matter primarily of local concern. 
 
 The possibilities of help through regulation are not what they might have 
 been, as witness Mr. John A. Beeler states at page 1669 of the Proceedings: 
 
 "The electric railways were for so many years unaccustomed to regulation that they 
 came to respect much too slowly the value of cooperation with state and municipal regulatory 
 bodies. Today, when the« electric railway needs all the cooperation it can get, it finds that 
 it has been a demoralizer of public confidence in these very commissions and local authorities 
 whose help would now be so valuable." 
 
 The limitations of unrestricted state regulation as a remedy for the ills 
 of the electric railways, from the points of view of their owners and of their 
 patrons, respectively, will be discussed in a later chapter. 
 
Chapter XLI 
 SERVICE AT COST 
 
 The theory most generally and urgently advocated on behalf of the electric 
 railway companies for the readjustment of their public relations and for the 
 restoration of their credit under private ownership and operation is known as 
 "service at cost." With respect to this theory, as with respect to many other 
 things in connection with the street railway business, the tables have been turned 
 in recent years. Service at cost originated with the advocates of low fares, who 
 believed that 5 cents was too much as the price of an average street car ride. 
 The bitter controversy between the City of Cleveland and its local street railway 
 company, extending over a period of eight or ten years, finally culminated in the 
 settlement proposed by Judge R. W. Tayler of the Federal District Court, and 
 since known as the Tayler plan. This was the first street railway franchise in 
 the United States, at least so far as the public knows, in which the service-at-cost 
 principle was embodied, and Judge Tayler may properly be regarded as the 
 "father" of service at cost. 
 
 Ten years ago the senice-at-cost idea meant that the car riders were to pay 
 for their rides just what they cost and no more. Since the cost of rides has been 
 going up as a result of war prices the electric railway companies themselves have 
 adopted the idea, and to them it means that those who render street railway 
 service shall get for it what it costs and no less. In the old days it was a device 
 on the part of the public to pull fares down ; now it is a device on the part of 
 the companies to push fares up. In this respect it is much like the reproduction- 
 cost theorv' of valuation, which was advocated by the public in the era of low 
 prices in an effort to get away from the permanent capitalization of high prices 
 and possibly imprudent expenditures in the early years of railroad construction ; 
 while now the theory is advocated by the companies for the purpose of securing; 
 the benefits of appreciation in land values and also for the pur])ose of recouping 
 the losses which their security holders, in conmion with all other fund holders, 
 have incurred by the operation of economic law through l1ie decrease in the pur- 
 chasing power of money. From the standpoint of the car riders, the test of a 
 service-at-cost plan is that they shall enjoy as low fares as possible while paying 
 the full cost of the service. From the standpoint of the companies the essentiiil 
 test of the service-at-cost plan is not what the car riders pay but what the com- 
 panies get. This distinction is important, because from one point of view the 
 service-at-cost plan connotes a flexible fare, while from the other it connotes a 
 flexible income. 
 
 Some of the witnesses before the Commission maintained that service at 
 cost is the underlying aim of public regulation, and that, therefore, the difTerence 
 
 434 
 
Service at Cost 435 
 
 between commission regulation and service-at-cost contracts is a difference in 
 form rather than in substance. Where commission regulation is unrestricted, 
 continuous and effective, there is considerable force in this contention, as the 
 principal difference between the two schemes is that regulation is more flexible 
 and more dependent upon the exercise of human judgment, while service-at-cost 
 contracts are more definite, fixed and automatic in their operations. Under 
 present conditions the electric railway companies are eager for an assurance of 
 a fixed return upon their investment, and in order to get that assurance they are 
 quite willing to give up the advantages of a speculative investment where there 
 are ten chances of loss to one of profit. 
 
 The service-at-cost idea as applied to electric railways is so new that it still 
 has to be discussed for the most part from the standpoint of theory. The only 
 ser\'ice-at-cost experiment that has been in operation for a long enough time to 
 yield important and relatively dependable results from, the point of view of 
 practical experience is that of the Cleveland Railway. Other experiments in the 
 application of the service-at-cost principle have been embodied in the Dallas 
 Railway franchise in effect in April, 1917; the Massachusetts legislation under 
 which the Boston Elevated Railway system has been publicly operated since July 
 1, 1918. and the Bay State Street Railway system since June 1, 1919; the new 
 Montreal Tramways contract, in effect in February, 1918; the Cincinnati fran- 
 chise revision ordinance, passed in August, 1918, and the Youngstown franchise, 
 in effect in January, 1919.^ A service-at-cost plan was worked out in Phila- 
 delphia, but was disapproved by the Pennsylvania Public Service Commission; 
 and service-at-cost plans worked out for Chicago, Denver and Minneapolis were 
 all rejected by popular vote. Service-at-cost plans have been under discussion 
 recently in many other communities, but no one of these can be of value to us 
 unless for purposes of theoretical discussion. No two service-at-cost contracts 
 are alike, not even excepting those enacted by the same Massachusetts legisla- 
 ture for the benefit of the two big street railway systems of that state. 
 
 Before analyzing particular service-at-cost plans that have been put into 
 operation, we may properly consider what the principal elements of the cost of 
 street railway service are. This is a matter of prime importance, as it is uni- 
 versally agreed that the actual and necessary cost of service under private owner- 
 ship and operation must be paid either by the car riders or by their friends, the 
 taxpayers. The four principal elements entering into the cost of street railway 
 service are: (1) ordinary operating and maintenance expenses; (2) taxes and 
 other public charges; (3) amortization of capital destroyed through operation; 
 and (4) return upon capital invested in the enterprise. 
 
 Operating expenses include mainly wages and salaries, the cost of power, 
 the cost of materials and supplies used in operation and maintenance, compen- 
 sation for personal injuries and damages to property, and miscellaneous general 
 expenses. At first blush it might be thought that the determination of the operat- 
 ing expense of an electric railway is a perfectly simple matter about which there 
 need be no dispute, but this is very far from the truth. There are endless oppor- 
 tunities for differences of opinion with respect to the amount of expenses that 
 are necessary in rendering a given amount of service. Here, questions may be 
 
436 Electric Railway Problem 
 
 raised about the salaries paid to general officers, the wages paid to labor, the 
 price paid for power or for coal and other supplies entering into its production, 
 the waste of power through inefficient use, the waste of labor and power through 
 inefficient schedules and improper routing of cars, and numberless other items 
 of expense with respect to which good policies and bad policies, or good manage- 
 ment and bad management, will bring widely different results. But with respect 
 to itenii; like these, the actual expenses of operation can be readily ascertained 
 with reasonable accuracy. Whether particular items of expense are proper, and. 
 if proper, whether the amount of the expense is excessive, are questions of great 
 importance to those who have to pay the cost of service, but they do not involve 
 doubt or uncertainty as to what the cost of service during a given period actually 
 is. However, there are items that properly form a part of current operating 
 expense which, in many cases, do not appear in the company's statement of the 
 financial results of operation. The two most important items coming within 
 this class are accident liabilities and deferred maintenance. 
 
 Compensation for accidents is clearly a part of the operating expense of the 
 period within which the accidents occur. Yet, it is often a matter of years before 
 the extent of a street railway company's liability for such accidents is finally 
 determined. It will be found that at the close of any fiscal year an electric rail- 
 way company, no matter how well managed, has incurred liabilities of this char- 
 acter which are not yet liquidated; yet, the extent of this undetermined liability 
 depends, in large measure, upon care in operation and efficiency in the settlement 
 of clainis. This is well illustrated by the testimony of Mr. C. J. Joyce, repre- 
 senting Mr. Thomas E. Mitten, of the Philadelphia Rapid Transit Company. 
 In Chapter XXXI of this report I have already cited Mr. Joyce's testimony to 
 the effect that the number of accident suits pending against the Philadelphia 
 Rapid Transit Company was reduced from 4,953 on December 31. 1910, to 2,524 
 on December 31. 191S. It has been the custom with some companies not to 
 charge to the expenses of operation for a given year the undetermined liability 
 for accidents. Where this plan is followed it means that the company is always 
 worse ofT financially than it ap]icars to be ujjon any given date. There is an 
 accunnilated but indefinite and unrecorded amount of operating expense that 
 constitutes a liability against the future. A true service-at-cost plan necessarily 
 includes an accident reserve in order that the compensation for injuries and 
 damages may be properly charged against the cast of the service during the 
 period when the accidents occurred. 
 
 The other nlajor item of operating expense with respect to which a com- 
 pany's operating statement is likely to be misleading is the maintenance. In times 
 when the management is more interested in paying dividends than in the upkeeji 
 of the proiiorty. or in times when it is diflicult to secure labor and materials, or 
 in times when revenues arc too meagre to pay the full cost of operation, a com- 
 pany is likely to permit the accumulation of "omitted" or "deferred" maintenance, 
 and where this occurs it means that the full cost of oiK-ration during a given jierioil 
 is not being paid during that period, but that the operating expenses are in part 
 being postponed, with the result that a double burden of maintenance will fail 
 upon the company during a succeeding period. 
 
Service at Cost 437 
 
 In the cost of maintenance, as distinguished from amortization, is included 
 not only the cost of current repairs, but the cost of those replacements which 
 become necessary from time to time in the ordinary process of keeping the prop- 
 erty in condition for efficient service. Indeed, after an electric railway has gone 
 through what is termed a "complete cycle of renewals," the accruing depreciation 
 of the property is fully offset by current maintenance and renewal expenditures. 
 The cost of service unquestionably includes the wear and tear on the property, 
 but if, at the end of the year, the property, exclusive of additions and better- 
 ments made during the year, is in the same per cent condition of cost new that 
 it was in at the beginning of the year, it is obvious that the entire cost of service, 
 so far as maintenance and depreciation of the old property are concerned, has 
 been taken care of in operating expenses. On account of fluctuations in re- 
 newals and uncertainties with respect to oncoming inadequacy and obsolescence, 
 it is important that there should be included in the cost of service, as a part of 
 operating expense, an extra allowance to build up a reasonable maintenance 
 fund to equalize the renewals that may come along in bunches. 
 
 It will be seen that, with respect to this maintenance item, it is necessary in 
 determining the true cost of service to steer a middle course. Care must be 
 taken to include the full cost of maintaining the property at the highest practi- 
 cable standard of operating efficiency, with a sufficient maintenance reserve to 
 equalize the ups and downs in renewal requirements ; while at the same time 
 care must be taken not to include in the cost of service a separate allowance for 
 ultimate depreciation that in fact is not accruing during the period for which 
 cost of service is being determined. 
 
 With respect to the second principal element in the cost of service, namely, 
 taxes and other public charges, ordinarily there is little reason for trouble in 
 ascertaining what these items actually amount to. Here again there is room for 
 grave ditiferences of opinion as to whether or not particular taxes ought to be 
 levied or particular charges made, but that involves questions of public policy 
 and does not throw doubt upon the actual cost of service so long as the taxes 
 and charges referred to are in fact levied against the electric railways. How- 
 ever, even here, the actual cost of service for a particular period is sometimes in 
 doubt because a company has refused to admit the legality of taxes or other 
 public charges levied against it. Tax litigation often extends over a number of 
 years, and in that case the true cost of service for a particular year cannot be 
 determined until the tax litigation has been settled. The ultimate result may be 
 a decrease in the cost of service if the company wins, and an increase in the cost 
 of service, on account of the expenses of the litigation and accumulated interest 
 charges, if the company loses. It will be seen, therefore, that even if for pur- 
 poses of determining the cost of service in a given year all taxes and public 
 charges levied against the company are presumed to be legal and are provided 
 for from current revenues, nevertheless, if the company loses, the expenses of 
 the unsuccessful litigation will not have been provided for. However, there should 
 be relatively little trouble in assigning to a given period that portion of the taxes 
 and public charges which is properly to be considered a part of the cost of service. 
 
 The next major item in the cost of service is the provision for the amortiza- 
 
438 Electric Railway Problem 
 
 tion of capital destroyed in operation during the period when the service is being 
 rendered. If the capital value of an electric railway, recognized in a service-at- 
 cost plan, represents the original investment in the property less its accrued de- 
 preciation, and if the property has reached a condition of stable equilibrium, the 
 wasting away of the property, as I have already said, will be fully ofYset by current 
 maintenance and renewals, if the proper standard of efficiency is maintained. Addi- 
 tions and extensions, however, will gradually depreciate from a 100 per cent 
 condition at the time when they are installed to a condition approximating the 
 permanent average for the entire property. This depreciation cannot be taken 
 care of by maintenance; nevertheless, it is a part of the cost of service and should 
 be provided for currently. Capital that is destroyed in the public service must 
 be made good to the investors as a part of the cost of that service. As the moneys 
 contributed for amortization cannot be economically expended or used in the 
 maintenance of the property, they should either be returned to the investors and 
 deducted from the capital value upon which a return is to be paid in the future, 
 or else they should be invested in additions and extensions, if needed, without 
 increasing the capital value. In either way the amortization charge, if properly 
 estimated, will truly represent this particular element in the cost of the service. 
 The fourth major element in the cost of electric railway service is the cost 
 of money, or the return 'upon the investment. This is determined by the recog- 
 nized capital value and the allowed rate of return. Here again many oppor- 
 tunities arise for dispute as to the legitimate cost of capital, and also in many 
 cases as to the actual cost of capital. In general, the cost of capital as an ele- 
 ment in the cost of service is the return that the company is legally or eciuitably 
 obligated to pay upon the investment. Here, however, we get into the difficulties 
 that arise from a differentiation between capitalization and valuation. If the 
 capital value upon which a rate of return is to be paid is fixed without relation to 
 the outstanding securities and capital obligations of an electric railway company, 
 it may turn out that the company has to pay more for the use of borrowed capital, 
 or capital held under lease, than the full amount of the fair return recognized 
 as equitably due to the investors considered as a single group. From the point 
 of view of the company, the cost of capital includes its actual fixed charges plus 
 a reasonable return upon the portion, if any, of the investment furnished by its 
 stockholders. In this cost is included provision for the amortization of bond 
 discount and expenses, but a question arises where, under the terms of its mort- 
 gage, a company is required to accumulate a sinking fund for the payment of its 
 bonded debt. It is clear that a fixed charge of this nature is not a legitimate 
 part of the cost of service, because the effect of the accumulation of a sinking 
 fund for the payment of bonds when they fall due is to provide for the ultimate 
 transfer of the bondholders' interest in the property to the stockholders, and if 
 the amortization charges through which this transfer is effectuated are treated 
 as a part of the cost of service and charged up to tiic public in the fares, the result 
 will be that tiie public will pay for the property — or the bondholders' interest in 
 it — and present it to the stockholders. In earlier chapters of this report I have 
 already discussed the valuation and the rate of return, the two factors that go 
 to determine the cost of capital. When ihnsi- f.n-ti)r>; have been definitely fixed. 
 
Service at Cost 439 
 
 there is no further difficulty in ascertaining what the cost of capital amounts to 
 as an element in the cost of service. 
 
 In the foregoing analysis I have included in a broad way all of the elements 
 that go to make up the full cost of service during any given period, but we still 
 have to consider the question of the surplus. As a matter of prudence, it may 
 be advisable, especially in normal times, to add to the cost of service a margin 
 for future contingencies. This is not strictly necessary where the business is 
 well established, and where care is taken to cover all of the actual elements of 
 current costs in the provision for current revenues. A contingent reserve fund 
 is by no means so important under a service-at-cost plan as it is under a plan 
 where a fixed and unchangeable rate of fare is the principal source of electric 
 railway revenues. Nevertheless, it is difficult to make any financial arrangement 
 so flexible that it will respond immediately and completely to fluctuations in the 
 cost of service, and for that reason it may be advantageous to include for prac- 
 tical purposes in our estimate of the cost of service a little leeway for the purpose 
 of stabilizing and equalizing the financial results of successive periods. 
 
 In fact, one of the primary questions to be determined in the application of 
 the service-at-cost theory is the length of the period within which revenues and 
 expenses are to be equalized. In general, it may be said that a car rider, when 
 he drops his fare into the box, pays the full cost of the service rendered to him, 
 and that the electric railway has no other source from which, either before or 
 subsequent to that act, it can derive any additional compensation for the service. 
 But obviously, the person who rides alone in a car out to the end of the line, or 
 with two or three others during the period of low traffic, is not paying the full 
 cost of the service rendered to him, while on the other hand the passengers riding 
 for short distances, or in crowded cars during the rush hours, are paying more 
 than the cost of the service rendered to them. In like manner, the passengers 
 who ride on a stay-at-home Sunday pay less and the passengers who ride on a 
 go-to-town Saturday pay more than the actual cost of the service rendered to 
 them. Also, there are undoubted fluctuations in traffic and in operating expenses 
 between different seasons of the year which affect the cost of the service at par- 
 ticular times, but it hardly seems necessary to bring the cost-of-service theory to 
 so fine a point as to cause fluctuations in the rates of fare on account of seasonal 
 changes, either in traffic or in operating expenses. 
 
 It remains a question as to how far the principle involved in the flexible 
 fare adjusted to the cost of service should be modified by the advantages of 
 stability in the charges for transportation service. Strikes, epidemics, wars, hard 
 winters, hot summers, constitutional amendments, and other unusual occurrences 
 are likely to cause a fluctuation in the cost of service, even where the periods 
 compared are as long as a year. It is necessan,', how-ever, that some definite 
 period shall be adopted as the unit of time within which the revenues are to be 
 made equal to the cost of service, or that some other means shall be devised for 
 securing reasonable stability in rates. 
 
 It will not be practicable to present in this report a complete analysis of all 
 the service-at-cost arrangements that have been put into effect or definitely pro- 
 posed. Perhaps it will be sufficient for our purpose to analyze with some care 
 
440 Electric Railway Problem 
 
 the Cleveland plan, the Montreal plan, the Massachusetts plan, and the Cincin- 
 nati plan as representing distinct types of service at cost, and refer only briefly 
 to the salient features of some of the other plans, insofar as they differ from 
 these and tend to throw light on the fundamental problem with which we are 
 concerned, namely, the potential efificacy of the servicc-at-cost principle in the 
 restoration of electric railway credit. 
 
 Referring now to the Cleveland plan, the first important thing about it is 
 that it was the sequel to a long-continued struggle on the part of the city to 
 secure a 3-cent fare. The following are its most essential features: 
 
 (1) The recognized capital value of the property devoted to public use at 
 the time the contract became effective is fixed and the method is prescribed by 
 which subsequent additions to capital value shall be made. The capital value so 
 fixed is used as the basis for determining the return upon the investment as an 
 element in the cost of service, which in turn determines the rate of fare. The 
 capital value is also used as the basis for determining the purchase price in case 
 the city at some future time concludes to buy the property. If the city takes 
 over the property before the expiration of the franchise, it will have to pay a 
 bonus of 10 per cent upon that portion of the capital value represented at the 
 time by capital stock, but if it waits until the expiration of the franchise to ac- 
 quire the property, the purchase price will be the capital value as it appears at 
 that time, and no more. Also, at the time the Cleveland ])lan was inaugurated, 
 the capitalization of the company was cut down to correspond with the recog- 
 nized capital value, and the plan provides that additions to capital value shall be 
 measured by the par value of the new securities issued or the floating debt in- 
 curred upon terms prescribed in the contract. It is noteworthy also that this 
 capital value has been adopted by the State Tax Commission of Ohio as the 
 valuation of the Cleveland Railway property for purposes of taxation. Thus we 
 see that a fundamental characteristic of the service-at-cost plan as worked out 
 in Cleveland is the establishment of one definite capital value for rate purposes, 
 for public purchase (with the qualification above mentioned), for capitalization 
 and, incidentally, for taxation. 
 
 (2) The compensation of the investors takes the form of a fixed rate of 
 return. For the first ten years of the experiment this rate of return was 6 per 
 cent per annum upon the approved capital stock outstanding at anv given time, 
 plus the actual interest and amortization charges paid on funded debt, not exceed- 
 ing, however, a total effective rate of 6 per cent, and 6 per cent on the floating 
 debt. The plan as originally adopted did not contemplate anv future change 
 in the rate of return upon the company's capital stock, and made no provision 
 for fluctuations in the cost of money, except as such fluctuations could be ab- 
 sorbed through changes in the rate of interest on borrowed money within the 6 
 per cent maximum. As a matter of fact, when the Tayler grant went into effect 
 on March 1, 1910, the recognized capital value was represented by $14,675,600 of 
 capital stock, $8,128,000 of 5 per cent bonds and $1,288,000 of floating debt, mak- 
 ing a total of $24.091,<>00; whereas nine years later, on March 1. 1919, the capital 
 value was represented by $28,720,055 of capital stock and $5,495,000 of 5 per 
 cent bonds, with no floating debt, making a total of $34,215,055. The change in 
 
Service at Cost 441 
 
 the relative amounts of stock and bonds outstanding indicates that under the 
 Cleveland plan the company has found it most advantageous to finance itself by 
 the sale of stock upon which the rate of return fixed in the original grant wsls 6 
 per cent. In 1919, shortly after the franchise had been renewed upon the old 
 terms, the trainmen struck for a large increase in wages. As a concession to the 
 company to induce it to settle the strike, the city authorities consented to enter 
 into an arbitration proceeding with the company to determine whether the fixed 
 rate of interest allowed on the capital stock should be increased from 6 per cent 
 to 7 per cent, and, as I have already fully explained in Chapter XXXIX of this 
 report, the Arbitration Board, by a majority vote, recommended that the con- 
 tract be changed so as to increase the rate to 7 per cent. Thereupon, the city 
 council passed the necessary ordinance amending the franchise, and unless it is 
 ultimately defeated by referendum the rate of return upon the capital stock 
 under the Cleveland plan will hereafter be 7 per cent.^ No change has been made 
 in the provision limiting to 6 per cent the rate of interest on funded or floating 
 debt, including the cost of amortizing bond discount, if any, and, therefore, it 
 will be more than ever to the interest of the Cleveland Railway Company to 
 finance itself through the sale of additional stock. 
 
 (3) The nominal duration of the franchise under the Qeveland plan is 
 25 years, the limit set by the Ohio state law, but the plan contains provisions 
 which offer an extraordinary inducement to the city to renew the franchise at the 
 end of each 10-year period. If it fails to do so, it will lose, during the remain- 
 ing fifteen years of the life of the franchise, the right to initiate extensions and 
 permanent improvements, and will lose the right to control the service under the 
 terms of the contract. Moreover, the company will gain the right, regardless of 
 the actual cost of service, to charge the maximum rate of fare permitted by the 
 contract. These inducements for renewal are so strong that the Board of Arbi- 
 tration in the seven-per-cent-return proceedings recognized "the strong proba- 
 bility that the grant will be renewed and so become practically perpetual." In 
 fact, the grant has already been once renewed. Nevertheless, the city has re- 
 served to itself the right to terminate the franchise at any time upon six months' 
 notice, by taking over the entire property and paying therefor the capital value 
 plus a bonus of 10 per cent on that portion of the capital value not represented 
 by the funded or floating debt assumed by the city at the time of purchase. 
 Moreover, the city also has reserved the right to designate a licensee to take over 
 the Cleveland Railway Company's property upon the same terms upon which the 
 city may take it over, subject to the condition that such licensee shall agree to 
 accept a smaller return upon the portion of capital value represented by capital 
 stock, by at least one-quarter of one per cent, than the return which the Cleve- 
 land Railway Company at the time is entitled to receive or is then willing to 
 accept. In case the franchise is not renewed, the city or its licensee may acquire 
 the property when the franchise expires, without paying the 10 per cent bonus, 
 but the city is under no absolute obligation either to renew the franchise or to 
 acquire the property. The city may not, however, even at the expiration of the 
 franchise, grant a franchise to any other company to operate a railway over the 
 existing lines of the Cleveland Railway Company or any one of them, except upon 
 
442 Electric Railway Problem 
 
 condition that such other company purchase the railway or such portion of it 
 upon the terms prescribed in case of purchase by the city. In practical effect, 
 the Cleveland plan provides the equivalent of an indeterminate franchise, termin- 
 able at any time when the city is ready to take over the entire property, both 
 inside and outside of the city limits, and pay therefor the recognized capital 
 value plus the 10 per cent bonus on the amount of the capital stock then out- 
 standing. 
 
 (4) The Cleveland plan provides that the physical property shall always 
 be maintained at a standard equal to 70 per cent of its reproduction value, and 
 that when replacements are made the full cost of reproducing the identical items 
 of property withdrawn from service shall be paid as a maintenance charge re- 
 gardless of the actual cost of the original items withdrawn. This provision pre- 
 cludes the capitalization, at the time when replacements are made, of the in- 
 creased cost of elements of the property arising from the fact that wages and 
 the prices of materials have increased. This is not in accordance with the rules 
 of accounting prescribed by the Interstate Commerce Commission and by state 
 public service commissions generally. \\'hile the general price level is rising, 
 this rule tends to increase the current cost of service and to keep the capital 
 account below the actual amount of the investment ; on the other hand, when the 
 price level is falling, the opposite effects will be produced where the items of 
 property being withdrawn from service and replaced represent original installa- 
 tions at a higher level of prices. 
 
 Of the original capital value recognized in 1910, between 25 and 30 per 
 cent represented franchise values, unpaid rentals of the Municipal Traction Com- 
 pany, and pavement belonging to the City of Cleveland. Obviously, these items, 
 or at least the first two of them, were not proper items for permanent capitaliza- 
 tion; yet, the plan makes no provision for the amortization of these elements 
 of the capital value. Furthermore, the plan makes no provision for the amor- 
 tization of the permanent depreciation accruing on additions and extensions in- 
 stalled subsequent to the date of the grant, and ultimately representing the dif- 
 ference between the cost new of such additions and extensions and the 70 per 
 cent condition in which the property as a whole is to be maintained. This means 
 that an ultimate depreciation approximating 30 per cent on all new investment 
 is not directly provided for as a part of the cost of service under the Cleveland 
 plan. The amount to be expended from month to month on maintenance and 
 renewals is limited to a certain allowance per car mile. This allowance is sub- 
 ject to increase or decrease from time to time by agreement between the city and 
 the company, or, in the event of disagreement, by arbitration. 
 
 (5) Operating expenses, other than maintenance, are limited under the 
 plan to a fixed allowance per car mile, but this allowance may be changed from 
 time to time by agreement or by arbitration. No provision is made for an acci- 
 dent reserve, and the deferred liability of the Cleveland Railway Company on 
 account of unliquidated personal injury claims is not counted in the cost of 
 sen-ice for the period within which the accidents occur. This has the effect 
 of keeping the Cleveland Railway Company constantly behind to the extent of 
 this accumulated accident liability. It docs not necessarily result in a lower cost 
 
Service at Cost 443 
 
 of service or a lower rate of fare in any given year, as the deferred liabilities 
 from preceding years that are liquidated during a given year may fully offset the 
 liabilities for that year which are deferred to succeeding years. 
 
 (6) Under the Cleveland plan, the street railway property is taxed the 
 same as any other private property, and the company is required to keep the 
 pavements in repair between the rails and the tracks and to a distance of one 
 foot on the outside of the outer rail. The company is not required to repave or 
 to sprinkle the streets or keep them clear of ice and snow, or to pay bridge 
 rentals, or car license fees or local franchise taxes. It is not required to bear 
 the expense of moving its structures to get out of the way of public improvements. 
 In Chapter XXX of this report, I have already described the taxes and street 
 expenses incurred by the Cleveland company in 1918. In brief, the service-at- 
 cost plan, as worked out in Cleveland, is intended to free the car riders from 
 carrying any burdens that are not regarded as a legitimate part of the cost of 
 transportation. 
 
 (7) On the basis of the recognized capital value and of the various ele- 
 ments going to make up the cost of service as above outlined, the Cleveland plan 
 provides that the street railway system shall be self-sustaining through the appli- 
 cation of a flexible fare schedule between certain prescribed minimum and maxi- 
 mum limits. Originally, the maximum fare that could be charged under the 
 franchise was 4 cents cash and 7 tickets for 25 cents, with a penny for a transfer. 
 Under the stress of war conditions the franchise was amended so as to provide 
 as the maximum possible fare 6 cents cash and 9 tickets for 50 cents, with a 
 penny for a transfer. The minimum fare remains as provided in the original 
 plan, namely, 2 cents cash, with a penny for a transfer and a penny rebate upon 
 the taking up of the transfer. Including these extremes, the Cleveland ordinance 
 as amended prescribes 15 separate fare schediiles which constitute a sliding scale 
 that is automatically applied as the cost of service fluctuates from time to time. 
 As a part of this automatic device, the plan provides for a special fund called 
 the "interest fund," the amount of which was fixed at $500,000 when the contract 
 first went into effect in 1910. Into this fund are paid all of the earnings of the 
 company in excess of the allowances for operation and maintenance, and out of 
 the fund are paid the fixed return upon the capital value, taxes, and miscellaneous 
 charges. As an accounting matter the fund is maintained on an accrual basis. 
 Whenever the fund rises above $700,000. that fact is a signal for a reduction of 
 the fare to the schedule next below the schedule then in force, and whenever 
 the fund sinks below $300,000 that is a signal for an increase in the fare. The 
 scheme for the adjustment of fares is not entirely inflexible, however, for if 
 either the company or the city is of the opinion that the fare should be otherwise 
 than as indicated by the amount in the interest fund, a different adjustment may 
 be effected by agreement between the city and the company, or if they cannot 
 agree, then by arbitration. But in any case, the rate fixed by arbitration may not 
 exceed the maximum rate stipulated in the franchise. 
 
 (8) Under the Cleveland plan public supervision is exercised through a 
 city street railroad commissioner appointed by the mayor with the approval of 
 the city council, and subject to removal at any time by the mayor. The com- 
 
444 Electric Railway Problem 
 
 missioner acts as the technical adviser of the council in all matters affecting the 
 interpretation or application of the contract, and in all action under the terms 
 of the contract affecting the quantity, the quality or the cost of service, or the 
 rate of fare. In general, the city has the right to require extensions and to con- 
 trol the service, subject to the limitation that the company shall not be prevented 
 by any city requirement with respect to service or extensions from earning the 
 stipulated return upon its capital value, and in case of dispute as to the probable 
 effect of a particular requirement the matter shall be determined by arbitration. 
 
 Under the Cleveland plan a great many different matters affecting the in- 
 terpretation and application of the contract must be submitted to arbitration 
 upon the demand of either the city or the company. Arbitration, therefore, be- 
 comes a very important feature of the plan, and the arbitration provisions of 
 the contract are worked out with unusual care. The parly demanding an arbitra- 
 tion must name its representative and give notice to the other party of the ques- 
 tion upon which arbitration is demanded. Within ten days the other party must 
 name its representative, and the two so selected shall, within ten days, select a 
 third arbitrator, but in case the two are unable to agree within the time specified, 
 then the third arbitrator, upon the application of either party, is to be appointed 
 by the United States District Court judge for the district comprising the city of 
 Cleveland. However, the party applying to the judge for the appointment of the 
 third arbitrator must give five days' notice to the other party and must fomiulate 
 the questions to be determined by the board of arbitration. Before making a 
 final appointment, the judge is required to give three days' notice to both the 
 city and the company of the person or persons being considered by him for the 
 appointment, and either the city or the company may, within this period of three 
 days, present objections to any person or persons under consideration. The 
 board of arbitration is required to decide upon the question submitted to it within 
 30 days after the appointment of the third arbitrator, unless the board itself is 
 unanimous in agreeing to an extension of time. The expenses of a board of 
 arbitration, and the expenses of the city street railroad commissioner in his work 
 of supervision over the company, are paid by the company and included in the 
 cost of ser\'ice. It is noteworthy that the Cleveland plan takes no cognizance 
 whatever of state comnu'ssion control. The actual jurisdiction of the Ohio Pub- 
 ilc Utilities Commission is limited, for practical purposes, to matters of capitali- 
 zation, and apparently, in view of the detailed control exercised by the city over 
 accounts and capital expenditures, the actual control of the state conunission even 
 in this field is little more than perfunctory. 
 
 (9) The Cleveland Railway system is not confined to the corporate limits 
 of the City of Cleveland, but serves suburban municipalities having a consider- 
 able population. Nevertheless, the service-at-cost contract is in the form of an 
 agreement between the railway company and the city. Indeed, the city's option 
 to purchase the property at any time prior to the expiration of the franchise is 
 conditioned upon its ac(|uiring the entire system, botli inside and outside of the 
 city limits. If the franchise is permitted to expire and the city at that time is 
 without authority to take over the suburban lines, it may then acquire that 
 portion of tlie system lying within the city limits and may require the company 
 
Service at Cost 445 
 
 at the same time to convey to a licensee designated by the city the remainder of 
 the system. The Qeveland franchise, however, does not supersede the com- 
 pany's contracts with the suburban municipalities, but the cost of suburban ex- 
 tensions and betterments is not to be included in capital value without the city's 
 consent. As the municipality of East Cleveland is now surrounded on three 
 sides by the City of Cleveland, the renewal of the Cleveland contract in effect in 
 1919 prescribes the rates of fare between points in the City of Qeveland and 
 points in the City of East Cleveland, but otherwise the contract does not attempt 
 to fix the schedule of fares to be charged by the company beyond the limits of 
 the City of Cleveland. Thus it will be seen that in Cleveland the service-at-cost 
 plan has been worked out on the basis of an arrangement between the central 
 municipality and the operating company and, as Secretary Baker testified, no 
 trouble has been experienced by reason of lack of cooperation between the city 
 and the suburban communities. 
 
 The entire Cleveland plan is based upon the theory of cooperation between 
 the company and the local authorities of the central municipality, and of the 
 settlement of their differences by arbitration rather than by an appeal to a higher 
 public authority such as a state commission or a court. The company's return 
 upon its investment is definitely fixed and limited. As the board of arbitration 
 in the seven-per-cent-return proceeding stated : 
 
 "The City does not guarantee the stock, * * * * [,ut the franchise does protect 
 the stock in a way equivalent in effect to a guaranty." 
 
 Under the Cleveland plan the public has control of service so long as it can be 
 shown that the maximum rate of fare authorized by the contract will pay the cost 
 of the service demanded. The city also has an absolute check upon expenditures 
 for maintenance and renewals, and a general check upon capital expenditures. 
 It has indirect control of operating expenses through the car mile allowance for 
 operation subject, however, to the company's right of appeal to arbitration. 
 
 It is under this franchise that the Cleveland Railway Company went through 
 the war "on easy street" and does not know "what a banker is" in its business, 
 to use Mr. John J. Stanley's words. At the same time, Cleveland offers the 
 spectacle of a great city in which it has been at no time necessary, even during 
 the war period, to raise the fare above 5 cents cash, with a penny for a transfer.^ 
 This rate went into effect August 4, 1918, but remained in effect for only 11 
 months. On July 5, 1919, the next lower rate provided by the ordinance which 
 includes tickets at the rate of 11 for 50 cents, became effective, and on December 
 16. 1919, a further reduction of the fare took place through the sale of tickets at 
 the rate of 6 for 25 cents. In May, 1920, following an increase in wages, the 
 tickets were again abolished. The 5-cent cash fare and the penny transfer 
 charge remain. Meanwhile, from June 1, 1919, to the close of the year, the 
 wages of trainmen were 55 cents per hour for the first three months of employ- 
 ment, 58 cents for the next nine months, and 60 cents thereafter; the operating 
 expense allowance was 23 cents per car mile for the entire period, and the main- 
 tenance allowance 10 cents per car mile from June to October, 9 cents per car 
 mile in November, and 8 cents per car mile in December. It is worthy of note 
 that from March 1, 1910, when the service-at-cost plan became effective, to 
 
4-46 Electric Railway Problem 
 
 December 31, 1919, the fares changed nine times; the wages of trainmen changed 
 six times ; the operating-expense allowance changed nine times ; and the main- 
 tenance-expense allowance changed twice. From March 1, 1910, to December 
 14, 1917, a period of nearly seven years, the fare was three cents cash, with a 
 penny transfer. Part of the time the transfer charge was rebated as the trans- 
 fers were taken up, and part of the time there was no rebate. 
 
 Secretary Baker, who as one of Tom L. Johnson's trusted lieutenants went 
 through the long struggle that led up to the Cleveland settlement, and who was 
 mayor of Cleveland for four years after the contract went into effect, described 
 to the Commission at some length the origin and principal characteristics of the 
 plan. At pages 1003 and 1004 of the Proceedings, Mr. Baker makes the follow- 
 ing general comments upon it: 
 
 "There are two or three comments to be made about it. In the first place, it was a 
 popular settlement, in the sense that the people of Cleveland understood it. 1 do not think 
 it is possible for me to emphasize too strongly, so far as the expression of my own belief is 
 concerned, the feeling that no street railroad settlement can be a successful one which is not 
 understood in its details and approved by the people. It is one of the most intimate of their 
 services, and they resent and distrust and suspect the management unless they understand. 
 
 "The whole theory of the Cleveland settlement was. first, that the people understood all 
 that had gone on in the past, and all that was proposed to be done, and had a continuous 
 means of information as to the state of affairs, !)y the inspection of the city street railroad 
 commissioner's books and the publication at short intervals of reports from him. 
 
 "The city street railroad commissioner in Cleveland every month prints in the public 
 newspapers the state of the interest fund, so that people can sec whether it is going up or 
 whether it is going down ; whether there is soon going to be a change of fare up or down ; 
 and when the change comes, there is never the slightest question about it. The people have 
 known, in advance, that they were approaching the period where the fare would go up or 
 would go down, and it is accepted without the slightest hesitation or objection. 
 
 "The great thing accomplished, therefore, in the Cleveland settlement, was that it was 
 accomplished with the intelligent and detailed comprehension and undertaking of the people 
 of the city and the subsequent working of the ordinance has always been relatively easy 
 because of the fullness of the disclosures made and the completeness of the information the 
 public have on the subject. 
 
 "Perhaps the most striking defect in the ordinance is the thing you would rather have 
 me point out than anything else, and that is the lack of stimulus to the operators to operate 
 economically." 
 
 It is generally admitted that the valuation is the fundamental thing to be 
 determined at the very threshold of service at cost. The relatively low valuation 
 arrived at in Cleveland is in part responsible for the comparativelv low cost of 
 service there ; yet it may not be amiss to take judicial notice of the fact that 
 Mr. Peter Witt, another of Tom Johnson's lieutenants, and later on the city 
 street railroad commissioner through Mayor Baker's two administrations, has 
 recently been stating publicly that tlie reduction in the Cleveland Railway's cap- 
 italization had very little to do with the low fares. He points out that the in- 
 terest on $10,000,000 would add only one-fifth of a cent to the average fare in 
 Cleveland on the basis of the present traftic. It is agreed, however, that the 
 success of the Cleveland plan has resulted from the spirit of cooperation iriani- 
 fested by the public. The public belief that the capital value fixed in the con- 
 tract was a fair measure of the true investment was undoubtedly an essential 
 condition upon which the public good will was founded. This is made doubly 
 clear by .Secretary Baker's testimony at pages 1000 and 1010 of the Proceedings, 
 where he describes bow the Cleveland valuation was made: 
 
 "The Chairman : Then is the first fundamental proposition in all street car questions 
 that wc must know what the true value of the property is? 
 
Service at Cost 447 
 
 "Secretary Baker: Absolutely. Absolutely and fundamentally. 
 
 "The Chairman : That precludes overcapitalization, and inspires confidence by the public 
 in the integrity of the plan ? 
 
 "Secretary Baker : Exactly. 
 
 "The Chairman : Was that valuation in Cleveland made by the state or by experts 
 selected by the city as well as the company? 
 
 "Secretary Baker : It was made by experts selected by the city and the company, and 
 they worked in pairs. The city had a track man and the railroad had a track man. The 
 city had a car man and the railroad had a car man, and so on, with the power house men, 
 etc.; and they worked in pairs. Whenever they agreed, their agreement was reported to Mr. 
 Gofi and Mr. Johnson, and I do not recall a single instance in which they rejected an 
 agreement of the two valuers. Where there was di.sagreement, Mr. Goff and Mr. Johnson 
 settled the disagreement in a public hearing. 
 
 "The Chairman: Do you think that method of valuation is as satisfactory as to have 
 it done by a state commission? 
 
 "Secretary Baker : That is two questions in one. There are some state commissions 
 that would do it ver>' well, and there are some state commissions that would do it very badly, 
 and there are some that would never get done. I made a calculation as to how long it 
 would take the state commission of the State of (!)hio to reach a case involving an electric 
 light controversy which I had sent down there, and it was something like 140 years before 
 they could get to it. 
 
 "The Chairman: But if the state commissions had their organizations so perfected that 
 they could expeditiously value the physical property of the street car company, do you think 
 it would be preferable, or 
 
 "Secretary Baker : I do not think it would be nearly so good as the system we have. 
 
 "The Chairman: Why? 
 
 "Secretarj' Baker : As I said a moment ago, the street railroad is the most intimate 
 service the people have in a city. I think it is so intimate that they regard it as their own, 
 as distinguished from any state interests. I am inclined to think that there is a strong likeli- 
 hood that a greater degree of confidence is inspired when the city itself does it than when 
 the state does it. 
 
 "The Chairman : Do you feel that the value that was established in Cleveland is fairly 
 representative of the true value of the property? 
 
 ******** 
 
 "Secretary Baker : Very accurately ; very closely. As a matter of fact, there are two or 
 three items of half a dozen million dollars in there which should never have been put in there, 
 in my judgment; but those are differences of opinion. For instance, Judge Tayler * * * * 
 allowed the value of some paving which the company had done in return for the grants which 
 were given it. I do not believe paving was ever an investment value of a street railroad in 
 Ohio. I think it was a concession made to the public for the grant, but I do not think it was 
 a capital investment or should ever have been so regarded. 
 
 "The Chairman : Does the valuation by the municipality in that way present the oppor- 
 tunity for municipal corruption? 
 
 "Secretary Baker: In the valuation? 
 
 "The Chairman: Yes; the company has something to sell the city, really, and it is 
 interested in having the value upon as high a basis as it can get it? 
 
 "Secretary Baker : Oh, yes. It does present it ; but it presents it no more than it does 
 when the valuation is to be made by a state commission. 
 
 "The Chairman: Have you ever heard of any state commission that was subject to an 
 influence of that kind? 
 
 "Secretary Baker : I never have heard of it ; but they are all human beings, they are 
 all men. If a company were to start out to corrupt a judge who was judging its property, 
 it would not. in my opinion, make very much difference whether he was a state or a 
 municipal officer. That work can only succeed when it is done by men of the highest char- 
 acter and capacity, of course." 
 
 With respect to the provision of the Cleveland plan by which the full repro- 
 duction cost of replacements is charged to maintenance, Mr. Baker says at page 
 1004 of the Proceedings : 
 
 "We were a little too hopeful about that ordinance in one aspect. We believed that the 
 replacements could come out of the maintenance fund, and we did not make a sufficient 
 apportionment of the replacement cost to capital account. Our effort was to keep the capital 
 account down. 
 
 "I can illustrate what I mean by taking a single instance: If the company wanted to 
 relay the rail on Woodland Avenue, let us assume that the rail was ten years old, and that 
 at the time of the settlement its life was only a prospective three years more. Plainly, cor- 
 rectly, when that rail was relaid the three years of lifetime left it at the time of the settle- 
 ment should have been paid out of maintenance, but the nine years of expired life in that rail 
 
448 Electric Railway Problem 
 
 ought to have been paid out of new capital, lx:cause it was valued on the basis of its de- 
 preciated condition ; and there ought to liave been an addition of new capital in the new rail 
 to the extent of nine to three. \Ve did not do that. And, as a consequence, the maintenance 
 fund of the company was constantly being called upon to bear altogether too high a contribution 
 for replacements of property which was nearly worn out at the time of the settlement, and 
 which rapidly wore out when it was in use under the settlement." 
 
 In the testimony just quoted, Mr. Baker apparently confuses two issues that 
 are involved in the Cleveland replacement rule. It surely is perfectly proper, 
 and indeed necessary if a gradual inflation of the capital account is to be avoided, 
 that replacements should be charj^ed to maintenance to the full amount of their 
 cost new as carried in the original appraisal upon which the capital account was 
 based. It is only by the continuous process of substituting new items of property 
 for worn-out items as they are withdrawn from service that the average condi- 
 tion of the property as a whole can be maintained at the normal level for effi- 
 cient operation, which in Cleveland is fixed at 70 per cent of "reproduction 
 value." The items going to make up the depreciable property are all of the time 
 wearing out or becoming inadequate or obsolete at varying rates. When the 
 particular rail, to which Mr. Baker refers, that stood at 25 per cent condition in 
 the original appraisal is replaced out of the maintenance fund by new rail at 
 100 per cent condition, this does not mean an increase in the value of the prop- 
 erty as a whole, because other rail that stood at 100 per cent condition and 75 
 per cent condition and 50 per cent condition has in the meantime gone down 
 25 points, but is not yet ready for replacement because it is not entirely worn out. 
 On the average, the new value injected into the property by replacements merely 
 offsets the wear and tear on elements of the property not yet ready to be replaced. 
 It is one of the merits of the Cleveland franchise, as contrasted with the Chicago 
 settlement franchises of 1907, that the former by the very provision which Mr. 
 Baker criticises prevents the gradual deterioration of the property as compared 
 with its recognized capital value, while in Cliicago where replacements are 
 charged to maintenance only to the extent of the depreciated value of the items 
 replaced as set forth in the original appraisal, the process of "watering" the 
 capital value is going on all the time by putting back into it the equivalent of the 
 accrued depreciation that was originally taken out. The real trouble with the 
 Cleveland replacement provision is that it charges to luaintenance the full present 
 cost of reproducing the worn-out article, even though this may be double or 
 treble the original cost new of the article. Thus, the Cleveland replacement pro- 
 vision prevents the gradual readjustment of the capital account to the higher 
 price level now prevailing, and puts upon the farepayers as a part of the current 
 cost of ser\'ice the burden of substituting high-priced materials and labor for 
 low-priced materials and labor in the construction account. Some considera- 
 tions of prudence and conservatism may be advanced in favor of this rule, es- 
 pecially where something is needed to offset neglect of amortization of dead 
 capital and accruing depreciation on new jiroperty under other provisions of the 
 plan, but standing by itself and judged from the accounting standpoint the 
 rule is undoubtedly indefensible. 
 
 It will be recalled that Mr. Baker referred to "the lack of stimulus to the 
 operators to operate economically" as the most striking defect of the Oeveland 
 ordinance. In elaborating this point at page 1005 of the Proceedings, he says: 
 
Service at Cost 449 
 
 "We faced, at the outset, the problem of the complete control of the service and of the 
 property in the interest of the public, which you see is reserved in this ordinance, because the 
 company can practically do nothing without the consent of the council ; and the alternative 
 plan, which we knew as the Boston gas plan, of an increasing return on the capital invested 
 as an inducement to economical operation. 
 
 "We all put our heads to it, and we all tried to find some way to combine those two 
 things ; but it seemed illogical, when the city had complete control of operation and there 
 was nothing left for stimulus to the management to do. So we put in a flat rate of return 
 on the capital at 6 per cent. 
 
 "I think that was a mistake. I think there ought to have been a provision that the com- 
 pany should have b'/y per cent as long as it continued to make enough money to operate a 
 3-cent fare fiat, and that it should lose a half of 1 per cent upon its capital return when it 
 had to charge an extra cent for a transfer, and that it should lose another quarter of a per 
 cent when it had to go to the next higher, and that its rate of return should be based upon 
 the fare which they were able to maintain. If there had been that inducement to the 
 management to thrift and providence and economy, I think it would have been a better plan." 
 
 Still, Mr. Baker is b\- no means sure of the results that would follow from 
 the adoption of his sliding scale suggestion, as is shown by his further testimony 
 at pages 1014 and 1015 of the Proceedings: 
 
 "The Chairman : You have discussed the question of efficiency of service under your 
 plan, and you admitted that there was one defect in your contract? 
 
 "Secretan.- Baker : I think there are a good many. That is the chief one. 
 
 "The Chairman: That was the chief defect? 
 
 "Secretary Baker: Yes. 
 
 "The Chairman : Do you believe that would be taken care of entirely by the provision 
 which you suggested, of having a reduced return on capital as the rate of fare goes up? 
 
 "Secretary Baker : I am not sure. We thought about that a verj' great deal, and found 
 it so difficult a problem that we left it unsolved, as you see. 
 
 "The Chairman : I can see where that might operate very eflfectively upon the owner 
 of the stock, and perhaps the officers of the corporation, but how is that going to influence, 
 at all, the conduct of the employes? 
 
 "Secretary Baker : I do not know that it can, unless it stimulates in the management 
 a cooperative spirit which will find its response in the operator. 
 
 "The Chairman: So that it must work from the top dov\'n? 
 
 "Secretary Baker: I should think so. 
 
 "The Chairman : Is there any way that you can W'ork out a plan by which you can 
 get the real initiative and efficiency throughout the whole personnel of the company? 
 
 "Secretarj- Baker : I have no plan in my mind." 
 
 Mr. Baker is strongly of the opinion that the street car question must be 
 settled locally, on the basis of complete cooperation between the city and the 
 company and complete public knowledge of all the facts. At page 1011 of the 
 Proceedings, we find the following question and answer : 
 
 "The Chairman : From your study of the street railway question, do you feel that the 
 Cleveland plan could be safely adopted in many of the communities of the country? 
 
 "Secretary Baker : In such communities of the country as were ready to study it and 
 understand it and grve it their real approval, it would be a very great advantage; but any 
 momentary fascination with the Cleveland plan which led to its adoption without a funda- 
 mental appreciation of it and determination to stand by it and see it work would, of course, 
 be inadvisable." 
 
 Further along, in response to questions by Commissioner Sweet, Mr. Baker 
 describes in some detail the picturesque background of popular education that 
 made the Cleveland settlement possible. At pages 1016 to 1018, we get the story: 
 
 "Commissioner Sweet ; * * * * Can you not suggest some way, as the result of 
 your interest and study of this subject in Cleveland, by which the cities in general could be 
 helped in solving this problem? 
 
 "Secretary Baker : Well, so far as my own experience is concerned, Mr. Sweet, I think 
 that the only solution that will be permanently helpful will be one which the cities will work 
 out with the companies themselves. 
 
 "If I were asked to advise Philadelphia or Pittsburgh or Chicago or New York or any 
 other city about the solution of its street railroad problem, I would say, 'Get the Council and 
 
450 Electric Railway Problem 
 
 the Board of EHrectors in the same room, with all the tacts and all the figures, and let every- 
 body in the community understand what they are.' I believe that any community in .\raerica 
 will pay cheerfully and willingly whatever rate of fare is necessary to carry people on their 
 street railroads and to maintain good service in their communities, if they are sure that they 
 are paying only proper operating expenses, proper maintenance and a proper return on 
 capital. As soon as they are sure of that, I believe that any community in America will pay 
 whatever rate of fare is necessary. 
 
 "Commissioner Sweet: You lay great stress upon the education of the people? 
 
 "Secretary Baker: Undoubtedly, sir. * • * * Mr. Frank Walsh, of Kansas City, 
 came to see me once when 1 was City Solicitor of Cleveland, and said that Mr. Johnson had 
 sent him to me to learn something about our Cleveland street railroad situation. 
 
 "I said to him: '1 am going to court at this moment, and 1 cannot see you until I get 
 back; but if. in the meantime, you will go down to the Public S(|uare and pick out the most 
 unlikely looking citizen on a liench there, and ask him about it, and then come back to me 
 after that, 1 will tell you what he has not told you." 
 
 "When I got back from court. Mr. Walsh came in and said: "I don't think there is 
 anything you can add to what he has told me. I picked up a fellow with a broken hat and 
 worn-out looking shoes and of a generally unpromising aspect, and asked him about the 
 Cleveland street railroad situation, and he told me its history from the beginning until now. 
 I even know the nicknames by which the officers of the companies are called.' 
 
 "He said that he thought I could add nothing to the information that had been given 
 to him; that that man was able to discuss even the legal questions, and what the courts had 
 decided in the fifty-one injunction suits. 
 
 "Commissioner Sweet : That was simply because, starting in a fight that interested the 
 people, and progressing along with referendum votes that the people had to express them- 
 selves on. and the various steps, the people had become thoroughly familiar with all angles 
 of the subject? 
 
 "Secretary Baker: Yes. Mr. Johnson had a circus tent — two of them, in fact — and he 
 used to take this tent around over the city and put it on vacant lots, and Peter Witt, who is 
 now a street railroad expert, had to make a speech about forty minutes long on the general 
 problem of street railroads, and then, as city solicitor. 1 spoke generally about an hour, dis- 
 cussing the legal aspects of it, and the latest decisions of the courts, as to why the courts 
 decided it that way, and what our adversaries said and what we said on the legal questions, 
 and then Mr. Johnson would end with about thirty minutes answering questions from anybody 
 on any subject — whether on the subject of street railroads, or not ; any question that anybody 
 wanted to ask him. 
 
 "That went on for weeks and months and years, and as a consequence cvcr>hody in 
 Cleveland went, and became familiar with these matters. The women went with their baby 
 coaches, and pushed them up in the vacant space in front of the platform, and left the babies 
 there while they sat back and asked Tom questions." 
 
 In connection with the get-together policy recommended by Secretary Baker, 
 attention should be called to the fact that in Cleveland when the o]>posing forces 
 did finally get togctlier it was not found necessary to wipe out more than 45 
 per cent of the common stock of the street railway company. In many cities, 
 there can be no doubt whatever that a conservative valuation on the basis arrived 
 at in Cleveland would wipe out all the common stock, and i)erhaps even make a 
 deep cut into preferred stock and bonds. Where such a condition prevails, it 
 is obviously impossible for tiie city and the company to "get together" except 
 through a receiver or after a complete reorganization. This has an important 
 bearing ui)on the ability of other communities to follow Secretary Baker's advice. 
 .\nother question as to the potential eHicacy of the Cleveland plan is raised in 
 connection with the still increasing cost of sen'ice, particularly with respect to 
 wages, that has already boosted the fares in Cleveland beyond the upper limits 
 contemplated when the ordinance was originally drafted, and that in the future, 
 particularly if wages keep on going up. may drive the fares even beyond the 
 limits now prescribed in the Cleveland ordinance as amended to meet war con- 
 ditions. Secretary Baker's optimism is not great enough to cover, without mis- 
 givings, an increase in the unit fare above five cents, as will appear from his 
 testimony at pages 1024 and 1025 of the Proceedings: 
 
Service at Cost 451 
 
 "Commissioner Sweet: Do you think that if other cities had gone through the same 
 process ot education and the public felt the same way about it and had adopted the same 
 plan, you would get the same results in other cities ? 
 
 "Secretary Baker: I should think so, Mr. Sweet. It just occurs to me, take the Cleve- 
 land situation. As the price of wages went up and of materials, the rate went up in Cleveland 
 so that there was a constant attempt on the part of the rate to assimiliate itself to the needs 
 of the company. They finally got to the place where the ma.ximum rate permissible under the 
 ordinance was not enough and they went to the Council and told them so and the Council 
 said, 'We realize that on the figures you have presented,' and they authorized a higher rate 
 temporarily than the ordinance permitted. In other cities they had adjusted their operations 
 to a fi.xed rate of fare and could not get anywhere at all as the increase went on in their 
 operating expenses, and their catastrophies and calamities have been precipitated until they all 
 came at one time, while Cleveland simply had the little hump at the top of the hill where it 
 had to pass over, where its highest rate of fare would not pay operating expenses. 
 
 "Commissioner Sweet: If it should be necessary in the course of the ne.xt year or so — 
 we do not know what is ahead of us — to go higher and higher, would you from your knowl- 
 edge of the situation in Cleveland and the balance of the country judge that the point of 
 highest revenue would be at a higher point of fare in Cleveland? In other words, that the 
 people of the community would be satisfied with paying a higher fare if it was necessary to 
 do so w'ithout any resentment such as is felt in an ordinary community? 
 
 "Secretary Baker : They are perfectly satisfied, they will pay whatever is necessary to 
 carrv- them where they want to go, because they know they are only paying a stipulated 
 return and stipulated wages. But I do not believe personally that a rate of fare higher than 
 5 cents is economically justifiable: that is, I do not think it is the point of maximum return 
 if you charge anything more than 5 cents. When people have to break a 10-cent piece to pay 
 the fare they move to a place nearer their work so they will not have to pay it." 
 
 With respect to any essential differences between the Cleveland plan and 
 municipal ownership, Mr. Baker's opinion is found at pages 1010 and 1011 of 
 the Proceedings : 
 
 "The Chairman : What is the real difiference between the Cleveland plan and municipal 
 ownership and operation ? I understand what the technical difiference is, but in its broad 
 aspect as to service and efficiency and rates, what is the difference? 
 
 "Secretary Baker : I do not think there is any very substantial difiference. I think that 
 all of the operating advantages of municipal ownership are gotten by that plan. 
 
 "Mr. Warren : There is no recourse to the ta.x levy, is there ? 
 
 "Secretary Baker : None. 
 
 ******** 
 
 "If there is a deficiency of earnings, there is no way to make tlie_ tax payers pay it. 
 "Commissioner Sweet: And under municipal ownership there would be? 
 "Secretary Baker : Undoubtedly." 
 
 And so it appears that in Secretary Baker's opinion the Cleveland plan gives 
 to the riding public all the advantages of municipal ownership and operation 
 but leaves the investors without the recourse to the tax levy which, under muni- 
 cipal ownership, would be possible as an ultimate guaranty that interest charges 
 will be paid; apparently, Mr. Baker does not believe in subsidizing the car riders 
 under any plan of operation, as will appear from his testimony at page 1027 of 
 the Proceedings : 
 
 "Commissioner Meeker: You think under certain circumstances it would be justifiable 
 to support the street railways through taxation 
 
 "Secretary Baker : No, I do not think so. 
 
 "Commissioner Meeker: If they cannot earn sufficient revenue to pay the current wages 
 and the price of materials and a reasonable return upon the capital investment you would 
 have the lines discontinued? 
 
 "Secretary Baker : Yes. 
 
 "Commissioner Meeker : You would apply that to Boston with 
 
 "Secretan,- Baker : I would apply it anywhere. 
 
 "Commissioner Meeker : With ruthlessness ? 
 
 "Secretary Baker : I do not believe in taxing the people of Boston to let some people 
 ride on street cars. People who get the service from the street cars pay for the service they 
 get. and if there are not enough of them who want the service to justify its continuance, it 
 ought to be discontinued." 
 
452 Electric Railway Problem 
 
 The present City Street Railroad Commissioner of Cleveland. Mr. Fielder 
 Sanders, gave the Commission the benefit of the conclusions reached by him as a 
 result of his experience in the administration of the Cleveland contract. At 
 page 1458 of the Proceedings, he says : 
 
 "The plan has undoubtedly, in my judgment, been a success from the company stand- 
 point. I think that is undisputed. The stockholders are amply protected. They have secured 
 their 6 per cent dividends, when the company was losing money in 1917 and 1918. The fran- 
 chise is practically, so far as the constitution of Ohio allows, a flat guaranty." 
 
 He expresses the opinion that the property has been built up under the 
 service-at-cost contract until it is "the finest surface line in the country." At page 
 1458, he describes the advantages which the public has derived from the plan : 
 
 "It has been. I will be frank to say, very largely a success from the public standpoint. 
 
 "In the first place, building up this very fine property has been a good thing for the car 
 riders, because the finer the property the better the equipment, the better the cars, the faster 
 tlie service, and so forth, the more satisfied the people arc. naturally. 
 
 "The service has been good. It has l)cen criticised in spots, but generally speaking the 
 Cleveland service is considered to be very Kt)od. 
 
 "The fare has been uniformly low. There is no question about that." 
 
 Mr. Sanders ascribes the success of the plan to the comparatively low valua- 
 tion, to the company's exemption from extraordinary taxes and miscellaneous 
 public charijes. to the development of the latest ideas in operation ; the favorable 
 topographical conditions that obtain in Cleveland ; the relative shortness of the 
 average ride ; and more than everything else, to the confidence of the public in 
 the operation. At pages 1459 and 1460 of the Proceedings, he says : 
 
 "I think that the real secret of the success of the plan is that it has the support of the 
 people. Everybody turns in in Cleveland and helps to operate this railroad. There is not 
 any knocking, there is not any criticism, there is not any holding tack by the people. They 
 ride on the cars and pay their fares cheerfully Ix-cause tliey think, as I say. that this line is 
 not only operated at cost but a large numl>er hi them think it is operated by the city." 
 
 Mr. Sanders points out two serious disadvantages of the plan which have 
 developed in recent years, namely, the city's inadequate control over extensions 
 and the city's lack of authority to deal directly with the labor problem. He de- 
 scribes the.se difiicultics at pages I4()0 and 1461 of the Proceedings, as follows: 
 
 "The disad\-antages are two. In the last two or three years there have been two glaring 
 things happened to this franchise which are disadvantages. One of them is what happens 
 to all private operation and ownership, namely, a reluctance to extend the lines, in other 
 words, a closeness of figuring in building new extensions. That fact obtains under the Cleve- 
 land grant almost as strongly as it does under purely private ownership and operation without 
 any public control. 
 
 "The Chairman : Why should that reluctance exist, when the capital is guaranteed in 
 its return? 
 
 "Mr. Sanders : I'or this reason : The franchise provides that the city may not require 
 any extensions to be built which will im|)air their security, which will impair their ability 
 to earn 6 per cent. .\nd in the last two years, not quite so much now .is it was in the last 
 two years, but in the last two years they have refused to build extension after extension 
 because of the fact that they were not quite sure of their security. I am of the opinion that 
 it is an absolute guaranty, but that reluctance to build extensions obtains under the Tayler 
 grant as well as under private operation. 
 
 "Hut the second fault is a more serious one than that. We could get past that. The 
 second fault is the labor trouble which is as inherent in this as in a private franchise. In 
 other words, this mmpany controls its own o))eration. .Ml the city does is to regulate. The 
 city docs not opor.Tle The city has no more cmitrnl of Mr. Stanley's motormcn and con- 
 ductors than this Conmiission has. He hires men and di.scharges them. He pays them such 
 wages as he sees fit. In case of labor disputes the City of Cleveland is practically helpless. 
 The City of Cleveland and tin- car riders, althoiich they are the jK-ople who lose and not the 
 stockholders of the company, arc the innocent bystanders. 
 
Service at Cust 453 
 
 "The Chairman: Has tlie city any veto over the wage allowance? 
 
 "Mr. Sanders: The city has a veto over the wage allowance to this extent, that it can 
 refuse to give the company the money to pay wages with, and then in that case the question 
 must be arbitrated ; but the city cannot compel the company to pay the w'ages that the city 
 thinks it ought to pay. In other words, the company fixes its own wages." 
 
 With respect to the suggestion that the Cleveland plan be amended so as to 
 provide a sliding scale in rate of return upon capital for the purpose of encourag- 
 ing the management to be economical, Mr. Sanders testifies as follows at page 
 1463: 
 
 "The Chairman : It has been suggested that it might be amended by adding in the con- 
 tract that as the rate of fare goes down the rate of return goes up. What do you think- 
 about that ? 
 
 "Mr. Sanders: Six months ago I was very much in favor of that. .Academically that 
 is a very good thing, but practically 1 do not believe it will work. 1 have commenced to 
 change my mind on that. 
 
 "The Chairman : Why? 
 ^ "Mr. Sanders: In the first place the street railroad settlement, a franchise, must be 
 founded on popular approval. The fixed rate of return has popular approval, the people like 
 it. They know what they are getting. If there is a sliding scale of return they do not 
 know what they are getting. There is always suspicion that the operators of the railroads 
 are getting something out of it which will detract from the proper operation. That is a 
 political reason, it may be good or bad, but as a public officer it strikes me as a good reason. 
 
 "In the second place, there is always a tendency with the operators with a sliding scale 
 to skimp the property and not render to the riders what they are entitled to. In a corpora- 
 tion the size of the Cleveland Railway, which spends $2,500,000 to $3,000,000 a year in main- 
 tenance. 1 per cent on its stock, which would be $300,0000, could be lost sight of in that 
 maintenance. It would be an easy matter to skimp that property $300,000 a year and get 
 that e.xtra per cent, but in the long run the car riders would pay for it. 
 
 "In the third place. I do not believe a dividend to the stockholders, if you will grant 
 that you need the incentive, would get your reaction. You ought to give a dividend to the 
 operators. They are the people that make for efficiency ; it is not the stockholders. Now, 
 if the salaries of the operators, if the president, general manager and the head of the main- 
 tenance department have their salaries raised dependent on how much they save out of their 
 allowance. I can see how some results could be obtained.'' 
 
 Mr. Sanders concludes his testimony at pages 1464 and 1465 of the Proceed- 
 ings by suggesting municipal operation as the cure for the weaknesses which the 
 Cleveland plan has developed : 
 
 "Notwithstanding the fact that this plan has worked fairly well there is a great deal of 
 talk of municipal ownership in Cleveland, but it is not because of antagonism to the company ; 
 they are satisfied with the company ; but because the people there think it is a step forward, 
 they think some of the defects of this plan can be cured by municipal ownership and opera- 
 tion, whether it is municipal ownership or only municipal operation. I have been quoted 
 myself many times, and I am still of the opinion that municipal operation would cure this 
 labor trouble defect I have mentioned and also make the extensions possible. I am a firm 
 believer that the people ought to get exactly what they want and are willing to pay for. 
 
 "The Chairman: Do you believe as a matter of fact that municipal operation in Cleve- 
 and would give you better results and cheaper service than you are getting now? 
 
 "Mr. Sanders : I would not say it would be cheaper service. The people of Cleveland 
 might be willing to pay more for service if the service were extended out into the country. 
 They might cheerfully pay a higher rate of fare. I do not know. I do not say it would be. 
 I do not think it would be any more expensive, but I would not undertake to say that a lot 
 of money would be saved, because municipal bonds are pretty nearly on a 6 per cent basis 
 now." 
 
 On behalf of the Cleveland Railway Company certain modifications of the 
 franchise have been suggested. Chief among them are ( 1 ) the entire removal 
 of the maximum fare limitation : ( 2 ) the establishment of an amortization fund 
 to take care of the dead capital that would not be an asset to the company if the 
 value of its property were being fixed without regard to the provisions of the 
 ordinance, and (3) a depreciation reserve for the new investment. One of the 
 
454 Electric Railwav Problem 
 
 provisions of tlie plan as it now stands is to the effect that if tlie city fails to 
 renew the grant, so that at any time it comes within fifteen years of expiration, 
 the company shall have the right to assume control of service and charge the 
 maximum rate of fare stipulated in the ordinance. The idea is that under those 
 conditions the company shall have the right to protect its security holders by 
 providing for the amortization of the capital account out of the earnings in excess 
 of the cost of service, and in that case, in the event of acquisition by the city, 
 the purchase price will be diminished by the amount of the amortization that 
 has taken place. The Board of Arbitration in the seven-per-cent-return pro- 
 ceeding found by unanimous vote that this provision of the contract would 
 "probably afford the company, even under the present high cost of operation, 
 sufficient earnings to liquidate the entire capitalization" during the fifteen-year 
 period. Yet. the arbitrators found that "the natural tendency to consider the 
 Cleveland Railway Company merely as a public utility and to put it in the class 
 with other public utilities which have failed to give either service or profit, and 
 to discredit any enterprise which is in part politically controlled, becomes a bur- 
 den and handicap to the company in time of stress when financial conditions 
 are disturbed." For this reason, the arbitrators recommended the setting up of 
 a reserve fund at a rate of not less than $,^00,000 a year, to be held in trust for 
 not less than ten years, and at the end of each ten-year period, to be used in 
 the event of the renewal of the franchise for betterments and extensions without 
 any increase of capital value; and otherwise to be held for the liquidation of the 
 stock at the termination of the grant. 
 
 The company's demand that the maximum fare limitation be entirely re- 
 moved has been refused by the city. The reasons for this refusal are set forth 
 in a statement by tlie city street railroad commissioner quoted at length in the 
 company's annual report for 1919. Ilriefiy, these reasons are: (1) that if the 
 maximum limit were removed, there would be no machinery left to control the 
 company's charges during the last fifteen years of the franchise period in case 
 the city at any time should fail or refuse to renew the grant at the ten-vear inter- 
 val ; (2) the six-cent maximum now provided by the ordinance is thought to 
 be sufficient to meet nil the company's requirements on the present scale of 
 expenses: and ( ,^ ) if costs should go up still further, some other plan besides 
 fare increases would have to be devised to meet them, because it is believed that 
 the people of Cleveland would refuse to ride rather than pay a fare higher than 
 six cents. 
 
 With respect to the comjiany's demand for a depreciation reserve, it is to be 
 noted that the Board of .\rbitration in ihe seven-per-cent-return proceeding 
 unanimously recommended a modification of the ordinance bv the substitution 
 of "capital value" for "reproduction value" in the section re(|uiring the main- 
 tenance of the entire property at 70 per cent of its reproduction value. .Appar- 
 ently, this change would mean that the 70 per cent would appiv not to the exist- 
 ing physical property alone, but to the eiuire capital value including the items 
 of dead investment or iinangibles to which reference has already been made. On 
 the other hand, this provision would change the standard of maintenance, so far 
 as concerns the physical i)i-o|)erly in existence on March 1. 1910. as replaced 
 
Service at Cost 455 
 
 from time to time, from 70 per cent of cost new to 70 per cent of depreciated 
 value, or in other words, 70 per cent of 70 per cent. Apparently, the change 
 suggested would introduce other confusions in place of those that now exist. 
 
 From the point of view of service at cost and ultimate public ownership, it 
 is most essential that the full cost of service be paid as we go along, and that 
 the capital value should be kept down to a conservative figure and that any ele- 
 ments of dead investment or intangible values be worked out as soon as pos- 
 sible through the process of amortization. While the original Cleveland valua- 
 tion is frequently referred to as "conservative" or "low," both the company and 
 the city admit that it still contains elements amounting to approximately seven 
 million dollars that never should have been permanently capitalized. This is 
 in a total present capital value of $34,218,500. In connection with the seven- 
 per-cent arbitration proceeding, I wrote the city street railroad commissioner 
 under date of October 3, 1919, as follows : 
 
 "I think undoubtedly that an increase in the rate of return upon the capital stock can 
 be postponed for the present if the arbitrators can be induced not to cross a bridge before 
 they get to it, but if conditions require the expenditure of the amount of money suggested 
 by the company for extensions and improvements during the next ten years, and if the city 
 gives its assent to this ambitious program, I would say that in all likelihood, unless financial 
 conditions settle down and street railways generally come into better repute, it will be neces- 
 sary, before any considerable part of the program of improvements is undertaken, to modify 
 the Tayler franchise in one of two directions: either to increase the interest rate on stock 
 or the allowed interest rate on bonds, and thus give the company's securities an increased 
 speculative value: or else to modify the ordinance so as to give them a better guaranty of 
 receiving the fixed rate of return now provided for. In choosing between these two courses 
 of action, if one or the other of them becomes necessary, it does not seem to me that the city 
 should hesitate for a moment. An additional one per cent in the annual return upon the 
 investment will do nobody any good but the investor. The car riders will have to pay the 
 interest as the years go by, and when the city undertakes to purchase the property it will 
 have to pay the full amount of the capital value, receiving therefor the physical property, as 
 to the condition and value of which in relation to capital value there is now so much dispute. 
 If. on the other hand, the equivalent of the additional one per cent on the stock, or some 
 other amount, were to be put into an amortization or sinking fund for the reduction of 
 capital, it would serve the double purpose of adding to the security of the investors and of 
 reducing the ultimate purchase price of the property to the city. There can be no doubt that 
 from the point of view of sound street railway finance and sound public policy all elements 
 in the capital account which do not represent property ought to be amortized out of earn- 
 ings, since they cannot now very well be cancelled, having been agreed to in the Tayler 
 settlement." 
 
 As I have said, the Board of Arbitration was unanimous in recommending 
 an amortization reserve, hut the majority of the board also recommended a seven 
 per cent return. By these combined recommendations, the investor's position 
 would be doubly strengthened and the immediate cost of the service would be 
 doubly increased. But both of these additional charges, taken together, would 
 mean only one-fifth of a cent more per revenue passenger. 
 
 In Chapter XI of this report, where the discussion related to the failure 
 of the electric railways to amortize the normal accrued depreciation, I called 
 attention to the testimony of Mr. James D. Mortimer, which appears at pages 
 1970 to 1998 of the Proceedings, where he attempts to show that "service at cost" 
 in Cleveland has been service at less than cost. That there may be something 
 in Mr. Mortimer's contention is apparent from the discussion we have just had, 
 but as pointed out in the earlier chapter, Mr. Mortimer's criticism implies that the 
 car riders of Cleveland, under the service-at-cost franchise, should have been 
 
456 Electric Railway Pkoblem 
 
 called upon to make up to the company the previously accrued depreciation that 
 was cut out of capital account at the time of the settlement. This raises a very 
 important issue that confronts a city or a regiilatory conunission whenever the 
 value of a street railway property is being fixed for the first time, whether as a 
 basis for a service-at-cost contract or merely for purposes of regulation. Is it 
 an essential part of the present and future cost of service under a new deal to 
 make up to the investors the previously accrued depreciation of their property 
 for which they have failed to make specific provision out of their past earnings? 
 
 The new Montreal contract, which has now been in operation for two years, 
 represents in many important respects a radically different type of service-at- 
 cost franchise from the Cleveland ordinance which we have been discussing. 
 First of all, it is very difTerent in its origin. The Cleveland arrangement came 
 as the result of a 10-year fight between the city and the street railway company ; 
 their differences being finally threshed out between themselves and a settlement 
 arrived at without the interference of the state. Moreover, the Tayler plan 
 went into effect only after it had been submitted to the voters of Cleveland and 
 received their approval. As we have seen, it is based entirely upon the theory 
 that street railway transportation is a local problem, to be worked out between 
 the operating company and the public representatives of the car riders. The 
 development in Montreal was very different. The old contract between the City 
 of Montreal and the Montreal Street Railway Company ran for a period of 30 
 years from 1892 and reserved to the city the right, at its expiration in 1922. to 
 take over the property at an appraised valuation. This franchise, prior to the 
 commencement of the European War, proved to be very profitable. As the end 
 of the franchise period approached, however, the usual disagreements that occur 
 before the expiration of limited-term franchises developed between the city and 
 the company, j)articularly with respect to extensions which the company alleged 
 that it could not finance without a renewal of its franchise. The company was 
 especially anxious to get away from the city's option to purchase, which would 
 become effective in 1922. .'\s early as 1911, the Montreal Tramways Company 
 secured a charter from the Quebec legislature, running for a period of 42 years, 
 together with a franchise to acquire, maintain and operate tramways in the City 
 of Montreal. The exercise of this franchise was conditioned, however, upon 
 the company's making a contract with tiie city to determine the duration of the 
 grant and the conditions of operation, maintenance, equipment, establishment 
 and extension of routes in the city, rates of fare, percentages of gross earnings 
 to be paid the city, the share of the cost of paving and maintaining the streets 
 and of removing snow to be paid by the company and such other terms and con- 
 ditions as the city might deem it advisable to impose. The new company acquired 
 the existing street railway j)ropcrty, overcapitalized itself in true American style 
 and proceeded to negotiate with the city authorities for a new franchise. 
 
 These negotiations, running through a jicriod of several years, led to public 
 scandal, but not to franchise progress, and the legislature in 1917 took the matter 
 entirely out of the hands of the City of Montreal and appointed a special com- 
 mission of five members, residents of the metropolitan area, to draw up the con- 
 tract between the city and the company. The commission was authorized to 
 
Service at Cost 457 
 
 "employ experts and any other persons" whose services it might deem necessary 
 or useful in the performance of its work, and it was authorized to inquire into 
 the facts over which its jurisdiction extended, "by all means suitable for enlight- 
 ening it." The contract was to come into force, after being signed by the com- 
 mission or by a majority of its members, on the day that it should be signed by 
 the Tramways company. This contract was to bind the company and the city 
 for a period of 36 years, except as it might be changed from time to time by 
 mutual consent of the parties. At the end of the 36 years or at the expiration 
 of any subsequent period of five years, the city was to have the right upon due 
 notice "to appropriate for itself the railway of the said company as well as the 
 immovables and dependencies, plant and cars belonging to it and necessary for the 
 operation of the said railway, by paying the value thereof to be fixed by arbitrators 
 and 10 per cent over and above the estimate." 
 
 It will be seen from the above that the Tramways Commission was vested 
 with extraordinary powers. It was not required to consult the civic authorities 
 or the people of Montreal with respect to the terms of the contract to be drafted 
 by it and was not even required to give public hearings for the purpose of re- 
 ceiving suggestions and criticisms. ■ Its powers were limited only by the provi- 
 sions of the statute and by the necessity of securing the Tramways Company's 
 approval of its work. 
 
 As to the statutory limitations, they were few but important. Through an 
 apparent oversight the act did not confer upon the commission any power to 
 bind the municipalities served by the company other than the City of Montreal. 
 However, the commission, as soon as it had studied the problem, saw the necessity 
 of dealing with the metropolitan district as a whole and prepared the contract on 
 this basis. Its action was validated by the subsequent ratification of the contract 
 itself by the legislature. 
 
 The two other limitations imposed by the statute were not to be overcome 
 in this easy fashion, as the company was interested in maintaining them. One 
 arose from the provision of the act extending the company's franchise until 1953, 
 and postponing the city's e.xisting option to acquire the property by purchase 
 from 1922 until that date. This made it impossible for the commission to condi- 
 tion the continuance of the contract upon the good behavior of the company or 
 upon its maintenance of amicable relations with the city. It placed the company 
 in a position where it would have an assured, irrevocable franchise for a period 
 of 36 years, and where any means adopted to secure adequate service at reason- 
 able rates during that period would have to be independent of possible recourse 
 to municipal ownership and operation. 
 
 The third limitation prevented the commission from establishing the value 
 of the property at the present time as a basis for future purchase by the city, 
 and consequently prevented it from adopting any amortization scheme for the 
 gradual reduction of the purchase price out of earnings. 
 
 Thus the commission's problem was reduced to the devising of ways and 
 means by which satisfactory service and reasonable rates could be secured to the 
 public during a period of 36 years under private ownership and management. 
 There was nothing in the act which required the commission to prepare a contract 
 
458 Electric Railway Problem 
 
 that the company would accept, but it was well understood in Montreal that the 
 purpose of the Tramway's Commission Act was to facilitate the settlement of the 
 relations between the city and the company by the preparation of a contract that 
 the company would accept and that would complete and bring into effect the pro- 
 visions of the company's charter granted in 1911 and of the act itself extending 
 the company's franchise to 1953. 
 
 Early in 1917, shortly after the commission was organized, it held a series 
 of public hearings for the purpose of receiving the suggestions of the civic author- 
 ities and various civic organizations and individual citizens. It employed an 
 electrical engineer, a professor in McGill University, as its technical adviser. 
 After its public hearings were closed the commission made a trip to Chicago, 
 Cleveland and other American cities for the purpose of investigating street rail- 
 way conditions in this country. Subsequently, it caused a quick valuation of the 
 Montreal Tramways property to be made, and prepared a contract which after 
 some negotiation with the company was accepted and signed by both parlies Jan- 
 uary 2<S, 1918. and ratified by the legislature as a part of the Montreal city bill on 
 February 9 following. 
 
 The people of Montreal and the suburban communities were not taken into 
 the confidence of the commission, and the terni.s of the new contract were not 
 published until after the contract was signed. In fact, the ratification act was 
 rushed through the legislature before copies of the contract in English were avail- 
 able to the Montreal public. 
 
 The new contract applies in all important respects to the entire area served 
 by the company's system, and all provisions of the old municipal contracts in- 
 consistent with it are superseded by its provisions. For the administration of the 
 contract and for the exercise of permanent supervision over the company, a per- 
 manent Tramways Commission is established consisting of three Tucmbers ap- 
 pointed by the lieutenant-governor in council, that is to say. by the provincial 
 authorities. The commissioners are required to reside in the territory under 
 their control. They are appointed for a term of 10 years but may be dismissed 
 for cause at any time by the appointing power. Both the City of Montreal and 
 the company al.so have the right to apply to the superior court for the dismissal 
 of any commissioner for fraud, bribery, or refusal or neglect to carry out in 
 good faith the powers or to perform the duties assigned him by the contract. 
 This commission is given complete authority over extensions, maintenance, service 
 and all the vital features of construction and operation, subject to the limitations 
 of the contract itself and subject to an appeal from its decisions in most of the 
 important matters over which it has control to the Quebec Public Utilities Com- 
 mission. The ap|)eal may be taken by the company or by the City of Montreal. 
 or by any interested nnmicipality or by any party to the matter at issue. The 
 commission is specifically required to hear and decide all complaints or applica- 
 tions made to it verbally or in writing by any person whomsoever. 
 
 Article 92 contains the meat of the contract. It was prepared by a com- 
 mittee consisting of Senator Charles P. Beauhien of Outremont and Charles Lau- 
 rendeau. Chief City .\ttorney of Montreal. In the course of their work they be 
 came familiar with the weak points in the Chicago and Cleveland settlements, and 
 
Service at Cost 459 
 
 it was their purpose to devise, if possible, a plan based upon the service-at-cost idea 
 that would provide inducements to the company to work in the public interest. 
 They started out by accepting the theory that the character and extent of service, 
 the financial requirements of the investment, the necessary operating expenses 
 and payments to the city must first be determined, and that rates must then be 
 fixed so as to bring in the revenue required for these purposes. They made note 
 of the fact that under the Cleveland franchise the fluctuations of rates cannot go 
 beyond the limits of certain prescribed schedules and that the rate of return on 
 ^e investment is definitely fixed so that the company's motive for economy and 
 efficiency in operation as a means of earning additional profit is destroyed. They 
 deemed these provisions of the Cleveland scheme to be defects, and determined 
 not to copy them. 
 y Under the terms of section 92 of the new contract, the Tramways Company 
 is required to provide out of its own resources a guaranty fund of $500,000 
 which is to be maintained continuously at this full amount and is to be deposited 
 so as to remain available at all times for the purposes for which it is created. 
 
 Gross revenues can be disposed of only in the manner prescribed by the con- 
 tract. Operating expenses, naturally, have the first call, and in order to keep 
 the company's e.xpenditures under control and to supply an inducement for econ- 
 omy and efficiency in operation the following plan was adopted : At the beginning 
 of each year the Tramways Commission is to establish an allowance per car mile 
 for operating expenses. This allowance will include provision for ta.xes, for 
 the expenses of the commission itself, for insurance, for accident and damage 
 claims including a reserve for claims not liquidated during the year, and for all 
 other operating expenses exclusive of maintenance, renewals and depreciation. 
 The commission is also to fix at the beginning of each year the permissible average 
 density of traffic per car mile, so as to prevent the company from overcrowding 
 its cars. If at the end of the year the company has kept within its operating 
 allowance, or has not exceeded it more than 2i4 per cent, it will be entitled to a 
 special bonus to be known as the operating profit which shall be equivalent to one- 
 eighth of 1 per cent on the total average capital value for the year. At the present 
 time this amounts to about $47,500 per annum. If, on the other hand, the com- 
 pany has overspent its operating allowance more than 2i/2 per cent, it will be 
 penalized to the extent of such excess expenditures by the loss of the operating 
 profit and, if necessary, by being compelled to make up the balance of the excess 
 expenditure out of its own guaranty fund. It is recognized, however, that an 
 inflexible operating allowance fixed at the beginning of a year may prove to be 
 insufficient on account of conditions arising that could not be foreseen at the time 
 when it was fixed. It is stipulated, therefore, that in case the company is able 
 to prove to the satisfaction of the commission within 60 days after the close of the 
 year that the excess expenditure has been necessary and unavoidable in the ren- 
 dition of ser\'ice as required by the commission, the penalty is to be remitted and 
 the operating bonus allowed. Any portion of the operating allowance not needed 
 during the year is to be returned to gross revenues. 
 
 The next charge against gross revenues is for the maintenance and renewals 
 fund. There, also, the commission is to fix annually an allowance per car mile 
 
460 Electric Railway Problem 
 
 "for the purpose of maintenance, renewals, replacements and substitution made 
 necessary by wear and tear, age, obsolescence, inadequacy, accidents or other 
 cause." The entire plant and property of the company used in providing public 
 transportation service must be maintained at all times at the highest practicable 
 standard of operating efficiency. Whenever any item of property contained in 
 the appraisal or subsequently added to the tramways system becomes worn out or 
 useless, it is to be disposed of under the commission's direction and the proceeds 
 are to be paid into the maintenance and renewals fund, unless other disposition 
 of such proceeds is made necessary by the provisions of any deed of trust, and 
 in that case the proceeds must be deducted from capital value. An exception is 
 made in the case of moneys received from the sale of land and buildings, which 
 are in all cases to be deducted from capital value and not to form a part of the 
 fund. All expenses for maintenance, renewals, replacements and substitutions 
 are to be paid out of this fund, and moneys not needed for these purposes during 
 any year remain in the fund and are held in reserve until required for such pur- 
 poses or for investment in betterments, additions and extensions as elsewhere 
 provided in the contract. Whenever any portion of the property is replaced, the 
 cost of the replacement up to the full reproduction value of the unit or article 
 as fixed by the appraisal ( or the actual cost, in the case of items installed sub- 
 sequent to the appraisal), is to be paid out of the fund and any cost in excess 
 of that amount is to be charged to capital. If the cost of any replacement is 
 less than the reproduction cost (or the actual cost, as the case may be) of the 
 item replaced, the difference is to be appropriated from the fund from time to 
 time for the making of betterments, additions and extensions without any in- 
 crease in capital value. The commission may change the maintenance allow- 
 ance from year to year, but the fund is not to be permitted, except temporarily, 
 to fall below the sum of $500,000. No money can be paid out of this fund, or 
 loaned or invested, except with the commission's approval. If the city acquires 
 the ])Iant at the termination of the contract, the maintenance and renewal fund 
 will belong to the city and will not be added to the purchase price of the property. 
 The third charge upon gross revenues is the return upon capital. The amount 
 of the investment, exclusive of working cajjital, is fixed at $,^6.28().295 as of De- 
 cember M. 1917. This figure represents reproduction-cost new as of July 1, 
 1917, without depreciation, except that in the bargain the company was induced 
 to "throw in" certain new e(|uipmeiU added during the second half of 1917 at a 
 cost of $896,848, and this amount may be regarded as a partial offset to accrued 
 depreciation or overhead charges included in the appraisal. W"orking capital has 
 since been fixed at $1,5.^0.000. The net amount of additions and bettennents 
 made subsequent to January 1, 1918, will be added to capital value. The com- 
 pany is permitted to receive in quarterly payments from gross revenues a sum 
 equal to j)er cent on capital value. From time to time as new money is required 
 for additions, bettennents and extensions approved by the commission, such money 
 must be supplied by the company, and the money so supplied will be added to 
 capital value and the comi)any will be entitled to an annual return of 6 per 
 cent upon it, but when money is needed for these purposes, the company nmst 
 borrow temporarily moneys in the maintenance and renewals fund, or in the 
 
Service at Cost 461 
 
 contingent reserve fund or in the tolls reduction finid hereinafter described, to 
 the extent that in the commission's judgment the moneys in such funds are 
 available. On moneys so borrowed, the company must pay into the funds annual 
 interest at the rate of 6 per cent, which it in turn will receive from gross earn- 
 ings as its regular return upon additions to capital value. On account of the high 
 cost of money during the war, the contract gives the company an additional allow- 
 ance of 1 per cent per annum on money supplied by it for capital expenditures 
 during the continuance of the war or within two years after its close, this addi- 
 tional rate being limited, however, to a period extending five years beyond the 
 close of the war. Working capital is to be furnished by the company as ordered 
 by the commission and upon such capital the company will receive the regular 
 return of 6 per cent per annum. In addition to the allowances already described, 
 the contract specifies that the company shall receive annually the sum of $181,- 
 421.47 out of gross revenues to be expended solely for discount, commissions, 
 printing, engraving, etc., incident to the issuance and sale of bonds or stock. 
 This flat stun is the equivalent of one half of 1 per cent upon the original capital 
 value as fi.xed by the contract. If any portion of this allowance is not required 
 in any one year for the purposes above described, it must be kept in a special 
 account and reserved for use in subsequent years for similar purposes. In pro- 
 curing additional capital required under the contract, the company must limit its 
 issues of mortgage bonds or debenture stock so that they will not aggregate more 
 than 75 per cent of the total additional capital furnished under the contract. 
 The net effect of the provisions relating to return upon capital is that the com- 
 pany will be allowed 6 per cent to be distributed in interest and dividends, an 
 additional I per cent temporarily on new money supplied during the war and the 
 equivalent of one-half of 1 per cent on the original capital value to cover the 
 expense of financing new capital ; subject to the limitation, however, that any 
 portion of this special allowance not used for this purpose shall not be distributed 
 to the stockholders during the life of the contract, and that the dividends paid 
 upon stock shall not during that period exceed 10 per cent per annum. 
 
 The fourth charge against gross revenues is a payment of $500,000 per 
 annum to the City of Montreal. This is in lieu of the percentage payments pro- 
 vided under the old contract. 
 
 The fifth charge against gross revenues is an appropriation for the contin- 
 gent reserve fund. This fund is to get 1 per cent of the revenues until it amounts 
 to $500,000, when the appropriation from revenues will be suspended until again 
 needed to restore the fund to this full amount. This fund constitutes a surplus 
 which must be maintained as a guaranty that the charges against gross earnings 
 heretofore described will be made up in case of a deficiency in any particular 
 year. At the termination of the contract the moneys remaining in this fund will 
 be distributed in the same manner as the divisible surplus now to be described. 
 
 All the portion of the gross revenues remaining after the payment of the 
 charges heretofore described will constitute the divisible surplus and will be dis- 
 tributed at the end of each year in the ratio of 30 per cent to the city, 20 per 
 cent to the company, and 50 per cent to the tolls reduction fund. The portions 
 of the surplus paid to the city and to the company respectively will belong to them 
 
462 Electric Railway Problem 
 
 to be disposed of as they see fit, subject to the limitation already mentioned that 
 the company may not in any year during the life of the contract pay dividends 
 on its capital stock in excess of 10 per cent. 
 
 The tolls reduction fund, which is to be built up year by year from 50 per 
 cent of the divisible surplus, is a fund to be used for the reduction of fares in 
 case the fares in force at the beginning of the contract or at any subsequent period 
 prove to be unnecessarily high. When this fund reaches the sum of $1,000,000 
 the commission way reduce the fares, and when it reaches the sum of $2,500,000 
 the commission miisl reduce the fares. In order to insure reasonable stability 
 in the new fare schedules established by the commission, the contract provides 
 that when fares are to be reduced, one fourth of the moneys then in the tolls 
 reduction fund shall be taken out and turned back into gross revenues, and that 
 the amount of the reduction of fares for the year shall be at least equal to the 
 amount so taken out of the tolls reduction fund but shall not exceed that amount 
 plus an amount equal to 75 per cent of the annual flow from gross revenues into 
 divisible surplus. Thereafter, at the beginning of each year, the commission is 
 to take a like amount out of the tolls reduction fund and turn it back into gross 
 revenues so long as moneys are available for this purpose. This plan was de- 
 vised for the purpose of stabilizing rates as much as possible and at the same time 
 preventing the commission from completely stopping the flow into the divisible 
 surplus by arbitrary reductions. If the tolls reduction fund becomes exhausted, 
 the rate of fare, nevertheless, will not be changed unless an increase becomes 
 necessary. Whenever the contingent reserve fund falls below $300,000, with all 
 prior charges upon gross revenue paid in full, the commission must appropriate 
 moneys from the tolls reduction fund to restore the contingent reserve fund to 
 the full amount of $500,000, and if no moneys are available in the tolls reduction 
 fund the conmiission must increase the fares in an amount at least sufficient to 
 restore the contingent reserve fund and maintain it at the full amount. At the 
 termination of the contract any moneys remaining in the tolls reduction fund 
 will be the projjerty of the city without any enhancement of the inirchase price 
 to be paid for the company's plant. 
 
 In Chapter XX\TI1 of this report 1 have already described the Montreal 
 fare schedule in eft'ect under the old contract and the two schedules that have 
 been put into effect under the new one. It will be recalled that the present cash 
 fare, except during the night, is seven cents, with general ticket fares at six cents 
 or a little less. The average of all fares paid in November, 1919. under the 
 present schedule, was 5.S4 cents, as compared with 5.37 cents in Cleveland during 
 the first half of 1919 when the highest rate of fare thus far charged was in effect. 
 
 It will be seen that the Montreal settlement was based on the theory that 
 no franchise contract will enforce itself; that no matter how good the scheme, 
 it will not work .lutomatically ; that private operation of a street railway system, 
 if the public interests are to receive adequate attention, must be continuously 
 supervised through the application of public intelligence and will. However, 
 instead of municipal control, the Montreal contract provides for a local metro- 
 politan commission appointed by the provincial authorities and subject in almost 
 every respect to the appellate jurisdiction of the provincial utilities commission. 
 
Service at Cost 463 
 
 Arbitration cuts no figure in the Montreal scheme, as pubHc control is theoreti- 
 cally complete. The people of Montreal and its suburbs can have exactly the 
 kind of service that the two commissions think is good for them and are willing 
 to make them pay for. It should be explained further that by the terms of the 
 contract, a uniform tarifY territory is established to include the City of Montreal, 
 the cities of Westmount and Outremont and certain adjacent towns to which 
 the principal fare schedule applies. Outside of this territory are seven suburban 
 communities in each of which a special schedule of rates has been established. 
 Each of these suburban schedules is lower than the city schedule. 
 
 In April, 1920, in the closing weeks of the session, the New York Electric 
 Railways Association caused to be introduced in the state legislature a so-called 
 service-at-cost bill which was patterned somewhat after the Montreal plan, but 
 was strikingly dilTerent from it in certain respects. The Jenks bill, as it was 
 called, made provision for a bonus as "the premium for operating efficiency and 
 economy." This bonus, however, was to be one-half of one per cent on the 
 investment, or four times the corresponding bonus allowed in the Montreal plan. 
 Moreover, any changes in wages that might take place during the year were to 
 be automatically accepted as modifying the operating allowance fixed at the be- 
 ginning of the year. Also, instead of a supervisory commission fixing the oper- 
 ating allowance, this was to be done by agreement between the city and the com- 
 pany or by arbitration. The "investment value" of the property as a basis for 
 determining the return to capital was to be fixed by agreement or by arbitration, 
 and upon the amount so fixed the company was to receive a return of 10 per cent 
 per annum. Pending the determination of the investment value the company 
 was to receive a rate of return sufficient at least to pay "all e.xisting fixed charges, 
 rentals and all other compulsory obligations necessary to prevent mortgage fore- 
 closure or the disintegration of the system of the company" as operated at the 
 time of the passage of the act. 
 
 For the purpose of determining matters of difiference between the company 
 and the municipality arising out of the operating of the company's property 
 under the service-at-cost agreement a "fare reduction board" was to be estab- 
 lished, consisting of three members, one to be selected by the municipality, one 
 by the company, and the third by agreement between the municipality and the 
 company, or, in case of their failure to agree within thirty days, then by the 
 presiding justice of the Appellate Division of the Supreme Court. A municipality 
 having a service-at-cost contract with a company was to have the right to submit 
 to the company a list of six persons, of whom one, selected by the company, 
 should be chosen as a member of the board of directors. The local authorities 
 of the municipality were to have the right to appoint a street railroad commis- 
 sioner, and, with the approval of the fare reduction board, fix his compensation, 
 which would be paid out of gross revenues. Under this plan, when a service- 
 at-cost agreement between a municipality and a company had been filed with the 
 Public Service Commission, the latter's jurisdiction over service and rates would 
 cease during the period of the agreement or any renewal or extension of it. 
 
 These agreements were to be limited in the first instance to five years, and, 
 unless they were renewed, the parties, at the end of that time, were to be restored 
 
464 Electric Railway Problem 
 
 to the status occupied by them during the period prior to the coming into effect 
 of the service-at-cost plan. 
 
 Quite a number of the detailed features of the Montreal contract, were pre- 
 served in the Jenks bill, but three fundamental changes, all of them strongly 
 favorable to the companies, should be noted. First, the basic rate of return upon 
 the investment was to be fixed at 10 per cent instead of 6 per cent. Second, the 
 companies were to be relieved of all responsibility for wage increases. Third, 
 the control of service and the administration of the terms of the service-at-cost 
 agreement were not to be vested in public regulatory bodies, but were to be effected 
 by agreement between the parties or by arbitration. In this last respect the Jenks 
 bill embodied a lame imitation of the Cleveland arbitration plan. Fundamentally, 
 the service-at-cost plan outlined in the Jenks bill would supersede entirely the 
 exercise of the police power of regulation by either state or local authorities, 
 and would not give the public the eft'cctive right to demand such service as it is 
 willing to pay for. 
 
 The Jenks bill was defeated by a close vote in the New York Assembly, but 
 it illustrates the extreme importance of the details in any service-at-cost or other 
 plan for the readjustment of the public relations of the electric railways. One 
 of the mistakes made in Montreal was the failure of the original Tramways Com- 
 mission to take the public into its confidence and to secure its approval of the 
 plan adopted. The public of New York had almost no opportunity to familiarize 
 itself with the provisions of the Jenks bill while the attempt was being made to 
 force it through the legislature, and the tactics adopted by the New York Electric 
 Railways Association in this case aroused the resentment of the municipalities of 
 the state. The Montreal plan contains some admiirable features, but the evidence 
 before the Commission makes it clear that it is a grave mistake to suppose that 
 any service-at-cost plan can be successfully applied by mere imitation, and, be- 
 yond a doubt, if the plan that is in successful operation in one community is to 
 be adopted in another, the public cannot be expected to accept the plan without 
 question after it has been changed in important respects by the companies for 
 their own benefit and without public consultation. 
 
 The third most distinctive type of service at cost thus far jiut into effect 
 has been worked out in Massachusetts, where in 1918 three separate and some- 
 what different service-at-cost acts were passed : one for the operation of the Bos- 
 ton street railway lines, another for the operation of the Bav State street railway 
 system serving most of the cities of Massachusetts north and south of Boston, 
 and the third, a general act for the benefit of any other street railway companies 
 of Massachusetts that might choose to accept it and comply with its conditions. 
 The two special acts inaugurated a system of public operation by boards of 
 trustees appointed by the Governor, with the consent of the council, without public 
 ownership. In both cases the legislative acts, having been accepted by the bene- 
 ficiaries, have established service at cost on the basis of contractual relations be- 
 tween the companies and the state. 
 
 In the case of the Boston Elevated Railway Act, the right is reserved to the 
 commonwealth or to any political sub-division of it to purchase, at any time 
 during the period of public managciuent and operation, the company's "whole 
 
Service at Cost 465 
 
 assets, property and franchises as a going concern" by the assumption of the 
 company's outstanding indebtedness and liabilities and by the payment of an 
 amount in cash equal to the amount paid in in cash by the company's stockholders 
 for the stock then outstanding. Special provisions are contained in the act for 
 the acquisition of the property of the West End Street Railway Company (owner 
 of most of the surface lines of Boston) now leased to the Boston Elevated Rail- 
 way Company, in case this property shall have been acquired by the lessee before 
 the date of public purchase. These provisions are not to preclude the com- 
 monwealth or any political sub-division of it from acquiring the property and 
 franchises of either company at any time through the e.xercise of the power of 
 eminent domain. 
 
 The act specifies that there shall be five trustees who shall serve for a period 
 of ten years from the date when they assume the management of the company 
 and shall each receive a salary of $5,000 per annum for their services. The 
 trustees themselves appoint a chairman. Any trustee may be removed for cause 
 by the Governor with the advice and consent of the council. The state is to 
 manage and operate the company's properties for a period of ten years and during 
 that time the trustees will have the right to appoint and remove, in their dis- 
 cretion, the president and all other officers of the company, excepting the board 
 of directors. The trustees also have the right "to regulate and fix fares, includ- 
 ing the issue, granting and withdrawal of transfers and the imposition of charges 
 therefor." They are to "determine the character and extent of the service and 
 facilities to be furnished" and in these respects their authority is exclusive and 
 not subject to the approval, control or direction of any other state board or com- 
 mission. The trustees and their employes are deemed to be agents of the com- 
 pany, not of the state, and the company is liable for their acts and negligence 
 to the same extent as if they were in its immediate employ. It is stipulated 
 that nothing in the act shall affect the right of the state or any of its sub-divisions 
 to tax the company or its stockholders the same as if the company had continued 
 to manage and operate its own property. The public trustees have authority to 
 make contracts and to issue stocks, bonds and other evidences of indebtedness in 
 the name of the company, but they are not authorized to make any additional 
 contracts for the operation or lease of new subways or elevated or surface lines 
 which would involve the payment of compensation beyond the period of public 
 operation. However, the trustees may construct or purchase additional surface 
 lines, even after the consent of the directors has been refused, if the trustees de- 
 termine after a public hearing that public necessity and convenience require such 
 construction or purchase. 
 
 Before accepting the act the company was required to raise the sum of 
 $3,000,000 in cash by the issuance of preferred stock at not less than par, such 
 stock being entitled to cumulative preferential dividends not to exceed 7 per cent 
 and such preferred stock is subject to retirement at the request of the trustees, 
 or after the period of public operation, at 105 and accrued dividends. The pro- 
 ceeds, to the extent of $1,000,000, were to be set aside as a reserve fund and the 
 remaining $2,000,000 were to be subject to the disposition of the trustees to pay 
 the cost of additions and improvements to the property. The act prescribes that 
 
466 Electric Railway Prublem 
 
 the trustees shall from time to time "fix such rates of fare as will reasonably 
 insure sufficient income to meet the cost of the service, which shall include oper- 
 ating expenses, taxes, rentals, interest on all indebtedness, such allowance as they 
 may deem necessary or advisable for depreciation of property and for obsolescence 
 and losses in respect to property sold, destroyed or abandoned, all other expendi- 
 tures and charges which under the laws of the commonwealth now or hereafter 
 in effect may be properly chargeable against income or surplus, fixed dividends 
 on all preferred stock of the company from time to time outstanding and divi- 
 dends on the common stock of the company from time to time outstanding at the 
 rate of five per cent per annum on the par value thereof during the first two years, 
 five and one half per cent per annum on the par value thereof during the next 
 two years and six per cent per annum on the par value thereof during the balance 
 of the period of public operation." The act provides that the dividends shall 
 be paid quarterly beginning at the expiration of 6 months from the commence- 
 ment of public operation ; and that the total of the first three payments shall aggre- 
 gate 5 per cent on the par value of the common stock. Within 60 days after 
 their qualification the trustees were required to "fix and put in operation rates 
 of fare which in their judgment will produce sufticient income to meet the cost 
 of the service as defined * * * * gpj y^jtliin sixty days thereafter shall 
 adopt and publish a schedule of eight different grades of fare of which four shall 
 be below and four above the rate of fare first established ; and whenever by reason 
 of any change in the existing rate of fare there are less than four grades either 
 above or below the rate then in force, the trustee shall forthwith adopt and 
 publish a schedule of additional grades of fare so that there shall always be not 
 less than four grades of fare above and below the existing rate of fare." How- 
 ever, the trustees at any time when they think that the rates of fare or the schedule 
 should be changed, with respect to either the method or the basis upon which fares 
 and transfer privileges are established, or for any other reason, may adopt and 
 put into effect new schedules or rates of fare. 
 
 \\'henever the company's income is insufficient to meet the cost of service 
 as defined, the reserve fund is to be used as far as necessary to make up the 
 deficiency; and if, on the other hand, the income is more than enough to meet 
 the cost of ser\ice, the excess is to be transferred to the reserve fund. The act 
 made no provision for an automatic change, before June 30, 1919, the end of 
 the fiscal year, in the fares first established by the trustees, but it does provide that 
 subsequent to that date account shall be taken quarterly of the condition of the 
 reserve fund and, if at the end of any quarter this fund exceeds its original amount 
 by 30 per cent or more, and if during the past quarter the income has exceeded 
 the cost of service, then the trustees nuist within another month put into effect 
 the next lower grade of fare; and in like manner, if the reserve fund is found to 
 be less than 70 per cent of the original amount, the trustees must within a month 
 put into effect the next higher grade of fare. The act provides that if on June 
 30, 1919, or semi-annually thereafter the amount remaining in the reserve fund 
 is insufiicient to make good any deficiencies that may have accrued in the cost of 
 service, the State of Massachusetts shall pay to the company the amount of such 
 deficiencies, less the amount, if any, in the reserve fund applicable thereto. 
 
Service at Cost 467 
 
 Thereafter, if the reserve fund exceeds its original amount at the end of any half 
 year, the trustees must apply the excess as far as necessary to reimbursing the 
 state for moneys previously advanced by it under the provisions just described. 
 The moneys advanced by the state are in the first instance to be borrowed by the 
 state treasurer, but for the amounts so advanced assessments are to be levied upon 
 the cities and towns in which the company renders service in proportion to the 
 number of persons in such cities and towns using the company's service, as de- 
 termined by the board of trustees. 
 
 During the continuation of public management the trustees are bound "to 
 maintain the property of the company in good operating condition, and to make 
 such provision for depreciation, obsolescence and rehabilitation that, upon the 
 expiration of the period of public management and operation, the property shall 
 be in good operating condition." Public management is to continue after the 
 expiration of the 10-year period until the state elects to discontinue it, and its 
 discontinuance may be accomplished only by appropriate legislation passed not 
 less than two years before the date fixed for turning the property back to the 
 company. Whenever moneys advanced by the state and collected from the 
 municipalities are repaid by the company, they are to be redistributed to the muni- 
 cipalities in proportion to the amounts previously collected from them. Upon the 
 termination of the period of public management the company is to operate the 
 property and "may fix and collect such just and reasonable fares as will produce 
 an income sufficient to pay the reasonable cost of the service'' as defined in the 
 act, including dividends upon the common stock at the rate of 6 per cent per 
 annum on the par value, but no more, and the company may establish fare 
 schedules that will automatically increase or decrease in the same manner as 
 authorized during public control. The act stipulates, however, that the state shall 
 not be under any liability to make payments to the company for deficiencies in 
 income accruing after the discontinuance of public operation. Thereafter, the 
 company is to be subject to public regulation and supervision in such mann'er as 
 may be determined by the legislature, but "such regulation and supervision shall 
 not be exercised so as to reduce the income below the reasonable cost of the 
 service'' as defined in the act. The act contains a provision, however, that none 
 of its provisions shall be construed to constitute a contract binding upon the 
 state other than the provisions which define the terms and conditions under which 
 the property is to be managed and operated by the trustees during the period of 
 public management and the provisions of the section requiring the trustees to 
 maintain the property at all times in good operating condition. 
 
 It appears from this analysis that service at cost as applied to the Boston 
 Elevated Railway system means ( 1 j public operation; (2) a fixed and guaranteed 
 return upon capital; (3) an obligation on the part of the state to rehabilitate the 
 property and maintain it in good condition; (4) a flexible fare sufficient to pay 
 the entire cost of service, including rehabilitation and dividends; (5) the right 
 of purchase either by the state or by a municipality upon repayment to the stock- 
 holders of their actual investment in the property (or as an alternative bv con- 
 demnation proceedings); (6) operation by state-appointed trustees entirely in- 
 dependent of any supervision or control by the local authorities or by the Public 
 
468 Electric Railway Problem 
 
 Service Commission; (7) the right on the part of the state to bring the policy of 
 public management to an end at any time after the expiration of 10 years, but 
 with the promise, which however is not en forcible as a contract, that in case the 
 property is turned back to private control, the company will be given the right to 
 fix its own rates as may be necessary to enable it to get revenues sufficient to pay 
 the full cost of service, including 6 per cent dividends, but without a guaranty 
 that deficiencies in revenues will be made up from taxation. 
 
 The Boston Elevated service-at-cost act was not submitted to the local 
 authorities of Boston or to the people of Boston for their approval and it is 
 clear from the testimony before the Commission, as well as from other sources 
 of information, that in its operation the Boston plan has been very unpopular. 
 As we have already seen, the 5-cent fare was discontinued one month after the 
 public trustees took hold. The unit fare was put up to 7 cents on August 1, 1918; 
 to 8 cents on December 1, 1918, and to 10 cents on July 10, 1919, and it was not 
 until the latter part of September, 1919, that the company's current revenues were 
 sufficient to meet the full cost of the service as defined in the act and as fixed 
 by the trustees. However, after September, 1919, the 10-cent fare yielded more 
 than the cost of service during every month up to February. 1920, when there 
 was a loss of about $372,000, said to have resulted principally from the enormous 
 expense incident to the winter snow storms. The loss under the first year of 
 public operation ended June 30. 1919. was $4,980,000 of which nearly $4,000,000 
 had to be made up out of taxes. With the 10-cent fare in effect all but the first 
 ten days of the period, the loss for the eight months ended February 28. 1920, 
 including certain items of back pay reaching back into the preceding fiscal year, 
 was approximately $7vW.0OO. It is no wonder, perhaps, that the Bostonese have 
 not been greatly pleased with a service-at-cost plan that has imposed upon them 
 a heavy burden of taxation without delivering them from the 10-cent fare. As 
 taxpayers they doubtless would enjoy the prospect of having the $4,000,000 
 already advanced to make up the deficiency in street railway earnings returned to 
 them out of the future profits, but as farepayers they cannot view with com- 
 placency the fad that the 10-cent fare is now yielding only a small and somewhat 
 uncertain margin over the current cost of service and that no reduction in fares 
 can be effected until the accumulated deficiencies of more than $5,000,000 have 
 been made up nut of earnings. 
 
 In Chapter XI 1 of this report. I have already quoted at some length the 
 testimony of Chairman McLeod. of the Massachusetts Public Service Commission, 
 with r('S|)ect to the <k'|)reciation policy of the Boston Elevated service-at-cost act 
 as administered by the public trustees. Discussing the reasons for the present 
 high cost of service in Boston. Mr, McLeod. at page 1443 of the Proceedings, says: 
 
 "The in.iintcn.iiicc charges on the Boston Elevated tlurins the [<Ast year have exceeded 
 the maintenance expeiuHliires for the year heforc hy substantially two and a half million 
 dollars, which represents pretty nearly donblc the expenditures for maintenance alone, and 
 there has Ix-en an expenditure of a little over $.?.(KK).0(X) of depreciation reserves over and 
 alxive that amount, of which $l.().'iO,00() represents the increase over the previous year. In 
 other words, the company's maintenance ami depreciation proRrams toRcther liavc repre-icnted 
 an exiienditnre of over $4.(KK).(HX) more under public control than was cxi>cnded imder private 
 control, and that of course has Ihhmi one very siRnificant element in hrinRintf about the finan- 
 cial situation and dcvclopinR the increased opcratiiiR cost which has necessitated an advance 
 in fares," 
 
Service at Cost 469 
 
 Mr. McLeod brings out the fact that before the Boston plan was adopted the 
 Massachusetts Pubhc Service Commission tried in vain to get it changed in certain 
 respects where the commission thought the interests of the public were not prop- 
 erly safeguarded. At pages 1444 and 1445 of the Proceedings, we find the fol- 
 lowing testimony : 
 
 "The Chairman : Is the company charging all its depreciation and maintenance to oper- 
 ation ? 
 
 "Mr. McLeod : It is charging all to operation ; so far as the depreciation requirement is 
 concerned, it is significant to remember that this depreciation fund is not intended to cover 
 depreciation in roadway and track ; that renewals in ties and paving and roadway are made 
 as part of the maintenance charge. Now, in accounting practice it has, I think, been most 
 common to include the depreciation of your rails and the depreciation of your ties, except 
 perhaps so far as minor renewals and patching up is concerned, as coming under your depre- 
 ciation program. But under the system adopted by the trustees, which was in accordance 
 with the plan outlined in Mr. Beeler's report, this maintenance program — this entire program 
 of track reconstruction — is charged up to maintenance and not charged to depreciation. 
 
 "The Chairman: Now, if the Board continues this practice, at the end of ten years you 
 are going to have a splendidly equipped plant to turn back to the corporation. The cost of 
 putting that plant in condition, charged to operating expenses, is all borne out of the revenue. 
 That means that the cost to the taxpayers or rather to the passengers has been excessive 
 during that ten years. What method has been adopted, if any, to reimburse the public for 
 the money which it expends for that purpose? 
 
 "Mr. McLeod: There has been no method adopted, and that is simply one point and 
 perhaps the most conspicuous point of several points that might be mentioned where the 
 public interest was not adequately served in the legislation that was passed. I know when 
 that matter came up the commission in a prepared statement and I myself orally before the 
 committee argued as strongly as I possibly could the lack of equity in the very point that 
 you have raised and suggested that the Act in that respect should be drawn upon the analogy 
 of the law and practice of the Railroad .-Xdministration where ample provision is made pro- 
 tecting the public from having the investors profit * ♦ * * by any increments of value 
 added to the j)roperty during the period of public control. But no such safeguards have been 
 put into the Massachusetts .\ct, although the commission used all its eflforts to see that a 
 provision of that kind was embodied in it." 
 
 Mr. Grenville S. MacFarland, representing the Hearst newspaper interests, 
 was an important factor in the formulation and negotiation of the Boston Ele- 
 vated service-at-cost plan. As a witness before the Commission, Mr. MacFarland 
 advocated public ownership and operation, but his support of the Boston plan 
 in its origin was evidently based upon the conviction that public operation, even 
 with private ownership, would do away with the most serious evils of the old 
 regime. At page 1356 of the Proceedings, he says: 
 
 "I think the gravamen of the evil of the present situation is not in private ownership; it 
 is in private operation, private control. For instance, Glasgow for 19 years tried public 
 ownership and private control, and it did not work ; it was a miserable failure in every 
 respect, politically, economically, financially and socially. And then they took over the public 
 control and it has been the classic example of the success of municipal operation in the world. 
 
 "Under private ownership and public operation, if the operation is complete and the 
 separation between the ownership and the operation is as complete as it is under our plan in 
 Boston, your stockholder becomes nothing more than a government bondholder." 
 
 At page 1355 of the Proceedings, he refers to the Boston contract as follows: 
 
 "In consideration of the public operation — taking over the possession of the property — 
 we agreed to give them a return on their investment which they could not possibly earn under 
 the contract, and in consideration of that they agreed to turn over the possession of their 
 property. 
 
 "The Chairman: Do you think that was a fair solution of the problem? 
 
 "Mr. MacFarland: I do think it is a fair solution with this qualification, .^t the time 
 a very good bargain was not driven by the public. I do not think anybody in Boston who 
 was acting on the public side had any idea of the extent to which that property was gutted; 
 that is to say. the extent to which dividends were paid out of capital, and nhsnlescenci- and 
 maintenance had been neglected and the railroad had been allowed to run down. And now 
 the public, of course, has got to rebuild it and make a new milch cow out of it. That is to 
 
470 Electric Railwav Problem 
 
 say, if the old stockholders ever contemplate taking it back again. And in any event they 
 are building it up against themselves if they ever decide to purchase it. 
 
 "The Chairman: Kates are going up by leaps and tKunuls in Boston. 
 
 "Mr. MacFarland: Well, they have gone up to 10 cents, and the counsel for the railroad 
 who is here just told me that they are making money." 
 
 Asked what he thought of the Cleveland service-at-cost plan, Mr. MacFarland 
 says at page 1357 of the Proceedings: 
 
 "I think it has worked pretty well in Cleveland under special circumstances, under cir- 
 cumstances that you will not be able without great struggle to effect in other cities, and 
 under circumstances to bring about which 1 think you would find the owners of the street 
 railways would prefer public ownership and operation. That is, they went through a reor- 
 ganization in Cleveland at the beginning of the cost-of-service plan and that reorganization 
 squeezed out a great deal more water than you are liable to get the stockholders of these 
 convalescent roads — I will not say convalescent roads but sick roads — to consent to even in 
 their contrite mood now. Their cost-of-service plan contemplates the cost of service after 
 paying the cost of the capitalization which now exists in the roads. 
 
 "The Chairman: Now, referring to the principle involved rather than to the practical 
 difficulties, do you believe that if the property of the plant is properly valued, either by the 
 city or by some state tribunal, and the contract made which secures the proper return to the 
 capital invested with efficient regulation over the service and capital expenditures, the main- 
 tenance requirements and of the accounting — would that Ix; satisfactory and properly safe- 
 guard the public interest? 
 
 "Mr. MacFarland: For a while, while the public was interested in it. It would be like 
 a new broom that sweeps clean. But just as surely as those things have worked out in that 
 way in the past, in the long run the man who is interested in the private property, in the 
 company under that management, will find ways by stealth or hook or crook of cumulating 
 a profit that was not contemplated in the original contract. It always has been so and always 
 will be so." 
 
 Mr. MacFarland's testimony brings into sharp relief the testimony of Mr. 
 Roger W. Rabson and other witnesses who insist that a service-at-cost plan 
 ought to offer the investors a chance for additional profit, in excess of the mini- 
 mum return, as an incentive to efficient and economical inanagement. It will be 
 recalled that Mr. Babson suggested as his solution of the electric railway problem, 
 the lifting of all restrictions as to rates and the equalization of public burdens 
 and service requirements as between the railways and their jitney competitors. 
 He expressed the opinion that the street car fares in Boston would be lower under 
 such an arrangement than they are today under public operation. lie gave as 
 his reason for this opinion the fact that "the state is holding the umbrella" and 
 the stockholder's interest is gone. At pages 1055 and 1056 of the Proceedings, 
 he goes on to say : 
 
 "The wage worker is in the same position. He looks upon it as a grab-bag, you might 
 say — that it is not coming out of anybody especially, that it is coming out of the whole 
 public in general, and that the spirit of the age is to grab, and consequently his restraints 
 are off. 
 
 "It may work out all right, but I feel very strongly that before we go headlong into 
 municipal ownership or service at cost we should free the street railways from their shackles, 
 that we should stop iK-r.secuting them, and give them an opportunity to save themselves. And 
 I am not sure but that, in giving them an opportunity tn save themselves, some communities 
 woulrl save themselves likewise, Ix-cause the relation l)etween the prosixjrity of a community 
 and the prosperity of its street car system is very, very vital." 
 
 Mr. Babson admitted that the Cleveland system must be a good system if it 
 produced the results claimed for it. Mr. Warren brought out the fact that what 
 Mr. Babson objected to in the Boston plan was the public guaranty of the divi- 
 dends. .\t page 1062 of the Proceedings, we find the following: 
 
 "Mr. Warren: In Cleveland, as I understand the situation there, the only guaranty is 
 that the company may charge up to a certain limit a sufficient fare to meet that cost of ser- 
 vice: but it has to got it out of the operation of the projiorty? 
 
 "Mr. Babson : That is more in line with what I have suggested. That is all right." 
 
Service at Cost 471 
 
 A little further on, Mr. Babson said that the plan he liked best was the New 
 Brunswick plan, introduced by Professor Richey. That was a sliding scale plan 
 giving the stockholders a higher rate of return as fares are reduced. Mr. Bab- 
 son also refers to the sliding scale plan adopted twelve or fifteen years ago in 
 connection with the gas service of Boston, and adds, at page 1063 of the Pro- 
 ceedings : 
 
 "The effect of it is that everybody is right on his toes, and we have a very efficient 
 organization there. We have the best gas engineers in the countr>', and we have very low 
 priced gas. I think it has been successful." 
 
 Mr. Ralph S. Bauer, of Lynn, did not mince words in expressing his opinion 
 of the service-at-cost plan as it has worked out in practice in Boston, as indicated 
 by the following statement by him at page 1625 of the Proceedings: 
 
 "This service-at-cost plan, so-called, is a plan that is only a temporary expedient, 
 because of the fact that there are no measuring standards of efficient, economic and careful 
 operation by which the public who ride on the cars can determine whether or not those costs 
 have been proper ones. 
 
 "The public trustee plan as worked out by the Boston Elevated Railroad, in my judg- 
 ment, is a colossal blunder. It nullifies every effort to careful, efficient and economical 
 street railroad management. The trustees as appointed by the Governor are most all of them 
 lawyers, no one of them street railway operating men; they have shown neither courage nor 
 initiative in handling the property, and they have chased the rates of fare up to a point now 
 that the people ride on the street cars at a 10-cent cash fare about the same as they do on 
 ambulances, only when they have to." 
 
 Interstate Commerce Commissioner Eastman also has his doubts of service 
 at cost if applied as it has been in Massachusetts. At page 2078 of the Pro- 
 ceedings, he says : 
 
 "I think it is liable to work well where it is the result of mutual agreement between the 
 local people and the owners of the property, and is not forced upon them by some agency 
 like a state government. In other words, where it is the result of a mutual feeling and a 
 meeting of minds of those most vitally interested, and it is also likely to be successful where 
 the fares vary around five cents. When you get to a situation where the cost of service leads 
 to fares higher than five cents, you are running into great danger, because it is very apt, 
 if you base it upon a flexible rule, to keep fares mounting up indefinitely without any real 
 advantage to anyone. One of the difficulties in raising fares is that once you have them 
 raised it is almost impossible to reduce them, if they do not produce the results desired." 
 
 The Boston Elevated service-at-cost act did not restore the company's credit 
 sufficiently to meet its pressing needs for new capital. The problem has been 
 solved temporarily by the state's purchasing of the Cambridge subway from the 
 company for $7,868,000, thus placing this amount of new capital at the disposal 
 of the public trustees for construction purposes. 
 
 The Bay State service-at-cost act differs from the Boston Elevated act in 
 several particulars. It provided for the reorganization of the old Bay State 
 Street Railway Company which was in receivers' hands when the act was passed. 
 Upon the organization of the new company the Governor was to appoint, with the 
 advice and consent of the council, five trustees to operate the road, but, in this 
 case, the term of those first appointed was to be five years, although the period 
 of public operation was to be ten years, the same as in the case of the Boston 
 Elevated. The new company was organized as the Eastern Massachusetts Street 
 Railway Company, and public operation went into effect on June 1, 1919. By the 
 terms of the Bay State act the capitalization of the new company, including stock, 
 bonds and other evidences of indebtedness, representing the property whose in- 
 
472 Electric Railway Problem 
 
 vestment value was fixed by the Public Service Commission as of August 31, 1916, 
 was limited to the equivalent ol $40,282,340 on a six per cent basis, plus subsequent 
 additions and improvements. Certain adjustments of the sum just described as 
 representing the recognized capital value were to be made by the Public Service 
 Commission. 
 
 The new company was authorized to issue serial bonds, with not more than 
 $5,000,000 outstanding at any one time, and these bonds were to be payable in 
 installments within a period of not more than ten years from the dates of issue. 
 In addition to the security of a new mortgage, the annual installments of these 
 serial bonds were given a first lien upon all the earnings of the new company 
 applicable to dividends in the years when such installments of serial bonds ma- 
 ture, but the moneys used to pay oflf the serial bonds in lieu of the payment of 
 dividends are to be capitalized in the form of additional capital stock to be dis- 
 tributed to the stockholders in place of dividends. For the purpose of refunding 
 serial bonds or any maturing obligations of the new company or of the leased 
 lines within the state, or for the purpose of making additions or improvements, 
 the public trustees are given authority to cause the new company to issue secur- 
 ities under the laws of the state, and it is stipulated that serial bonds and C(|uip- 
 ment notes may he issued without reference to the amount of capital stock out- 
 standing; also that bonds may be sold at a discount, with provision for the amor- 
 tization of the amount of the discount during the life of the bonds. 
 
 Tlie act forbade the new company to aci|uirc the property of the defunct 
 Bay State company until the trustees were satisfied that provision had been made 
 by the security holders of the old company for paying in $1,000,000 in cash for 
 securities of the new company to be used in the rehabilitation of the lines and 
 for other purposes, and also that provision had l)cen matle for the immediate sale 
 of at least $2,500,000 of serial bonds. Out of the proceeds from this sale, the 
 sum of S500.000 was to be used to set uj) a reserve fund, and the sum of $2,000,000 
 was to be set aside to be spent by the trustees in additions and improvements or 
 in the payment of receivers' certificates issued for such purposes. The public 
 trustees were authorized to enter into agreements with the purchasers or holders 
 of serial bonds up to the amount of $4,(K)0,000 maturing in not more than ten 
 years from the date when the new company acquired the property; such agree- 
 ments to provide that if the earnings of the new company otherwise applicable 
 to dividends should be insulficicnt to jwy the installments of these serial bonds as 
 they mature the trustees shall make up the deficiency. In order to enable the 
 trustees to make this agreement, it was provided that the slate should purchase 
 from time to time a sufficient amount of serial bonds to supply this deficiency, 
 and it was also provided that the state should be reimbursed for moneys spent in 
 this maimer by tlie mmiicipalities served by the new company in proportion to 
 the number of persons in .such municipalities using the service. 
 
 The control of the public trustees with respect to the management and oper- 
 ation of the property is substantially the same as in the case of the Boston Ele- 
 vated Railway, and similar provisions obtain with respect to the cost of service 
 and the semi-automatic regulation of rates to cover the cost of service. It is 
 provided, however, in the case of the Ray State lines that those north of Boston 
 
Service at Cost 473 
 
 shall constitute one fare district and those south of Boston, another; and that 
 the items entering into the cost of service shall be allocated by the trustees be- 
 tween the two districts for the purpose of estimating the basis for fares ; but 
 the trustees are authorized to make further sub-divisions of the territory served 
 into fare districts. A special provision in this law gives any city or town served 
 by the company's lines the option to determine by a majority vote of the electors 
 to contribute out of taxes a certain amount toward the cost of service "for the 
 purpose of preventing increases in fares, or of reducing fares, or of avoiding dis- 
 continuance or reduction of service." Such contributions may be for the period 
 of the war and for two years thereafter, and are limited to "any part or all of 
 the increase in the cost of operation due to increased wages, or the cost of supplies 
 or coal in excess of the average cost for the year ending July 1st, 1914, as 
 determined and apportioned by the trustees." Moreover, the contribution by 
 any city in any one year is limited to 50 cents for each $1000 of assessed valua- 
 tion, and the contribution of any town to $1.00 for each $1000 of assessed valua- 
 tion. It is provided that if part only of the cities and towns in any fare district 
 contribute to the cost of operation in the manner just described the trustees 
 shall make such adjustments in fares as they think equitable under the circum- 
 stances. 
 
 The return upon investment as an element in the cost of service in the 
 case of the Bay State lines is defined as the interest payments, stated dividends 
 on the preferred stock and 6 per cent on the common capital stock of the new 
 company. In the case of the Bay State lines it is definitely provided that public 
 management is to terminate at the end of the ten-year period. The company 
 will then come into the control of the property under the general laws of the 
 state, unless, in the meantime, the property has been acquired by the state, or 
 by some political sub-division of it, in accordance with the option of purchase 
 described in the act. This option is similar to that contained in the Boston 
 Elevated act. The Bay State lines are relieved during the continuance of the 
 war and for a period of two years thereafter, unless otherwise ordered by the 
 Public Service Commission, from paying "any part of the expense of the con- 
 struction, alteration, maintenance or repair of any street, highway, or bridge, 
 or any structure maintained or placed therein or thereon, or of the abolition of 
 any grade crossing or the removal of wires from the surface of any street or 
 highway to an underground conduit or other receptacle." 
 
 It is to be noted that service at cost is defined in substantially the same way 
 in the Boston Elevated and the Bay State acts, but the state provides no guaranty 
 in the case of the Bay State lines that the prescribed return on capital will be 
 paid if it turns out that the system is unable to earn the full cost of service. 
 However, as we have already seen, the state's guaranty in the case of the serial 
 bonds enabled the trustees to dispose of $2,500,000 of them on a 6 per cent 
 basis, and in this way, as Mr. Loring testified, the trustees have been provided 
 with adequate new capital for additions and improvements for a period of two 
 or three years at least. Under the Bay State act, if deficiencies accrue, there is 
 no provision for making them up out of taxation, either temporarily or perma- 
 nently, except that individual municipalities may, if they wish, contribute a 
 
474 Electric Railway Problem 
 
 limited amount for the purpose of keeping the fares down or preventing the 
 suspension of service. Moreover, the Bay State act contains no promise that 
 the service-at-cost plan will be continued beyond the termination of the ten-year 
 period of public management. 
 
 It is apparent from the testimony of Mr. Homer Loring. Chairman of the 
 Board of Public Trustees now operating the Bay State lines, that the deprecia- 
 tion policy now being pursued with respect to this system is similar to that 
 pursued by the Boston Elevated trustees. At page 1655 of the Proceedings, 
 Mr. Loring says : 
 
 "We are setting aside a depreciation account of $1,041,000. 
 
 "The Chairman: .\nd that is much larijer than has been heretofore charged? 
 
 "Mr. Loring: Oh. si.x times; I think $150,000 was about the largest amount they had 
 ever charged. 
 
 "The Chairman : Is it your view that the depreciation that you have charged off fairly 
 represents what should be charged in the future or is there some abnormal condition? 
 
 "Mr, Loring: Of course, that matter is affected verv largely by the prices of material. 
 A million dollars depreciation in the old days of the Bay State would have been a very large 
 amount, but it buys now the same material and labor that $500,000 would have bought then. 
 The trustees were reluctant about setting the figure as high as $1.0(X),000. but after very 
 careful figures of the cost of everything that that would buy which went into the tracks and 
 the power plant and cars we made up our minds that since the law directed us to charge an 
 adequate amount, no smaller amount would \x adequate." 
 
 Mr. Loring states that the physical condition of the system was bad when 
 the public trustees took control and that much deferred maintenance had accu- 
 mulated. The trustees propose to rehabilitate the property and put it into good 
 condition just as rapidly as they can. At page 1656 the following testimony 
 appears : 
 
 "The Chairman : What will be done to repay the state for the large amount of money 
 which it is putting into this property to build it up? 
 
 "Mr. Loring: Well, of course, that is a consideration that the state pays for the security 
 owners turning over control of the property. 
 
 "The Chairman : So it is not expected that the state can be recouped for any expendi- 
 ture which is made for taking care of deferred maintenance or putting the property in good 
 shape? 
 
 "Mr. Loring: No, not so far as deferred maintenance is concerned. 
 
 "The Chairman : That is to be a contribution by the state. 
 
 "Mr. Loring: That is to be a contribution by the state. .\t the same time we are not 
 fixing the amount of depreciation. Mr. Chairman, at any larger than a normal amount. In 
 other words, the amount we are fixing tixlay is insufficient to take care of past deficiencies." 
 
 But there is this important difference between the obligations assumed by 
 the commonwealth toward the Bay State system and the obligations assumed 
 toward the Boston Elevated system, namely, that if the rehabilitated Bay State 
 lines are turned back to their owners in good condition, the upbuilding of the 
 property will not have been accomplished through direct contributions of the 
 state, while in the case of the Boston Elevated this may be just what will hap- 
 pen in case operation at a high rate of fare should not prove sufficiently remu- 
 nerative to enable the trustees to reimburse the deficiencies now being tnade up 
 through taxation. 
 
 All accounts agree that the service-at-cost plan as applied to the Bay State 
 lines has not been an unqualified success from the standpoint either of the 
 investors or of the public. The unit rate of fare in effect since July, 1919, has 
 been 10 cents cash, without reduced rates for tickets except in particular com- 
 munities where the trustees have been experimenting with special fare schedules 
 
Service at Cost 475 
 
 in the hope of getting the lost traffic back. Mr. Loring testified that fare in- 
 creases on the Bay State lines have in every case resulted in some gain in gross 
 revenues. Upon this point Mr. Loring's testimony, at pages 1657 and 1658 of 
 the Proceedings, is very significant : 
 
 •■Commissioner Sweet: You have gained, say, a little? 
 
 "Mr. Loring: Yes, it is comparatively little. 
 
 "Commissioner Sweet: But you have greatly diminished the car riding? 
 
 "Mr. Loring : \'ery greatly. 
 
 "Commissioner Sweet: You have simply from a much smaller number of people got 
 double the amount of money and that has made a comparatively slight increase in the total 
 revenues ? 
 
 "Mr. Loring : \\e feel it is a very unfortunate situation, that a public utility as it ceases 
 to serve the public, as the part of the public it serves is cut down, its functions are shrunken 
 just that much. 
 
 "Commissioner Sweet: In order to increase the revenue very little you have decreased 
 the value of the utility to the public a great deal. 
 
 "Mr. Loring: We as trustees have determined on the cour.^e of trying to get the income 
 we need from as many people as possible. 
 
 "Commissioner Sweet : That is it exactly. You want to keep up in value as a public 
 service utility. 
 
 "Mr. Loring : That is the course we want to follow, yes. 
 
 "Commissioner Sweet : So you would not recommend to this Commission any adoption 
 of a report or the formulation of conclusions that would produce the revenue necessary for 
 immediate use at the sacrifice of the real purpose for which these organizations exist, that is, 
 service to the public, unless their very existence depends upon doing so. You would deem 
 that a very last resort, would you not? 
 
 "Mr. Loring: Yes, I would say I would try other things first. Of course, assuming 
 you have got to raise the money to continue the company's credit, if no other way can be 
 found you have got to get your revenue from a few people, but I think it is very unfortunate 
 if that course has to be followed. 
 
 "Now, that of course is what is happening in the Boston Elevated situation to a less 
 extent than in ours. They are now getting the money. I understand they are getting now 
 their cost of service out of the public, but of course they are getting it through a substantial 
 loss in the number of car riders. I think it far better to get it that way than not at all, 
 because they are maintaining good service and serving the people well, and if that is the 
 only way, all right; but I think it would be very much better if the same amount could be 
 obtained in some way from more fare earnings. But that can only be done by experimenting 
 with fares and trying them out. 
 
 "Commissioner Sweet : Is it your belief that a great deal of the falling ofT of patronage 
 is due to ill-will, to a sort of resentment on the part of the public against these corporations 
 in the belief they ought to give them the service at a small price? 
 
 "Mr. Loring : There is no question about it in my mind. I have seen proof of it again 
 and again and again. When we raised the fare to 10 cents it resulted in a virtual boycott 
 in some cities, and I understand in one city now — the manager of a factory told me in that 
 city now — the help that rode on the street cars were jeered by the other people. But, of course, 
 that is wholly lack of information." 
 
 In the Electric Railway Journal, issue of February 14, 1920, is an article 
 showing the increase in gross revenues of the Eastern Massachusetts Street 
 Railway for the first seven months of public operation, that is, from Tune to 
 December, 1919, as compared with the same months of the preceding year when 
 the Bay State lines were being operated by a receiver. The figures show an 
 increase of 19.3 per cent in gross. During the earlier period the unit cash fare 
 under the zone system was six cents. During the later period the unit cash fare 
 was ten cents. Moreover, it is known that the latter part of 1918 was generally 
 in the electric railway industry a low-traffic period, while the latter part of 1919 
 was a high-traffic period. The comparative figures of gross earnings quoted in 
 the Journal article are as follows : 
 
476 Electric Railway Problem 
 
 Per Cent 
 
 Month 1918 1919 Increase Increase 
 
 June $909,360 $988,319 $7&958 8.7 
 
 lulv 1,029.111 1.169.775 140,664 13.7 
 
 August 1,114.068 1,286.010 171,942 15.4 
 
 September %9,768 1,104.618 134,850 13.9 
 
 October 795,616 1,073.463 277.847 34.9 
 
 November 879,325 1.0.S5.809 176,484 20.0 
 
 December 913,535 1.214,632 301,097 32.9 
 
 Total $6,610,783 $7,892,626 $1,281,783 19.3 
 
 The figures for the Union Street Railway Company operating in Xew 
 Bedford, where the five-cent fare was retained, and no change in rates made 
 except by the discontinuance of the 3-cent workingmen's tickets and the with- 
 drawal of certain transfer privileges on an interurban division, show an increase 
 of 37 per cent in gross passenger earnings for the same seven months period, and 
 an increase of 24.4 per cent in the inimber of revenue passengers carried. For 
 the month of December alone, when the Eastern Massachusetts increase in gross 
 earnings was 32.9 per cent, the New Bedford company had an increase of 38 
 per cent in traffic and 42 per cent in gross passenger revenue. According to the 
 article in the Electric Railway Journal, it was expected that for the first eight 
 months of operation under the public trustees the entire system of the Eastern 
 Massachusetts company would "just about show the bond interest was covered." 
 There is nothing in the record or in the supplementary information available 
 to me to show that the service-at-cost plan in efTect on the two big Massachu- 
 setts electric railway systems has restored the credit of either company, except 
 to the extent that public aid has been given or guaranteed. What Mr. Loring 
 thinks about the importance of the reestablishment of credit appears at page 
 1653 of the Proceedings, where he says : 
 
 "I feel very strongly that that is the big question that the street railroad business of the 
 country has before it now, and I am afraid, the fact is I know, that in many cases, in many 
 cities, it is put to one side. It behings right at the front 1 believe at all timis. The com- 
 panies cannot run and .serve the public well without credit. There is a constant demand for 
 better facilities, and personally 1 believe today the only way they can be bridged over this 
 exceedingly uncertain period which confronts them is through some form of public credit. 
 And that leads me to say that if the public is going to lend its credit to them, the public 
 mu.st have a decided hand in the operation of the properties during the period for which the 
 credit is extended." 
 
 The general service-at-cost act, passed by the Massachusetts legislature 
 in 1918.' has thus far been a failure, if for no other reason than that no com- 
 pany has accepted it. By this act the cost of service is defined as including 
 "operating expenses, taxes, rentals, interest on all indebtedness. * * * « 
 dividends on preferred stock and interest return at the rate of six per cent per 
 annum upon the stock investment as determined by the commission, ♦ * ♦ * 
 and such allowances for depreciation, for obsolescence and for losses in respect 
 to property sold, destroyed or abandoned as may be fixed from time to time in 
 the case of each company by the commission, and all other expenditures and 
 charges which, under the classification of accounts of the Interstate Commerce 
 Commission and under the laws of the commonwealth, are properly chargeable 
 against income or surplus." The term "stock investment" is defined to mean 
 the "capital investment" le.ss the amount paid in for outstanding preferred stock, 
 
Service at Cost 477 
 
 bonds and other evidences of funded indebtedness. The term "capital invest- 
 ment" is defined as meaning "the amount of cash or fair value of the property 
 paid in" for stock, bonds and other securities and "properly expended for capi- 
 tal purposes," all as to be determined by the Public Service Commission. 
 
 Any company accepting this general act is required to provide a reserve 
 fund of not less than 6 per cent nor more than 12 per cent of the gross earnings 
 of the preceding year. This reserve fund may be provided by the issuance of 
 either bonds or common stock, or preferred stock, issued under provisions of 
 law. The company is also required to provide an improvement fund to be 
 raised by the issuance of securities in an amount to be determined by the com- 
 mission, but not exceeding 5 per cent of the capital investment. This fund 
 must be fully subscribed within sixty days after the determination of the capital 
 investment, and must be paid in from time to time as required by a plan of 
 gradual improvement to be submitted to and approved by the commission. 
 
 Any company desiring to accept this act is required to apply to the com- 
 mission to determine the amount of its capital investment and the amount of its 
 stock investment ; also, the status of its unfunded debt, together with evidence 
 satisfactory to the commission that it has provided or will provide the reserve 
 and improvement funds above described. 
 
 Upon the acceptance of the act a company is required to file a schedule of 
 nine different grades of fare and of transfer privileges, one of which it shall 
 designate as the initial grade which it desires to establish and which, in its opin- 
 ion, will enable it to earn sufficient income to meet the cost of service. Four of 
 the other grades shall provide for progressive increases and four for progressive 
 decreases in revenue, and shall be based upon a calculation that each increase 
 or decrease will be equivalent to 30 per cent of the normal reserve fund. The 
 Public Service Commission, after a hearing, is to approve the fare schedule so 
 filed or else to establish a substitute schedule based on the same general prin- 
 ciples. If at the end of any quarter of the calendar year the amount in the 
 reserve fund is 30 per cent above normal, and if during the preceding three 
 months the company's income has been greater than the cost of service, the 
 company is required within thirty days thereafter to put into effect the next 
 lower grade of fare, and conversely, if the amount in the reserve fund is less 
 than 70 per cent of the normal amount, and if during the preceding three months 
 the company's income has been less than the cost of service, the next higher 
 grade of fare must be put into effect. 
 
 By the acceptance of the act a company agrees to sell its entire property 
 and franchises as a going concern to the state or to any city or town at any 
 time for a cash payment equal to the stock investment plus the amount of cash 
 paid in for preferred stock, and the purchaser of the property will, in addition, 
 assume "all the outstanding bonds, contracts, leases and other liabilities of the 
 company." As in the Boston Elevated and Bay State acts, it is stipulated that 
 nothing in this act shall affect the right of the state or a municipality to acquire 
 the property of a company by condenmation proceedings. 
 
 For any company accepting the act the Governor is to appoint three members 
 of the board of directors of the company. In order that the Public Service Com- 
 
478 Electric Railway Problem 
 
 mission may exercise adequate supervision over companies accepting this ser- 
 vice-at-cost plan, such companies are required to furnish the commission monthly 
 statements showing the condition of the reserve fund, the company's income 
 and expenditures and such other information as the commission may desire. 
 The state is to be divided by the commission into street railway districts, and 
 for each district within which the service-at-cost act has been accepted by one 
 or more companies the commission is to appoint one or more resident super- 
 visors, whose salaries and expense allowances are to be fixed by the commission 
 and paid by the company or companies under their supervision as an operating 
 expense. It will be the duty of these district supervisors "to keep in constant 
 touch with the operation of the companies and to inform the commission of all 
 complaints and criticism of the service rendered." The act provides that if any 
 special investigation of any company is deemed necessary by the commission, 
 the investigation may be ordered and the company will have to pay the expense 
 of it. The act also provides that "the commission may require such changes in 
 the management and operation of any company which has accepted the pro- 
 visions of this act as in its opinion may be necessary for the efficient conduct of 
 the business of the company in the interest of the public." It is also provided 
 that if a majority of the state directors of a company operating under this act 
 believe that a particular order or decision of the Public Service Commission 
 would impair the ability of the company to pay a 6 per cent interest return upon 
 the stock investment, they shall so advise the commission in writing, and if the 
 commission still insists upon its order or decision the company may apply to 
 the supreme judicial court for a reversal or modification of the order or deci- 
 sion ; and the court may appoint three commissioners to determine the facts and 
 questions at issue, and their report, when confirmed by the court, will be final. 
 
 It is noteworthy that this general service-at-cost act differs from the Boston 
 Elevated and Bay State special acts in the fact that it does not proviile for public 
 operation and does not provide for a state or municipal guaranty either of new 
 securities to be issued or of the fixed return upon the existing investment. It 
 is to be remembered that outside of the Boston Elevated and Bay State systems 
 there are several urban street railways of considerable size in Massachusetts, 
 notably those of Worcester, Springfield. Holyoke and New Bedford. If none 
 of these systems has been tempted to embrace the service-at-cost plan under the 
 terms prescribed by the State of Massachusetts in this general act, it may per- 
 haps be presumed that service at cost without a public guaranty is not to be 
 regarded as the solution of the problem of electric railway credit in Massachusetts. 
 
 The Cincinnati service-at-cost ])Ian. adopted in August, 191S, differs in 
 certain respects from all of the plans thus far described. The occasion for the 
 adoption of the plan was the fact that the existing street railway franchise in 
 Cincinnati, granted in 189(1 for a term of 50 years, contained a provision that 
 at the end of the first 20 years and each 15 years thereafter its terms and con- 
 ditions should be open to revision and that the new rates of fare to be charged 
 should be based upon the cost of carrying passengers at the time of the revision. 
 In point of fact a revision of the ordinance, coupled with a lease of a proposed 
 rapid transit line, was negotiated in 1917 and ratified by the voters of Cincinnati. 
 
Service at Cost 479 
 
 This particular plan, however, was defeated by a decision of the Ohio Supreme 
 Court, which held the new ordinance to be invalid on the ground that it made 
 provision for lending the city's credit to a private company. Delays incident to 
 the negotiation of the rapid transit lease, and the further delays resulting from 
 the litigation, threw the problem of the revision of street railway fares in Cin- 
 cinnati over into the period of high prices resulting from the war. Mr. W. C. 
 Culkins, at that time Cincinnati's Director of Street Railroads, explains at pages 
 472 and 473 of the Proceedings the general problem with which the city was 
 confronted and the attitude it assumed towards it. Upon this point he says : 
 
 "Now, in approaching this question the city took the view in the experience that had 
 already appeared during the war times that there was a new viewpoint necessary in the 
 working out of a franchise that would be the most serviceable to all concerned. They realized 
 that a street railway utility was the key utility in any community, since it made all other 
 industries possible, and that therefore it was highly important to the development of the 
 community that some kind of a franchise be worked out which would allow the community 
 itself to expand and to do its part in the general expansion of the country. They took rather 
 the new view. The old franchise was the old type of franchise. It contained very few 
 restrictions ; it provided that cars should run as often as the public convenience required, and 
 neglected to say who should determine that. And it was found there was a very great differ- 
 ence of opinion between the stockholder and the strap hanger as to how often cars ought 
 to run. The view taken by the city in this case was that we should visualize a street railway 
 franchise not so much as a permit given to permit a corporation to operate an industry in 
 the city, but the creation of an agency to carry out a purely municipal function ; that it was 
 the duty and the function of the city, which it might exercise of its own motion and of itself, 
 to provide transportation of its people, and if it did not do it that it should create an agency 
 under its control that would carry out this function in the way that the city should direct. 
 
 "It was very evident that most of the trouble in street railway franchises was growing 
 out of too much rigidity all along the line, not only in rates of fares but in terms and con- 
 ditions, and the city felt that perhaps the cure for too much rigidity was a great deal of 
 elasticity. The question was opened at a time when prices were very high, when it would 
 be obviously unfair to the company to expect them to operate on a rate of fare based on 
 pre-war conditions. It would be obviously unfair to the community to ask them to allow 
 the company a rate of fare based upon war times which would continue for a period until 
 1931. assuming that there was a probability at least of there being some change in conditions 
 during that period. So that the thing which seemed to be obvious was the service-at-cost 
 plan, since it would automatically adjust itself to these changing conditions. It would be 
 high enough to allow the public to have the kind of service that it wanted and was willing 
 to pay for, and it would automatically reduce those rates when the costs and market condi- 
 tions changed in accordance with that. So that a plan was adopted that follows somewhat 
 the Cleveland plan, being the oldest service-at-cost plan in operation then, with such modifi- 
 cations as we felt experience had warranted in that plan." 
 
 The first striking thing about the Cincinnati plan is that the contract was 
 not based upon a valuation, but rather upon a recognition of the existing fixed 
 charges of the Cincinnati Traction Company, including its obligation to pay a 
 rental to the Cincinnati Street Railway Company, owner of the original lines, 
 equivalent to 6 per cent on the lessor company's capital stock. This basis of 
 settlement was arrived at after three physical valuations of the property had 
 been made, one by the company, one by the Ohio Public Utilities Commission and 
 one by an appraisal engineer employed by the city. The capitalization finally 
 accepted did not vary much from the reproduction-cost valuation made by the 
 state commission, but was about double the depreciated value fixed by the city's 
 own expert. 
 
 The gross receipts are to be used for the payment of the several elements of 
 the cost of service in the following order : 
 
 A. Operating expenses, including the liquidation of accrued personal injury 
 claims ; also, all taxes and other governinental imposts not properly charsreable 
 
480 Electric Railway Problem 
 
 to capital and not including the percentage tax on gross earnings paid to the 
 city; also, all payments and charges for depreciation which for the first period 
 of 5 years under the contract are to be made in the manner and according to the 
 practice previously followed by the company, unless otherwise ordered by the 
 Ohio Public Utilities Commission, and after the end of this period as "ascertained, 
 determined, fixed and prescribed" by the commission ; such depreciation charges 
 to include an amount sutticicnt to pay the company's equipment notes as they 
 fall due from year to year unless otherwise ordered by the commission; also, 
 payment for the cost incurred by the cit>' and the company in connection with 
 the valuation of the property, and the cost incurred by the company for its part 
 of a traffic survey begun in August, 1916, these payments to be charged as oper- 
 ating expenses and distributed over a period of 6 years from April 1, 1919; also, 
 payment to the city of certain viaduct rentals ; also, expenses and court costs 
 incurred by both the city and the company growing out of the enforcement or 
 resistance to the enforcement of any ordinance, order or decision provided for 
 in the contract. Immediately upon the contract going into effect, the city and 
 company were to apply to the Ohio Public Utilities Commission to establish sys- 
 tems of accounts to be kept in connection with the operation of the property 
 that, under the agreement, the city would have the right to purchase. 
 
 B. Annual rentals provided for by the leases of the underlying properties, 
 amounting in the aggregate to $1,234,937. 
 
 C. An annual payment of $215,000 for interest and $82,445 for sinking 
 funds on $4,000,000 of capital expenditures made by the operating company 
 prior to December 31. 1916; also, interest on the operating company's equipment 
 notes, such notes amounting in the aggregate to $1,159,000. The $4,000,000 
 and the $1,159,000. together aggregating $5,159,000, were designated as the 
 "reducible debt," which is to be paid off out of earnings. 
 
 D. Interest and other fixed charges on securities issued to reimburse the 
 company for capital expenditures and mode subsequent to January 1, 1^17. The 
 contract provides that the amount and character of the securities or notes to 
 be issued by the company, the rate of interest or dividends thereon, the sinking 
 fund or other method of retiring them, if any, and the price at which they may 
 be sold, shall be subject to the approval of the director of street railroads and 
 also of the (J)liio Public Utilities Commission. Under this sub-division, also, 
 comes interest on floating debt; also, interest on equipment notes issued after the 
 ordinance took etTect; also, payment of principal of equipment notes, if the Public 
 Utilities Commission requires the payment of such notes through the deprecia- 
 tion funds to be suspended without making other specific provision for their 
 payment ; also, payments to the city on account of the construction and installa- 
 tion of tracks and poles on the Hopple Street viaduct, but such ixiymeiits. though 
 made out of the gross earnings, are to be charged as an arldition or betterment 
 to the company's pro|)erly. It is provided that as between the city and the com- 
 pany no charge shall be made to capital for imjirovements, additions or better- 
 ments paid for by the city or from donations to the company or from special 
 assessments against i)rnperty not owned by the company, but the proportion of 
 the cost of viaducts and of the elimination of grade crossings and other special 
 
Service at Cost 481 
 
 assessments which have been or may hereafter be paid by the company are to be 
 charged to capital as additions and betterments. 
 
 E. An annual payment of $416,000 to the operating company as an earning 
 upon the capital invested by it after it came into possession of the leased lines, 
 in addition to the "reducible debt" provided for under sub-division C. 
 
 F. An annual payment of $350,000 to the City of Cincinnati as a tax on the 
 company's gross earnings; also, certain sums required to nxake up to the city 
 the company's arrearages in the percentage tax due under the old ordinance prior 
 to the date of the new contract. 
 
 G. An amount to be fixed by the director of street railroads for the accu- 
 mulation of an adequate working capital fund. 
 
 H. A reserve fund of $250,000 is to be provided from the sale of securities 
 and all surplus gross receipts remaining after the payments provided for under 
 sub-divisions A to G inclusive are to be added to this reserve fund until it reaches 
 the nomial sum of $400,000. After the fund has been built up to this amount, 
 the surplus gross receipts are to be divided between it and the company in certain 
 proportions, dependent upon the rate of fare being charged from time to time. 
 If the fare for adult passengers is more than 6 cents, the reserve fund will 
 get all of the surplus gross receipts ; if the fare is 6 cents, the fund will get 
 80 per cent and the operating company 20 per cent of the surplus ; if the fare 
 is SjA cents, the fund will get 70 per cent and the company 30 per cent; if the 
 fare is 5 cents or less, the fund will get 55 per cent and the company 45 per cent. 
 
 The contract provides that whenever the reserve fund reaches $650,000 
 the fares shall be reduced, and thereafter at intervals of not less than three 
 months the fare shall be further reduced so long as the reserve fund continues 
 to grow. Conversely, fares are to be increased when the amount in the reserve 
 fund gets as low as $250,000. All deficiencies in the payments provided for 
 under sub-divisions A to G above enumerated are to be charged against the 
 reserve fund and are to be taken into consideration in determining the condition 
 of the fund at any given time with respect to its effect upon the fare schedules. 
 Provision is made for published notice for at least one-half month of any change 
 of fares that is to be put into effect. All payments and accruals payable out of 
 gross receipts as above described are to be cumulative in the order named, and 
 the company is authorized to borrow money temporarily to pay any deficiencies 
 under sub-divisions A to F inclusive. 
 
 The city reserves the right to acquire the properties under the power of 
 eminent domain conferred upon municipalities by the constitution of Ohio, and 
 also reserves the option to take over the property at any time upon payment of 
 the sum of $26,238,950; plus any portion of the "reducible debt" outstanding 
 at the time ; plus the amount necessary to pay and retire car trust notes issued 
 subsequent to the date of the ordinance and outstanding at the time of purchase; 
 plus the amount necessary to pay and retire the then outstanding securities 
 issued for the reserve fund or for capital expenditures subsequent to January 1, 
 1917; plus "any and all accrued and unliquidated deficiencies at the time of 
 such purchase in the payments required to be made under sub-divisions A to F, 
 both inclusive" ; plus all sums raised and paid by the company prior to the time 
 
482 Electric Railway Problem 
 
 of purchase in financing deficiencies in the gross receipts and not subsequently 
 liquidated; minus the balance in all depreciation and insurance funds accrued 
 after January 1, 1917, and held by the company; also, minus all sums paid into 
 sinking funds for securities issued by the company after January 1, 1917; also, 
 minus the sum or sums at the time of purchase in the working capital and reserve 
 funds; also, minus a sum equal to the aggregate amount of payments made and 
 judgments satisfied after January 1, 1917, for injuries and damages occasioned 
 prior to that date. At the time of purchase under this option, the company's 
 cash on hand, its bills and accounts receivable from the operation of the property 
 and its cash from the sale of securities and notes as provided in the contract, 
 will pass to the city, and the city will have to assume all of the company's out- 
 standing contracts and obligations and pay all its bills and accounts payable for 
 obligations incurred under the terms of the agreement. 
 
 At the time the Cincinnati service-at-cost plan was put into effect the initial 
 rate of fare should have been considerably more than 5 cents, but as both Mr. 
 Culkins and Mr. Walter A. Draper, \'ice-President of the Cincinnati Traction 
 Company, testified, the new scheme was started off with the 5-cent fare as a 
 means of forestalling a referendum which was threatened by interests that were 
 opposed to a higher fare. The rate schedule put into effect at the start provided 
 a 5-cent cash fare for adults, and a fare of 2i/2 cents for children under 10 
 years of age other than infants, the latter being carried free. l"pon the pay- 
 ment of the cash fare a passenger was entitled to free transfer privileges. In 
 the operation of the flexible fare feature of the contract, based upon the fluctua- 
 jions in the reserve fund as detennincd by the cost of service, each successive 
 decrease or increase was to be of lA cent per adult passenger and of half that 
 rate for children. Tickets for adults were to be sold in strips or packages of 6 
 and tickets for children in strips or packages of 4, but tickets were not to be 
 sold at reduced rates. 
 
 Under the Cincinnati plan the city reserves to itself the control of the 
 service on all of the company's routes, including the right to fix the operating 
 schedules, the type of cars and the transfer regulations and to fix, change and 
 extend routes. The city's right to rccjuire extensions and changes in routes is 
 to be exercised by ordinance to the extent that the city council is empowered 
 under this contract, the city charter and the laws of the state to require such 
 extensions or changes. The control of sei^ice, except with respect to extensions 
 and rerouting, is vested by the agreement in the director of street railroads, an 
 official whose office is created by the city charter independent of the provisions 
 of the street railway contract. The director is to exercise control by written 
 order, effective 10 days after service upon the company, unless within that time 
 the company files objections to the order. In case objections are filed with him, 
 the director is required to hold a public hearing in the matter as soon as prac- 
 ticable and thereafter to serve upon the company a copy of his decision. All 
 orders of the director against which no complaint is filed, and all of his decisions 
 after a hearing, arc to be "final and conclusive and enforcible bv the citv by 
 an action in specific performance." and the company may defend snch an action 
 "solely and only on the grounds that as to orders or decisions involving expen- 
 
Service at Cost 483 
 
 ditures for operating expenses the budget or supplementary allowances are insuf- 
 ficient to enable the operating company to perform its corporate obligations, 
 maintain its organization and perform all the duties" imposed upon it under 
 the terms of the ordinance, or that, where capital expenditures are involved, the 
 company, "acting diligently and in good faith and using all usual means to do 
 so," is unable to provide the funds for financing the expenditures required by 
 the order. 
 
 The director of street railroads acts as the technical adviser of the city 
 council and of all city officials in all matters within their jurisdiction involving 
 the interpretation of the contract or concerning its application or relating to the 
 quality, quantity or cost of service, and in all other matters within their juris- 
 diction upon which the city council or the city officials may request advice or 
 information. The director is required to keep himself informed on all matters 
 pertaining to the cost or quality or quantity of service furnished by the company, 
 its receipts and disbursements, its leases, rentals and property, its transfer regu- 
 lations, its rules, its vouchers of expenditures, its payments made to the city 
 under the contract, and the manner of its compliance with the terms of the 
 contract. If he disapproves of the object of any voucher or expenditure, or of 
 the company's manner of complying with the provisions of the contract, or of 
 the city ordinances, or of the rules or regulations made or decisions rendered 
 under the contract, he is to notify the company and see that the matter is 
 adjusted. The company is required to give the director and his employes access 
 to and facilities for inspecting and auditing "all receipts, disbursements, vouch- 
 ers, prices, payrolls, salaries of all officers, time-cards, papers, books, documents 
 and property" relating to or used in the performance of the company's duties 
 and obligations. Proposed contracts for the purchase of power and all new 
 and additional leases or franchise grants and agreements for the use of property 
 included within the city's purchase option, and all agreements for the use or 
 sale of power or other commodities by the company must be submitted to the 
 director and will be effective only upon being approved by him in writing. 
 
 One of the most distinctive features of the Cincinnati plan is the require- 
 ment that the operating company shall submit to the director 45 days prior to 
 the end of each calendar year "an estimate of grpss receipts and budget of 
 operating expenses" for the ensuing year, setting forth an estimate of the 
 amount to be expended under each of the general accounts as provided by the 
 uniform system of accounts for electric railways prescribed by the Interstate 
 Commerce Commission. Supplementary estimates for additional expenditures 
 required in operation may be submitted to the director during the year. No 
 operating expenses may be incurred except under these general accounts, and 
 the total amount of the expenditures in any one of the general accounts may 
 not exceed the amount provided in the budget and the supplementary estimates ; 
 but, with the approval of the director, budget allowances in any particular 
 account may be increased by decreases of like amounts in the allowances in 
 other accounts. The contract provides that the director, within 10 days after 
 receiving the budget or any proposed supplementary estimate, shall either ap- 
 prove or disapprove it and notify the company of his decision. If he disapproves 
 
484 Electric Railwav F'roblem 
 
 it he must give his reasons therefor in writing, and in case the director and the 
 company are unable to agree the matter in controversy is to be submitted to 
 arbitration. The board of arbitration is to be constituted by the appointment of 
 one arbitrator by the director of street railroads, one by the operating company, 
 and the third by the two arbitrators thus selected. If either party fails to appoint 
 an arbitrator within 5 days after notice, the trustees of the sinking fund of the 
 City of Cincinnati are to appoint the arbitrator for the party so in default. If 
 the two arbitrators first appointed are unable to agree upon a third, then the 
 appointment is to be made by the arbitration committee of the Cincinnati Cham- 
 ber of Commerce upon application by either party. It is to be a rule of the 
 arbitration that sutticient funds shall be allowed to the company to enable it to 
 perform its corporate obligations, maintain its organization, and perform all of 
 the duties of operation and maintenance imposed upon it under the terms of the 
 contract. 
 
 The company is required to issue free transfers to enable passengers "to 
 ride continuously from the point of boarding cars to destination," except that 
 it cannot be required to issue transfers that will entitle a passenger to return 
 upon a car substantially to the point of hoarding the car upon which his fare 
 was paid or a transfer issued to him. The company's rules and regulations 
 governing the issuance of transfers are subject to the ap])roval of the director 
 of street railroads, and in this matter as in the control of service his orders and 
 decisions are final. As bearing upon the cost of service, it should be noted that 
 the Cincinnati contract requires the company to carry policemen and firemen 
 free when in uniform. 
 
 The salaries and expenses of the director of street railroads and his assist- 
 ants are not treated under the Cincinnati contract as an operating expense. On 
 the contrary, they are paid by the city the same as other municipal salaries and 
 expenses. This is regarded by Mr. Culkins as a weakness in the plan. When 
 asked by Mr. Warren what changes he would make in the Cincinnati plan if he 
 were starting out to draw a service-at-cost franchise just as he would like to 
 have it. a sort of ideal or model franchise, Mr. Culkins says at page 479 of the 
 Proceedings : 
 
 "I do not know that I would make any fundamental changes. 1 think there i.s a weakness 
 in our ordinance that the suix.Tvision is cliargcd to the Rcneral taxpayer rather than as a 
 cost vi operatiiMi. That will always have a tendency to crah the sui)ervision, because cities 
 are always hroke I believe that legitimately ought to be a charge against the car rider, 
 for the service is specilk-ally for the car rider, and you can easily sec it differentiates from 
 every other city department." 
 
 In his comment upon the provisions of the Cincinnati plan Mr. Culkins 
 lays particular stress upon the provisions for the adjustment of the company's 
 share in the profits on the principle of the sliding scale. At pages 474 and 473 
 of the Proceedings, he says: 
 
 "Rased upon our information that the greatest criticism of the service-at-cost ordinance 
 plan was that it tended to produce an inertia on the part of the company, a sort of feeling 
 "We get ours, now go ahead and tell us what to do'— tliere is a provision bv whicli the com- 
 p-iny may participate in this >urplus at certain times. • * * • .So we think we have a 
 piece of machinery in there which makes it always against the interest of the company to 
 have high rates of fare but which enforces from our point of view the necessity of cco- 
 notnical operation. Now, it might Ik- said that the company might impair the service in 
 
Service at Cost 485 
 
 order to get that, but the city retains absolute control. To my mind that is a very vital 
 feature of this ordinance. The city maintains that control over the operation of the company, 
 over its finances, over its service, over its investments, and that control, with the exception 
 of three particulars, is vested in the director, in one man, with a view of centralizing the 
 responsibility. He is not only made responsible for that, but he is made responsible wherever 
 any other department touches this company, that the company need only to go to one man 
 and then it becomes his duty to take it to the proper place. The matter of extensions, re- 
 routing and further franchises is vested in the city council, but they are required to refer 
 the matter to the director for report and recommendation before they take any action on it." 
 
 In a letter to the Commission, dated January 29, 1920, Mr. Culkins says : 
 
 "The experience of Cincinnati for the first fifteen months of operation under the service- 
 at-cost franchise presents some features of interest in connection with the problems before 
 the Commission. 
 
 For this period the cost of service per revenue passenger and the gross receipts per 
 revenue passenger, in each month, was as follows : 
 
 Total Cost of 
 
 Mouth Income Service Surplus Deficit 
 
 October, 1918 5.11 6.56 1.45 
 
 November 5.13 6.20 1.07 
 
 December 5.11 6.76 1.65 
 
 January-, 1919 5.73 6.94 1.21 
 
 February 5.69 6.99 1.30 
 
 March 5.63 6.89 1.26 
 
 April 6.09 6.84 ,75 
 
 May 6.09 6.56 .47 
 
 June 6.10 7.22 " 1.13 
 
 julv 6.71 7.39 .68 
 
 August 6.76 7.09 .3,3 
 
 September 6.74 7.05 .31 
 
 October 7,04 6.79 .25 
 
 November 7.03 7,02 .01 
 
 December 7.08 7.07 .01 
 
 "It will be seen that the proper relation between the variations in the cost of service and 
 the rates of fare did not exist for a considerable portion of the period. 
 
 "The experience of the earlier months of 1918 showed that the cost of service per 
 revenue passenger, readjusted to the new ordinance conditions at the time of passage, would 
 be 5.76 cents, but for reasons of expediency the initial fare was placed at five cents (5c). In 
 the months of October and November the epidemic of influenza reduced the traffic to a great 
 extent, and in December a War Labor Board order became effective, greatly increasing the 
 wage scale. 
 
 "The automatic provisions of the ordinance limited the increase of fares to one-half 
 cent ( YzC) at intervals of not less than three (3) months. 
 
 "Other unforeseen expenses were encountered from time to time, including another in- 
 crease in wages under the order of the \\ ar Labor Board in May, a new contract with the 
 union in July, a coal shortage in August, and a large amount of additional track recon- 
 struction made necessary by the improvement of city streets. As a result, each period showed 
 additional increases in the ever growing deficit. 
 
 "In October, 1919, the fares reached seven cents (7c.), which was sufficient to provide for 
 the current cost of service, but deficiencies had piled up amounting to about appro.ximately 
 S1.700.0(K), and under the provisions of the ordinance, fares must continue to increase until 
 this deficit was liquidated. This would have meant an ultimate fare of nine and one-half 
 cents (9^c), or two and one-half cents (2>^c) more than the cost of service in October. 
 Fares would be too high and an abnormal condition to the reserve fund would ensue, fur- 
 ther disturbing the symmetry of the plan. 
 
 "To avoid this, as well as a further increase in fares, the company, with the authority 
 of the city and the Public L'tilities Commission of Ohio, issued securities in order to spread 
 out the payment of the deficit and avoid the abnormal burden upon the car riders in a single 
 year. The question of probable loss of traffic and other effects of the increased fare were 
 also considered, both by the company and the public officials, who recognized that an unusual 
 condition in unusual times called for unusual treatment. 
 
 "Two features are outstanding in the Cincinnati experience : 
 
 "First — The initial rate of fare should be sufficient to provide the cost of service. 
 
 "Second — Provision should be made for adjusting the rates of fare to any abnormal in- 
 crease in expenses which might he classed as an unforeseen contingency. 
 
 "This would suggest a large initial reserve fund, or some device for quick adjustment 
 
486 Electric Railway Problem 
 
 and readjustment of fares in cases of emergency. The difficulty about a large reserve fund 
 is that in most cases the companies may be unable to provide it by sale of securities. In some 
 cases the state or local laws may make the provision difficult, but in any model ser\'ice-at-cost 
 ordinance this situation should be provided for. 
 
 "In other respects I have no occasion to change the view expressed to the Commission 
 that the Cincinnati plan offers the principles upon which the street railway problem may be 
 solved. The public has taken to it kindly and the loss of traffic due to increased fares, in my 
 opinion, has been less than in other cities." 
 
 Mr. Walter A. Draper, from the company's side, is quite solicitous for some 
 reward for the holders of common stock. The Ohio Traction Company is the 
 holding company for the Cincinnati Traction Company, which, as the lessee of 
 the Cincinnati Street Railway Company and the Cincinnati and Hamilton Trac- 
 tion Company, is the operating company. Referring, apparently, to the holding 
 company, Mr. Draper testified that the $7,500,000 of common stock outstanding, 
 technically described by Chairman Elmquist as the "hope" stock, was issued 
 practically to take up the discount at which the preferred stock was sold. He 
 said that under the Cincinnati contract the common stockholder was given some 
 hopes of participation in profits, but not enough. At page 505 of the Proceed- 
 ings, he says: 
 
 "This incentive, this division, that might remain after the requirements are taken care 
 of, was one of the things that we discussed more than any other one point with the city. 
 \Vc insisted that there should be some consideration given, no matter what the rate of fare 
 was; that if the rate of fare went up. it was not our fault, under this plan, but it was 
 due to conditions, and that we were entitled to consideration with a high rate of fare, the 
 same as we were with a low rate of fare, at least something ; but in order that we might be 
 given this spur to try to get fares down by economical operation, we recognized the fair- 
 ness of getting less in case the fare was high than we would get in case the fare was low." 
 
 As to the general importance of incentive and as to the deserving character 
 of the coinmon stockholder — the man of vision — Mr. Draper has ven,- decided 
 views, as will be seen from the following testimony found at pages 499 and 500 
 of the Proceedings: 
 
 "It is true that a service-at-cost franchise, offering an almost certain return, makes it 
 more easy, or at least possible, to Inirrow money. But bankers have always taken into con- 
 sideration not the question whether a concern can just live — just manage to make ends 
 meet — but rather how much margin, how much over the lore living it can make. .\nd this 
 question of lianking and getting new money is a vital one. Not only has the question to be 
 solved as to how street railroads are to make their operating expenses, but how are they to 
 pay interest on borrowed money in the shape of permanent investment or bank loans. Actual 
 experience under the Cincinnati franchise has demonstrated that the banker begins to take 
 more interest wlion he is shown that in addition to a tixed low interest rate that is practi- 
 cally assured, the company can do even a little tx^tter by careful and attentive management. 
 When it comes lo marketing securities, those paying a fixed return of six per cent will not 
 sell so well as those that have at least some show of paying a fixed return of six per cent 
 and then something more. Mut six per cent is not now a sulTicicntly high return. If six per 
 cent must \ye written in the franchise then let there also Ik.- written therein that an additional 
 one or two per cent can Ix- earned by hard work. If the fixed return is just enough to meet 
 the dividend or intere>-t cm a senior security, let the possible additional return go to the 
 common stockholder, who under a service-at-cost francliise is pretty aiit to ho left at the 
 dock when the lx«at pulls out because there is no room for him. .\nd don't forget that the 
 common stockholder has plaved his part, if not the important part, in the development of 
 street railroad enterprises. The senior security holder is the lianker. The common stock- 
 holder is, or was, the prosiwctor, the pioneer, the builder — the man with the vision. 
 
 "Those who operate street railroads have not lost, and it is to Ix- hoped, never will lose 
 their ambition to operate as economically and efficiently as possible ; and yet, because we are 
 all >>till human, there i^^ needed an addition to the desire to make a showing, the spur of 
 real financial Ix-nefit. I'nder a rigid service-at-cost franchise the comp.iny really becomes a 
 sort of clearing house for the money it takes in. It pays the employes, then the tax gatherers 
 and then the senior security lioUlers. This takes it all. Justice and goixl business sense 
 
Service at Cost 487 
 
 dictate that there should be at least a small commission paid for all this work. It will add 
 zest to an otherwise flat existence. Operating under a service-at-cost franchise without some 
 added incentive would be a good deal like asking an old gambler to play poker for fun and 
 not for money." 
 
 The last sentence, which I have italicized, almost "lets the cat out of the 
 bag." It indicates that the common stockholders in the electric railway field 
 want both security and a speculation. Mr. Draper is, perhaps, on safer ground 
 at pages 500 and 501 of the Proceedings, where he says : 
 
 "There is another potent argument for providing this incentive and that is the tendency 
 of the public to feel that if the company is practically guaranteed a certain return and caii 
 get no more, it will be indifferent to how high operating costs and fares may go, and will 
 readily 'pass the buck' to the city in matters of higher wages or any other element likely to 
 affect fares on the very comfortable theory of 'Why should we care? Let the men get higher 
 wages, so long as the car rider pays.' 
 
 "In a recent discussion of the wage question with our employes, the main interest the 
 public took in the matter was whether we wouldn't give in without much pressure because it 
 would all go into the rate of fare. In fact, some people declared that we were in league 
 with our men to get the rate of fare up and hold it there through their asking for higher 
 wages and our quickly granting the demand. When they were informed that it was to our 
 interest to keep fares below six cents, as we would then receive an additional allowance, 
 they saw things differently." 
 
 Another point of criticism of the Cincinnati plan was the fact that it was 
 inaugurated at a five-cent fare when the cost of service as defined in the agree- 
 ment was known to be more than five cents.' Mr. Draper also has his doubts 
 about the budget plan. Upon this point he says, at pages 505 and 506 of the 
 Proceedings : 
 
 "We felt that the matter of the budget is something that is a little more theoretical than 
 we would like to see it. It is almost impossible to anticipate as far ahead as we have to 
 under this franchise, what our expenditures are going to be. 
 
 "Commissioner Sweet: But tliere is some elasticity in that, as explained by Mr. Cul- 
 kins. is there not? 
 
 "Mr. Draper: There is some elasticity, but notwithstanding that there is a feeling 
 on the part of the director and city administration, that by the very fact that we are asking 
 for an additional allowance, we are not operating quite as economically and carefully as we 
 should, unless it does have some specific thing, take, for example, the increase in wages. Of 
 course, you can measure that very accurately." 
 
 On the general subject of the need for incentive, Dr. Milo R. Maltbie takes 
 strong ground. At pages 2093 and 2094 of the Proceedings, he says: 
 
 "The most important thing, it seems to me, to be kept in mind in framing any new plan 
 to be considered in the situation as it now exists is that there must be some provision made, 
 in any plan, which will furnish an inducement for efficiency. In other words, if any plan, 
 whether it be a limited term franchise or an indeterminate franchise, or a cost-of-service 
 franchise, or no franchise at all, with just a local consent to operate, subject to regulation 
 in every instance, unless some provision is made whereby inefficiency will be punished or 
 suffer some loss and efficiency will be rewarded where it exists, the tendency will be toward 
 stagnation; and public regulation and control has to labor with this problem as well as any- 
 thing else; because the tendency will be, of course, to meet the demands. If it does not make 
 any difference to the operators of a company whether they pay high prices for materials or not. 
 the tendency will be not to give that subject any particular attention. They will pay the 
 high prices. If there is no reward for purchasing materials when prices are low, and no 
 punishment for purchasing materials when prices are high, the inevitable result will be to 
 purchase in more or less of a haphazard way and to pay high prices. 
 
 "In the same way, if there is no incentive to efficiency, politics is apt to come into 
 the situation, in not the way which is usually referred to, but in a different way, which is 
 just as effective, as far as that is concerned, in bringing bad results as it is in the old- 
 fashioned way; but if control and management does not get its reward or its punishment, 
 as the case niay be, the political parties will be apt to use a private corporation as a means 
 
488 Electric Railway Problem 
 
 Professor Edward W. Bemis. appraisal engineer and consulting public 
 utility expert on the public side, finds considerable to criticise in the service-at- 
 cost plan, although he was associated for many years with Tom L. Johnson in 
 Cleveland and more recently had a hand in the preparation of the Dallas ser- 
 vice-at-cost franchise. His testimony, at pages 2113 and 2114 of the Proceed- 
 ings, is as follows: 
 
 "I find serious difficulties with a scrvice-at-cost plan, although it looks so good in theory. 
 
 "The Chairman : In both cases you mentioned, had you supported the service-at-cost plan? 
 
 "Mr. Bemis : Yes. The plan, as I think, works out pretty well in Cleveland. 1 think 
 not so well in Dallas, where the valuations that were finally accepted. I believe, were some- 
 what higher than originally planned. 
 
 "The great difficulty with the service-at-cost plan is in getting a good valuation to start 
 with. The public are not yet sufficiently educated on the subject of valuation to know just 
 what it means and there is a great danger of fastening on the public a valuation that will 
 be too high and which will be very difficult to get away from. 
 
 "There is also danger that a scrvice-at-cost plan will require a fare higher than the 
 social welfare of the community may demand and which could only be gotten around by 
 subsidizing the road or by direct municipal purchase and operation. But you are tied almost 
 to a higher fare under a scrvice-at-cost plan while it lasts, as in Boston today. I think very 
 often we are in a situation or would be under public management such as Director Hines 
 called to the attention of the Government not long ago when he thought a rise of freight 
 and passenger charges, particularly of freight charges of the railroad, today. $300.00(1.000 
 would mean an increase of charges to the public of several times that, as the charges were 
 passed along. He thought it might be better to have taxation bear that burden than to raise 
 the fares. He made that in an official communication to Congress, you may remember. 
 
 "But the scrvice-at-cost plan ties one down rather closely to a fare which might, if 
 things keep on as they have, become too high in some cases, although maybe not in all. 
 
 "I think, too. that the scrvice-at-cost plan requires, as in Cleveland it has secured, a home 
 rule different from regulation by state commission. I think it needs to be closely in touch 
 with the people and when it is it has its l)est chance of success, because it then tends to 
 produce that cooperation which there has been in Cleveland between the city and the railway 
 in effecting many economies and preventing many costly attacks on the road, in excessive 
 pavement charges or excessive awards by juries in damage cases and many other ways; 
 permits for turnouts and curves and so on. which really are very beneficial often to the com- 
 pany, and which the city can give without much cost if it feels in a friendly attitude. But 
 there are these difficulties of high valuation and fixed fare, a fare I mean fixed as to its base. 
 
 ".\nd. of course, our cities are hesitant for another reason : It seems to them to forfeit 
 the benefits of the franchises which they are now enjoying. The moment the shoe pinches 
 that is where the companies are suffering from their rigid adherence to the franchise when 
 they wore gaining; when they were making a good deal of money from the franchise they 
 were enjoying, they would not listen to a inodification. and now they are suffering the penalty 
 that the cities feel that they should not make concessions which the companies had refused 
 to make years ago. That may not be quite a proper position to take, but it is a very natural 
 one. 
 
 "Of course, we still have to face the question, if the cities adhere to that, how the 
 companies are going to get any money for extensions, which is after all the greatest problem 
 perhaps before even our larger and l>ctter companies, which are earning, it may be. a fair 
 return ott the actual investment but have capitalized so much Iwyond that. 
 
 "I do not know of any plan for issuing any underlying securities that would precede 
 the present bonds and enable companies to finance extensions where thcv are. as is often the 
 case. iMindod up to the full value of the property, and sometimes more. Bonds have even liecn 
 issued to buv st<x:k in consolidations. 
 
 "That difficulty is going to force the roads cither into reorganizations or city purchases. 
 There may he some better metho<l found or some other mclho<l. but 1 do not see just how 
 it can Ixr found indcss the roads are so very prosperous that they can float more securities 
 without reorganization." 
 
 Mr. Morris I.. Cooke's comment upon the service-at-cost plan is found at 
 pages 1692 and Ui9.^ of the Proceedings, as follows: 
 
 "At least theoretically we are all for some kind of a 'cost-of-service' plan. But I am 
 opposed to the kind which has been principally stressed before this Commission, first because 
 it will have a tendency to validate excessive valuations, and second because it will inevitably 
 capitalize inefficiency. 
 
 "The proposal is quite comparable to the profit sharing schemes so strenuously urged 
 
Service at Cost 489 
 
 now as a cure-all for industrial disorders. Labor is not a bit interested in profit sharing, 
 because labor has no confidence that it understands the rules of the game, and has had no hand 
 in developing those rules. Any cost-of-service plan initiated now would rest in most instances 
 on a discredited financial base and be operated under accounting methods designed for an 
 altogether different purpose than the one which I take it we all have in mind now, that is, 
 the service of the public." 
 
 I have already quoted Dr. ]\Ialtbie's testimony upon the need for an incen- 
 tive to good management under any scheme that may be adopted. He is quite 
 critical of the service-at-cost plan to the extent that it is based upon a contract 
 with fixed terms and is put forward as a substitute for continuous public regu- 
 lation through the exercise of the police power. He calls particular attention 
 to the arbitration of the rate of return in the Cleveland contract, and takes the 
 position that service at cost has not been tried long enough to prove its merits 
 as a scheme for adoption generally as a means of solving the electric railway 
 problem. His testimony on these points is found at pages 2102 and 2103 of 
 the Proceedings, where he says : 
 
 "Now, there is one other feature, as to the cost-of-service franchise, that I would like 
 to call to your attention and that is this : That a result of the adoption of the plan is to make 
 the relation between the city and the company one of contract and not one of police power. 
 Of course, the basis for the regulative power which exists in the legislature and which may 
 be delegated to an administrative body is the sovereign power of the state. And, of course, 
 historically it goes away back to the old Inn cases in England, and that power as I under- 
 stand it cannot be irretrievably delegated to someone else, it cannot be contracted away, but 
 always remains in the state in some form, either the legislature or the courts or an adminis- 
 trative body. 
 
 "Now, if you substitute for regulation a contract or a paper — we will not call it a 
 contract for the moment — a paper which attempts to specify all of the things that are usually 
 covered by regulatory orders or by statutes, you have substituted a contract for a sovereign 
 power or for the police power and it makes and establishes a more or less ironclad, unchange- 
 able paper which has practically all of the qualities of the contract or else what is attempted 
 to be covered in many cities by a cost-of-service plan. 
 
 "Now, the trouble with a contract to cover these points is in the first place that it becomes 
 entirely out of date. We have seen that happen again and again. And one of the difficulties 
 of the present situation is that the contracts that have been made in past years are not 
 applicable to the conditions that exist, and while they might and perhaps did do very well 
 for the time and for some time after they were made, they have become inapplicable to the 
 conditions which exist at the present time and consequently break down in some provision 
 or another. 
 
 "Mr. Eastman referred to the fact that when you have a contract as a statement of the 
 relations between the public on the one side and the private corporation upon the other, the 
 general result is that that contract is modified when the company wants it modified and not 
 when the city wants it modified. If it is a contract, you have to get the assent of both 
 parties and if the company does not want to modify it there is no way under heaven that you 
 can compel it to modify it, if it is a contract. Whereas, under regulation, if a public service 
 commission makes a mistake * * * * because its orders are not contracts, it can be 
 repealed or modified or changed at any time. But if you get a contract drawn up between 
 a private company and a municipality that cannot be modified except with the consent of 
 both parties, and if the municipal authority makes a mistake the shrewdness of the manage- 
 ment of most utilities, human nature being the same the world over, will lead them to take 
 advantage of that, whereas, if the city wants that contract changed, it is not so easy to get 
 it done. • 
 
 "Whether a cost-of-service contract can be worked out which will protect all of these 
 points, I am not at present prepared to say. But reference has been made to the Cleveland 
 franchise and for the purposes of the record. I think your attention ought to he called to the 
 fact that at the present time there is proceeding in Cleveland an arbitration to determine 
 whether the rate of return shall be raised to 7 per cent or not. Now, there probably is not 
 any more important thing in a cost-of-service franchise than the rate of return. .And if a 
 company and a city make a contract that the security holders that have put in their money 
 are entitled to a 6 per cent return on the monev they have put in. and then in less than 6 
 months you proceed to arbitrate the question of whether they shall have more or not. you 
 are going to the very vitals of the contract, ."^nd if you can arbitrate the rate of return in a 
 cost-of-service franchise I do not know what there is in the franchise that cannot be arbitrated. 
 Well, if you can arbitrate the whole thing and every provision in it, it simply means this, that 
 
490 Electric Railway Problem 
 
 you make a contract or what is called a contract and then you leave it to three persons to be 
 chosen at some other time to decide every provision in that contract. Xow, that is not 
 regulation, because those arbitrators are not regularly elected public authorities. They are 
 persons who are chosen outside. And if you are going to leave every provision in a contract 
 to be arbitrated in that way it is not a contract any more, except as there may be sonie 
 restricting clauses to the extent ol what may be arbitrated. 
 
 "Whether six per cent is right or not, I do not undertake to say at this time, in the 
 Cleveland situation ; but merely to point out that the basis for the claim that they should 
 have seven per cent instead of six per cent, is that conditions have caused six per cent not 
 to be a fair rate of return, and that, in fairness, they ought to have seven per cent. 
 
 "Well, that is an illustration of what I said a few moments ago. namely, that a fixed 
 contract which undertakes to provide all of these things is a thing that may become very 
 ill adapted to the conditions which exist in later years. Personally. I do not believe the 
 success or failure of these cost-of-service franchises can be determined by one year's or two 
 years' or five years' experience. When we have been through these war-time conditions, 
 and the conditions that are going to obtain in the next few years, we will have a pretty 
 definite idea whether those franchises are good or whether they are not good. The question 
 is going to come as to whether they are suited to the conditions that change from time to 
 time or whether they are not." 
 
 Mr. Carl H. Mote, then Secretary of the Indiana Public Service Commis- 
 sion, comments upon the service-at-cost plan at page 1094 of the Proceedings, 
 where he says : 
 
 "The so-called service-at-cost program is actually the program we arc supposed to follow 
 under the public service commission law of Indiana, and for that reason we hear nothing 
 about it in our state. I am not familiar with the origin of the phrase but I imagine its 
 inception could be traced to some municipality where the electric railways were overloaded 
 with fixed charges and where it was designed to produce sufficient revenue to meet exorbitant 
 fixed charges as well as actual operating expenses, including maintenance and depreciation. 
 Service at cost involves, first, a correct valuation of the property. There is no means of 
 knowing what the cost of electric railway service is, unless this basis is known. I should think 
 cities, without facilities for a.scertaining valuation, might be led into a position of agreeing to 
 provide a return on excessive valuation, in which case there would not be service at cost at 
 all, but service at an excessive cost. To me, the phrase represents merely a straining to 
 name a process or a theory already in practice in Indiana." 
 
 Since Mr. Mote testified, the City of Indianapolis has come forward with 
 the suggestion that a service-at-cost plan, with a flexible fare between certain 
 limits, be put into effect by the Indiana commission by an order relating to the 
 Indianapolis Traction and Terminal Company during the emergency recognized 
 by the commission — that is to say, until conditions return to normal so that the 
 obligations of the existing city franchise, temporarily suspended, will come into 
 force again." 
 
 That a service-at-cost plan adapted to one comnumity under one set of con- 
 ditions might not work out well in another comnumity under another set of 
 conditions is apparent by a comparison of Cleveland and Boston, or for that 
 matter Geveland and Cincinnati. It is also apparent from the contrast between 
 the conditions in Indiana, as described by Mr. Mote, and those in at least ])ortions 
 of New England, as described by many witnesses. For example. Chairman 
 Richard T. Iliggins. of the Connecticut Public Utilities Commission, at page 1109 
 of the Proceedings, says: 
 
 "Something has heen said alxiut the question of service at cost. Theoretically that is 
 ."iound. and i> the policy that our connniskioii have tried to follow: but practically there 
 are certain obstacles to its working out as an absolute (henry. Street railways are critically 
 ill and they cannot l>c revived and put uixm a sound basis over night. If the service-at-cost 
 IHilicy were to Ik- adnpted. in tny opinion, and a rale established high enough to meet the 
 operating expenses, lixed charges and overhcid charges and pay a fair dividend upon the 
 capital or the value of the property as the case may be. the rates of fare would necessarily 
 be so high as to be iirohibilive, where you have got unrestricted and unregulated competing 
 transportation agencies." 
 
Service at Cost 491 
 
 Mr. William D. B. Ainey, Chairman of the Pennsylvania Public Service 
 Commission, was asked whether he or his commission had given any considera- 
 tion to the service-at-cost plan. He replied in the negative, and was quite un- 
 willing to express an opinion about it, but upon being pressed made this indirect 
 comment, which appears at page 1404 of the Proceedings : 
 
 "I have not gotten to the point of where I believe the public will get the best service 
 except that the initiative for that service is in the hands of private interests, largely un- 
 controlled, except to the extent that it must at all times he a reasonable service, and must be 
 at a reasonable rate. I have no reason to doubt that the present methods are adequate, in 
 Pennsylvania." 
 
 In his testimony Chairman Ainey referred with a certain amount of admi- 
 ration to the Mitten management of the Philadelphia Rapid Transit Company, 
 and it is quite possible that his apparent predisposition against the service-at-cost 
 plan may have been based in part upon his observation of the Philadelphia situa- 
 tion. At any rate, Mr. Thomas E. Mitten speaks out quite positively against 
 the service-at-cost plan, as will appear from his statement at page 1516 of the 
 Proceedings, as follows : 
 
 "The so-called service-at-cost plans are already proving a disappointment, for the reason 
 that neither men nor management are paid according to the e.xcellence of their work. 
 
 "Boston is one example where expenses have mounted skyward and no fare, possible of 
 collection, has been found sufficient to meet the added cost of production. 
 
 "Cleveland has already nullified Tom Johnson's accomplishment of sweating profits from 
 the omiers and thus reducing rentals, by showing an inability to now produce its very short 
 ride at 5 cents without charging an extra one cent for transfer. The City of Cleveland 
 paves its own streets and in addition pays its street railways in money for services sometimes 
 required to be supplied gratis by the street railways in other cities. The public of Cleveland 
 stands for much latitude in operating methods, in order to keep the fare down, while the 
 contest between the men and the management as to which should get added compensation 
 first, goes merrily on— SURELY THE ANSWER LIETH NOT IN THIS DIRECTION." 
 
 Curiously, Mr. James D. Mortimer, who has been operating the Milwaukee 
 street railway lines for many years under practically imrestricted state regula- 
 tion, combines Cleveland and Philadelphia in his condemnation for rendering 
 service below cost, instead of at cost, evidently sharing with other electric rail- 
 way men the chagrin felt by the industry as a whole in having to explain away 
 the 5-cent fare under war conditions in these two cities. Mr. Mortimer, at pages 
 780 and 781 of the Proceedings, makes the following criticism of "some" of the 
 service-at-cost plans : 
 
 "Some of these service-at-cost franchises are defective in two important respects. 
 
 "First, there is no guaranty of the integrity of the capital. The franchises on their faces 
 provide for a diminishing capital account. In other words, they make no adequate provision 
 for the accumulation of reserves against the future replacements of the physical property. 
 They require usually the creation of reserves only in sufficient amount to take care of current 
 replacements, and in the Cleveland so-called cost-of -service franchise, if they encounter an 
 extraordinary replacement, that is carried as a suspended asset and written off over some 
 agreed period of time. In other words, there has been a number of years in which the 
 Cleveland Electric Railway was financially insolvent, and an examination of the balance 
 sheet would have disclosed that. 
 
 "That is touched on in considerable length in Doolittle's book on a study of the Cleveland 
 problem.' 
 
 "The second defect in these cost-of-sprvice franchises lies in the fact that the cost of 
 capital is continually changing, and there is no provision made for the determination, at the 
 time, of the return that is to be allowed upon additions to capital account." 
 
 Dr. Dugald C. Jackson is of the opinion that inflexibility in rate of return 
 to capital is the major defect of the service-at-cost plan as now advocated. He 
 
492 Electric Railway Problem 
 
 evidently has the Boston plan particularly in mind. At pages 1418 and 1419 of 
 the Proceedings, he says: 
 
 "The introduction of supervision by public utility coinmissions was essentially a move 
 which, unilormlv and fairly applied, would result ni providnig good service at cost, when 
 a fair return oii the investment is included as part oi the cost in addition to the ordinary 
 daily out-of-pocket expenses. At the same time it affords opportunity for a street radway 
 operated with particularly able, foresighted management and giving notably good service 
 to profit through receiving a larger return on its investment than the average for the industry, 
 as the state commission has a certain range over which they may within the satisfaction of 
 the public allow returns. 
 
 "The present slogan for service at cost adds to this the additional feature of guaranty 
 by the ta.xpayers of a return on the investment, associated with operation under public 
 authority. This addition has been adopted in certain instances, but it is facing considerable 
 criticism, and however gocxi it is, is going to fail also from intle.xibility if the actual return 
 on the investment is fixed at the upper level and cannot be modified as changing conditions 
 in the value of money progress. There must be the .same flexibility from the standpoint of 
 return on the investment as there is from the standpoint of wages and other things, in order 
 that the projects can be maintained and extended as the city requirements require. 
 
 "Commissioner Gad^(K■ll : Won't you develop that thought just a little, the necessity for 
 keeping the return on the investment flexible? 
 
 "Mr. Jackson: Professor Irving I'isher, part of whose statement I heard, gave you an 
 illustration of the difference between the market for bonds and the market for stocks under 
 different conditions, and I think either he or perhaps one of the commissioners brought out 
 the fact that where one has service at cost with a fixed return to the property holders one 
 practically puts the stockholders in the aspect of bondholders under ordinary conditions, be- 
 cause they have a substantial guaranty from their communities that they shall get so much 
 and alter that they do not get anything mure. Now, that is very good lor the time the 
 adjustment is made, and it may t)e good indefinitely, but with the very wide cliangcs of con- 
 ditions which are occurring in this country and also in the world the rates at which money 
 may be obtained vary. We used to think that without peradvcnture the rate at which money 
 could be obtained was going to fall in this country and would continue to fall. It was lower 
 in the European countries, the great centers of money capital of Great Britain and France 
 and Germany, and we thought we were in the direction of coming to somewhat similar rates 
 for money which would be put into enterprise. Hut as an actual fact the war overset that 
 and consequently our judgment as to what the future would be was all wrong. Not only 
 has the rent of money increased in this country but it has tx;en changed entirely in all the 
 European countries. It has increased greatly. Whether that increase is going to remain 
 it is very diflicult to say. It depends upon some of these considerations that Professor 
 Fisher put liefore you and which are so large that I have not very much confidence in their 
 being settled as promptly as he seemed to hope. In other words, we are in a period and are 
 going to remain in a i>eriod in all probability of uncertainty in regard to how much return 
 a man who has a dollar and is willing to put it into a street railway will receive. 
 "The Chairman; Would you favor changing the return on the bond? 
 "Mr. Jackson : No, I would not favor changing the return on the bond because that is 
 an agteemcnt that was made, and when a man makes a contract he ought to be expected 
 to stand In it under such circumstances. * • • • When a return on a bond under a 
 particular mortgage becomes less than that at which people are willing to let out their money, 
 a company having fixed the rate by means of its mortgage, a company sells additional bonds 
 cither at a price materially lower than par. so as to raise the return and mend the market 
 situation or else it fails to sell bonds. If the return is larger than seemed necessary to get the 
 money, they may do something in the way of refinancing so as to issue additional bonds 
 if they wish to issue Inmds under a new mortgage with other provisions in respect to return. 
 "Now. with the fixed return of the stockholders one is in the situation where he cannot 
 sell to vary the return as you can with a liond. .Mthough the return on the par may be fixed 
 by the mortgage, by selling at different prices below par you can vary the return. But if a 
 slock must lie put out at par for money and you have a fixed return it is absolutely in- 
 flexible, and this priicess therefore puts the stockholder in a situation that is even less 
 flexible than the bond contract of old as to the iKmdholder." 
 
 Dr. lack.son assumes that capital stock must be issued at par. He does not 
 
 even suggest the possibility of its being sold for the best price obtainable under 
 
 public supervision. He does not think that the issuance of non-par stock would 
 
 solve the problem, .\ftcr referring again to the fixed return on the investment 
 
 under a service-at-cost plan, he says at page 1420 of the Proceedings: 
 
 "1 think it is the only major disadvantage, and if that can Ix: corrected so as to protect 
 the public and at the same time play fair with the stockholders 1 believe that the cost-of- 
 
Service at Cost 493 
 
 service plan is quite a desirable one, although I also believe that for most instances it ought 
 to be operated under supervision of state commissions rather than separate commissions, 
 because the average city is not large enough to maintain the necessary supervisory staff." 
 
 Mr. Henry G. Bradlee, President of the Stone and Webster Corporation, 
 favors some kind of a service-at-cost plan as the arrangement most likely to 
 satisfy the public, as will appear from his testimony at page 212 of the Pro- 
 ceedings : 
 
 "In general, we believe that the service-at-cost franchise is working in the right direction 
 and we believe that some plan of this sort, something which is a distinct departure from 
 former methods, is an essential to restore credit. There must be something definite and 
 something radical done in order to change public sentiment, and the best solution from the 
 standpoint of relations with the public that we have seen suggested is the service-at-cost 
 franchise in some form.'' 
 
 Mr. Luther R. Nash, also of Stone and Webster, gave extended testimony 
 in analysis and criticism of various service-at-cost plans that have come into 
 eftect or been proposed. He is quite in favor of the exercise of the public super- 
 visory powers by the state commissions, even under service-at-cost contracts, 
 and incidentally approves of that feature of the Massachusetts general service-at- 
 cost act. At pages 664 and 665 of the Proceedings, the following appears : 
 
 "I have said in this paper that I thought it would be desirable that the supervisor should 
 be a man preferably of technical education, or else a man of broad business experience, who 
 should be appointed by the state public service commission, and perhaps act as the agent of the 
 commission, instead of supervision under the service-at-cost franchise being independent 
 of the state commission. This plan of state commission appointment would have this 
 advantage, if the service-at-cost plan becomes widely extended 
 
 "Mr. Warren : That is the Massachusetts general statute plan, is it not, which was 
 adopted last year? 
 
 "Mr. Nash: I so understand. 
 
 "While that plan has not come into general use at all as yet. because of the unfavorable 
 financial conditions, this general Massachusetts plan provides that for each service-at-cost 
 company, or at least a group of nearby companies, the state board shall appoint a supervisor, 
 who has special charge as the agent of the commission of these companies. 
 
 "Mr. '\\'arren : Those unfavorable financial conditions are due to the fact that the 
 Massachusetts act requires the barometer fund, and also a rehabilitation fund, I think. 
 
 "Mr. Nash : To be set up in cash in advance. 
 
 "Mr. Warren: And raised through the issues of securities? 
 
 "Mr. Nash : Yes ; that is the real trouble. 
 
 "Mr. Warren : The companies have not found themselves able to secure the credit 
 necessary to issue securities ; is not that true ? 
 
 "Mr. Nash : That is true. 
 
 "The effect in any state of a large number of service-at-cost franchises under such a 
 plan of supervision would be that the state commission would be able to train a body of 
 supervisors, more or less in the way that our diplomatic corps is or ought to be trained^ 
 taking young men and educating them in the office of the commission, sending them out as 
 supervisors of the smaller properties, and gradually transferring them to larger and larger 
 positions of responsibility, with their increase in experience ; so that in the end there would 
 be developed a body of specially trained supervisors to have charge of this class of public 
 service." 
 
 Mr. Nash's suggestion as to how this cost of supervision may be kept within 
 reasonable bounds is found at pages 675 and 676 of the Proceedings: 
 
 "The Chairman : * * * * jt appears that the cost of public supervision must be 
 borne by the utility. 
 
 "Mr. Nash : I think so. 
 
 "The Chairman : Might not that prove very burdensome to the utility, in the case of 
 small plants? 
 
 "Mr. Nash: It might, of course, but I think that the supervision might be so adjusted 
 by having a joint supervisor for a number of such small plants, who would not spend all of 
 his time on any one of them — a supervisor, as I have suggested before, appointed by the 
 state commission and responsible to them, dividing his time over an appreciable number of 
 
494 Electric Railway Problem 
 
 small plants. I think that is quite true, that a very small railway would not need the atten- 
 tion, the entire attention, of even one supervisor, and other large systems will require not 
 only the entire attention of one man, but of a subordinate staf? of engineers and accountants." 
 
 Mr. Nash"s testimony is interesting from several points of view. With 
 respect to the valuation in service-at-cost franchises, he says at page 665 of the 
 Proceedings : 
 
 "In my opinion, the actual investment, honestly and prudently made, to use the words 
 of the Massachusetts commission, is the most logical basis for determining the return to 
 investors. That, in these franchises, is also the basis of the city purchase, which is a feature 
 of nearly all of them, with, in most cases, the addition of a small percentage to cover costs 
 of liquidation and the procuring of money, where not otherwise provided for in the plan. 
 
 "In the majority of cases. I think the valuation has approximated at least the actual 
 investment of the properties, where it has been possible to determine that. In a few cases, 
 a depreciated value has been accepted, but these have been cases where the franchises have 
 expired, or, for other reasons, the railways were not in a position to strenuously contest the 
 values which they thought were too low." 
 
 Mr. Warren and Mr. Nash agree, as all the witnesses do. that tliis deter- 
 mination of the investment or rate base is essential to any service-at-cost plan, 
 as will be seen from the following testimony at page 469 of the Proceedings: 
 
 "Mr. Warren : But in every case there lies at the entrance upon this plan a determina- 
 tion by agreement or in some way. ultimately by agreement, I suppose, as to what that rate 
 base or so-called value of the property shall be. 
 
 "Mr. Nash: That is one of the essentials of the service-at-cost plan." 
 
 Mr. Nash agrees with those witnesses who regard the purpose of regula- 
 tion by state commissions as essentially the same as the purpose of these service- 
 at-cost contracts, but points out that the essential difference is one of procedure, 
 and here the primary difference lies in the automatic feature of the service-at- 
 cost plan by which rates of fare go up or down according to the state of the 
 "barometer" fund, without waiting upon the slower processes of conunission 
 regulation. On these points Mr. Nash testifies at page 467 of the Proceedings: 
 
 "The purpose or scope of service-at-cost franchises is not at all dissimilar to that of the 
 regulation of the public service commissions. It involves the determination of all the elements 
 of cost of .service and adjusting the fares to that cost. The elements of cost include the return 
 on the capital invested which the investors demand for the use of their money, the ordinary 
 expenses of operation, the upkeep of the property or a provision for its depreciation, taxes 
 and the creation of such reserve barometer funds, and in a few cases amortization, although 
 I do not consider amortization any i>art of the proper cost of service. Those are the funda- 
 mental elements which enter into practically all of these service-at-cost franchises. Not all 
 of them carry out fully the service-at-cost plan. The early ones had a fixed fare which was 
 assumed to tx^ higher than the cost of service, with a provision that the surplus yielded by this 
 fixed fare in excess of the cost of service would be divided between the city arid the railway. 
 Hut the later forms have an automatic adjustment of the fare to the cost and that automatic 
 feature I consider the essential difference between the operation of a service-at-cost franchise 
 and the regulation of railways as practised by the state commissions. 
 
 "I think one reason why the service-at-cost plan has become popular is because of this 
 automatic feature. It has t>cen the experience of a gofxl many railways in taking cases 
 before public service commissions, even where these commissions have full authority to act, 
 which they have not in manv cases, that action has been slow. I have been concerned in 
 a number of rate cases myself where, with a comparatively free slate, the commissions have 
 held cases under consideration for the major part of a year before rendering a decision, even 
 when the condition of the railway, its needs of additional revenue, were perfectly obvii>us. 
 
 ".•\s an alternative, anv plan of procedure which would automatically increase or decrease, 
 so far as that is concerned, the fare as soon as the need developed is and .should be welcomed 
 by the electric railways." 
 
 Mr. Nash concludes from the testimony of Mr. Stanley and Mr. Culkins 
 
 that increases in fares in Cleveland. Cincinnati and possiblv other places where 
 
Service at Cost 495 
 
 service-at-cost franchises have been in effect have occasioned little reduction 
 in riding as compared with cities where fares have been increased by negotia- 
 tion or commission order. At pages 663 and 664 of the Proceedings, referring 
 to this traffic loss under the 6-cent fare, he says : 
 
 "I think that loss arises almost entirely, not because the car riders cannot afford to pay 
 the additional cent, but because of the agitation and resentment arising in connection with 
 the negotiations for the increase. City councils, city officials, where an appeal is taken to 
 a public service commission for an increase of fare, always feel it incumbent upon them 
 to protest the increase, and the public press and professional politicians take that opportunity 
 to very loudly and at great length express their opinion of the public utility that would 
 impose additional burdens upon the poor working people. The result of that is bound to be 
 a large amount of popular attention to the subject and a lot of misunderstanding, and conse- 
 quent resentment, without which I feel quite sure — and the testimony before the Commission 
 has borne it out — that the reduction in riding would be comparatively small. In other 
 words, the operation of the service-at-cost franchises tends to minimize the unfriendly public 
 relations, and yield revenues from fare changes that should, under normal conditions be 
 yielded — the kind of increases in revenue that actually take place in private business, where, 
 as a matter of course, the charges for commodities have increased in these days as the cost 
 of the commodities increased. 
 
 "So that I think that that feature of the service-at-cost franchises is of very particular 
 importance." 
 
 This is a matter of primary importance, as it bears upon the fundamental 
 problems of public cooperation and the ultimate earning power of the electric 
 railway business under increased rates. Fortunately, we have certain figures 
 in the table presented in Chapter XXVIII of this report which may tend to 
 throw light upon Mr. Nash's conclusion. We can compare the first nine months 
 of 1919 with the first nine months of 1917 in the case of Cleveland, Cincinnati, 
 Youngstown, Montreal and Boston, where the rates were increased under ser- 
 vice-at-cost plans without reaching the top limit, with certain other communities 
 where the rates were increased by other means than barometer funds under 
 service-at-cost agreements. The following figures seem to indicate that Mr. 
 Nash's conclusion was a verdict of hope, not clearly sustained by the available 
 evidence : 
 
 Per cent Increase Change in Traffic. 
 
 in Average Per cent Per cent 
 
 City or Svstem Fare Paid Increase Decrease 
 
 Cleveland 1 . .' 54.12 .... 2.53 
 
 Detroit (City Lines) 31.68 1.85 
 
 Milwaukee 17.64 9.08 
 
 Cincinnati! 21.12 .... 1.90 
 
 St. Louis 20.00 .... 0.77 
 
 Indianapolis 17.37 10.39 
 
 Baltimore 21.23 14.22 
 
 Youngstown 1 17.19 .... 3.14 
 
 Toledo 30.65 .... 4.00 
 
 Montreal 1 17.11 4.61 
 
 Boston! 70.36 .... 15.47 
 
 Pittsburgh 29.98 .... 12.73 
 
 29 Cities 2 17.80 6.65 
 
 15 Cities 3 41.77 .... 7.54 
 
 ! Operating under service-at-cost contracts. 
 
 - Cities or systems in Class C as shown on Tables IV and VI in Chapter XXVIII of this 
 report. 
 
 3 Cities or systems in Class D as shown on Tables ly and VI in Chapter XXVIII of this 
 report. 
 
 It is noteworthy that the increase in traffic during this same period was 
 
 15.08 per cent on systems where fares had not been materially increased. The 
 
 only service-at-cost city showing an actual increase in revenue passengers for 
 
496 Electric Railway Problem 
 
 this period is Montreal. In all of these service-at-cost cities, except Cleveland, 
 the average fare paid after October 1, 1919. has been higher, and in some cases 
 a good deal higher, than the average for the first nine months of 1919. The 
 Montreal average fare went up from 4.79 cents to 5.84 cents; the Boston fare 
 went up from an average of S.5 cents to 10 cents straight; the Cincinnati fare 
 went from an average of 6.2 cents to a little over 7 cents; and the Youngs- 
 town city rate went to 8 cents cash, with 7 tickets for 50 cents, on January 1. 
 1920, as compared with an average of 6 cents for the entire system of the 
 Mahoning and Shenango Valley Traction Company for the first nine months of 
 1919. The Cincinnati fares were headed for the skies, as Mr. Culkins explains in 
 his letter of January 29. 1920, but the upward curve is being flattened down by 
 the arbitrary modification of the service-at-cost plan so as to- spread out the 
 deficits over a period of years and avoid the danger, foreseen by both the city 
 and the company ofiicials, that the fare would get so high as seriously to curtail 
 traffic in spite of the good will and spirit of cooperation supposed to character- 
 ize the riding imblic under a service-at-cost arrangement. It is again unfor- 
 tunate that the traftic figures for the Bay State system under the service-at-cost 
 act are not available, as they could properly be compared with the figures for 
 the Connecticut Company lines and the lines of the Public Service Railway Com- 
 pany of New Jersey, which are operated uniler somewhat similar conditions 
 with respect to the character and distribution of the population served. The 
 Connecticut and Xew Jersey experiences with traftic losses have figured largely 
 in the estimates of what fare increases will do to the riding habit. But there is 
 no evidence that conditions have been any better on the Bay State lines under 
 the service-at-cost plan than they have been in Connecticut and Xew Jersey, 
 where all the fare increases have been brought about without the help of service- 
 at-cost plans. The evidence seems to be clear that the service-at-cost plan as 
 worked out in Cleveland, with its particular background of battle and final com- 
 promise, has enlisted public support to a remarkable degree. It is not shown, 
 however, that a service-at-cost plan \\x)rked out in any other way brings the 
 same benefits either to the company or to the public. 
 
 Mr. Xash docs not regard the public guaranty contained in the Boston act 
 as characteristic of the service-at-cost plan. This point is brought out at pages 
 670 and 671 of the Proceedings, where the following testimony is found: 
 
 "Mr. Warren: \Vh.it would you say were the salient features of a service-at-cost 
 franchise, the essential features. distinKuishiiiR it from an ordinary franchise? 
 
 "Mr. Nash : The essential ditTerence is in the assurance to the investor, that, as far as 
 any rate of fare can \k put into efiict which the patrons, tlie car riders, can alTord to and are 
 williuR to pay. the investor will get a normal return upon his investment. In other words, 
 the kind of a return that he would Rct if he put his money in an alternative commercial or 
 industrial pro|)osition. 
 
 "That is not a Ruaranty. I think that distinction ouRht to he very clearly brought out. 
 that it is not a Ruaranty in the ordinary franchise. In our Massachusetts cases, the Boston 
 Klcvated act at least, that is a Ruaranty that the stale treasury will make up the deficit, and 
 the return to the investor is ahsolutcly Ruarantecd; hut it is expected that the deficit which 
 the state makes up at one time will Ik' paid at another under more favorable conditions by the 
 car riders ; so that in the end the state will not lo.se anythiuR, but there is no definite provision 
 for that in the act. 
 
 "Mr. Warren: So that one essential feature and difference is the assurance to the in- 
 vestors, that so louR as the business is cajwhle of producing it, they will get a fixed normal 
 return on their investment? 
 
Service at Cost 497 
 
 ''Mr. Nash : That is the real vital advantage of it. 
 
 "Mr. Warren: Is there any assurance to the car rider that he does not always enjoy 
 under present franchises? 
 
 "Mr. Nash : There is an assurance to the car rider that he can have any kind of service 
 that he is willing to pay for. 
 
 ******** 
 
 "Mr. Warren : So that really tho.se two features are very important, the determination 
 of the value of the property used, and then permission to the company automatically to have 
 its rates go up and down, to furnish a return upon that value? 
 
 "Mr. Nash: Those are the fundamentally necessary features. 
 
 "Mr. Warren : Those are the two reciprocal benefits ? 
 
 "Mr. Nash : Yes. 
 
 "Mr. Warren : The investor says, T won't require you to pay on money that is never 
 invested,' and the car rider says, 'You may get a proper return on whatever is invested.' 
 
 "Mr. Nash : Exactly." 
 
 On the subject of depreciation as a factor in the cost of service, Mr. Nash 
 differs quite radically from Mr. Mortiiner, who, it will be remembered, insists 
 that a full reserve should be accumulated equivalent to the difference between 
 the cost new of the property and its present value as measured by its per cent 
 condition of cost new. Mr. Nash takes the position that the depreciation reserve 
 should be sufficient to provide for actual replacements of worn-out property as 
 they become necessary from time to time, but that obsolescence and supersessions 
 not definitely foreseen should be taken care of by the generation of car riders 
 who benefit from them. In view of the effect upon fares of the depreciation 
 policies established by the State of Massachusetts under the Boston and Bay 
 State service-at-cost acts, this point is one of great importance. At pages 667 
 and 668, Mr. Nash says: 
 
 "The effect of the method of accruing for replacements, depreciation, so-called, which I 
 have referred to as being produced by the Interstate Commerce Commission and some of the 
 state commissions in their accounting requirements, leads to the accumulation of a large 
 reserve — in some cases, a very large reserve — which is never used. This reserve — the accumu- 
 lation of it — comes from the car rider in the case of the railway company. It is money taken 
 from the car riders, and usually this reserve is invested in the property. That is not in these 
 days a very profitable investment for the car rider, and if he had his option, he would prefer 
 to invest his money somewhere else. Of course, normally and theoretically, this investment 
 reserve earns a return. It is unnecessary to go out and borrow as much outside capital ; so 
 that the fi.xed charges against our operation are less than otherwise would be the case ; but 
 so long as this reserve is in excess of any possible actual requirements — and I am familiar 
 with calculations which show that even on a sinking fund basis, this reserve might amount to 
 as much as 40'-r of the investment in the property — to the extent that that is excessive, the 
 car riders pay a liigher rate of fare than otherwise would be neces.sar>-, and I think in any 
 service-at-cost program any excess accumulation of that kind should be avoided. 
 
 "I am heartily in favor of full provision for any actual requirements, but I doubt very 
 much whether provision should be made for so-called obsolescence and supersession; in other 
 words, whether the car riders of today, using a certain type of equipment, should furnish 
 the means of retiring that equipment, so that subsequent car riders may have the advantages 
 of more efficient, safer and otherwise more attractive service. For example, we are now 
 introducing in very large numbers about the countr>- — quite large numbers— the one-man car. 
 It is a more efficient piece of equipment than the older style of car. The cost of operation 
 is less. The older and heavier equipment is, in effect, abandoned. It probably will be for 
 some time used for extra heavy service, but in the end it is a supersession, and there is a 
 reduction in future costs. There is a more frequent service for the car rider, and I think 
 the user of the one-man car is tlie man who ought to, in part, at least, pay for the amortiza- 
 tion of the remaining life of the equipment which is superseded. 
 
 •'In short, in the service-at-cost franchise, the car rider should pay as a part of the cost 
 enough to accumulate reserves for existing renewals, but not for theoretical depreciation or 
 for unforeseen obsolescence of equipment." 
 
 After a good deal of further discussion as to the proper method of provid- 
 ing for depreciation on account of obsolescence, Mr. Nash, in answer to a ques- 
 
498 Electric Railway Problem 
 
 tion by Commissioner Beall, makes the following statement at page 677 of the 
 Proceedings : 
 
 "The thought I liave in mind is that every railway should set up a reserve. I do not 
 know that I would attempt to define what that would be, because it involves so many different 
 questions, as to probable useful life and the extent of the effect of changes in the art, and all 
 that; but if I were guessing at a suitable reserve, which would take care of any actual retire- 
 ments and replacements on a normal charge, I would say sometliing like lO'f of the invest- 
 ment. I think that would be enough to wholly take care of any normal amount of retirements." 
 
 I have already discussed to some extent this matter of depreciation in the 
 introductory pages of this chapter. Mr. Xash evidently does not believe in the 
 deduction of accrued depreciation from the original investment in arriving at a 
 rate base. I do, and for that reason I believe that accruing permanent deprecia- 
 tion is a part of the cost of service. So far as depreciation is due to obsolescence 
 and inadequacy, it cannot be definitely measured in advance, and of course to 
 provide for it fully and with certainty in advance would put an unreasonable 
 burden upon the present car riders. It is a matter for the use of judgment, but 
 the rule to be applied is that the physical value of the plant plus the uninvested 
 depreciation reserve should be kept at all times as nearly as possible on a par 
 with the recognized capital value. When an agreement is reached as a basis for 
 a service-at-cost plan, the accepted value ought to be the depreciated value, 
 unless it is proposed to tax the future car riders to make up deficiencies that 
 may have occurred in the past under a different arrangement. If those defi- 
 ciencies are to be made up, they should be made up, and not carried permanently 
 in an inflated capital account. 
 
 Mr. Xash is in favor of an indeterminate franchise, but believes that cer- 
 tain features of the franchise should be subject to review from time to time to 
 insure proper flexibility. It will be remembered that in his statement of the 
 fundamental and essential characteristics of service at cost Mr. Xash includes 
 an assurance to the investor of the right to earn a normal return upon his invest- 
 ment, a return similar to what he would get if he put his money into an alter- 
 native commercial or industrial proposition. This is by no means as clear as it 
 purports to be. The crucial question is: Shall the investor get a fixed rate of 
 return, or a flexible rate of return adjusted from time to time to the normal 
 rate of return currently offered on other investments? Mr. Xash assents to Mr. 
 Warren's proposition that "the determination of value and the assurance of a 
 return" — these essential features of a .scrvice-at-cost franchise — ought not to 
 need review. At page (u2 of the Proceedings, he says: 
 
 "Tliosc should l)c fundamentally unchanged. They should be fi.xed." 
 
 But he goes on directly to say : 
 
 "Now, take the question of the rate of return, for instance. I do not think we can 
 foresee indefinitely what rate of return the investor is able to earn in any other business, and 
 what he is intillid to under a scrvicrat-cnst franchise: so that there might well be a provision 
 for arbitration (>r readjustment of things of that kind that are subject to change with chani;ing 
 general conditions. 
 
 "("ommisvinner Meeker : Would you make these changing features subject to review at 
 peril Klical intervals, say. every ten years, or whenever the emergency arises? 
 
 "Mr. Nash: Preferably when a real enKrgcncy arises, if it is possible to define what 
 one means by a 'real emergency." That is always difficult." 
 
Service at Cost 499 
 
 Here Mr. Nash gets into deep water. He has to agree that if the rate of 
 return is to be left open to adjustment by arbitration from time to time, it will 
 have to be subject to decrease as well as to increase. It appears, however, that 
 the only kind of fluctuation attractive to the investor would be fluctuation up. 
 The matter is discussed at pages 672 and 673 of the Proceedings, as follows : 
 
 "Commissioner Gadsden : Mr. Nash, don't you think that that will, in some measure, 
 affect the securities of the investor; if an investor buys a security under any consideration 
 of that kind, with the provision that the rate on these securities is subject to revision, don't 
 you think that that is going to make money more expensive to get, under this plan? 
 
 "Mr. Nash : There would be a tendency both ways. 
 
 "Commissioner Beall : You think normally it would go up, and not down? 
 
 "Mr. Nash: If the investor foresaw that prices were going to continually rise, and that 
 the rate of return that he could command in the future ought to be revised, he would look 
 for a revision to give him an opportunity to get more than he started with. 
 
 "Commissioner Beall: Well, are not the chances all the other way? 
 
 "Mr. Xash : It is pretty hard to tell how the average investor would look at the future, 
 whethei he thinks prices are going up or going down. 
 
 "Commissioner Beall : A banker would not undertake to raise money under those con- 
 ditions. He could not do it. absolutely. 
 
 "Commissioner Gadsden : That is a gamble ; that is not an investment." 
 
 Perhaps Mr. Thomas L. Sidlo, of Cleveland, states the case for a variable 
 rate of return as well as any of the witnesses. In describing service at cost, he 
 says at page 1588 of the Proceedings: 
 
 "This cost should include the labor charge, the operating charge, the power charge, the 
 maintenance charge, etc., all according to the market. In addition it sjiould include the 
 'money charges,' that is, the return to the company's security holders on their investment. 
 This return should not be "fair' or 'fixed,' but it should be certain and in accord with the 
 prevailing cost of money for this kind of capital requirement. In other words, it should be 
 subject to ascension or declension, according to the necessities of the money situation, perhaps, 
 however, with a fixed minimum which should always be assured. The reason for this is 
 obvious. The cost of money is just as important and inevitable an item entering into tlie cost 
 of service as labor and material and is as susceptible to the control of economic influences. 
 This fact should be recognized and accredited. This applies especially w'here the type of 
 security is to be common shares, either exclusively or predominantly, and where the effort 
 will be made to keep these shares actively at par or in the region of par or in a price range 
 that will be sufficiently attractive to invite fresh capital. The rate of return should not be 
 susceptible to frequent or violent changes. This might give a gambling quality to the stock, 
 but the rate should not be so immutably fixed as to make it impossible to recognize and meet 
 changing money market conditions." 
 
 Mr. Nash's theory of fluctuation in the rate of return is based in part upon 
 his acquaintance with our old friend, the "Mexican dollar," as will appear from 
 his statement at page 675 of the Proceedings : 
 
 "If the costs of living generally have gone up not less than 50"^^, the investor, who, 
 theoretically, may live on his income, ought to have his income increased SCT/. The investor 
 makes his money work for his living, and he is just as much entitled to a higher wage on his 
 money as the workingman is entitled to a higher wage for his physical labor." 
 
 The discussion is confused by a mixture of ideas and problems. If service 
 at cost is designed primarily as a means for rehabilitating credit, its function is 
 not to restore to old investors what they have lost, perhaps temporarily, through 
 the depreciation of the dollar, but to of?er the new investment security and a 
 certainty of return as compared with other investments, and give it a rate of 
 return which, under the conditions, is enough to attract it into the electric rail- 
 way field in sufficient amount to enable the electric railways to "carry on." 
 What the old investor gets under a service-at-cost contract is a matter of equity 
 and bargaining; but the rate of return for the new investment, except to the 
 
500 Electric Railwav Problem 
 
 extent that the old investors contract to supply it. necessarily depends upon 
 market conditions from time to time. Here again the necessary flexibility can 
 be obtained, if the rate of return on new capital is to be just what it costs to 
 get it. The Cleveland Railway Company claimed, and the Cleveland Board of 
 Arbitration found, that the original provision of the Tayler grant with respect 
 to rate of return was not flexible enough to enable the company to finance exten- 
 sions and improvements needed in the immediate future, but the modification 
 recommended in that case does not increase the flexibility of the rate of return, 
 but merely adopts the clumsy and expensive expedient of raising by 16"-^ per 
 cent the contractual rate on $28,000,000 of capital stock already outstanding in 
 order to offer new investors an attractive rate on money hereafter to be put into 
 the enterprise. W'e should never lose sight of the fact that the new investor 
 in times like these puts in depreciated dollars, and does not ask a rate of return 
 based upon the theory that he is investing dollars that differ in any way from 
 the dollars in which his return is to be paid so long as present conditions prevail. 
 On the subject of incentive to economical administration. Mr. Nash ap- 
 proves in theory the London sliding scale as applied to street railways in the 
 Cincinnati and Dallas service-at-cost franchises, with the important qualification 
 that in neither of these cases has it "worked" and that it is always hard to get 
 it started on the right basis, and even if you do succeed in that a change in con- 
 ditions may make a change in the basis necessary. He also favors the Montreal 
 plan for supplying incentive, with the qualification that the commissioners who 
 administer the plan need to be paragons of political virtue and business fore- 
 sight. Aiter describing the Montreal "operating profit" plan, whereby the man- 
 agement receives at the end of each year a bonus of 14 of one per cent on capital 
 value if it has kept within the operating allowance, he says at page 669 of the 
 Proceedings : 
 
 "That is a small amount, so far as percentages ro, but it should serve as an incentive 
 to keep the expenses within all rcasdiiable limits; but the just working of an allowance of 
 that kind requires absolute unvarying fairness on the part of the commission that fixes the 
 allowance in advance, with a very clear forecast of what is going to happen, (^tlicrwise, it is 
 difficult to definitely and successfully apply it. If the commissioner fixes his allowance one 
 year: if he fixes it just as clo.sc as he can. and the company comes a little bit under, the 
 tendency in the succeeding year, if the commissioner dees not want the company to eani its 
 operating allowance, is to crowd the allowance down, so that in a .series of years, there is an 
 attempt to crowd the allowance down to the lowest possible limit, and the incentive is lost 
 If. on the other hand, the allowance is made liln-ral so thai the company can easily live within 
 it. somclxxly gets up and says the commission and the company are in collusion, and there i^ 
 an operating profit there that really does not lielong to the company and was not really earned. 
 
 "That is the difficulty in applying that sort of an incentive, but the principle is theoretically 
 good." 
 
 In other words: "Cheer up, brothers; we know what the problem is, but 
 thus far we have been unable to solve it." .\nd so, in this state of mind, Mr. 
 Nash would ri-commcn<l to Pittsburgh "the same general plan they have in 
 Cleveland or Cincinnati, ' with "just incidental modifications," as he says at 
 page 691 of the Proceedings. Then he continues: 
 
 "I think • * • 'of the point of flexibility that 1 mentioned, not having the thing 
 so tightly sewed up that it cannot be adajited to varying conditions from time to time, and 
 the point of incentive to Ixith the investors and the management to get the most that is po-; 
 sihie out of the propi'rly : the investor to more rcidilv furnish the money, the management 
 to keep itvelf up to the highest pitch and to keep in the service of the railway the cla.ss of 
 
Service at Cost 501 
 
 men that is necessary to secure tlie best results. If the extent of supervision, for instance, 
 is so great that the officials of the company are merely clerks to carry out the instructions and 
 the plans and designs of the supervisory body, that is not attractive work for a real man. 
 Just so far as is consistent with the interest of the public I think the management should be 
 left free to initiate the improvements and take credit for improvements." 
 
 Mr. Nash thinks that neither a maximum nor a minimum rate of fare 
 should be contained in a service-at-cost franchise. In this opinion, at least so 
 far as the maximum is concerned, Mr. Nash is supported by the opinion of 
 Mr. W. B. Head, Vice-President of the Dallas Railway Company. It appears 
 that in Dallas not only the street railway but the gas and electric properties 
 have been put on a service-at-cost basis. At page 631 of the Proceedings. Mr. 
 Head says : 
 
 "The great defect, as it turned out, in the railway franchise, on account of the war 
 situation, is the fact that it has a top limit, and, to that extent, is not a service at cost. You 
 cannot go above a five-cent fare, and, therefore, it is not a service-at-cost franchise, to that 
 extent." 
 
 The standard rate of return allowed in Dallas when the maximum fare is 
 being charged is 7 per cent. Mr. Head states that the company has been earn- 
 ing 4 per cent. It is apparent that all is not well in Dallas. At page 632 of the 
 Proceedings, Mr. Head says: 
 
 "We are not properly serving the city. We are not making any extensions. We have 
 not the money, and we cannot get the money. We need new equipment, and we cannot get 
 money with which to purchase the equipment." 
 
 Still, Mr. Head has hopes that the company may be able to pry the lid off 
 with a lever which it retained at the time the franchise was negotiated, as will 
 appear from his testimony at page 636 of the Proceedings : 
 
 "The Chairman: Do you expect to be able to get the lid off that maximum fare? 
 
 "Mr. Head : I rather think we will, for this reason : One of the trading points of the 
 city was that, on account of the fact that they put this lid on, we introduced certain clauses 
 in the franchise by which they cannot force extensions when we are not making the allowed 
 return, and we are hopeful of using that to be able to get this lid oiT, so that the property 
 can grow. That was one of the offsets to the limit being placed." 
 
 On behalf of the public Mayor E. V. Babcock, of Pittsburgh, and Mr. 
 Charles K. Robinson, special counsel for the city in public utility litigation, gave 
 important testimony on service at cost, based upon their study of that plan as 
 applicable to the soltition of Pittsburgh's transportation problem. To them the 
 problem of incentive is the stumbling block, as will appear from Mayor Bab- 
 cock's statement and Mr. Robinson's comment on it. At pages 1900 and 1901 
 of the Proceedings, Mr. Babcock says: 
 
 "The use of the service-at-cost plan, which is now strenuously proposed in behalf of the 
 street railway companies, has many elements to commend it to favorable consideration. It, 
 however, possesses one element which may prove that it is not the final solution to the diffi- 
 culties, namely, that it robs the operating company of the incentive to secure the best operating 
 economies and keep down the cost of the service. Various expedients by way of adopting 
 annual budgets and by giving the local municipal representatives a voice in the fixing of the 
 budget have been suggested, and on the other hand, incentives have been suggested to reward 
 good management by operating bonuses and by dividing excess profits, but all of these plans 
 are quite unsatisfactory and give no assurance that they will accomplish the desired results. 
 Yet it may be that no better plan can be evolved to carry the business across from the un- 
 regulated age to the present regulated age than that of service at cost with arrangements 
 providing for possible municipal ownership under reasonable conditions of purchase. If a 
 service-at-cost plan could be developed whereby good judgment could he fairly rewarded, 
 then nn cprinus obiection could be raised to the plan." 
 
502 Electric Railwav Problem 
 
 At page 1907 of the Proceedings Mr. Robinson, answering for Mayor Bab- 
 cock and himself, explains the difticuhies they found with respect to this matter 
 of incentive. The record shows the following: 
 
 "The Chairman: How are you going to provide for that incentive? 
 
 "Mr. Robinson: « ♦ • * Qur idea is this: That up to the present time, so far as 
 we have any knowledge, there has been no plan evolved which occurs to us to lie satisfactory 
 in the way of meeting that particular and rather serious objection. 
 
 "We are reasonably familiar with the plan that has been adopted in Montreal where 
 they have an operating bonus, 1 iK'lieve. That, however, is dependent entirely, if it is analyzed, 
 to a point where it becomes a question of individual judgment as to whether or not the 
 company has met a definite budget or not, and leaves it practically in the control of an 
 individual commissioner or commissioners to decide that question and that lays itself open to 
 complications which seem to us not to meet the situation. 
 
 "The Cincinnati arrangement, while in a sense fairly meeting the problem in the sense 
 that it divides certain excess profits, nevertheless in a situation where there is a very rapid 
 change in the general economic and financial conditions, entirely fails to meet the situation, 
 because, being predicated upon certain assumptions that a certain rate of fare, a certain 
 amount of return, certain costs, and so forth, are the bases of judgment, if those bases are 
 violently changed by war conditions, or by any economic or other conditions, or by mechanical 
 art developments which might be incident to the one-man car, or otherwise, then the whole 
 arrangement is immediately distorted, and the thing you were trying to do. which was to 
 reward good management, may. after all. prove a punishment for an economic condition over 
 which they have no control, or may prove a gift hccau.se of factors over which they have 
 no control." 
 
 Again, at page 1912 of the Proceedings, Mr. Robinson says: 
 
 "The trouble with the cost-of-service plan, it seems to me, is it offers no check against 
 many forces which naturally tend to very much increase the cost of ser\-ice, because the com- 
 pany, having no direct interest in those costs, necessarily would not try to keep them down. 
 Thev might, for instance, increa.sc their payrolls very materially, because it would mean 
 nothing to the operating management, and of course the pressure to increase those is constant. 
 It is the inherent danger which attaches to a system which more or less guarantees the returns 
 without providing any incentive to keep the costs dowTi." 
 
 Further on, at jiages 1921 and 1922 of the Proceedings, Mr. Robinson men- 
 tions a second objection to the Cincinnati franchise, namely, this: 
 
 "It locks the whole arrangenicnt into a flat fare arrangement absolutely, and that, I think 
 is unwise. 1 think provision should be made for such adjustment of the fare as experience 
 and practice may develop to be the best for the community and the best for the company." 
 
 Moreover, in his opinion, the sliding scale coupled with the barometer fund 
 as worked out in the Cincinnati franchise would prove to be illusory even if the 
 plan were operating under normal conditions. It will be remembered that when 
 the fare is at a certain point a portion of the surplus goes to the company, but 
 the balance goes to the reserve fund, and that tends to build up the fund to a 
 point where the fare is automatically reduced, and the reduction of the fare 
 presumably reduces or cuts off the surplus, of which the cotnpany is to get a 
 larger share as a reward for operating at the lower fare. Commissioner Gads- 
 den and Mr. Robinson, between them, gave this Cincinnati incentive provision 
 a pretty hard rap, as will appear from the testimony at page 1922 of the Pro- 
 ceedings : 
 
 "Commissioner Gadsden: I imagine if is largely illusory anyhow? 
 "Mr. kobinson : 1 think it is. under the Cincimiati plan, largely illusory. 
 "Commissioner tiadsden : It does not vest until the fare goes down? 
 "Mr. Robinson : .'Xnd the moment it gets there you have to change it. 
 "Commissioner Gadsden: But it listens well? 
 
Service at Cost 503 
 
 "Mr. Robinson: That is it exactly. That is what I think about the Cincinnati plan. 
 I think, if you analyze it, that it is very largely illusory and does not produce what you 
 started out to do." 
 
 One of the most illuminating things that Mr. Robinson said relates to the 
 question of the proper basis for the valuation in a service-at-cost franchise. His 
 argument for the use of the actual investment is found at page 1914 of the 
 Proceedings : 
 
 "I have personally, of course, always put the emphasis upon the actual investment in the 
 properties and upon those bases of reproduction which are based upon the normal situations 
 undisturbed by excessive war prices, subject only to the exception that where money actually 
 spent during the war period has been put in at the increased costs due allowance, of course, 
 should be made for the actual expenditures, keeping in mind all the time, of course, the 
 investment or cost. Because, after all, when you use the words 'Service at cost,' there seems 
 to be no logic in the situation unless you say that it means cost to the investor or cost to 
 the capitalist as well as cost to the public. There is no more reason why cost should be 
 applied as against the public than it should be applied in a sense against the investor, and that 
 situation appeals to me personally for another reason at the present time. In the past, the 
 companies have accepted franchises with many conditions which attach to the question of 
 fares and attach to the condition of these obligations relating to paving and various municipal 
 charges. They now appear before the public and make the contention, properly, that they 
 are public servants and the performance of those conditions is no longer possible. They will 
 continue to perform their public duties, and they say in the name of the public that they are 
 serving that they should be reheved of those things, and it seems to me in the situation which 
 has arisen that there is a moral and ethical responsibility on the part of the companies to ask 
 only that they should be allowed to receive a return upon a fair estimate of cost." 
 
 Mr. Morris L. Cooke's final comment on service at cost as proposed before 
 the commission is far from encouraging. At page 1698 of the Proceedings, 
 he says : 
 
 "I think with the service-at-cost plan as I have heard it described and as it has been 
 presented here, you are going to step from the frying pan into the fire. I do not believe that 
 its promoters realize the temper of the public or the trouble it is going to get them in. 
 
 "The Chairman: What is the difficulty, if any, that may arise? 
 
 "Mr. Cooke: I think primarily the difficulty is that it is based on the theory that such 
 a matter as this can be arranged by a fixing of a new standard such as the rate of return and 
 the fare and a few things of that kind, and the big questions involved, questions of efficiency of 
 management and cultivation of the public and the solution of the labor problem, escape them." 
 
 The service-at-cost program lacks definiteness, because no two service-at- 
 cost contracts are alike even in the essential details. It bristles with difficulties, 
 because it requires initially the determination of the fundamental question of 
 value, with respect to which the interests of the parties are most divergent and 
 the theories of engineers, accountants, economists, lawyers, commissions and 
 courts most conflicting and chaotic ; because it drives a dagger into the very 
 heart of private initiative while still depending on private management to func- 
 tion ; because it takes the electric railways out of the field of regulation by the 
 police power and cancels their obligation not to charge more than the service 
 they render is reasonably worth to the public ; because it recognizes that local 
 transportation is a public function and proclaims the necessity for intimate public 
 control, while cheerfully admitting the incapacity of the public to perform the 
 function directly. Even these general statements require qualification, for on 
 the two principal electric railways of Massachusetts private management has been 
 discarded, and in Cleveland and Dallas the maximum fare limit has been re- 
 tained as a measure of the reasonable worth of the service. Service at cost has 
 not proven its ability to secure public cooperation except in Cleveland, and 
 
504 Electric Railway I'rublem 
 
 there a referendum has been invoked against the recommendations of the Board 
 of Arbitration in the seven-per-cent-return proceedings. In the forms presented 
 to them the people of Chicago, Denver and Minneapolis have voted against 
 service at cost, and indirectly it has been rejected by the voters of Detroit.* 
 Apparently, the public in many communities looks upon it as a "cost-plus" device 
 — only this and nothing more. At best, it is not a remedy that can be applied 
 quickly, unless also foolishly or dangerously. It has not proven its ability to 
 restore credit in the present emergency without a public guaranty. 
 
Chapter XLII 
 THE USE OF PUBLIC CREDIT 
 
 During the war period capital advances were made by the Federal Govern- 
 ment, through the United States Shipping Board Emergency Fleet Corporation 
 and the War Finance Corporation, to a considerable number of electric railway 
 companies which were unable to furnish on their own credit the capital required 
 to enable them to render the public service deemed by the Government to be 
 essential to the continuity and success of its war activities. In the case of the 
 Shipping Board, advances were made for the construction of extensions or the 
 provision of additional equipment and power facilities, to enable the electric rail- 
 ways to provide transportation for the war workers. In the case of the War 
 Finance Corporation, loans were made to certain companies in pursuance of the 
 Corporation's power to make advances to going concerns whose operations were 
 deemed necessary or contributory to the prosecution of the war. For example, the 
 Government assisted in the refinancing of the Brooklyn Rapid Transit Company's 
 notes on the theory that the company's operations were so essential to the successful 
 prosecution of the war that a failure or a crippling of the service would seriously 
 prejudice the Government's war-making functions and activities. The Govern- 
 ment's policy, however, was to exact ample guaranties from the companies which 
 received assistance that its advances would ultimately be repaid. In some cases, 
 at least, the Shipping Board retained title to the equipment and tracks purchased 
 or constructed with the funds advanced by the Government. 
 
 It has not been suggested, howiever, by the witnesses before the Commission 
 that the credit of the Federal Government can properly be used to uphold the 
 electric railway industry in times of peace. It is recognized, therefore, that pub- 
 lic credit, if made available for this purpose, outside of the District of Columbia, 
 must be the credit of the states or municipalities in which the local transporta- 
 tion service is rendered. This statement needs to be qualified only to the extent 
 that certain electric railways might be regarded as part of the national transporta- 
 tion system of the country. In case the policy of government aid to the steam 
 railroads is continued or the policy of Federal operation resumed, with or with- 
 out government ownership, it is quite possible that some of the electric railways, 
 even of those that operate in the public highways, may ultimately be treated by 
 the Government as a part of the general transportation system, either because 
 they are interstate carriers or because they perform auxiliary service, not strictly 
 urban or local in its nature. It seems, however, that for the purposes of this 
 discussion any probable use of national credit in support of the electric railways 
 may be treated as exceptional and incidental and not as furnishing a possible 
 solution of the main problem with which we are concerned. 
 
 505 
 
506 Electric Railway Problem 
 
 In the preceding chapter, under the discussion of service at cost, attention 
 has been called to the fact that the new capital required for extensions and 
 improvements of the Boston Elevated Railway system and the Eastern Massa- 
 chusetts Street Railway system ( formerly the Bay State lines) has been secured 
 through state aid. The 10-year public guaranty enabled the public trustees for 
 the Boston Elevated to dispose of a certain amount of bonds, and the purchase of 
 the Cambridge subway by the state has supplied the Boston company with a large 
 amount of additional capital ; while in the case of the Bay State system the state 
 guaranty of a new issue of serial bonds has enabled the trustees to dispose of 
 them in sufficient amount to meet the company's capital requirements for the 
 present. Here we have instances where public credit has been used to bolster up 
 the electric railway situation, but only in connection with the trustee plan of 
 public operation. 
 
 In Chapter XXIII of this report 1 outlined some of the general programs 
 offered by the witnesses before the Commission, including public ownership, as 
 means for restoring electric railway credit ; and in Chapter XXIV I discussed 
 briefly the pros and cons of public ownership from the point of view of economic 
 theory as voiced by various witnesses. Public ownership got through the ordeal 
 with some burns and bruises, but still in condition to be considered as a poten- 
 tial remedy for bankruptcy. That public ownership would solve the problem 
 of credit is universally and almost too readily admitted by the witnesses. In 
 view of the immense and almost insuperable difticulties that we meet in trying 
 to work out a solution on some other basis, it is apparent that public ownership 
 must be given serious consideration, not merely as an ultimate solution to be 
 worked out in the future at our leisure, but in its bearing upon the immediate 
 crisis in the electric railway field. If desirable — or even if necessary to the 
 public welfare — can public ownership and operation be depended on for quick 
 results? The American Electric Railway Association, in its brief filed after the 
 close of the iiearings, gives a negative reply, and for that reason dismisses the 
 subject without extended comment.' 
 
 Upon all sides, it is admitted almost unanimously that the electric railways 
 are an essential industry and that local transportation in urban communities is 
 a public function, for which the community through some of its governmental 
 agencies must assume final responsibility. Heretofore, this function has been 
 performed in the main by private agencies under varying degrees of public con- 
 trol. These agencies have now reported back their inability to continue to per- 
 form the function under the conditions heretofore prescribed. New conditions 
 arc demanded. Public policy cannot stand still in the matter. It must either 
 go backward, by withdrawing the hand of regulation and permitting the electric 
 railways to fight out the battle of life or death as a non-essential, competitive, 
 private industry, or else go forward to the assumption of a larger and larger 
 degree of public responsibility in connection with the performance of this public 
 function. We cannot blink the fact that regulation of competitors, relief from 
 taxation, public subsidies, and public control of wages and hours and conditions 
 of work, and service at cost, all involve public encroachments upon private man- 
 
Use of Public Credit 507 
 
 agenient, on behalf of adequate service at reasonable rates. We are being driven 
 farther and farther into the realm of public control, and the question arises : 
 Can we stop far enough short of public ownership or of public ownership and 
 operation to make stopping worth while, even from the point of view of those 
 who do not wish to reach that goal? 
 
 We have seen that Colonel Kutz, as Chairman of the District of Columbia 
 Commission, favors municipal ownership of track and roadbed as a means of 
 getting around the paving problem. In New York we find public ownership of 
 the subways as a means of solving the credit problem. Yet the lessees of the 
 municipal subways are in distress along with the rest of the electric railways. 
 Boston financed its own subways and now the State of Massachusetts has taken 
 over the privately-constructed Cambridge subway as a means of releasing capital 
 to the Boston Elevated Railway Company for use in extensions and betterments. 
 The company's leasehold obligations to the City of Boston have been an impor- 
 tant cause contributing to its financial distress and the high fares that have pre- 
 vailed under public operation. Philadelphia is constructing a municipal rapid 
 transit system, and has long been negotiating with the Philadelphia Rapid Transit 
 Company for its operation. The policy of public ownership and private opera- 
 tion has had many advocates for many years. This is the plan suggested for 
 Pittsburgh by Mayor Babcock and Mr. Robinson, as will appear from the fol- 
 lowing statement at page 1901 of the Proceedings : 
 
 "Theoretically it seems that the best possible arrangement to meet the situation would 
 be to have municipal ownership with private operation. I have said 'theoretically,' because of 
 numerous practical difficulties which present themselves in such a program. It may be plainly 
 demonstrated, however, that such a plan, if definitely stabilized and assured, has very great 
 advantages over any other arrangement and eliminates all of the controversial atmosphere 
 which now exists between private capital and the public. It would permit of financing on 
 much lower interest rates than financing by private interests. It would give the municipality 
 complete control of its own development and place in its hands the key to its own destiny. 
 Coupled with private operation it would produce all of the advantages of private, as contrasted 
 with municipal or public operation with its associated political entanglements, and if com- 
 bined with a plan whereby, at fi.xed periods, say every ten years, the operation of the system 
 was let to the best bidder, it would insure good service at reasonable cost." 
 
 It will be reinembered that the Massachusetts Public Service Commission in 
 its Sixth Annual Report, issued early in 1919, could see no remedy for the credit 
 problem short of public ownership. Chairman Frederick J. McLeod, of the 
 Massachusetts commission, and Interstate Commerce Commissioner Eastman, 
 formerly a member of that coinmission, both point to public ownership as the 
 way out, in their testimony before the Commission. 
 
 With respect to the reaction of Massachusetts public opinion to the service- 
 at-cost plan as applied to the Boston Elevated and the Bay State lines, Mr. Homer 
 Loring said that the last legislature undoubtedly would have passed acts limiting 
 the fares to five cents and providing for the payment of any resulting deficien- 
 cies out of taxes, if Governor Coolidge had not "stopped the fire" by appointing 
 a street railway commission to investigate the matter. The commission referred 
 to submitted its report a short time after the Federal Electric Railways Commis- 
 sion's public hearings were closed, and recommended with respect to the Boston 
 Elevated that no action be taken at the present tiine looking to public ownership. 
 
508 Electric Railway Problem 
 
 At pages 39 to 41 of the report, filed November 15, 1919, the special commission 
 says : 
 
 "It is admitted that under public ownership adequate capital could be provided at a saving 
 of over $900,000 per year, as compared with the total of interest on bonds and loans and 
 dividends on stock now paid by the company, the reason, of course, being that the Common- 
 wealth can always secure capital at lower rates than a private corporation. In the event 
 of public ownership the communities affected would lose taxes to the amount of at least 
 $7SU,CKX). 
 
 "It will be noticed that the option provided in the bill continues not only for ten years 
 but as long as the Commonwealth may elect to manage the property under the terms of the 
 act of 1918. All that this Commission might properly do would be to advise that the option 
 be availed of now, or negotiations be opened to secure a better price, or that the property 
 be taken by the exercise of the power of eminent domain. We make no recommendation 
 because we are content to leave the matter as it is — to be acted upon if and when the Legis- 
 lature feels moved to act. 
 
 "We reach this conclusion for various reasons. In the first place we are disposed to 
 think that it will be wise to give the present experiment in the management of the Elevated 
 longer trial. It has been in operation a little over a year, under most unsettled general 
 business conditions. Already the revenues derived from the 10-cent fare are deemed by the 
 trustees adequate to meet the obligations of the road. Further experience inay make it clear 
 that a readjustment of fares, through the creation of a zone system, will make possible a 
 materially lower basic fare. The cfTcct of removing some of the burdens now imposed 
 through taxation and otherwise, if our recommendations be adopted, is yet to be determined, 
 while a reduction of the cost of labor and materials if and when it occurs would, as a matter 
 of course, be followed by a reduction in fares. We now have public control which could not 
 bo made more effective by public ownership. On the contrary, the board of directors of the 
 Elevated must he in at least a mildly critical attitude towards the management, and_ because 
 of the public and private interests involved, sometimes conflicting, all of the operating con- 
 ditions of the road are likely to challenge rigid public scrutiny. Is it e(iually certain that 
 under public ownership the management would be held to as high a standard of efficiency? 
 All these considerations, and some to follow, suggest that the option to buy should not be 
 exercised now or at any time hereafter without most deliberate consideration. 
 
 "We believe that this is an inopportune time to increase the bonded indebtedness of the 
 State, direct or contingent, nor can anyone assert with knowledge that street cars propelled 
 by electricity will be our most efficient means of transportation ten or twenty years hence. 
 Macaulay foretold a time when some traveler from New Zealand might, in the midst of a 
 vast solitude, take his stand on a broken arch of London Rridge to sketch the ruins of St. 
 Paul's. So our children or our children's children may live to gaze curiously upon the sub- 
 ways, then converted into catacombs where may peacefully slumber the illustrious dead, and 
 where the bones of the projectors and security holders of the Elevated Road might well be 
 laid. The elevate<l structure converted into a promenade would aflford a convenient sanctuary 
 for those who might desire to escape from the motor traffic of the congested streets below, 
 where one must needs be quick if one would not Ix- dead. 
 
 "Private capital is already engaged in this enterprise. Why he in haste to release it? 
 Why be impatient to remit all of the taxes we are now collecting? Stockholders and bond- 
 holders would perhaps Ik^ willing to exchange their securities for cash or for bonds of or 
 guaranteed by the Commonwealth. While the condition of the security holders of the Boston 
 Elevated prior to the act of 1918 aroused and in many cases deserved sympathy, it was not 
 their condition but the absolute necessity for insuring transportation facilities to the metro- 
 politan district that justified some measure of relief." 
 
 It can hardly be said that the recommendation of this latest Massachusetts 
 street railway commission carries with if much solace to the hard-pressed electric 
 railways of the country. The report, in eflfect, says: "The private investors 
 are already in this enterprise. It is a shaky one. The state has already done 
 too much for ihcm. T.et them sweat." Immediate public ownership is not re- 
 commended, but the commission's failure to recommend it is not. a]>parently, the 
 result of a desire to come to the rescue of the companies. 
 
 Four members of this Massachusetts sjiecial connnission, inchidins; State 
 Senator John J. Walsh, who gave testimony before the Federal Electric Railways 
 Commission, filed a minority statement recommending the immediate purchase, 
 by the state, of the Boston Elevated Railway property, and supported their posi- 
 
Use of Public Credit 509 
 
 tion vigorously, as will be seen by the following quotation from pages 57 to 59 
 of the report: 
 
 "The street railway situation in Massachusetts calls for clear, positive and radical action. 
 No longer are we justified in experimenting with weak palliatives administered here and 
 there. Investigation and discussion have been exhausted. It is time to do something. Some 
 lailways hereabouts may doubtless continue for some time under private ownership and 
 operation, if relieved of certain unnecessary burdens. Other privately owned street railways 
 in certain areas may possibly be operated through public officers and supported through public 
 subsidy. To provide such an opportunity for such action may be wise. Existing facts, how- 
 ever, justify the conclusion that if the public regards reasonable service at low rates of fare 
 as a public necessity, the public must sooner or later take over the service. Indeed, a majority 
 of the responsible witnesses who appeared before the commission to a greater or less degree 
 regarded public ownership as inevitable. 
 
 "Adequate street railway service is essential to the social and economic life of our com- 
 munities. It must be maintained, improved and extended. For these purposes large amounts 
 of capital are required. It is evident that privately owned street raihvays have exhausted 
 their borrowing powers, while at the same time the public is disgruntled at lending its credit 
 to a publicly controlled but privately owned railway for the purpose of guaranteeing, either 
 primarily or incidentally, a high rate of dividends on stock values largely in excess of market 
 quotations, besides suffering an intolerably high and restrictive fare collected from the car 
 riders alone. The public can own the Boston Elevated Railway at a cost lower than it is 
 now- obliged to pay in the form of guaranteed rental to stockholders. Our present plan 
 affecting the Boston Elevated Railway, while perhaps defensible as an emergency measure in 
 view of the condition of the Boston Elevated Railway in 1918, has worked out in an une.x- 
 pected manner. It has neither the full character of a privately conducted business enterprise 
 nor of a publicly owned and managed public utility. The fact that the legislative contract of 
 1918 affecting the Boston Elevated Railway was deemed by honorable legislators of ordi- 
 narily soimd judgment as necessary to save transportation in the metropolitan area from 
 cessation is a strong indication of the immense public necessity of transportation facilities. 
 These facts, taken together, point unerringly to just one thing, namely, full public ownership, 
 however we may oppose the idea in theory. The man who after long experience, serious 
 investigation and thoughtful consideration 'sees no other way out' than public ow'nership 
 certainly is not justified in remaining in a cave of despair. The arguments against public 
 ownership and operation of any undertaking are easy to state and easy to accept. They seem 
 overwhelmingly convincing when brought against any new and specific application of public 
 control. They are precisely the same as when the public first conceived of taking over from 
 privately owned and operated schools the education of children. They are precisely similar to 
 the arguments used when public convenience began to seek public owership of privately owned 
 turnpikes and bridges. They are not different from those used when the public went into the 
 business of delivering and selling water for the use of communities instead of leaving tlie 
 business to private operation. When from experience the public becomes convinced that private 
 ownership of any service essentially public in character has failed to function satisfactorily, 
 the public invariably has adopted and always will adopt the extreme method of satisfying its 
 wants and needs through public operation and ownersliip of such service. .\n arguments, 
 however plausible, however sound, however convincing to the mind, that deal with theories 
 and not conditions, have been and will continue to be disregarded when the public is convinced 
 that private ownersliip and control of a necessary public utility is a failure. Such is the 
 temper of the public mind at the present time, at any rate, as to the Boston Elevated Railway. 
 
 "Public confidence in the present arrangement is shaken beyond restoration. Nothing can 
 restore the good-will necessary to the efficient conduct of a transportation system like the 
 Boston Elevated Railway except the elimination of the idea on the part of the car riders 
 that any group of people is getting an undue advantage from the operation of a public utility. 
 There can be no question that to tlie average man in the metropolitan district it is an in- 
 tolerable thing that the Boston Elevated Railway stockholders should be guaranteed a rate 
 of dividend snd a security of principal which appertain only to a well-conducted, successful 
 enternri.se. No theoretical arguments against public ownership will suffice to change the 
 public mind. Public ownership and public control should be made possible for every com- 
 mnnit'' wh-ch. after patient experience and deliberate consideration, desires to elect such 
 altcrrative " 
 
 Ex-Governor Foss, who testified before the Commission in niidsumnTer, 
 was emphatic in his recommendation of immediate public ownership and confi- 
 dent in his prediction of what Massachusetts was going to do about it. At pages 
 801 and 802 of the Proceedings, he testifies as follows : 
 
 "The Chairman : During the working out of this scheme of public ownership, what is to 
 be done with these utilities, assuming that they are in a desperate condition? 
 
510 Electric Railway Problem 
 
 "Mr. Foss : I say. go to it immediately. 
 
 "The Chairman: Well, what? 
 
 "Mr. Koss : Well, go to it right off. We are going to get it in Massachusetts, we are 
 going to take it up there. We are not going to wait for the nation to act. 
 
 "The Chairman: Vour solution, then, is government ownership? 
 
 "Mr. Foss : Yes. 
 
 "The Chairman: That is the only thing you have to offer? 
 
 "Mr. Foss: That is the only thing I have to offer; either government ownership and 
 government operation or government ownership and private operation, but government 
 ownership first. 
 
 "The Chairman: Then do you believe that the one function of this Commission which 
 has been appointed by the President is to make a recommendation to the country in favor 
 of government ownership of the.sc utilities? 
 
 "Mr. Foss: I think that would be the greatest report you could make. It would mean 
 more to the people of this country than any report that has been made in my memory, because 
 this is the greatest question in the country." 
 
 The 1919 election has passed in Massachusetts and Mr. Foss is still an ex- 
 governor, and the well-hated Boston service-at-cost plan is finishing the second 
 year of its ten-year initial period. The Massachusetts men have not yet crossed 
 the Rubicon. They are still enjoying their resentment at the company's success 
 in getting a ten-year guaranty, and apparently are unwilling to let the investors 
 "pull out" entirely. Massachusetts could have undertaken public ownership. 
 Many of the cities of the country are not in a position legally or financially to 
 apply this remedy quickly. The situation in New York City was described, from 
 the point of view of the Interborough Rapid Transit and New York Railways 
 companies, by Mr. James L. Quackenbush. their general counsel. He takes issue 
 with Governor Foss at pages 824 and 825 of the Proceedings, as follows : 
 
 "The discussion of Governor Foss this morning about public ownership, that we are 
 going to do it right off, so far as the State of New York is concerned, if I may be pardoned 
 the use of a remark concerning the distinguished gentleman from Massachusetts, is nothing 
 but stuff and nonsense. 
 
 "L'nder the Constitution of the State of New York, the City of New York has absolutely 
 no power to lend its credit to any coriKiration. or to guarantee anything, or to become the 
 owner of stock in any corporation; but before the measure suggested by the ex-Governor of 
 Massachusetts can Ik- carried out in the State of New York, an amendment to the Constitution 
 must be obtained. This may seem like a law lecture, and probably it is familiar to you, but, 
 very briefly stated, under our Constitution, you can amend it only by a constitutional conven- 
 tion, or by an amendment passing the legislature ; then the .same amendment, as passed, being 
 submitted to the next succeeding legislature, made up of the Senate which has. since the first 
 enactment, been newly selected from the [leople ; and then, after those two successive legis- 
 latures have passed the amendment, it is submitted to the people at the next annual election ; 
 and on the timetable as of today of the Governor's program — mind you. 1 am not talking 
 about whether public ownership is the thing or not ; \ am talking about whether you can 
 do it now — we could not get anything through in New York State for our relief until the 
 legislature next year passed it. in 192(1. ,-ind then, there l)eing an election in 1920 for senators, 
 the Senate of 1921 would l>e a new one. and they could pass it in the fall of 1921. If the 
 people approved it. it would be in shape fi>r the legislature of 1922 to pass the requisite 
 legislation through In constitutional amendment. So that on the timetable 
 
 "Commissioner Meeker: Has not the legislature authority, however, to amend the 
 charter of New York City, so that New York may do it ? 
 
 "Mr. Qu,ickenbush : No. sir; it is absolutely prohibited by the Constitution — no city. It 
 is in the Constitution. The city itself, nor any city or other |K>litical sulxlivision in the state, 
 ran do it. That is because, in the very early days, when I lived up in the central part of the 
 state, they came along and bfinded my town to build the steam railroad out there. You all 
 know the history of the early days of that. That was put in the Constitution, so that no 
 misguiilcd gentlemen of ibr notions of the distinguished former Governor of Massachusetts 
 would use public monevs for any such things, for you cannot put his ideas into effect until 
 you have had the approval of two s\icressive lecislatures and have gotten the majority vote 
 of the voting population of the State of New York. 
 
 "The Chairman : .'Vssuming that public sentiment in New York was ready for public 
 ownership, what arc the steps possible to be taken bv which the properties in New York 
 could l)C taken over, after the Constitution had been amended and had been ratified? 
 
Use of Public Credit 511 
 
 "Mr. Quackenbush : If the legislature, convening on the first Wednesday of January, 
 1922, passed a bill and it v\"as signed by the Governor, the law would be there. Then would 
 come the question of condemnation or purchase. By no possible stretch ol my imagination, 
 can I conceive of the carr>ing out of anything that would protect my clients in less than 
 three years from today. I think you can see that that would be so. That is moving pretty 
 fast, too. So that that is not available." 
 
 It is fair to say that the City of New York, after having adopted the policy 
 of subway construction with public money, found itself in a position in 1913 
 where it felt compelled to appeal to private credit for help in financing a much- 
 needed program of rapid transit expansion. In this case city credit was so nearly 
 exhausted under constitutional restrictions and the enormous existing debt that 
 it could not unaided take care of the pressing transportation needs of the public. 
 Undoubtedly, the credit of the State of New York would have been sufficient for 
 this purpose, and the city's credit could have been made sufficient, conditioned 
 upon wise use, by the removal of the constitutional limitations. But the diffi- 
 culties explained by Mr. Quackenbush exist, and for the moment the amount of 
 public credit that can be made available for the electric railways is not by any 
 means unlimited in all communities. 
 
 No one would question the ultimate ability of the communities through their 
 governmental organization to finance electric railway construction, but the trouble 
 is that public credit cannot be easily mobilized for the purpose under existing 
 constitutional and statutory restrictions, and in many cases these restrictions can- 
 not easily be removed. In many cases, the Alassachusetts plan as embodied in 
 the Boston and Bay State contracts with public operation, could be put into effect 
 by legislation without immediately burdening public credit with the entire load 
 of existing street railway investments. Undoubtedly, in most cases, either the 
 state or the municipality could finance the new extensions and additional facilities 
 immediately required except where great programs of general rehabilitation or 
 deferred expansion are imperative. But, as we have seen, there are serious dif- 
 ficulties in some jurisdictions in the way of using public credit to help the electric 
 railways out except under public operation or public ownership. Therefore, 
 we must first consider the problem from the point of view of the ability of the 
 public to assume the whole burden of the investment and release private credit 
 entirely. In this connection, consideration must be given to the disadvantages 
 and the advantages that arise, from the standpoint of public credit, as a result 
 of the fact that electric railway systems overrun municipal boundaries. The 
 disadvantages grow out of the inherent difficulty of establishing municipal owner- 
 ship of a utility that operates as a unit in more than one municipality, and often 
 in a great many of them. The trouble here is both political and legal. The 
 advantages grow out of the possibility of creating transportation districts as a 
 new type of municipality with unencumbered debt-incurring power. 
 
 The Proceedings do not show the extent of the existing limitations upon state 
 and municipal indebtedness, nor the extent to which states and municipalities are 
 prevented from loaning their credit to street railway companies, or from taking 
 over electric railway properties subject to their outstanding obligations. Neither 
 time nor funds have been available to undertake a special investigation along 
 these lines, although it is a matter of great importance in connection with the 
 
512 Electric Railvvav Problem 
 
 subject with wliich the Commission has to deal. If we assume that, in order to 
 give public credit free play in sustaining the local transportation function, it 
 will be necessary for the public to acquire the electric railway properties, our 
 first task is to determine the extent of the existing investment. This is the old 
 fundamental ditticulty that lies across the path of every possible solution of the 
 electric railway problem. As we have already noted, the spokesmen for the 
 electric railway industry speak loosely of an investment of from five billion dol- 
 lars to seven billion dollars, but when we tr\' to ascertain just what this means 
 in actual money invested in the public service, or even in the present value of 
 propertv devoted to the public service, we find ourselves in a maze of doubts 
 and difficulties. 
 
 Mr. Charles K. Robinson, who for a number of years, as special city solici- 
 tor, has been studying the local transportation problem of Pittsburgh, says that 
 it is hard to tell the net capitalization of the 21S companies which together make 
 up the Pittsburgh Railways system. He fixes the total amount of outstanding 
 securities as approximately $160,000,000, but a good deal of that represents dup- 
 lication of stock interest control. "The actual amount which they claim is not 
 duplicated in any way is about $120,000,000," says he at page 5516 of the rec- 
 ord. We have already seen that the joint board of engineers appointed to 
 appraise the Pittsburgh lines found the actual investment in physical property 
 determined by the historical-cost method to be $59.069,3S2. of which $11,271,458 
 represents superseded property and $12,039,600 more represents accrued depre- 
 ciation of existing property. Thus we see that in the Pittsburgh case the actual 
 cost of the existing property less the depreciation that has accrued is only 
 $35,758,324. or less than one-third of the net capitalization. 
 
 I have also discussed Mr. Babson's estimate of the shrinkage in value of 
 electric railway securities during the past few years, coupled with the Census 
 Bureau's statistics of capital stock and funded and floating debt outstanding in 
 1917. It may well be that the ascertainment of the total investment in the exist- 
 ing physical property of the electric railways, less accrued depreciation, would 
 bring the total down from the five to seven billions claimed by the companies 
 to somewhere between two and three billions, but of course a settlement on that 
 basis could not in the nature of things be accepted by the present managements 
 and would require a radical and well-nigh universal reorganization of the entire 
 credit structure of the companies. If such a program were to be put through, 
 those responsible for it would have to abandon definitely the idea that public 
 interest re<|uires the restoration or preservation of the solvencv of the existing 
 companies, and whatever readjustments in the financial world might follow from 
 the jjcrpetuation of the present low security values would have to be accepted 
 and made the best of. What .seems more likely to happen, if we are to judge 
 from the settlements that have been efiectcd in the past and from the valuations 
 that have been established by regulatory bodies, is that a compromise will be 
 eftVctcd between the rock-botton depreciated investment figure and the sky-high 
 undepreciated war-price value claimed by the cnmi)aiiies. As an illustration, 
 the Pennsylvania Public Service Commission fixed the value of the Pittsburgh 
 properties for purposes of reorganization at $()2,500.000. which is nearlv twice 
 
Use of Public Credit 513 
 
 the minimum on the basis of depreciated investment value, although scarcely 
 more than half the net capitalization. It seems hardly likely that even in these 
 times of distress the electric railway properties of the country could be acquired 
 by the public for less than three billion dollars. If, for purposes of discussion, 
 we assume that figure, we must then ask this question : Are the states and the 
 municipalities of the country in a position to take over this investment without 
 straining their credit beyond the point where a substitution of public for private 
 credit would be advantageous? 
 
 As I have already stated, no sufficient study has been made to determine 
 the amount of municipal credit available under existing debt limits. It is signifi- 
 cant, however, that the special bulletin on "Financial Statistics of Cities." issued 
 by the Bureau of the Census in March, 1919, shows the aggregate gross debt 
 of the 227 cities estimated to have a population of over 30,000 each to have been 
 $3,803,640,378. This includes both funded and floating debt. After the deduc- 
 tion of sinking fund assets, the aggregate net debt of these cities was $2,661,- 
 451.218. It is noteworthy that the total net debt of these municipalities out- 
 standing in 1918 was only about 82 per cent of the total funded and floating debt 
 of the electric railways as reported for 1917. Undoubtedly, the cities having a 
 population of less than 30,000, for which the debt figures are not available, would 
 swell the total considerably, and on the other hand the indebtedness of inter- 
 urban electric railways not within city boundaries would cut down considerably 
 the total of electric railway obligations. It seems quite probable, however, that 
 with these adjustments made, the net existing debt of the cities of the United 
 States incurred for all municipal purposes, would not exceed the funded and 
 floating indebtedness of the electric railways constructed to serve them. There- 
 fore, at the very least, the acquisition of the electric railways generally by the 
 municipalities would necessitate the immediate doubling of the net amount of 
 municipal indebtedness. Of course, individual communities would show ex- 
 tremely wide variation from this average. 
 
 When we come to consider the possible acquisition of the electric railways 
 by the states, the problem from the point of view of constitutional restrictions 
 is probably less difficult, but from the point of view of the relative magnitude 
 of the new as compared with the existing indebtedness, the problem is even more 
 difificult. A census report giving statistics of state indebtedness was issued in 
 1914 and shows that in 1913 the gross funded and floating debt of the 48 com- 
 monwealths aggregated $422,796,525. With sinking fund assets subtracted, the 
 figure was reduced to $345,942,305 of net indebtedness. It may be assumed, 
 perhaps, that as a result of the large expenditures in recent years for good roads, 
 the aggregate net indebtedness of the states at the present time is well over 
 $500,000,000. It is clear, however, that the acquisition of all the electric rail- 
 ways of the countrj' by the states would mean an addition to the indebtedness of 
 the states of at least five or six times the amount of their present net obligations. 
 
 It is true, of course, that an increase in public debt for the acquisition of 
 revenue-producing property is not so serious a matter and does not cause so much 
 financial or political shock as would be caused by a similar increase of indebted- 
 ness for non-productive property ; yet at the present time, when the future of the 
 
514 Electric Railway Problem 
 
 electric railways has been brought into more or less of doubt in the public mind 
 and when there is such great uncertainty with respect to the ability of the electric 
 railways to pay their way under any rates of fare which the pu])lic will tolerate, 
 the acquisition of these properties and the assumption of their investment value 
 as a public obligation, would be sure to strike terror to the heart of the average 
 taxpayer, who already feels the burdens of public obligations to be well-nigh 
 insupportable. 
 
 The net debt of the 227 cities included in the census bulletin is distributed 
 among five groups, as follows : 
 
 lU cities with a population of over 500,{XX) $1..S84.183.419 
 
 12 cities with a population of 300.000 to 500.000 366.737.634 
 
 47 cities with a population of 100,000 to 300.aX) 357.112.087 
 
 62 cities with a population of 50.000 to 100.000 198,990.777 
 
 96 cities with a population of 30,000 to 50,000 154.427,301 
 
 227 cities with a population of over 30,000 $2,661,451,218 
 
 It is significant that the net debt of New York City was $1,005,055,422, or 
 nearly 38 per cent of the total for all the 227 cities taken together. Also, it 
 should be said that the book cost of the local transportation lines of New York 
 City, exclusive of municipal contributions to rapid transit construction, is in the 
 neighborhood of $1,000,000,000. Some years ago, Mr. Bion J. Arnold, of 
 Chicago, the celebrated transportation engineer, reached the conclusion that street 
 railway traffic in large urban centers increases about as the square of the popu- 
 lation. It is perfectly obvious that this rate of increase cannot possibly go on 
 indefinitely in a growing community, as at this rate we should have the entire 
 population ultimately riding all of the time. At the same time, the riding habit 
 tends to increase as cities grow, and the necessary investment in transportation 
 facilities is likely to keep pace on the average with the trattic. Of course, for a 
 good many years after a complete new electric railway has been constructed, 
 the traffic would increase in a much greater proportion than the investment, but 
 ultimately the need for new facilities and more expensive construction is likely 
 to compel an increase in the investment almost, if not quite, as rapid as the 
 traffic increase. The investment rate is likely to be even higher than the traftic 
 rate when a community reaches the rapid transit stage. Indeed, the census 
 figures show that from 1902 to 1917 the numi)cr of revenue passengers carried 
 increased about 137 per cent and the outstanding securities increased about 139 
 per cent. 
 
 Clearly, the assumption by the public of the full burden of the electric rail- 
 way investment and of the complete obligation to furnish the credit required for 
 electric railway expansion would be an operation of some magnitude, and we 
 need to proceed cautiously in accepting the easy conclusion that public credit is 
 the all-sufTicient golden apple ripe for picking by the electric railways. Yet, it 
 may well be that the owner of the tree will have to make up his mind to harvest 
 and eat the crop in order to keep himself in condition while another crop is 
 growing. 
 
 Public credit may be made available for electric railway purposes in several 
 ways. The obvious one is the issuance of bonds secured by the general credit 
 
Use of Public Credit 515 
 
 and the taxing power of the connnunity. This is what people have in mind 
 when they urge the great advantages of public as compared with private credit 
 as a means of economical financing. The use of public credit in this way for 
 general purposes is usually held within rather strict limitations by constitutional 
 and statutory provisions, but in some cases it is partially or wholly freed from 
 these limitations when used for the acquisition of public utilities. Another way 
 in which public credit may be applied to the electric railway problem under public 
 ownership is by the issuance of bonds secured solely by the electric railway - ' 
 property plus a contingent franchise which will authorize the bondholder to step 
 in and take possession of and operate the property in case of default on the 
 principal or interest of the public bonds issued against the property. Such an 
 arrangement offers little additional security as compared with the bonds of a 
 private company operating under a favorable franchise. It is true that under 
 this plan the city may be freed from certain elements of the cost of service, par- 
 ticularly the payment of taxes, and it is to be expected that the city would not 
 permit itself the luxury of default so long as it really desired to continue the 
 policy of public ownership. There would always be the danger, however, that 
 temporary official incompetence or public impecuniosity might lead to a default, 
 perhaps for the very purpose of unloading the responsibility for the continuation 
 and development of service upon the bondholders. Thus the value of the security 
 offered to invested capital depends largely tipon the terms of the contingent 
 franchise. At best, if the mimicipality attempted to float bonds on such security 
 for the full amount of the purchase price or the construction cost, we should 
 have the property bonded up to 100 per cent of its cost, and there is little reason 
 to suppose that under these circumstances the enterprise would benefit materially 
 from the quasi-public character of the credit used. This plan seems to have 
 originated with the famous Mueller certificate law of Illinois designed to open 
 the way for municipal ownership in Chicago in 1906. That particular effort was 
 abortive, as the Illinois Supreme Court held that the proposed certificates could 
 not be issued outside of the general debt limit. However, the plan was incor- 
 porated a little later in the new "home rule" constitutions of Michigan and 
 Ohio. This scheme may work out well enough where it is used as a partial 
 source of credit coupled with dependence upon the general credit of the com- 
 munity for a part of the capital. This combination plan seems to be the one 
 contemplated by the charter and ordinances of Detroit. ^ 
 
 A third method of utilizing public credit for the purchase or construction 
 of municipal utilities has been originated in the far Northwest. This plan as 
 embodied in the laws of the State of \\'ashington authorizes the issuance of muni- 
 cipal bonds secured by a first lien on the gross revenues of the enterprise, with- 
 out a security franchise or the right of foreclosure in case of default. Under 
 this plan the city makes a contract with the bond-buyer binding itself to appro- 
 priate from the gross revenues from time to time a certain amount of money 
 calculated to be sufficient to meet interest and amortization requirements as they 
 arise, and to maintain rates at a point where they will yield sufficient revenue to 
 make these payments possible. It is the design of the law that the utility shall 
 be kept self-sustaining; but in case it is not, then the bondholder gets his due 
 
516 Electric Railwav Problem 
 
 anvway, as he comes in ahead of operating expenses, and the taxpayer "holds 
 the bag.'' 
 
 The constitution of the State of Washington provides that no municipality 
 shall become indebted for any purpose to an amount in excess of II/2 per cent 
 of the taxable property in such municipality without the assent of three-fifths 
 of the voters, and that with such assent the total debt shall not exceed 5 per cent 
 of the assessed valuation, except that an additional 5 per cent is allowed for 
 supplying the municipality with water, artificial light and sewers, when these 
 utilities are municipally owned and controlled and when the electors have ap- 
 proved the necessary bond issues. The Washington constitution also provides 
 that no municipality "shall hereafter (jive any iiioncy or property, or loan its 
 money or credit, to or in aid of any indh-idual, association, company, or corpora- 
 tion, except for the necessary support of the poor and infirm, or become directly 
 or indirectly the ozcncr of any stock in or bonds of any association, company, or 
 corporation." The Washington legislature in 1909 passed an act authorizing 
 cities and towns "to construct, condemn and purchase, purchase, acquire, add to, 
 maintain, conduct and operate certain public utilities," including electric rail- 
 ways within the limits of the city or town for the transportation of freight and 
 passengers. After repeating the constitutional provision limiting municipal in- 
 debtedness, the act goes on to provide that whenever the voters of the muni- 
 cipality have adopted a proposition for a public utility, but either no general in- 
 debtedness has been authorized or the public authorities do not desire to incur 
 a general indebtedness, the following plan of financing the utility may be utilized :- 
 
 "The common council or other corporate aiilhoritii-s shall have power to create a .special 
 fund or funds for the sole pur|X)Sc of defraying the cost of sucli public utility or addition, 
 bcllcrnicnt or extension thereto, into which special fund or funds the common council or 
 other corporate authorities of such city or town may obligate and bind the city or town to set 
 aside and pay a fixed proportion of the gross revenues of such pul)hc utility, or any fixed 
 amount out of and not exceeding a lixcd proportion of such revenues, or a fixed amount 
 without regard to any fixed proportion, and to issue and .sell Ixinds or warrants bearing 
 interest not exceeding six per centum per annum, payable semi-aimually, executed in such 
 manner and payable at such times and |>laces as the conuiion council or other corporate 
 authorities of such city or town shall determine, but such t>onds or warrants and the interest 
 thereon shall be payable only out of such special fund or funds. In creating any such 
 special fund or funds the common council or other corporate authorities of such city or town 
 shall have due regard to the cost of operation and maintenance of the plant or system as 
 constructed or added to. and to any proportion or part <if the revenue previously pledged as a 
 fund for the payment of lionds. warrants, or other indebteduess, and shall not set aside into 
 such special fund a greater amount or proportion of the revenue and proceeds than in their 
 judgment will Ik* available over and aliove such cost of maintenance and operation and the 
 amount or proportion, if any. of the revenue so previously pledged. .Xny such bonds or war- 
 rants and interest thereon issued against any such fund as herein provided shall Iw a valid 
 claim of the holder thereof only as against the said s|)ecial fund and its fixed proportion or 
 amount of the revenue pledged to such fund, and shall not constitute an indebtedness of such 
 city or town within the meaning of the constitutional provisions and limitations. Each such 
 Nind or warrant shall slate upon its face that it is payable from a special fund, naming the 
 said fund and the ordinance creating it. .Said bonds and warrants shall be sold in such man- 
 ner as the corporate authorities shall deem for the l)ost interests of the city or town, and the 
 corporate authorities may provide in any contract for the construction and acquirement of the 
 proposed improvement that payment therefor shall be made only in such bonds and warrants 
 at par value thereof. 
 
 "When any such special fimd shall have been heretofore or shall lie hereafter created 
 and any such obligation shall have heen heretofore or shall hereafter be issued against the 
 .same, a fixed proportion, or a fixed amount out of and not exceeding such fixed proportion, or a 
 fixed amoimt without regard to any fixed proportion, of revenue shall be set aside and paid 
 
Use of Public Credit 517 
 
 into said special fund as provided in the ordinance creating such fund, and in case any city 
 or town shall fail to thus set aside and pay said fixed proportion or amount as aforesaid, 
 the holder of any bond or warrant against such special fund may bring suit or action against 
 the city or town and compel such setting aside and payment." 
 
 This plan has been used to a considerable extent by cities in the State of 
 Washington, and in particular by the City of Seattle in achieving municipal 
 ownersliip of street railways. In this connection it is noteworthy that Seattle 
 is the only large American city that has actually acquired the local electric rail- 
 way system and assumed the full burden of its capital obligations. The transfer 
 of the Puget Sound Traction, Light & Power lines in Seattle to the city was 
 accomplished at the end of March, 1919, the purchase price being $15,000,000. 
 Prior to this the city had already owned and operated at a loss for several years 
 a municipal railway in two disconnected divisions, the construction cost of which 
 up to Deceiuber 31, 1919, was $1,154,950.40. The city now owns all the local 
 street railways except the Rainier Valley line, and negotiations for the purchase 
 of this road have been under way for some time. The total capital cost of the 
 present municipal railway system of Seattle up to the end of 1919, as indicated 
 by the figures just given, was $16,154,950. 
 
 Of the $1,154,950 invested in the older municipal lines, only $100,000 was 
 derived from the sale of street railway bonds. These were 6 per cent bonds 
 put out in 1918 at par. When it came to a question of the purchase of the Puget 
 Sound lines for $15,000,000 the city made an arrangement with Stone & Webster, 
 owners of the company, to take 5 per cent municipal railway bonds for the full 
 amount of the purchase price, and passed an ordinance providing for the acquisi- 
 tion of the properties in accordance with the terms of the agreeinent. This or- 
 dinance was approved December 31, 1918, by the then mayor of Seattle, Mr. Ole 
 Hanson. Section 2 of this ordinance provides : 
 
 "The gross revenues to be derived from the operation of the municipal street railway 
 system of the City of Seattle, including the additions and betterments to, and extensions 
 thereof, herein provided for, at the rates of transportation charged, and to be charged, upon 
 the entire system, will be sufficient in the judgment of the council and of the corporate 
 authorities of the city to meet all expenses of operation and maintenance, including the 
 operation and maintenance of the proposed additions, betterments and extensions, and to pro- 
 vide all proportions or parts of revenue previously pledged as a fund for the payment of bonds, 
 warrants and other indebtedness, with interest thereon, heretofore made payable out of the rev- 
 enues of the existing municipal street railway system, and to permit the setting aside in a special 
 fund, out of the gross revenues of the entire system, amounts sufficient to pay the interest on 
 the bonds hereby authorized to be issued, as such interest becomes due and payable, and to pay 
 and redeem all of such bonds at maturity. The amounts which the city council and corporate 
 authorities have determined and do hereby determine will be so available for the payment 
 out of such gross revenues into such special fund, to be used for the payment of the interest 
 on such bonds, will, on the first days of February and August in each and every year, be- 
 ginning with August in the year 1919. be not less than the interest at the rate of five per 
 cent (SVc) per annum, payable semi-annually, on the first days of March and September, 
 respectively, next succeeding such days, on all outstanding bonds of the issue of Fifteen 
 Million Dollars ($15,000,000), to be issued payable at the times and in the manner herein- 
 after specified. 
 
 "The city council and corporate authorities have likewise determined and do hereby 
 determine that the amount so available for the payment out of such gross revenues into such 
 special fund to be used for the pavment of the principal of such bonds, on the first dav of 
 February, 1922, will be not less than Eight Hundred Thirty-three Thousand Dollars ($833,000), 
 and that there will be so available thereafter for payment out of such gross revenues into 
 such special fund to be used for the payment of the principal of such bonds not less than 
 Eight Hundred Thirty-three Thousand Dollars ($833,000), on the first day of February in 
 each and everv vear. to and including the vear 1938, and not less than Eight Hundred Thirty- 
 nine Thousand Dollars ($839,000) on the first day of February, 1939." 
 
518 Electric Railwav Problem 
 
 Section 5 of the ordinance provides for the establishment of a special fund 
 to be called "Municipal Street Railway Bond Fund, 1919." The city's pledges 
 to maintain this fund and not to dispose of the municipal railway system without 
 providing for the liquidation of the indebtedness incurred in connection therewith 
 are contained in the following language : 
 
 "The City ot Seattle, after providing lor the payment of the proportions or parts of 
 the revenues of the municipal street railway system previously pledged as a fund for the 
 payment of bonds, warrants or other indebtedness, does hereby irrevocably obligate and bind 
 itself to pay into such fund out of the gross revenues of such municipal street railway system, 
 and all additions, betterments to, and extensions of, such system, at any time hereafter 
 acquired, before each semi-annual installment of interest falls due. a sum equal to such 
 semi-annual installment of interest upon all such bonds then outstanding and unpaid; and 
 annually on or before the first day of March, beginning with March 1. 1922, and to and includ- 
 ing March 1. 1938, the additional sum of Eight Hundred Thirty-three Thousand Dollars 
 ($833.(KtO), and on or before the first day of March. 1939, the additional sum of Eight Hundred 
 Thirty-nine Thousand Dollars ($839,000), for the payment of the principal of such bonds 
 at which time all of such bonds with interest shall be fully paid. Such fund is to be drawn 
 upon for the sole purpose of l)aying the principal and interest of such bonds from and after 
 the date of such lionds and so long as obligations are outstanding against such fund. The 
 City Treasurer of the City of Seattle shall, semi-annually, one calendar month prior to the 
 date upon which any interest or principal and interest shall become due. set aside and pay 
 into such fund from the gross revenues of the entire municipal street railway system of the 
 City <if Seattle, now belonging to it. including the additions, betterments and extensions herein 
 provided for. and any street railway property which it may hereafter acquire, with the equip- 
 ment thereof, a sum equivalent to the amount of interest so falling due, upon all bonds issued 
 hereunder and then outstanding, and annually one calendar month prior to the first day of 
 March in each and every year, beginning with the year 1922, and to and including the year 
 19,58. the sum of Eight Hundred Thirty-three Thousand Dollars ($833.0(K)). and one calendar 
 month prior to the first day of March. 1939. the sum of Eight Hundred Thirty-nine Thou- 
 sand Dollars ($839,000) as the principal of such bonds falls due. and until all of such bonds 
 with interest thereon be fully paid, and such fixed amounts out of such gross revenues are 
 hereby pledged to such semi-annual payments of interest and such annual payments of prin- 
 cipal, iiiut shall eoiiititiilc a r/iiin/r iif^oii such tiross ri'Ti'iiucs .tii/iivii>r lo nil thnrfjes whatso- 
 ever, iiiiliidiiii) chortles for niaiiitciuince and oferation. save and except the charges upon 
 such revenues heretofore created for the payment of principal and interest of One Hundred 
 Thousand Dollars ($100.(KX)). Seattle Municipal Street Railway Bonds. 1917. authorized by 
 Ordinance No. 37851. as amended by Ordinance No. 37923; and save and except the charges 
 upon such revenues heretofore created for the pavment of principal and interest of Five 
 Hundred Fifty Thousand Dollars ($550,000) 'Railway Extension Bonds, Series .\, 1918,' 
 authorized by Ordinance No .58666. and save and except the charges upon such revenues 
 sufficient to pay warrants drawn upon the City Railway Fund of the City of Seattle issued 
 prior In the talcing effect of this ordinance. 
 
 "The City Treasurer is hereby directed to make paytnent of the bonds and coupons herein 
 authorized, as the same fall due, from the moneys in such 'Municipal .Street Railway Bond 
 F-"und. 1919.' and from no other source. The payment of such Ixinds and coupons as they 
 fall due is hereby dcclare<l to be the onlv charge which has been made upon such fund or 
 which will ever lie made thereon until all of such bonds and the interest thereon shall have 
 l)ecn fully paid. The City of Seattle hereby hinds itself not to sell, lease or in any manner 
 dispose of the municipal street railway svstem now Ix-longing to it. or which niav hereafter 
 holonc to it. including the additions. U'ttermcnts and extensions herein provided for. until 
 all obligations outstanding against, or payable from, the Sfiecial fund hereby created, shall 
 have been paid in full, or in case it shall sell or dispose of the same before payment, it shall 
 not make any sale or disposition without then or theretofore providing that from the pro- 
 ceeds of any such sale or disposition, after the payment of all prior charges, there shall he 
 placed in said snecial fund a stnn sufficient in amount to discharge, and to be used for no 
 other purpose than the discharge, of principal and interest of all bonds issued hereunder 
 and then remaining impaid. and it shall not. in any event, sell or dispo.sc of such municipal 
 street railway system or any substantial part thereof for a smn less than enough to discharge 
 and pav the bonds herein authorized and the interest thereon. The City of Seattle further 
 binds itself to estal)lish and maintain rales for transportation upon such municipal street 
 railwav svstem which shall provide sufficient revenues to nermit such sums lieing paid into 
 such snecial fimd which the citv has plcflored to Ix- set n-idc semi-annually for interest, and 
 nnnuallv for principal, as herein nrovided to l>e applied to the pavment of principal and 
 interest of the iMinils herein authorized, until such hoiuN hnve been paid in full nnd in nddi- 
 f!on thereto all costs of operation and maintenance, and all Ixinds. warrants and indebtedness 
 for which any revenue.'! of .such system have heretofore been previously pledged." 
 
Use of Public Credit 519 
 
 Prior to this time tlie cit_\- had not definitely stated in any of the public 
 utility bonds issued under the act of 1909 that the fixed charges upon the indebt- 
 edness were to be met even though the operation of the utility should produce a 
 deficit ; but when it came to the purchase of the Puget Sound lines the city, in 
 order to increase the security and make the bonds acceptable to the owners of 
 the property, inserted in the ordinance and in the bond itself the language itali- 
 cized in the above quotation. This provision of the bond ordinance was attacked 
 in the courts by a taxpayer who averred that the proposed bond issue was con- 
 trary to the power of the city under its charter and the laws of the state, threat- 
 ening an indebtedness of the city in excess of the amount permitted by the con- 
 stitution of the state. Another taxpayer, intervening in the proceeding, main- 
 tained that the plan could not be carried out because it had not been submitted 
 to the voters. It should be noted that in October, 1918, the general question as 
 to whether or not the purchase of the Puget Sound lines should be consummated 
 upon the terms proposed was uniformly submitted to the voters of Seattle, and 
 was approved by them by a very large majority, but the ordinances as finally 
 worked out providing for the purchase of the property and the issuance of the 
 bonds were not submitted to popular vote. 
 
 The Washington Supreme Court handed down its decision March 5, 1919.' 
 Seven of the judges concurred in an opinion that "the proposed plan and bonds 
 will not create any indebtedness against the city'' and that "the city council has 
 authority to consummate the purchase without the sanction of the qualified voters." 
 They said : "We are satisfied the power of the city has been exercised in the 
 manner provided by the law." The chief justice and one of the associate justices 
 wrote a vigorous dissenting opinion in which they called attention to the vital 
 importance of the issues at stake. The following paragraphs taken from the 
 minority opinion vividly reflect the intense interest aroused by this case: 
 
 "The legal effect of the majority opinion is that all of the gross revenues are pledged 
 to the payment of the purcliase price; that if the one who renders labor or service as a 
 motorman. conductor or about the tracks and barns of the railway system is to be paid, he 
 may be paid out of the general revenues; that, instead of taking his j^ay in a warrant which 
 is a first charge upon the gross revenues as the law contemplates, he may not, if the gross 
 revenues are insufficient to meet the maturing bonds and interest, have his pay out of the 
 earnings of the utility at all. but tnust take his chances with a general fund warrant which 
 may be subject to discount and unless sanctioned by subsequent decree of this court will be of 
 doubtful validity. 
 
 ******** 
 
 "If the council did not intend to charge the general fund it might have said so in words. 
 It might have had 'due regard for the costs of maintenance and operation' as the statute directs 
 by reserving an "amount or proportion' of the revenues of the utility or, being mindful of 
 a possible charge, it should have submitted the measure to the people. The net result of the 
 ordinances as construed by the court is that the cost of maintenance and operation has not 
 been provided for. By the employment of an indirect method, dressed for the occasion in a 
 cloak of words, the law is circumvented, and the people whose right of participation and self- 
 determination was so carefully safeguarded, have been denied the sovereign riglit of the 
 franchise. 
 
 "It was suggested in consultation that the council could raise the rate charged for fares, 
 and thus meet the cost of maintenance and operation out of the revenues of the street car 
 system. Counsel made no such suggestion, as of course they could not, for with the gross 
 revenues of the system pledged irrevocably to the payment of the purchase price the seller 
 or the bondholder, as the case may be. can insist that the gross revenues belong to him, 
 whether they are accumulated by a charge of five, seven, ten or fifty cents for a single fare. 
 
 "Whether it is wise for the City of Seattle to purchase the property of the traction com- 
 pany is not of our concern. That is a matter for those who live in that city. That they may 
 
520 Electric Railway Problem 
 
 be charged for the upkeep and operation of the street car system is not denied. Our insist- 
 ence is that before \vt make it possible — and this is the statute as we read it — they should be 
 heard either in affirmation or negation of the plan. 
 
 "To hold that the gross revenues of the system may be irrevocably pledged to the pay- 
 ment of the purchase price as a first charge and then to say that in the judgment of the 
 council the gross revenues will pay the cost and the costs of maintenance and operation is to 
 nullify the statute and put a premium on evasion, pretext, subterfuge, quibbling and equivo- 
 cation for the expression of such opinion is not a setting aside or a reservation of an "amount 
 or proportion' to meet these charges. In other words, in case of suit the city would be 
 bound by its irrevocable promise and not by its gratuitous opinion. 
 
 "The law was designed to cover not alone what is, but what may be. The plan as out- 
 lined by the ordinances is a corruption of the statute providing for the acquisition of public 
 utilities and a direct assault upon the law which provides in terms that the owiier of property 
 shall not be called upon to pay a ta.x upon his property unless three-fifths, or a majority, of 
 the voters, as the case may be, shall so decree. 
 
 "Believing that the ordinance was drawn with intent to, or whether with intent it does 
 in legal effect, charge the general fund, or leaves the way open to levy a direct tax. thus 
 violating the letter and spirit of the law, we are constrained to dissent." 
 
 Since the purchase of the Puget Sound lines the city has put on the market 
 a new issue of municipal railway bonds to provide for extensions and improve- 
 ments, amounting to $790,(XX), and these have been disposed of on a six per cent 
 basis. The five per cent bonds accepted by Stone & Webster for the Puget Sound 
 lines, it is understood, are held in trust and no effort has been made to dispose 
 of them. 
 
 The Seattle Municipal Railway now comprises 228 mile& of single track 
 and is said to be the most extensive municipally-operated street railway svstcm in 
 the world. Mr. Thomas F. Murphine. Superintendent of the Department of 
 Public Utilities during 1919, in his annual report for that year gives the following 
 statement of the reasons why the Puget Sound lines were acquired by the city : 
 
 "It may not be amiss at this time to again set out some of the principal reasons which 
 prompted the City Government of the City of Seattle to acquire the railway properties ot 
 the I'uget Sound Traction. Light & Power Company. This company, for a number of years 
 prior, had failed to meet its franchise obligations, including extensions of its lines, paving, 
 maintenance of paving, bridge rentals and paynK-nf of a percentage of its gross income tax. 
 and further stated that it was unable to increase the wages of its employes to a point made 
 necessary by an increased cost of living; and. moreover, its service to the public under the 
 frying "war" conditions and the industries incident thereto, had completely broken down. The 
 company was not only asking to be relieved from all of its franchise obligations but was 
 demanding an increase in fare from a 5-ceiit to a 6-cent fare, with one cent additional for 
 transfers." 
 
 Early in 1920 as the result of a city election in which a new mayor was 
 chosen. Superiiucndent Murphine resigned, and the operation of the municipal 
 railway lines was in part reorganized. Considerable coiuroversy had arisen about 
 the tinancial results of operation. The public utilities department claimed a 
 surplus of $10.()59 from operation during the .seven months subsequent to the 
 acquisition of the Puget Sound system. For the first three months of 1919 the 
 original municipal lines were operated at a loss of $1,543, exclusive of interest 
 amounting to $7,947. and for the period from May 23, lf)14. when operation 
 first started, to March 31, 1919, the operating losses aggregated $o2.250. exclu- 
 sive of $121,010 for interest. These are the figures given in Mr. Murphine's 
 report. Mr. Murphine stated that the gross revenue of the combined lines for 
 the seven moiuhs period from April 1 to N'ovcmber 1. 1919. was $384.520.S5 
 greater than the revenue for the corresponding period of 1918, but that the 
 known operating expenses showed an increase of $660,154.13. He explained 
 
Use of Public Credit 521 
 
 that this increase in expense was due principally to a 33 per cent increase in 
 wages, an increase in service amounting to 21 per cent as measured by car hours 
 and 15 per cent as measured by car miles, and an increase of $257,125.97 in 
 maintenance and rehabilitation expenses. He pointed out that the total expense 
 for maintenance amounted to about 19 per cent of gross revenues, and added : 
 "This expenditure approximates in percentage that which bonding companies 
 handling securities of public utilities and other companies consider as a sufficient 
 expenditure or appropriation for both maintenance and depreciation." In fact, 
 the Puget Sound Traction, Light & Power Company, prior to the sale of its 
 property, followed the rule of estimating annual depreciation at 20 per cent of 
 gross earnings, less the amounts actually expended for maintenance. 
 
 The new mayor of Seattle, Mr. Hugh M. Caldwell, not being entirely satis- 
 tied with the management of the municipal railway, caused the city comptroller 
 to prepare a statement of the financial results of municipal railway operation 
 for the calendar year 1919, including nine months' operation of the combined 
 system. In his computation the city comptroller used depreciation figures esti- 
 mated by a representative of the State Bureau of Inspection and Supervision of 
 Public Offices. Apparently the $15,000,000 paid for the Puget Sound lines was 
 based upon their claimed book cost to the company without deduction for accrued 
 depreciation. The method followed in making the estimates for accruing depre- 
 ciation, used by the city comptroller, was to take the property at its ledger value 
 as shown in separate accotmts, redistribute "engineering and superintendence" 
 and "track and roadway labor" among the base cost accounts to which they refer, 
 deduct "land" and "materials and supplies" as undepreciable, and then apply 
 to the remaining accounts aggregating $14,352,281 various percentages for an- 
 nual depreciation figured on the straight-line basis. In this way a depreciation 
 charge of $451,774.97 on the purchased lines was figured out for the nine months 
 of municipal operation. In like manner the depreciation charge against the or- 
 iginal municipal lines for the full 12 months was fixed at $47,398.42. The per- 
 centages used and the assumed useful life from which they were derived in 
 connection with the several classes of depreciable property were as follows: 
 
 Assumed Annual 
 
 Class of Property Useful Life Depreciation 
 
 Way and Structures 
 
 Cable station buildings 50 years 2% 
 
 Grading 200 years H% 
 
 Ballast 20<1 years }4% 
 
 Ties and stringers l+r'*: years 7% 
 
 Rails, fastenings and joints 33\^ years 3% 
 
 Special work 12i/2 years 8% 
 
 Undergronnd construction ii^i years 3% 
 
 Paving 25 years 4% 
 
 Roadway machinery and tools 12 ^ years 8% 
 
 Bridges, trestles and culverts 20 years 5% 
 
 Crossings, fences and signs 10 years 10% 
 
 Signals and interlocking apparatus 10 years 10% 
 
 Telephone and telegraph lines 20 years 5% 
 
 Poles and fixtures 20 years 5% 
 
 Distribution system 25 years 4% 
 
 Shops and car houses 50 years 2% 
 
 Stations, miscellaneous buildings and structures 12^ years 8% 
 
 Park and resort property 33^^ years 3% 
 
522 Electric Railway Problem 
 
 Assumed Annual 
 Class of Properly Useful Life Depreciation 
 
 Equipment 
 
 Passenger cars 21 years ( + ) 4^% 
 
 Freight, express and mail cars 21 years( + ) 4^% 
 
 Service equipment 21years( + ) 4}i% 
 
 Electric equipment of cars 20 years 5% 
 
 Shop equipment 20 years 5% 
 
 Cable station equipment 20 years 5% 
 
 Furniture lOyears 107<- 
 
 Miscellaneous equipment, automobiles 5 years 20% 
 
 MlSCEU-ANEOUS AND GENERAL 
 
 Law expenditures 23.8years( + ) 4.2% 
 
 Interest during construction 23.8years( + ) 4.2% 
 
 Injuries and damages 23.8years( + ) 4.2% 
 
 Ta.xes 23.8years( + ) 42% 
 
 Miscellaneous expenditures 23.8years( + ) 42% 
 
 All depreciable property 23.8years( + ) 4.2% 
 
 By charging depreciation on the basis above indicated the city comptroller 
 figured out a net loss of $517,173.79 resulting from the municipal railway opera- 
 tions in 1919. This was without making any provision for sinking fund or 
 amortization. It will be remembered that beginning with 1922 the city will 
 have to make an annual payment of $8.53.000 on the principal of $15,000,000 
 bonds representing the purchase price. With respect to this obligation. Super- 
 intendent Murphine said in his report : 
 
 "In connection with a numlwr of criticisms, publicly and privately made, recently, to the 
 effect that we are at present not setting aside a fund to enable us to retire bonds when same 
 fall due, would state that no one. to our knowledge, ever expected the purchased system to 
 even pay operating expenses during the first year of operation under city management. In 
 fact, this department urged the City Council to make the first payment si.x years after pur- 
 chase, depending uiH)n the natural increase in revenue from transportation to show a sufficient 
 amount at the time the first payment on the bonds falls due, to meet the same. 
 
 "Our increase for this year over the receipts of the company, combined with the city 
 lines of last year, will approximate 11'.. per cent. If this increase should continue for the 
 first three years at even 7 per cent (which is less than the average percentage of yearly 
 increase of the city's population during the last ten years), and if we are enabled to obtain 
 funds to remodel at least 75 per cent of the cars now in operation, known as two-man cars, 
 to permit of their operation by one trainman, we shall he able to eliminate approximately 
 $750,000.00 per year of expense. This, together with the natural increase in the year ending 
 March 1. 1922. will show revenue more than sufficient to make the first payment on the 
 bonds." 
 
 The city comptroller's analysis of the financial results of niunici]),il r.iilway 
 operation in 1919 is shown on the opposite page. 
 
 It will l)e seen that all but $18,000 of the loss attributed to tlie year's opera- 
 tions was due to the depreciation charge, which was in addition to an expenditure 
 of 19.6 per cent of tiie gross earnings in maintenance. The city comptroller also 
 furnished a memorandum commenting upon the figures shown above, and point- 
 ing out tiiat ill certain respects the municipal railway was being favored from 
 the accounting stan(li)oint. The comptroller's memorandum follows: 
 
 "The above statement of income, profit and loss of the city railway department does not 
 include certain expenses, projx-rly chargeable to railway operation, borne by the general fund 
 and charged by authority of the legislative body of the city to the expen.se of the respective 
 departments rendering the services. 
 
 "Ulien the city accpiired the traction properties of the Puget Sound Traction, Light &■ 
 Power t'ompany on the first of .\pril. 1910. it iK'came necessary to increase the number of 
 emplo)es in several general fund departments. In the corporation counsel's office, two 
 assistants to the corixiratioii counsel, five claim agetits, one law clerk and two stenographers 
 were added to the force. <)wing to the large grist of damage claims and increased litigation, 
 expense for office supi)lies, stationery and printing, postage, etc., was materially increased. 
 
Use of Public Credit 523 
 
 STATEMENT 
 
 CITY OP^ SEATTLE 
 
 MUNICIPAL STREET RAILWAY DEPARTMENT 
 
 INCOME, PROFIT AND LOSS FOR THE YEAR ENDING DECEMBER 31, 1919. 
 
 Expense 
 Operating : 
 
 Way and structures (maintenance of roadway, bldgs. and 
 grounds) $282,992.92 
 
 Equipment (maint. of cars, shop equip., autos, etc.) 528.506.57 
 
 Power (power produced and purchased) 558,528.50 
 
 Conducting transportation (trainmen, car barn and car 
 service expense ) 1 .950,459.70 
 
 Traffic (advertising park and resort attractions ) Z,22S.ii 
 
 General and miscl. (gen. ofHce exp. ; ind. insu. ; injuries and 
 damages ; stationery and ptg. ; store exp. ; rent of track 
 and facilities) 245,109.09 
 
 Auto buses (exp. of auto buses connecting outlying terri- 
 tory with end of car line) 904.16 
 
 $3,568,729.27 
 Depreciation of road and equipment 499,173.39 $4,067,902.66 
 
 Deductions from Gross Income : 
 
 Interest on General Bonds $23,281.23 
 
 Interest on Revenue Bonds 579,683.83 
 
 .Amortization of discount on Revenue Bonds 2,314.01 
 
 Miscl. Interest (interest on Railway Fund Warrants) 2,145.26 607,424.33 
 
 $4,675,326.99 
 
 Revenue 
 Operating Revenue : 
 
 Passenger car service $4,030,602.04 
 
 Special passenger car revenue 471.00 
 
 .\uto bus service -74 79 
 
 Express service (carrying newspapers) 3.948.00 
 
 Freight sjervice 32.112.18 
 
 Mail service 6,212.60 
 
 Mini, employment passenger service (Police & Firemen)... 38.000.00 
 
 Miscellaneous transportation service 3,264.53 $4,114,88j.l4 
 
 Miscellaneous Revenue : 
 
 Station and car privileges (advertising privileges on stations 
 
 and cars) $12,946.50 
 
 Rent of cars 3,523.04 
 
 Rent of track and facilities 20,937.98 
 
 Rent of real estate 4,638 54 
 
 Electric current sold 578.78 
 
 Other miscellaneous revenue 643.22 43,268.06 
 
 $4,158.15.^20 
 Net loss for the year 1919 517.173.79 
 
 $4,675,326.99 
 
524 Electric Railway Problem 
 
 "The total cost of the city railway legal business borne by the general fund in 1919, was 
 about $20,000.00; the purchasing department expenses were increased approximately $5,IKX).00; 
 the expense of the comptroller's department for auditing claims, issuing warrants and keeping 
 accounts of the railway department cost in round figures $6,000.00. In addition, there was an 
 increase in the city treasurer's office expense of about $1.000.(X) for handling city railway 
 business in 1919. In the public utilities department, all the superintendent's salary of 
 $4,500.00 and half of the auditor's salary of $3,240.00 have been charged to that department 
 and paid from the general fund, notwithstanding more than two-thirds of their time has been 
 devoted to railway operation. 
 
 "Altogether some $35,000.00 of expense for the railway department was paid in 1919 out 
 of the general fund. It is true that the general fund receives two per cent per annum on all 
 railway fund money on deposit in city depositories, which would amount to perhaps $15,000.00 
 in 1919. 
 
 "Similar expenses of light and water utilities, though relatively small, are likewise borne 
 by the general fund and are consistently subject to the same criticism. 
 
 "Loans and advances have been made the railway fund, altogether amounting to 5200.- 
 000.00, by other funds, principally by the general fund, without charge lor interest. This 
 practice is not new. It has been the custom of the legislative body to make loans to other 
 utilities from various funds without providing for interest payment thereon, same being, in my 
 judgment, a questionable policy. 
 
 "In the budget for 1920, provision was made by the city council for reimbursement to the 
 light department depreciation reserve fund of an item of $25,000.00 previously loaned by that 
 fund to the railway department. In accordance with this plan, the $25,000.00 was included in 
 the general fund tax levy for 1920 and in I'ebruary of this year was paid by the general 
 fund, thus relieving the railwav fund of this liabilitv and reducing the total loans and advances 
 from $200,000.(X) to $175,000.00. In other words, the city made a levy of $25,000.00 for the 
 benefit of the city railway. 
 
 ".Another matter that should now he presented for consideration is the provision for 
 redemption of outstanding railway bonds. On the first day of February. 1922, $833,000.00 
 of the $15,000,000.00 of bonds issued by the traction company will be due and payable. Each 
 succeeding year till 1929, a like amount will fall due. Thereafter, this amount will be in- 
 creased by the addition of other serial bonds falling due. yet no sinking fund provision has 
 been made by the city to take care of these redemptions." 
 
 It appears that under the Seattle plan, if the conditions of the purchase 
 ordinances and the city comptroller's ideas ahoui depreciation arc fully carried 
 out, the car riders will be compelled to pay for the property within twenty years 
 and also build up a large depreciation reserve. Depreciation and maintenance 
 together as set up in the comptroller's statement amounted to 31.6 per cent of 
 gross revenues in 1919. It a proportionate part of the annual payment of 
 $833,000 for amortization, which is due to begin in 1922. had been charged last 
 year, the maintenance, depreciation and amortization charges would have been 
 nearly 47 per cent of the gross receipts. It is obvious that such a policy as this, 
 if carried through, would do great things for street railway credit whether under 
 private ownership or under the Seattle plan. 
 
 Undoubtedly, there is a tendency in some places to put obstacles in the 
 way of the use of ])ublic credit by setting up standards of financial conservatism 
 for nuinicipal operation that in all fairness may be described as unreasonable. 
 
 Seattle is making a laudable effort to keep the fare down to five cents while 
 paying a living wage and improving the proi)erty and the service.* San Fran- 
 cisco is doing likewi.se on its municipal railway, but during the past year has 
 found it necessary to trench somewhat upon its liberal depreciation reserve in 
 order to meet operating exi)enses. For the twelve months ended June 30. 1919. 
 the San Francisco mtniicipal railway shows a "gross profit" of $88,964. after 
 paying operating expenses and interest and setting aside IS per cent of gross 
 receipts for depreciation and accident reserve, but without having made anv 
 provision for taxes, car license fees and insurance, which under private owner- 
 
Use of Public Credit 525 
 
 ship would have amounted to $205,771, according to the official estimate. Main- 
 tenance expenses during this period were less than nine per cent of the gross 
 earnings. In the month of February, 1920, maintenance expenses were about 
 10.5 per cent, and after the deduction of the customary 18 per cent for reserve, 
 the month showed a deficit of $1,535 with gross earnings of $205,744. The de- 
 preciation and accident reserve on June 30, 1919, amounted to $1,809,890 or 
 somewhat more than 26 per cent of the property investment. In San Francisco 
 bonds for municipal railway purposes are issued against the general credit of the 
 city within the debt limit. 
 
 Detroit shows its conservatism by requiring as a part of its municipal owner- 
 ship program that fares shall be placed high enough to pay not only operating 
 expenses and interest charges, but also regular taxes and amortization charges 
 sufficient to provide for the retirement of all the bonds upon maturity. Under 
 the terms of the city charter bonds for public utility purposes may be issued 
 against the general credit of the city to the extent of two per cent of the assessed 
 valuation, but any additional bonds required for the acquisition or construction 
 of public utilities will have to be issued against the utility property with the pro- 
 tection of a contingent or security franchise. 
 
 Wisconsin was one of the pioneer states to establish a comprehensive public 
 utility policy, including the indeterminate franchise, unrestricted state regulation, 
 and the right of the municipalities to acquire public utilities at a price to be fixed 
 by the state commission. Nevertheless, as in so many other states, the use of 
 municipal credit for the acquisition of public utilities is limited by a provision 
 of the constitution which states that no municipal corporation "shall be allowed 
 to become indebted in any manner or for any purpose to any amount, including 
 existing indebtedness, in the aggregate exceeding five per centum on the value 
 of the taxable property therein." 
 
 At the 1919 session of the \\'isconsin legislature a bill sponsored by the 
 League of W'isconsin Municipalities in the interest of Superior. Green Bay, 
 Madison, Racine and a number of other cities was passed, by which a plan some- 
 what similar to the Washington plan was made available for the financing of 
 municipal utilities. I have been informed by the secretary of the Wisconsin 
 league that this bill was drafted by a partner of the late Judge Dillon, the well- 
 known authority on municipal bonds and municipal law. that its passage was 
 opposed by all the privately owned utilities, and that many of the attorneys for 
 public utility corporations appeared before the legislative committee to oppose 
 the bill, not as representatives of their corporations, but "in the interests of the 
 taxpayers." My informant says: "Of course Wisconsin cities have had for 
 some time full powers to purchase their utilities and, as the committee repeatedly 
 pointed out. this bill was not designed to give the cities any additional powers 
 insofar as the purchase of utilities was concerned, but merel\ to enable them 
 to pay for them. Of course, the utilities had difficulty in justifying their oppo- 
 sition to the bill, everybody being skeptical about their great interest in behalf 
 of the taxpayer." It may be said without fear of successful contradiction that 
 the public utilities themselves are in large measure responsible for the extent to 
 which public credit has been made unavailable for use in the present emergency 
 
526 Electric Railway Problem 
 
 of the electric railway industry. The Wisconsin bill referred to, as tinally 
 enacted, provides that whenever the qualified voters of any city, village or town 
 shall have determined by majority vote to purchase, acquire or construct any 
 public utility the common council or other governing authority of the munici- 
 pality shall be authorized to provide for the initial payment and for any neces- 
 sary extensions, additions and improvements in the following manner: 
 
 "2. Said common council or other governing authority shall by ordinance set aside the. 
 income and revenues of such public utility into a separate and special fund to be used and 
 applied in the maintenance and operation thereof, and in the payment of the cost tliereof. 
 Said ordinance .shall ti.\ and determine (a) the proportion of the revenues of such public 
 utility which shall be necessary for the reasonable and proix;r operation and maintenance 
 thereof; (b) the proportion of the said revenues which .-ihali be set aside as a proper and 
 adequate depreciation account; and (c) the fixed proportion of the said revenues which shall 
 be set aside and applied to the payment of the principal and interest of the bonds herein 
 authorized. 
 
 "3. In fixing and determining the proportion of the revenues of such public utility 
 required for operation and maintenance, the common council or other governing authority 
 shall have regard to the cost of operation and maintenance of the utility, and shall not set 
 aside into sucli special fund a greater amount or proportion of the revenues and proceeds 
 thereof than in their judgment shall be properly required for the said operation and main- 
 tenance. The sums so set aside for operation and maintenance shall be used and applied 
 exclusively for that purpose, until the accumulation of a surplus of the amount hereinafter 
 specified. 
 
 "4. The proportion .set aside to the depreciation fund shall be expended in making good 
 depreciation in the said public utility or in new constructions, extensions or additions to the 
 property of such public utility. Any accumulations of such depreciation fund may be invested, 
 and if invested, the income from the investment shall \x carried in the depreciation fund. 
 Said fund and the proceeds thereof shall not be used for any purjKJsc, other than as herein 
 provided. 
 
 "5. The fixed proportion which shall be set aside for the payment of the principal and 
 interest of the bonds herein authorized shall from month to month as the same shall accrue 
 and be received, be set apart and paid into a special account in the treasurv of the said citv, 
 village or town, to be identified as THE BOND .J^ND INTEREST RE- 
 DEMPTION ACCOUNT," the full title of such account to be specified by the said ordinance. 
 In fixing and determining the amount or proportion which shall be set aside for the payment 
 of the principal and interest of the txmds herein authorized, the common council or other 
 governing authority may provide that the anxnnit to \iq set aside and paid into tlie said bonds 
 and interest re<lemption account for any year or years shall not exceed a fixed sum which 
 sum shall be at least sufficient to provide for the payment of the interest and principal of the 
 said bonds maturing and becoming payable in each such year, together with a surplus or 
 margin of ten per cent in excess thereof. 
 
 "6. If any sun'lus shall Ix; accumulated in the said operating and maintenance fund, 
 which shall be equal to the cost of maintaining and operating the said plant during the re- 
 mainder of the calendar, operating or fiscal year then current, and the cost of maintaining 
 and operating the said utility during the calendar, operating or fiscal year then next ensuing, 
 any excess over such surplus may be by said common council or other governing authority 
 transferred to cither the (lepreciation account to Ik' used for any improvements, extensions or 
 additions to the properties of such public utility, or to the bond and interest redemption account, 
 as said common council or other governing authorities may designate. 
 
 "7. If and when a surplus shall lie created in the said Iwnd and interest redemption 
 account which shall be in excess of the interest and principal of any bonds becoming payable 
 during the calendar, operating or fiscal year then current, together with the amount of interest 
 or principal of any txmds which shall bi-come due and pavahle during the calendar, operating 
 or fi.scal year then next ensuing, the .said common council or other governing authority inay 
 transfer any excess over .such surplus to cither the operation and maintenance account, or to 
 the depreciation account, which .said common council or other governing authorities may 
 designate. 
 
 "R. To provide for the payment thereof and to provide for any extensions, additions 
 and improvements thereof, the said common council nr other governing authority shall be 
 and is hereby authorized to issue and sell Ixmds bearing interest at a rate not exceeding six 
 per centum per annum, payable amnially or semi-ainuially. executed in such manner and 
 payable at s\ich times not exceeding fortv years from the date thereof, and at such places 
 as the common coimril or other poverning authority of such city, village or town shall 
 determine, which Ivrnds shall be payable only out of the said special ri>dcmption fund. 
 • * • • .^ny such Winds and the interest thereon issued against any such redemption 
 fund shall be a valid claim of the holders thereof only against the said special redemption 
 
Use of Public Credit 527 
 
 fund and the fixed proportion or amount of the revenues pledged to such fund, and shall 
 not constitute an indebtedness of such city, village or town within the meaning of the con- 
 stitutional provisions and limitations. Each such bond shall state plainly upon its face that 
 it is payable only from the special fund, naming the said fund and the ordinance creating it 
 and that it does not constitute an indebtedness of such city, village or town. * * * * Such 
 bonds shall be sold in such manner and upon such terms as the governing authorities shall 
 deem for the best interests of .said city, village or town, provided, however, that such bonds 
 shall not be sold for less than par. The governing authorities may provide in any contract for 
 the purchase, acquisition or construction of any utility, that payment thereof shall be made 
 in such bonds at the par value thereof. 
 
 ******** 
 
 "10. The rates for all services rendered by such public utility to the municipality or to 
 citizens, corporations or other consumers, shall be reasonable and just, taking into account 
 and consideration the value of the said public utility, the cost of maintaining and operating 
 the same, the proper and necessary allowante for depreciation thereof, and a sufficient and 
 adequate return upon the capital invested. 
 
 "11. All moneys received from any bonds issued pursuant hereto shall be applied solely 
 for purchasing, acquiring or constructing such public utility, and in the payment of the cost 
 of any necessary e.xtensions, additions and improvements, and there shall be and there is 
 hereby granted and created a statutory mortgage lien upon the public utility so purchased, 
 constructed or acquired to and in favor of the holders of tlie said bonds and each of them, 
 and to and in favor of the holders of the coupons of said bonds. The public utility so pur- 
 chased, acquired or constructed shall remain subject to such statutory mortgage lien until the 
 payment in full of the principal and interest of the bonds issued pursuant thereto. Any 
 holder of the said bonds or of any of the coupons attached thereto may either at law or in 
 equity by suit, action, mandamus or other proceeding, protect and enforce the statutory 
 mortgage lien hereby conferred, and may by suit, action, mandamus or other proceedings, 
 enforce and compel performance of all duties required by this act, of the city, village or 
 town issuing the said bonds or of any officer thereof, including the making and collecting of 
 reasonable and sufficient rates lawfully established for service rendered by such utility, the 
 segregation of the income and revenues of the said utility and the application of the respective 
 funds created pursuant to the provisions of this statute. If there be any default in the pay- 
 ment of the principal or interest of any of the said bonds, any court having jurisdiction of 
 the action may appoint an administrator or receiver to administer the said public utility on 
 behalf of the said city, village or town and the said bondholders, with power to charge and 
 collect rates lawfully established sufficient to provide for the payment of the operating expenses 
 and also to pay any bonds or obligations outstanding against said utility, and to apply the 
 income and revenues thereof in conformity with this statute and the said ordinance, or the 
 said court may declare the whole amount of said bonds due and payable and may order and 
 direct the sale of the said public utility. Under any sale so ordered, the purchaser shall be 
 vested with an indeterminate permit to maintain and operate the said public utility. If any 
 city, village or town shall have acquired or constructed any such public utility and shall have 
 paid therefor and for any extensions and betterments authorized at the time of acquisition in 
 the manner herein provided, such city, village or town may provide for the extension, addi- 
 tion or improvement of such public utility by an additional issue or issues of bonds in the 
 manner herein provided ; provided, however, that such additional issue or issues of bonds shall 
 be subordinate to all prior issues of bonds which may have been made hereunder. ."Kny 
 city, village or town may issue new hondi in the manner herein provided and secured in the 
 same manner, to provide funds for the payment of the principal and interest of any bonds 
 then outstanding, provided that upon any re-issue of such bonds the question shall not be 
 required to be submitted to the electors whenever such re-issue shall be approved by a vote 
 of not less than two-thirds of the common council or other governing authority. * * * *" 
 
 It will be observed that this Wisconsin act combines the security of the 
 Washington plan with the security of the Mueller certificate plan. The bond- 
 holder will have a double remedy. He can either enforce his rights by an action 
 to compel the municipality to charge adequate rates to make the utility self- 
 sustaining, or in case of default he can institute a proceeding that will cause 
 the property to be operated by a receiver or to be sold at foreclosure. In the 
 latter case the purchaser will have the right to continue the operation of the 
 property under an indeterminate permit and subject to the regulatory laws of 
 Wisconsin. 
 
 To the extent that the use of public credit for electric railway purposes 
 
528 Electric Railway Problem 
 
 without the assumption by the public of the existing investment burden prove? 
 to be feasible in particular cases, there is considerable hope that some plan of 
 special assessments against the property benefited may be devised to take care ot 
 street railway extensions. This plan was suggested by Dr. Milo R. Maltbie in 
 his testimony before the Commission, who called particular attention to a study 
 of this subject made by the City Club of Xew York some years ago in coimec- 
 tion with the rapid transit problem. At page 2099 of the Proceedings, Dr. 
 Maltbie says that in his opinion the justification for the use of special assess- 
 ments in the case of a transportation line is particularly strong because "there 
 is not anything that will devefop the value of property if the lines are properly 
 selected * * * * so much as the transportation system." Mr. Lawson 
 Purdy, who for many years was president of the department of taxes and 
 assessments of New York City, filed a memorandum on the subject of special 
 assessments wiiich appears in full in the Proceedings. Mr. Purdy calls attention 
 to the fact that electric railway extensions constructed by the companies under 
 present conditions will constitute an especially heavy burden on the fare payers, 
 and to the further fact that the building of a new railway or an extension en- 
 hances the value of the land tributary to it. At page 2124 of the Proceedings. 
 he says: 
 
 "It is goiieralty true of the buildiiiR of an electrical railway, as in the building of any 
 other highway, street, or road, that if it does not enhance the vaUie of land by at least as 
 much as it costs it should not tie built."' 
 
 A little further on, at page 2125, after referring to the use of special assess- 
 ments for more than a hundred years past as a means of paying for street im- 
 provements, Mr. Purdy adds: 
 
 "This method of paying for certain public improvements has not only the advantage of 
 obtaining the money and obtaining it from those who receive the financial benefit, but it has 
 an added advantage. Real estate owners are prone to demand public improvements that they 
 think will iH'nelit their property even though such improvements are premature. If such 
 owners know that they must pay for these public improvements they are less likely to demand 
 them in advance of real need." 
 
 Mr. Purdy thinks that the special assessment policy would tend to tnie con- 
 servatism in the construction of street railway extensiotis, while at the same time 
 keeping the way open for them where they are really needed. At page 2125 
 of the Proceedings, he says: 
 
 ".Among the advantages of paying for electrical railways by assessment, whether owned 
 and operated by public authority or by private corporations, will be that extensions will not be 
 const ructitl unless they are actually needed. They can be constructed, however, if the 
 operating revenue is sufficient to meet operating expenses and mainten.ince, while the ex- 
 tensions could not I)c built if the revenue had to be sufficient not only for operating expenses 
 and maintenance but also to pay interest and installments upon the original cost. 
 
 "By pursuing the policy, wherever practicable, <>f building electric railways by special 
 assessments levied upon the property l)cnetiled. capital will steadily be diminished until 
 ultimately we may hope that the entire capital will be amortized and the railways thereafter 
 can be run for rates sufficient and only sutTicient to pay operating expenses and maintenance." 
 
 Mr. Purdy does not offer the special assessment plan as a solution of the 
 
 difficulties due to the depreciated dollar, but adds at the close of his statement, 
 
 at page 2126 of the Proceedings: 
 
 "If it is possible to continue to operate electric railways at all, this plan if adopted will 
 permit of such extension of their facilities as may be needed and promises a continual better- 
 ment of their financial condition." 
 
Use of Public Credit 529 
 
 It is clear that the problem of electric railway credit could be solved by 
 public ownership, if the legal, financial and political difficulties in the way were 
 removed, but in view of these difficulties this remedy cannot be applied on a large 
 scale immediately. The American Electric Railway Association brief closes with 
 the following statement : 
 
 "Private ownership and management must continue for some time and, with provisions 
 for readily and equitably changing to public ownership and operation, should it later be 
 desirable, the recommendations of the Commission must necessarily deal with utilities, financed 
 witli private capital and managed by private enterprise." 
 
 "Financed with private capital and managed by private enterprise!'' — this 
 flat rejection of the idea of the use of public credit as a means for correcting 
 the ills of the present critical situation makes the solution more difficult. There 
 is grave danger that continued reliance upon private credit can be made eflfective, 
 if at all, only by paying a "prohibitive" price for new capital and relaxing public 
 control to such an extent as to give the electric railway companies performing 
 this public function an independence and freedom from restraint greater than 
 they have ever enjoyed in the past. It is to go forward or to go backward, and 
 in all likelihood the exigencies of credit will determine the length of journey in 
 either direction. It may be that we have now reached one of those exceptional 
 crises in the development of community life, where the unreadiness and muddle- 
 headedness of government will fall into a panic with the approach of respon- 
 sibility and meekly meet whatever conditions are laid down by those who are in 
 possession of existing transportation facilities and have experience in rendering 
 transportation service. There is no telling what a panicky and conscience- 
 smitten public will do to avoid "the intolerable toil of thought." To relax un- 
 profitable restraints and to lift unreasonable burdens is a just and expedient 
 policy, but to take a single step backward in the essential control of transporta- 
 tion service by public agencies would be unwise and would doubtless entail the 
 unhappy ultimate results of public unwisdom. 
 
Chapter XLIII 
 THE ELECTRIC RAILWAY LABOR PROBLEM 
 
 111 the discussion of the plight of electric railway capital, and the failure 
 of electric railway credit, we have been compelled to travel a long road. And 
 now that we are at a place where conclusions are due, the labor problem re- 
 quires special consideration in the readjustment of the public relations of the 
 industry. What suits the stockholder and the bondholder may not suit the man 
 on the job. If we have exaggerated the importance of capital, the conductors, 
 the niotormen and the shopmen arise to correct us — and so we cannot escape the 
 labor problem if we would. 
 
 Capital is helpless to render transportation service without the assistance of 
 labor. The public cannot have continuity of transportation service, or for that 
 matter any transportation service at all, without the cooperation of labor. Dur- 
 ing the war the supply of labor in the electric railway business was short, just 
 as it was in many other industries. It cannot be said, however, that prior to the 
 war any particular difticulty was ever experienced over a prolonged period in 
 securing men to operate street railways. Ordinarily the companies had men 
 on the waiting list. While the car crews of an electric railway have positions 
 of considerable responsibility, the work they do does not require a very high 
 degree of education or a great deal of technical training and experience. It is 
 well known that the street railways have heretofore recruited their labor forces 
 largely from the continuous stream of migration of farmers' sons from the coun- 
 try to the city. 
 
 The condition in the electric railway industry at the present time is that 
 the wages paid are nominally much higher than they were a few years ago. As 
 a result of the work of the National War Labor Board the wages in this industry 
 were more or less standardized throughout the country, but since the War Labor 
 Board ceased to operate these standards have been more or less upset by the re- 
 sults of strikes and labor negotiations on particular systems. At the present time 
 there is a wide variation in the rate of wages paid, even where no substantial 
 variations seem to be warranted by differences in living conditions and the char- 
 acter of the work done. The last wage yearbook of the .Amalgamated Associa- 
 tion of Street and Electric Railway I'mployes of .America, issued Januarv 1, 
 1920, contains the wage rates paid on more than 300 unionized electric railway 
 systems in the United States and Canada.' From this source I have prepared 
 the table shown on pages 532 and .^33, giving the wage rates for trainmen on 
 the principal urban trans])ortation systems of the two countries so far as they 
 are imionized. 
 
 What has happened since the beginning of the World War is illustrated 
 
 530 
 
The Labor Problem 
 
 531 
 
 in a somewhat extreme way by the course of wages on the Cleveland Railway 
 operating under what is recognized as the most successful of the service-at-cost 
 franchises. From June 15, 1910, until May 1, 1915, which includes the first nine 
 months of the war, the wages of conductors and motormen in Cleveland were 
 27 cents per hour for the first year and 30 cents per hour thereafter. The new 
 rate of wages agreed upon in May, 1920, is 70 cents per hour for the first three 
 months of service, 7Z cents for the next nine months, and 75 cents after the first 
 year. It will be seen that this represents an increase of 150 per cent in the maxi- 
 mum rate of pay over the rates that were in force when the World War broke out. 
 Doubtless, the increases for the industry as a whole during this same period have 
 not averaged so much. But in 1919, the first year after the fighting in Europe 
 ceased and when the return of the soldiers to civil life had a tendency greatly to 
 increase the available labor supply, there was an epidemic of strikes which re- 
 sulted in great losses of revenue to many of the principal electric railway com- 
 panies, in great inconvenience to the public, and generally in radical advances in 
 wages, sometimes with a provision for back pay. The following list of strikes, 
 with the approximate loss of revenues resulting therefrom, has been compiled 
 from traffic and revenue data supplied to the Executive Secretary of the Com- 
 mission by the companies concerned : 
 
 STRIKES OX PRINCIPAL ELECTRIC R.^ILWAY SYSTEMS IN THE UNITED 
 
 ST.\TES DURING 1919 
 
 Date Durnliou Approximate Loss 
 
 City or System of Strike of Strike in Revenue 
 
 New York 
 
 Interborough Rapid Transit Company Aug. 17 2 days $230,000 
 
 CHIC.'kGO 
 
 Elevated Lines Tnlv 29 4 days 140,000 
 
 Surface Lines Tulv 29 4 davs 400,000 
 
 Boston July 17 4 days 320,000 
 
 New Jersey 
 
 Public Service Railway Company Mar. 12 6 days 300,000 
 
 Detroit ". June 8 5 days 275,000 
 
 CLEVEL.^ND lulv 6 2 days 75,000 
 
 Pittsburgh May 15 4 davs 170,000 
 
 Aui 15 14 days 600,000 
 Eastern Mass.achusetts 
 
 Bay State Lines June 3 days 130,000 
 
 Los .Angeles 
 
 Los .'\ngeles Railway Aug. 15 6 weeks (partial) 175.000 
 
 Pacific Electric Railway .4ug. 16 6 weeks (partial) 380,000 
 
 The Kansas Cities Jan. to Mar. 3 months 400,(XX) 
 
 Milwaukee Ian. 1 1 day 16.(K)0 
 
 Providence July 19 19 days 400,000 
 
 Seattle Feb. 6 4 davs 75.0(X) 
 
 Columbus, O Sept. 3 4 days 25.000 
 
 Des Moines Aug. 12 8 days 18.000 
 
 Nashville Aug. 20 1 day 5.000 
 
 $4,134,000 
 
 While the losses from strikes indicated above aggregate a considerable sum 
 of money, and in particular cases, no doubt, bore heavily upon the companies, 
 still $4,000,000 was only about two-thirds of one per cent of the total revenues 
 collected during 1919 by the companies from whose reports these strike data 
 were compiled. In view of the number of big systems involved, the revenue 
 
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534 Electric Railway Problem 
 
 losses seem small. The additional expense to the companies in the form of 
 wage increases enforced by the strikes was undoubtedly very nmch greater than 
 the revenue losses, and the fact that most of the strikes were so quickly and easily 
 won proves either that the men undeniably had a just claim to the higher pay 
 awarded them, that the companies have been weakened in their relation to 
 wage controversies by economic forces beyond their control, or that the prospect 
 of passing the burden on to the car riders in the shape of higher fares made 
 them less keen to resist labor's demands. Probably all these factors were work- 
 ing together to bring about the results which inevitably tend to higher unit costs 
 in the production of local transportation service. Up to May. 1920. the indica- 
 tions are that the present year will see another series of labor disturbances in 
 the electric railway field and further radical increases in the wages paid.- 
 While the War Labor Board was in existence there was a national agency to 
 which both parties could appeal for the arbitration of wage questions; but no 
 such agency will now be present to meet the problems that arise as the contracts 
 between the local divisions of the Amalgamated Association and the employing 
 companies expire from time to time, or to meet the problems that arise where 
 the employes on unorganized systems get together to demand larger pay and the 
 recognition of the union. 
 
 The exigencies of the war period have undoubtedly strengthened the unions. 
 The number of local divisions of the .Amalgamated Association increased from 
 about 160 in January. 1910. to 187 in January. 1916. and to 32S in January, 
 1920, Thus, it will be seen that the number of locals has more than doubled in 
 ten years. Moreover, the Amalgamated Association claims an increase of about 
 40,000 individual members during the war period. It is clear, therefore, that 
 the industry is now more thoroughly unionized than it ever was before.^ 
 
 Another element of strength for organized labor is the fact that at the 
 present time a street railway strike is relatively not quite so serious a matter 
 from the public point of view as it was before the advent of the automobile. 
 For this reason the operating companies cannot place so much dependence upon 
 the pressure of public need to sujjjiort them in the use of strikebreakers to keep 
 the cars in operation. In fact, it seems to have become almost a general custom 
 for electric railway companies to submit to a complete suspension of service 
 when a strike takes place and to make very little or no effort to resume opera- 
 tion until the strike has been settled and the old employes come back. An occa- 
 sional exception may still be noted, as. for example, the policy of the Kansas 
 City Railways Com|)any during the prolonged strike extending from December 
 11, 1918, to March 31, 1919. It will be remembered that the number of revenue 
 passengers carried by the Kansas City Railways Company in the two Kansas 
 Cities during the first nine months of 1919 was 18 per cent less than the number 
 carried during the first nine months of 1917. At the same time the average 
 increase in fare was 20 per cent, and no doubt accounts in part for the loss of 
 traffic. It may he safely assumed, however, that a large part of the loss was 
 due to the strike and the conditions growing out of it. With an active com- 
 petitor present, or potentially present, in the form of the jituey and the auto- 
 mobile bus, it is an extremely hazardous thing for a street railway company to 
 
The Labor Problem 535 
 
 enter upon a prolonged contest with its employes, as such a policy is pretty sure 
 to result in the diversion of traffic to competitive means of transportation and 
 to make the future of the electric railway in the particular community even more 
 insecure than normal conditions at the present time warrant. Under the cir- 
 cumstances, street railway strikes are nowadays attended with comparatively 
 little violence, and, therefore, public opinion is not so sharply divided between 
 those who consider the maintenance of law and order as the most essential 
 public policy and those who naturally sympathize with labor, particularly where 
 it is believed that the men are underpaid or are compelled to work under unrea- 
 sonable conditions. As a result, it seems to be clearly true that it is increasingly 
 difficult for electric railway companies to "break" strikes. 
 
 Even after the cessation of hostilities in the World War the cost of living 
 continued to climb, and unless in the near future there is a sharp recession in 
 prices it is to be expected that the employes of the electric railways, as their 
 yearly contracts expire, will demand further increases in wages and that this 
 will drive the companies which are not already in bankruptcy closer to the verge 
 of it if the men's demands are granted. This result may follow even where fare 
 increases are freely granted to meet the additional cost of operation, for it is 
 by no means certain that during the present era of high prices the electric rail- 
 way industry as a whole can be made to pay the full cost of service that is 
 involved in higher wages, along with the high prices now paid for materials and 
 money. At least, this result may follow unless there is a radical reorganization 
 of capital obligations of the industry. 
 
 Obviously, the electric railway problem is not merely a problem of credit 
 or of the new capital secured by credit. It is also, and even more fundamentally, 
 a problem of labor, because the solution of the labor problem is itself essential 
 to the restoration of credit. Capital that is already invested in the electric 
 railways will have to stay in the industry whether or not it likes the labor out- 
 look, but new capital need not come in so long as the labor problem remains 
 unsolved and threatens the security of the investment, and, within certain limits, 
 the permanency of the industry. Full cooperation of labor is, of course, essen- 
 tial to the highest prosperity and usefulness of any industry. The labor element 
 is peculiarly important in the street railway business, where the employes who 
 produce the service come directly in contact with the people who consume the 
 service. From the point of view of the labor problem, therefore, the present 
 condition of the electric railway industry contains seeds of trouble not only for 
 the people financially interested in the industry but also for the general public. 
 For the car riders there is the double danger of the increasing cost of service on 
 the one hand, which in the long run either they or the taxpayers will be com- 
 pelled to pay, and of the paralysis of service through industrial conflicts on the 
 other hand, which in general may be regarded as an even greater calamity than 
 increased cost. 
 
 From the point of view of the electric railway companies the labor problem 
 is fraught with immense danger. If wages keep on going up, even though the 
 increases can be shown to be fully justified by the living needs of the employes, 
 the companies will be financially ruined unless they are able to efifect radical 
 
536 Electric Railway Problem 
 
 economies in the use of labor or radical increases in the revenues derived from 
 the products of labor. From the point of view of the public, if wage increases 
 are sufficient to make it impossible for the companies to observe their public 
 contracts and live, the result may easily be that the character of the electric 
 railways as a public utility will be entirely changed, and that rate limitation or 
 regulation by public authority will become obsolete. If, as a result of the increas- 
 ing demands of labor, it becomes necessary to adopt a service-at-cost plan with- 
 out any maximum fare, or to inaugurate a system of unrestricted state regula- 
 tion based upon the service-at-cost idea and the rule that the investors are entitled 
 to receive a fair return upon their capital devoted to public use, the public is 
 likely to find itself in a position where it will have lost the protection of the rule 
 that public utility rates shall not be more than the reasonable value of the ser- 
 vice to those who desire to use it, and if that rule is once abrogated with respect 
 to local transportation service, the electric railways will cease to be a public 
 utility in the accepted sense of that term. Furthermore, if the cost of the labor 
 element in electric railway operation should increase to such a point as to make 
 the operation of electric railways economically impossible in competition with 
 other available means of transportation, the public would lose the great advan- 
 tages which it has heretofore enjoyed from the electric railway as an instrument 
 of public service. 
 
 Thus far I have been discussing the labor problem from the point of view 
 of the investors who have contributed or are to contribute capital to this indus- 
 try, and from the point of view of the car riders or the taxpayers who must pay, 
 in one way or another, the full cost of the service, if the service is to be con- 
 tinued. Under these circumstances neither the investors nor the general public 
 can afford to pursue the policy of overlooking the labor problem or neglecting 
 to come to full understanding of the labor point of view. It is to be feared that 
 in the past too many street railway managers and too many car riders have had 
 no thoughts about labor except from the standpoint of cost and opportunities 
 for profit. The managers have been annoyed by it, but have looked upon the 
 men as so many live rails, live motors and live wires, that cause trouble if not 
 handled circumspectly. 
 
Chapter XLIV 
 LABOR'S PUBLIC RELATIONS RECOGNIZED 
 
 It cannot be denied that, as a sheer element in the cost of electric railway 
 service, labor has become a problem of the first magnitude. It is certain, how- 
 ever, that this problem could be more readily solved if the true relations of 
 labor to the industry had been properly understood and recognized in the past. 
 It is also certain that the labor problem from the standpoint of cost cannot now 
 or in the future be solved without such an understanding and recognition. Labor 
 defiant, labor disloyal, labor discontented, labor indiflferent, or even labor lazy 
 will, under existing conditions, inevitably break the back of the electric railways. 
 
 The first great failure in connection with the street railway labor problem 
 has arisen from the fact that until very recently labor has been regarded merely 
 as an incidental element of cost for which the public assumed little or no respon- 
 sibility. Franchises have been granted everywhere to promoters or capitalists 
 whose services were either sought or accepted by the public in the development 
 or continuation of the much needed local transportation service. The mayors 
 and the common councils, the state legislatures and the public service commis- 
 sions have dealt not with the great groups of men who were personally to pro- 
 duce and distribute transportation service, but with the capitalists who were to 
 put up the money or with their representatives who were to assume responsi- 
 bility for the construction and operation of street railway lines. From the point 
 of view of the street railway franchise, from the point of view of the laws pro- 
 viding for the incorporation of electric railway companies, and even from the 
 point of view of public service commission laws and orders, the labor problem 
 has been almost universally ignored. This is generally true even in the most 
 elaborate and up-to-date contracts entered into upon the occasion of the resettle- 
 ment of the public relations of the street railways, such as the Chicago settle- 
 ment ordinances of 1907, the New York subway contracts of 1913, the Kansas 
 City settlement ordinance of 1914, the Tayler grant inaugurating service at cost 
 in Cleveland in 1910, the new Montreal Tramways contract of 1918, the Massa- 
 chusetts service-at-cost legislation of 1918, and the Cincinnati resettlement con- 
 tract of that year. In very rare instances some provision, more or less inade- 
 quate, has been made in a street railway franchise reserving to the city the right 
 to intervene in labor disputes, or to insist upon the submission of all such dis- 
 putes to arbitration. The Des Moines street railway franchise, granted in 1915, 
 is one of these few exceptions that prove the rule. That franchise contains the 
 following provision : 
 
 "Whenever * * * * any difference or differences shall arise between the company and 
 its employes or any division of its employes, who shall be engaged in any line of labor, about 
 the rights or obligations existing between them, and the difference or differences are in regard 
 
 537 
 
538 Electric Railway Problem 
 
 to a matter or matters which might be lawfully arbitrated, and not herein excluded from 
 arbitration, or some other method provided herein or by law or by contract between the com- 
 pany and its employes for arbitration, then the company or its employes or any division or 
 organization of its employes of the city may require such question or questions or matter or 
 matters to be submitted to arbitration. ILach of the parties to said controversy shall appoint 
 one arbitrator within tive days after written notice so to do has been given by one party 
 to said controversy to the other party, which notice shall specify in writing the question or 
 matter to be submitted to and to be decided by said arbitrators.'' 
 
 The two arbitrators so appointed are required to proceed at once to decide 
 the questions submitted to them, and it they cannot agree within a specified 
 time the parties to the controversy are to appoint a third arbitrator, or upon 
 their failure to do so the two arbitrators themselves are to select a third ar- 
 bitrator, and the board of three thus constituted must proceed to decide by 
 majority vote the questions submitted for their determination. In case either 
 party to the controversy neglects to appoint an arbitrator, or in case they or the 
 two arbitrators first selected are unable to agree upon a third arbitrator, the 
 appointment is to be made by the individuals composing the Supreme Court of 
 the State of Iowa or a majority of them. The procedure of arbitration is fur- 
 ther described in section 15 of the ordinance, as follows: 
 
 "It is further provided that the said Board of .\rbitrators may adopt such rules, regula- 
 tions and methods of procedure governing the hearings l)efore the board as it may deem 
 proper. It shall give reasonable notice to each of the parties to said controversy of the time 
 and place of hearings upon the questions and matters submitted to it. and such parties shall 
 have the right to appear by counsel before the board and to oflFer proofs and testimony on 
 behalf of their claims, and each of the parties shall furnish said board such information as 
 may be in its possession and as is desired by said Ixxard ; provided, further, that the board 
 may limit tlie e.xtcnt and time of hearings, and if said board shall, in its opinion, not have 
 sufficient time within which fully to hear and determine the questions and matters which 
 are for it to determine within the limitations and times as herein fi.xed. then it may extend 
 the time within which it is to reach an agreement, but not to exceed thirty days beyond 
 the times herein stipulated. .Ml arbitrators shall be persons competent to act on the ques- 
 tions, matters and things which are submitted to them. 
 
 "All expenses of every kind incurred by any board of arbitration appointed hereunder, 
 including a per diem charge of not to exceed $25 for each of the arbitrators, shall be fixed 
 by the Board of .Arbitration as a part of their award, and shall be paid as directed by said 
 board, except that in the arbitration of labor disputes each party shall pay the expense of 
 their own arbitrator and the third arbitrator .shall be paid jointly by both parties: and the 
 amount, if any, of such expense which the company is required to pay shall be charged to 
 
 operating expenses. 
 
 ******** 
 
 "The company by the acceptance of this ordinance agrees to continue to contract with 
 its employes and to insert in all contracts made with its employes, or any organization or 
 division of such employes, a clause binding all the contracting parties to an observance of 
 and compliance with all of the provisions of this ordinance, and especially with the provisions 
 of sections fifteen and sixteen relating to arbitration." 
 
 The award of the board of arbitration, made in writing and served upon the 
 company and tiie employes, is to be binding ujion both ])arties, but it is provided 
 that the board in fixing the time within which its findings are to be made effec- 
 tive "shall in no case change or modify any of the terms of the contract existing 
 between the company and its employes." 
 
 I cite tlicsc provisions of the Des Moines franchise because they recognize 
 the existence of a public interest in the relations between an electric railway 
 company and its employes. It will be remembered that in the list of strikes 
 during the year 1919, given in the preceding chapter of this .\nalysis, is one for 
 Des Moines which lasted eight days and entailed a loss of approximately $18,000 
 in gross revenues. The Des Moines franchise is not a service-at-cost contract, 
 
Labor's Public Relations 539 
 
 although in many respects it was written along distinctly modern lines. It has 
 not proven to be an unfailing talisman for the solution of the local street railway 
 problems of the city. This may be due, in part, to the city's failure to insist 
 upon a rock-bottom valuation at the time the settlement was made. At any rate, 
 Des Moines is one of the cities to which the Secretaries of Commerce and Labor 
 referred in their letter to the President under date of May 15, 1919. The prop- 
 erty is in the hands of receivers. That the arbitration provision of the franchise 
 did not prevent a strike of the trainmen in August, 1919. is due, apparently, to 
 the alleged inability and refusal of the receivers to pay the increase awarded to 
 the men. The story is told by Mr. Emil G. Schmidt, formerly president and 
 now one of the receivers for the company, in a letter to the Executive Secretary 
 of the Commission, dated December 12, 1919. Mr. Schmidt says : 
 
 "On July 28. 1919. a board of arbitration awarded the trainmen a wage increase of 
 13c an hour, ettective March 1, 1919. The receivers, however, were entirely out of funds 
 with which to meet this demand, and after a strike lasting from August 12 to August 20, 
 the Federal Court ordered the receivers to pay one-third of the back pay out of funds then 
 set aside for interest and taxes. On October 9th, however, Judge Wade set aside the arbi- 
 tration award of July 28th on account of the provisions of such award not having been 
 met either by the finding of sufficient evidence on August 4th that the receivers were deriving 
 sufficient funds to meet the increased wages, or the adoption of an ordinance by the vote 
 of the people which would provide for an increased revenue sufficient to meet the increase 
 in wages over and above existing cost of operation and fixed charges. This election was 
 held on September 22nd, but the franchise amendment was defeated. The setting aside of 
 the arbitration award above referred to therefore put into operation the old scale of wages 
 in effect prior to March 1. 1919. 
 
 "A new board of arbitration was then appointed, and the trainmen were awarded an 
 increase of 10c per hour, retroactive to March 1, 1919, or practically 3c an hour less than the 
 award of July 28th." 
 
 The threatened strike on the steam railroads of the country in the summer 
 of 1916, averted by the passage of the Adainson law, and the actual strikes dur- 
 ing that same period on both the rapid transit and the surface car lines of old 
 New York, brought prominently to public attention the vital character of the 
 public interest in labor disputes on transportation lines and the serious nature 
 of the mistake made in permitting the companies and the men to fight out their 
 differences without regard to the paramount interest of the public in the con- 
 tinuity of service. Legislative measures were proposed in New York designed 
 to enforce the public interest and to compel the would-be belligerents in the 
 public utility field to settle their disputes without a suspension of service. But 
 America's entrance into the war came on, and no agreement having been reached 
 on this proposed legislation, the matter was dropped and the solution of the 
 problem was left to the patriotism of the parties and to the good offices of the 
 Federal Government with its "big stick" of war necessity. 
 
 The National W^ar Labor Board succeeded in preventing or quickly stop- 
 ping street railway strikes, but it did so largely by giving its approval to the 
 demands of labor without having authority to make any corresponding adjust- 
 ment between the companies and the public. The triangular position of the 
 parties was recognized, but there was still a failure in the coordination and free 
 adjustment of their respective interests. With the War Labor Board gone and 
 nothing to take its place, we are again in a condition where the public has no 
 authentic and direct relations with labor. The responsibility of labor to the 
 
540 Electric Railway Problem 
 
 public is getting to be pretty clearly recognized by the public, and the public's 
 responsibility to labor is intermittently recognized by labor. Unfortunately, as 
 yet there is comparatively little mutual recognition of responsibility. The defini- 
 tion of this mutual responsibility and its clear recognition by both parties may 
 almost be said to be the labor problem in the electric railway field. One thing 
 may be put down as beyond the realm of controversy, and that is this, namely, 
 that neither the public nor labor can longer afford to put up with mere indirect 
 mutual relationships via the companies. Of course, much can be said for the 
 possibilities of improvement in the relations between the public and the com- 
 panies and between the companies and labor, but the real problem of electric 
 railway service and the payment for it cannot be solved without the establish- 
 ment of direct relations upon a sound basis between the public and labor. 
 Whether this can be accomplished short of public operation remains to be seen. 
 At the very least, it means the assumption by the public of ultimate responsi- 
 bility for operating policies in one of the largest and most important fields of 
 management. 
 
Chapter XLV 
 LIMITATION OF "THE RIGHT TO STRIKE" 
 
 From the public point of view it is getting to be as intolerable that labor 
 should enjoy the privilege of suspending a public utility service whenever the 
 employes think that they are not being properly compensated or are not being 
 permitted to work under proper conditions as it would be for capital to go on 
 strike for more pay or greater security in case of a fundamental disagreement 
 with the public. It is universally admitted that labor cannot be drafted into 
 public service except as a war measure and that no man or group of men can 
 be prevented from leaving the public service upon proper notice if they weary 
 of it or believe that they can better their condition elsewhere. Likewise, it is 
 admitted that capital cannot be commandeered in times of peace for use in the 
 expansion of local transportation facilities, and that individual investors cannot 
 be prevented from withdrawing from the street railway field if they can find 
 substitutes to take their place. It is clear that in this respect labor has the 
 advantage of capital. Labor can withdraw without providing a substitute, while 
 capital in most cases cannot do so, as it is restrained both by the inherent diffi- 
 culty of transforming its function without great loss and also by its obligation 
 not to leave the public in the lurch. 
 
 The electric railways can render no transportation service, either good or 
 bad, unless the cars run. Continuity of operation is of the essence of the 
 service. The public cannot afford under any conditions to have an essential 
 public service cease, whether it be from the breakdown of the investment, from 
 the unwillingness of the men to perform the service under the conditions pre- 
 scribed, or from the determination of rrlen who have been engaged in perform- 
 ing the service that nobody else shall do it when they quit. Obviously, capital 
 must be paid the wage that is necessary to attract a supply of capital. Here 
 old capital is more or less at the mercy of the public, except as it is protected 
 by contract or the community's sense of equity. Obviously, also, labor must be 
 paid the wage that will retain the present employes or attract new ones in suffi- 
 cient numbers and with sufficient qualifications to produce and distribute the 
 necessary service. 
 
 These things cannot be disputed by the public. But the public claims the 
 right to get capital m the cheapest market. Yet even this claim is not always 
 enforced. Lender some franchises and under many regulatory orders an arbi- 
 trary rate of return far in excess of the necessary cost of capital has been 
 allowed. For example, if eight per cent or even ten per cent is fixed as a fair 
 return either on the entire investment or upon that portion of it represented by 
 stock, the existing stockholders often retain to themselves the privilege of sub- 
 
 S41 
 
542 Electric Railway Problem 
 
 scribing for additional stock at par, even though on the open market the shares 
 would command a big premium. Yet, fundamentally, the public does not admit 
 that it is bound to pay more than the necessary cost of capital, and all that is 
 now theoretically claimed on behalf of the electric railway companies is a rate 
 of return high enough to attract new capital in the freedom of the money mar- 
 ket. The companies do not frankly claim, and the public certainly does not admit, 
 that the investors who are in shall be permitted to erect an artificial barrier 
 against new investors and claim more for themselves than they could if the 
 barrier was down. It is true that in the Cleveland seven-per-cent-return 
 arbitration proceeding the company claimed for the existing investors the going 
 rate of wages for money, notwithstanding the contract under which they invested 
 the money at a given rate of return, but the city's consent that this demand 
 should be arbitrated was obtained under duress and was not an admission of 
 the propriety of the claim. Now, when it comes to labor the question arises: 
 Shall men be treated differently from money? Shall the employes of a street 
 railway company be paid the going rate of wages, subject to the obligations of 
 term contracts, or shall they have the right through organization and the strike 
 to demand and secure higher wages than the services they render would com- 
 mand in the open "labor market"? Here we come up against the distinction 
 often made between capital and labor based upon the conception that labor is 
 not a commodity but a service, a human relation, and that the general welfare 
 of the community demands that labor shall be freed from the inexorable law of 
 supply and demand which controls the labor market, so-called. On this theory, 
 the employes engaged in a public service such as local transportation have the 
 right to determine for themselves what compensation they shall receive and 
 under what conditions they shall work, and have the further right, if their terms 
 are not conceded by the management, to cease to work — not only that, but to 
 compel the suspension of the service. A strike is not the wholesale resignation 
 of the employes, but the wholesale quitting of work without quitting the job 
 or giving place to others who might be willing to do the work under the pre- 
 scribed conditions. The "right to strike." as it is commonly understood in the 
 electric railway business, is the right of the men to take a vacation without pay 
 and the right of all of them to take it at one time and practically without notice ; 
 it is the right by concerted action to interrupt the service and keep it interrupted 
 until tile management conies to terms with the strikers. 
 
 If it be once admitted that transportation is an essential public service, the 
 so-called "right to strike" as I have defined it is preposterous in a civilized 
 conniuinity. It is the right to declare and wage private warfare while public 
 interests arc paralyzed. The public cannot possibly admit the right of any body 
 of employes to stop the public wagon — essential public service must go on. From 
 the standpoint of the public, the case again.st the "right to strike" in the electric 
 railway business is absolutely clear. The public admits that the employes are 
 under obligation to it. Hut here conies in the huntan factor. The men main- 
 tain that their first privilege and their first duty is self-preservation and that 
 their obligations to the public are of a secondary nature. The public, in the 
 broad sense of the term, by which is meant something more than the car riders 
 
The Right to Strike 543 
 
 as a class — in fact, the all-inclusive community of which the investors and the 
 operatives are a part, as well as everybody else — has a vital interest not only in 
 continuity of transportation service, but also in the welfare of the men who 
 render the service. This public cannot tolerate the "right to strike", in such a 
 service, but neither can it afford to take away froinj a large group of citizens 
 the ultimate means of self-help, unless it is both willing and diligent to set up 
 the machinery of arbitration by which the informed and responsible judgment 
 of society can be substituted for the ex parte judgment of the employes them- 
 selves in fixing wages, hours and conditions of work. The "right to strike" 
 against the decisions of such a tribunal cannot be recognized. Individual em- 
 ployes, aggrieved at its decisions, would have two recourses : they could resign 
 upon proper notice in order to improve their condition, or they could resort to 
 the court of public opinion and the ballot-box in an effort to get the judgment 
 overruled ; but the right by concerted effort to interrupt the service until the 
 informed judgment of society would consent to be overruled by their interested 
 judgment cannot for a moment be admitted in a coherent, organized democracy. 
 
 Labor is pretty consistently and rather violently opposed to the limitation 
 of the "right to strike," even in essential public industries such as transporta- 
 tion. This unwillingness, it seems to me, is proof of the fact that our democracy 
 is not yet fully coherent and organized. Labor feels that it is something apart 
 from the government ; it does not feel its own solidarity with the rest of the 
 community in its political manifestations. The government, like the companies, 
 is regarded as something set off against the men, something not theirs, but their 
 enemy's. The labor problem cannot be solved until government wins the sup- 
 port of labor; until labor ceases to be an unassimilated, undigested lump in the 
 political stomach of the community. And so, while the community cannot for 
 a moment admit the "right to strike" in public service employments, it cannot 
 solve the problem merely by prohibiting strikes. It must first recognize its own 
 responsibility to labor and set up the tribunals through which the legitimate 
 interests of labor will be conserved, but with the fullest protection that can be 
 guaranteed that labor engaged in public service will share with capital the dis- 
 advantages as well as the advantages that arise out of their voluntary devotion 
 to work in which the public interest is predominant and with respect to which 
 the ultimate public rights cannot safely be abrogated. 
 
 It is unfortunate that the Proceedings contain so little bearing directly upon 
 this proposed solution of the labor problem. Indeed, we ought, perhaps, to call 
 it merely a solution of one important aspect of the labor problem, namely, con- 
 tinuity of service, with respect to which the public interest and the immediate 
 interests of men and money combine. In time of strike the public gets no 
 service, the men get no wages, and capital makes no profit. 
 
 Mr. Thomas L. Sidlo, of Cleveland, fresh from the experiences of the 
 Cleveland Railway Company and the City of Cleveland with the electric railway 
 problem, recommends compulsory arbitration, as will be seen from the following 
 extract taken from pages 1588 and 1589 of the Proceedings: 
 
 "This is the most vexing and obstreperous problem confronting the street railway indus- 
 try'. From present indications it is likely to be still more troublesome in the future. No 
 
544 Electric Railway Problem 
 
 adequate solution has yet been found. In recent times street railway employes have found 
 the strike an unfailing weapon to enforce their demands. At present it seems as if there 
 were no definite limit to its possibilities. Some system of bonuses or some plan of "profit- 
 sharing' must be devised to bring the employes into the partnership relation and to force 
 them thus to accept the responsibility their type of employment owes to the public. The 
 need for some such solution is irresistible, unless the present situation with regard to wages 
 changes in a very marked way. In recent years street railway labor, although not of a high 
 order of skill, has not been in competition with the rest of the labor market. Wages have 
 been determined by the coercive strength of tlie 'local.' The suggestion that seems most 
 hopeful at this time contemplates a system of liberal annual percentage bonuses, based on a 
 schedule of seniority and continuity of service, and with no other "strings' to the plan. 
 
 "An aspect of the problem that is not at all clear relates to the question of the extent to 
 which public officials should take a hand in labor disputes. From one standpoint a 'hands-off' 
 policy seems highly desirable. This has the elementary advantage of leaving the decision 
 of the dispute to its merits. On the other hand, allowing the interested parties to fight it 
 out to the bitter end usually means public suffering, an emerging of the mob spirit, violence, 
 etc. For that reason it is necessary for the public interest to be represented. The best way 
 to achieve this recognition of the public interest is through compulsory arbitration of all 
 labor difficulties. This method will settle disputes without general punishment, will protect 
 the rights of the employes, and will not seriously interfere with the employment relation 
 or break down discipline. Its introduction in this country has already tx'en delayed too long." 
 
 The special street i^aihvay commission of Massachusetts, which filed its 
 report in November, 1919, recommended legislation to prevent strikes on local 
 transportation lines. With respect to the labor problem the report says: 
 
 "Most of this report, and all those of like tenor that have preceded it, have been primarily 
 concerned with the relation of capital to the street railway service of the Commonwealth. 
 There is, however, another indis[)ensable element, and that is labor. This community and 
 others have within a short time l)een paralyzed in their commercial and social activities by 
 strikes upon street railway systems. Moreover, all of our communities are living under the 
 shadow of threatened strikes. This Commission would fail in its dutj if it did not suggest 
 some method by which continuity of street railway service may l)e assured. 
 
 ""The distinction I)etween the carrying on of public utilities and of a private enterprise 
 is familiar. In the former, the public interest is paramount. The public utility may be 
 carried on by the state or by individuals ; it may receive grants from the state ; may exercise 
 the power of eminent domain. (Jn the other hand, the rates it may charge are regulated, 
 the quality and sufficiency of its .service supervised, its financing controlled. 
 
 '"Once an occupation is one of public necessity the service is charged with a peculiar 
 obligation, a trust of which one should not divest himself .it will. Life itself is involved in 
 the continuous operation of our pulilic utilities— the furnishing of water, of light and heat, 
 as well as of transportation. No one need enter this service unless he chooses, and once 
 engaged in it should not Ix- permitted to quit in such a manner as to paralyze it. A strike 
 upon a street railway brings the greatest suffering to those who can least endure it; the 
 well to (In may Iw incnnvenicnced. but they are not seriously injured. It is the great army 
 of wage workers — men and women — who are hard hit. They depend upon this transporta- 
 tion to get to and from their work. When it ceases they suffer, and the mere fact that it may 
 cease causes apprehension. 
 
 ".\ strike of a single day upon the ele\-ated causes a loss directly and indirectly of several 
 hundred thousand dollars. 
 
 ""We recommend a method for preventing strikes on street railways under public control 
 by making it unlawful for persons in that ser\'icc, by concerted action to fail to perform 
 from day to day their respective duties. 
 
 ""Provision should l)e made for an agreement between employer and employe to submit 
 questions relating to wages and working conditions to arbitration by a t>oard to \ie selected 
 as shall Im- provide<l in the agreement, failing in the creation of which the Public Service 
 Commission shall act. 
 
 ■".Xny person violating the provisions of the act would, ipsn facio, be discharged from 
 his position and Ix-conie ineligible to reemployment in such service for a periixl not exceed- 
 ing one year." 
 
 The commission submitted with its report the draft of a bill "'to secure 
 cnntiiniity of stT\ici' on street railways under public control." Tlu- provisions of 
 this bill were as follows: 
 
 "Section 1. It shall he unlawful for any officers, employes, agents or other persons in 
 the service of any street railway in the Commonwealth, publicly managed or controlled. 
 
The Right to Strike 545 
 
 by concerted action, combination or agreement, to hinder, obstruct or prevent the continuity 
 of service of such street railway, or to threaten such hindrance, obstruction or prevention. 
 
 "Section 2. The duly constituted operating officers of any street railway system, and 
 every person or association of persons in its service, shall, by written instrument or instru- 
 ments, agree to submit to arbitration by a board or boards, whose decision shall be final, 
 to be selected as therein provided, every- difference or dispute relating to wages or compen- 
 sation, hours of labor or working conditions, and any disputes or dittercnccs that may arise 
 in the course of the operation or management of such system, and to abide by the findings, 
 determination or award of such board. Copies of all such written instruments shall be filed 
 with the Public Service Commission. 
 
 "Section 3. The board shall hear the parties or their representatives and determine all 
 matters in dispute, and such determination shall be in force for such period of time as the 
 board may fix. To the extent that the matters in issue are controlled by statute or may 
 require legislation the board may make recommendation to the general court, with drafts 
 of such proposed legislation as may be necessary to carry the findings or recommendations 
 into effect. 
 
 "Section 4. In case of the failure of the parties to complete the selection of an arbitra- 
 tion board in accordance with said agreement or to make provision therefor, within sixty 
 days of a request by either party, or by the Governor, for the selection of such a board, 
 the Public Service Commission shall serve as such a board, and shall exercise all the powers 
 set forth in the preceding section. 
 
 "Section 5. Any person violating the provisions of section one shall thereupon be dis- 
 charged from tlie service, and his continuance in such service, or his reemployment or 
 reappointment in any capacity therein for a period not e.xceeding one year, as the Public 
 Service Commission may determine, shall be unlawful." 
 
 It will be observed that this proposed measure purports to relate only to 
 street railways "publicly managed or controlled," although the provisions of 
 section 2 seem to be broad enough to apply to all street railways within the state. 
 
 One of the members of the commission, Mr. Roland W. Boyden, in a sup- 
 plemental statement, expressed the opinion that "the measure proposed for pre- 
 venting strikes should not be limited to publicly controlled street railways," 
 and added: "Also, I should prefer to omit the penalty, placing reliance upon 
 the agreement, backed by the men's sense of public obligation and the force of 
 public sentiment." 
 
 When this measure came before a special session of the legislature, late in 
 1919, the employes, through their counsel, Mr. James H. Vahey, strenuously 
 opposed its enactment into law. Mr. Vahey maintained that the policy of com- 
 pulsory arbitration as embodied in this bill was in violation of the fundamental 
 guaranties of the United States Constitution. In the first place, he urged that 
 the bill would violate the provisions of the Fourteenth Amendment providing 
 for liberty of contract. Upon this point he cited the decisions of the United 
 States Supreme Court in Adair v. United States (208 U. S. 161) and Coppage 
 i\ Kansas (236 U. S. 1). In particular he cited the following words quoted by 
 Mr. Justice Pitney in the Coppage case froin the opinion of the Kansas Supreme 
 Court: 
 
 "Any act of the legislature that would undertake to impose on an employer the obliga- 
 tion of keeping in his service one whom, for any reason, he should not desire, would be a 
 denial of his constitutional right to make and terminate contracts and to acquire and hold 
 property. Equally so would be an act the provisions of which should be intended to require 
 one to remain in the service of one whom he should not desire to serve. ****•• 
 
 Applying this language to the proposed Massachusetts act, Mr. \'ahey said : 
 
 "An extraordinary situation would be presented in this Commonwealth if the proposed 
 legislation were adopted. The employes of two street railway corporations would be coerced 
 against their will to continue in service. The fact that a violation of Section 1 would not 
 necessarily disentitle striking employes from seeking employment elsewhere is no answer 
 
546 Electric Railway Problem 
 
 to the constitutional objections I have been discussing. It needs no argument to convince 
 >ou that they would be blacklisted wherever they went, and would have great difficulty in 
 obtaining employment." 
 
 Mr. \'ahey also contended that the provisions of the proposed legislation 
 were repugnant to the "equal protection" clause of the Fourteenth .Amendment. 
 He took this view upon the ground that the act was discriminatory insofar as 
 it purported to apply to the employes of two street railways only, namely, the 
 Boston Elevated Railway and the Eastern Massachusetts Street Railway, both of 
 which were under "public control," as that term is now used in Massachusetts. 
 
 He also contended that the proposed legislation would create involuntary 
 servitude and therefore fall foul of the Thirteenth Amendment. In this con- 
 nection he said: 
 
 "The right to strike is the only final defense of the worker against oppression. It is 
 the only weapon readily available, the use of which he tlioroughly understands. The right 
 is often more powerful than its exercise would be. Knowledge of the power of the workers 
 to act eflfectively, if a substantial measure of justice is not done them, is often the only influ- 
 ence felt by a mean employer. In competitive industry the mean employer drags down the 
 standards for the whole trade. If such an employer knew that there was no effective power 
 back of a demand, or if he knew that that power must be held in abeyance for a definite 
 period, he would take every advantage afforded by that knowledge." 
 
 Here Mr. \'ahey fails to distinguish between a private employer in a com- 
 petitive industry and a [lublic employer in the electric railway field. For a 
 legislative body to admit the force of this particular argument would be to 
 admit that the public, whom the legislature represents, might prove to be a 
 "mean employer." The fact that labor often looks upon society as now organ- 
 ized as antagonistic to its interests and as essentially identical with organized 
 capital perhaps receives some support from language which Mr. X'ahey quoted 
 from a dissenting opinion of Mr. Justice Oliver Wendell Holmes, rendered 
 when he was a member of the supreme judicial court of Massachusetts. The 
 reference is to the case of I'cgclahn v. Giiiitiicr. reported in 167 Massachusetts, 
 where, at page 107, Justice Holmes used the following language: 
 
 "One of the eternal conflicts out of which life is made up is that between the effort of 
 every man to get the most he can for his services, and that of society, disguised under the 
 name of capital, to get his .services for the least possible return. Combination on the one 
 side is patent and powerful. Combination on the other is the necessary and desirable counter- 
 part, if the tiattle is to be carried on in a fair and equal way." 
 
 Continuing his argument that the proposed legislation would mean involun- 
 tary servitude for the electric railway employes affected by it. Mr. V'ahey said: 
 
 "Vou will observe that in Section 1 of the pro|X)scd legislatioii no reference is made to 
 the term strikf. the prohibition U-ing confined to any concerted action, combination or agree- 
 inent which hinders, obstructs or prevents the continuity of .service of a street railway pub- 
 licly managed Reduced to its final analysis, that section really means something more than 
 a strike, which may often presupinisc a resumption of empluynient. Kor example. suppo.--e 
 that the employes of the Boston Klevated Kailway Company liecome dissatisfied with their 
 conditions of emplnvmeiit and are unable to get them changed by the com|iany. and assume 
 that the Public .Service Connnission. nNiut which I shall later on have something to say. acts 
 as an arbitration loard and lays down principles and policies which these street railway 
 employes think arc unjust, and that they also feel that it should Ix- futile in any other arbi- 
 tration l)cfore the Public Service Commission to have those policies and principles modified. 
 what then? .According to Section 1, if they leave their employment with no intention of 
 going lack into the service of the Boston Rlevated Railway Comjiany, they arc doing some- 
 thing which is prohibited by law and the result of which might make it irnpossihie for them 
 to secure employment elsewhere for reasons heretofore slated. In other words, any con- 
 certed action, combination or agreement which tends to hinder, obstruct or prevent the 
 
 I 
 
The Right to Strike 547 
 
 continuity of scr\'ice of a street railway publicly managed is declared unlawful under any 
 circumstances. If this is not involuntary servitude, I confess I do not understand that 
 expression." 
 
 Oil the ground that one of the companies affected by the proposed legisla- 
 tion, namely, the Eastern Massachusetts Street Railway Company, was not con- 
 fined to the State of Massachusetts in its operation, Mr. Vahey also maintained 
 that the proposed act would be an interference with interstate commerce and in 
 that respect violative of the Federal Constitution. 
 
 Turning from the constitutional objections, Mr. Vahey discussed the eco- 
 nomic, social and political objections which labor makes to any restriction of its 
 right to strike. Upon this point he said : 
 
 "The right to strike * * * * is inherent in every working man in this country. The 
 right to quit work for any reason sufficient to the workman himself is the concrete expres- 
 sion of individual liberty. Any curtailment of this right by proposed legislation of this 
 nature is a negation of liberty and a return to serfdom, and hence non-.'Vmerican. It is 
 wrong in principle because it destroys individual liberty. It is at variance with the spirit 
 of our Constitution, as I have shown you, to compel men's actions contrary to their own will. 
 I submit it is shocking to one's notions of real Americanism to say to a workman, 'Yon 
 must arbitrate and accept whatever decision is rendered ; if you do not, you will be penalized.' " 
 
 Mr. Vahey raised specific objection to the ultimate contingent jurisdiction 
 of the Public Service Commission as a board of arbitration under the proposed 
 act, as will be seen from the following: 
 
 "It is provided that the Public Service Commission, in case the parties cannot agree, shall 
 act as an arbitration board. Suppose that the Public Service Commission proved hostile to 
 organized labor. Suppose that it laid down uneconomic principles of arbitration law. For 
 example, labor has consistently maintained in arbitration matters that it was entitled to a 
 living wage, that the financial condition of the company was immaterial, and that the supply 
 and demand doctrine has no place in industrial arbitration proceedings. These contentions 
 are based upon sound economic reasoning and are strongly supported by precedents of the 
 highest source throughout the world, but the Public Service Commission would not be obliged 
 to follow them and could, if it saw fit, ignore them completely. It is reasonable to suppose 
 that just the moment the Public Service Commission took a stand favorable to the Boston 
 Elevated Railway Company and the Eastern Massachusetts Street Railway Company those 
 corporations woiild fail to agree upon any arbitration board suggested by the employes, 
 which would automatically cause the Public Service Commission to act as an arbitration board. 
 How is it possible by the most fanciful reasoning to satisfy the human mind that such a situ- 
 ation could be expected to be viewed with complacency by employes? It would be mon- 
 strously unjust. 
 
 "I submit that the proponents of compulsory arbitration in this matter cannot show that 
 the workingman is protected by the machinery provided by this act for the determination 
 of standards and the settlement' of disputes, the plain answer of the employes is that they 
 have no assurance that their contentions will receive the consideration due them from the 
 board of arbitration, sitting as a court under a coinpulsory law. They do not know what 
 preconceived notions of justice mav be brought to bear on the situation or what mfluences, 
 political or financial, mav be invoked to sway its judgment. If compulsop' arbitration fails 
 to secure important conditions, thev have no remedy at hand. They will be penalized if 
 thev disobev the awards. There is no right to appeal. .^ strike, at least, is their own affair. 
 If it fails, they can make plans for preventing its failure another time." 
 
 On the general subject of arbitration Mr. \'ahey cited the authority of an 
 article by Professor Frank T. Carlton found in the "Annals" of the American 
 Academy of Political and Social Science for January, 1917, of which the fol- 
 lowing is a part : 
 
 "Since labor is struggling upward toward a higher standard of living and toward higher 
 social standards, labor organizations look with suspicion upon any institution or method of 
 procedure in which precedent plavs a considerable role. Precedent for wage workers spells 
 slavery, serfdom or low standards of living and social inferiority. Laboring men and 
 women are struggling to get out of the 'servant' class. They want to be recognized as 
 'equals' of their employers and the managers of the business in which they are eaniing a 
 
548 Electric Railw av Problem 
 
 living. Wage workers are eaytrly looking forward to the day when labor as well as capital 
 shall have a voice in deternunnig the conditions in industry, to the time when the representa- 
 tives oi the employes shall be admitted to the meetings ot the boards ot directors. Com- 
 pulsory arbitration would seem to offer little opiwrtunity to press forward along this line. 
 
 ■■.•\gain, in case no definite legal principles can be invoked, the decisions of the board 
 depend in no small measure upon the training, interests and idiosyncrasies of the judge or 
 umpire. It has Ijeen noted that no fundamental principles which are of general acceptance 
 can be laid down for the guidance of boards of arbitration. Consequently, there is reason 
 for the assertion made by labor leaders that the decisions of boards of arbitration depend 
 upon the personal biases and the prect>nceivcd notions of the arbitrators. In the event of 
 the adoption of compulsory arbitration in this country, the choice of arbitrators, or of those 
 officials whose duty it would he to make such selection, would inevitably become a political 
 issue. .\nd further, political considerations would lx;come determining factors in the rigid 
 or the flabby enforcement of the law." 
 
 The policy of enacting special legislation to restrict the rights of the em- 
 ployes in a single industry would, in Mr. \'ahey's opinion, cause profound dis- 
 content. Upon this point he said : 
 
 "Such legislation obviously will weaken labor unions of public service employes, if not 
 destroy their u.sefulness. It will widen the gulf between capital and lalwr. \'oluntary arbi- 
 tration, where capital and labor meet as friends, will be completely ended. Trade agreements 
 will be less useful. 
 
 "It is not perfectly apparent that it is unjust to compel a small portion of the working- 
 men of this Commonwealth to arbitrate and at the same time allow the great majority of 
 employes to strike whenever they choose? How is it possible to prevent profound discontent 
 under such circumstances? Is it not ridiculous to say that machinists who work for a street 
 railway cannot strike and must arbitrate, while machinists who work for a big manufac- 
 turing concern can do as they like? This proposed legislation is advocated upon the ground 
 that the public is interested in it. That is undoubtedly true, but that does not justify the 
 legislature in taking away fundamental rights from one class of men and permitting the 
 rest of the community to continue in the enjoyment of them. In this country we are justly 
 jealous of individual rights and lilxTties, and we resent governmental intcrforeiice with what 
 we regard as our private affairs. To tlie average .-\merican the idea of compulsory arbitra- 
 tion, which, under this proixised legislation, means involuntary servitude, is decidedly repug- 
 nant to his concept of lil)erty. But in this legislation you would create, by discriminating 
 between the employes of public service companies and those of other industries, not only 
 the ordinary rcsentnu'nt which is natural where men no longer can quit work when they 
 choo.sc. but you would plunge into the greatest conceivable discontent a class of workingmen 
 who daily sec their friends and neighbors enjoying fundamental rights which they, themselves, 
 no longer possess." 
 
 In Mr. \'ahcy's language just quoted we see that labor shares with capital 
 the reluctance to admit that upon devoting itself to a public service it thereby 
 divests itself of. certain rights which it would otherwise enjoy. Labor in the 
 electric railway industry, like capital, objects to being regulated and declines to 
 accept in good faith the full consequences of employment in a public service. 
 
 Mr. \'ahey"s linal objection to the compulsory arbitration feature of the 
 proposed act was that compulsory arbitration is against public policy because it 
 would tend to prevent the proper spirit of cooperation between employes and 
 employers. This will api)ear from the following: 
 
 "In addition to the foregoing reasons 1 submit that this proposed legislation is against 
 public p«licy. I>ccause it would expose the public to danger from the unwilling performance 
 of a service requiring devoted attention. It is impracticable to enforce the relation of master 
 and servant against the will of either. The duties of street railway employes involve the 
 greatest attention, judgment an<l skill. The cfTect of compulsory arbitration with respect 
 to the enforcement of awards would In- to compel employes to remain in service against their 
 will. The operation of this rule might do irreparable injury to the public, In-cause it is 
 impossible to exact a high degree of efficiency from men who are compelled to work against 
 their will and imder awards that seem to them unfair and unjust." 
 
 Mr. Vahey maintained that compulsory arbitration has been a failure in 
 New Zealand and New South Wales, and that even the Canadian "Compulsory 
 
The Right to Strike 549 
 
 Investigation Act'' has not prevented strikes. Upon this subject he quoted from 
 Bulletin No. 233 issued by the United States Bureau of Labor, in which Mr. 
 Benjamin M. Squires gives the result of an exhaustive investigation of the 
 operation of this Canadian law. The following extracts from Mr. Squires' 
 report have a direct bearing upon the principles underlying the proposed Alassa- 
 chusetts act : 
 
 "Labor's attitude toward any limitation of tlie right to strike is well known. Strikes 
 are opportunistic and are looked upon as bom of necessity. If the right to strike or to 
 strike at an opportune time is taken away, then labor must be assured that its just demands 
 will be met in some other way. Labor is not ready, however, to leave wages and working 
 conditions entirely in the hands of government boards of arbitration. 
 
 "A restriction upon the right to strike or lockout pending an investigation by a gov- 
 ernment board as provided in the Canadian act is generally favored by employers because 
 it enables them to continue operation and to prepare for the possible contingency of a strike 
 and does not force them to accept the findings of such a board. If the form of such legis- 
 lation is changed to a compulsory acceptance of findings, employers are as apt as employes 
 to take exception to adverse decisions. Employers are seldom violators of the Canadian act 
 in the sense of declaring an illegal lockout. For that matter, a lockout at any time is exceed- 
 ingly rare. But it should be borne in mind that the distinction between a strike and a lock- 
 out is not clear cut. By a refusal to meet demands or to accept the findings of a legally 
 constituted government board, the employer may impose conditions which, though resulting 
 in a strike, nevertheless constitute a lockout as effectually as though the doors of his estab- 
 lishment were closed against his employes. 
 
 "In any anti-strike or lockout legislation it is necessary' with both employers and em- 
 ployes to meet the objection to what is regarded as a curtailment of rights and privileges. 
 Employers have the advantage in that they have been subject to a greater amount of gov- 
 ernmental regulation than have workers. But if either employers or employes are to be 
 brought to the point of voluntarily accepting arbitration as a substitute for direct action, 
 there must be some assurance that the underlying principle of arbitration is not merely a 
 restatement of the law of supply and demand which in the final analysis concedes the de- 
 mands of the stronger party." 
 
 In connection with this reference to the Canadian "Compulsory Investiga- 
 tion Act" it should perhaps be noted that in the 1919 epidemic of street railway 
 strikes, to which I have already referred. Canada was not entirely exempt. 
 Beginning June 22 of that year a strike occurred on the Toronto Railway Com- 
 pany's lines, which lasted for twelve days and entailed a loss of approximately 
 5228,000 in gross revenues. 
 
 The objections of Mr. Vahey and his associates to the proposed legislation 
 in Massachusetts proved effective at the special session of the legislature to 
 which the street railway commission's report was submitted. It is evident, 
 however, that we have reached a critical stage in the development of the rela- 
 tions between the public and labor in the electric railway industry, and that it 
 will be more and more clearly recognized as time goes on that the public's right 
 to continuity of service creates a distinction between the rights of labor in this 
 industry and the rights of labor in an ordinary private industry where absolute 
 continuity of operation is not so essential to the public welfare. That this dis- 
 tinction exists as a matter of law was clearly set forth by the United States 
 Supreme Court in JVilson v. New, 243 U. S. 332, in which the Adamson law 
 was upheld. It will be remembered that in 1916, in the face of a threatened 
 tie-up of the railroads of the country, and in response to an appeal from the 
 President, Congress undertook to establish an eight-hour day for the employes 
 of carriers engaged in interstate and foreign commerce. This act provided that 
 
550 Electric Railway Problem 
 
 after January 1. 1917, "eight hours shall, in contracts for labor and service, be 
 deemed a day's work and tlie measure or standard of a day's work for the pur- 
 pose of reckoning the compensation for services of all employes who are now 
 or may hereafter be employed by any common carrier by railroad. * * * * 
 and who are now or may hereafter be actually engaged in any capacity in the 
 operation of trains used for the transportation of persons or property on rail- 
 roads, except railroads independently owned and operated not exceeding one 
 hundred miles in length, electric street railroads, and electric interurhaii rail- 
 roads." 
 
 In sustaining this act. Chief Justice W'iiite, writing the opinion for the 
 majority of the court, says: 
 
 "That the business of common carriers by rail is in a sense a public business because of 
 the interest of society in the coMiiiucd o[)eration and rightful conduct of such business, and 
 that tlie public interest l)eKets a public right of regulation to the full extent necessary' to 
 secure and protect it. is settled by so many decisions, state and Federal, and is illustrated by 
 such a continuous exertion of state and I'ederal legislative power, as to leave no room for 
 c|uestion on the subject. It is also equally tnie that as the ri^ht to tix by agreement between 
 the carrier and its employes a standard of wages to control their relations is primarily pri- 
 vate, the establishment and giving effect to such agrced-on standard is not subject to be 
 controlled or prevented by public authority. Hut. taking all these propositions as undoubted, 
 if the situation which we have described and with which the act of Congress dealt l)e taken 
 into view — that is. the dispute iK'tween the employers and employes as to a standard of 
 wages, their failure to agree, the resulting absence of such standard, the entire interruption 
 of interstate commerce which was threatened, and the infinite injury to the public interest 
 which was imminent — it would seem inevitably to result that the power to regulate neces- 
 sarily obtained and was subject to be applied to the extent necessary to provide a remedy 
 for the situation, which included the power to deal with the dispute, to provide by appro- 
 priate action for a standard of wages tt) fill the want of one caused by the failure to exert 
 the private right on the subject, and to give effect by appropriate legislation to the regula- 
 tions thus adopted. * • * • If acts which, if done, would interrupt, if not destroy, 
 interstate commerce, may be by anticipation legislatively prevented, by the same token the 
 power to regulate may lie exercised to guard against the cessation of interstate commerce, 
 threatened by a failure of employers and employes to agree as to the standard of wages, 
 such standard being an essential prerecpiisile to the uninterrupted flow of interstate commerce. 
 
 "Mut, passing this, let us come to briefly recapitulate some of the more important of the 
 regulations which have In-en enacted in the past in order to show how necessarily the exer- 
 tion of the power to enact them manifests the existence of the legislative authority to ordain 
 the regulation now iK'fore us. and how completely the whole system of regulations adopted 
 in the past would he frustrate<l or rendered unavailing if the power to regulate inuler the 
 conditions stated, which was exerte<l by the act before us. was not possessed. That regula- 
 tion gives the authority to fix for interstate carriage a reasonable rate, subject to the limita- 
 tion that rights of private property may not lie (lestroyed by establishing them on a con- 
 fiscatory basis, is settled by long practice and decisions That the |Kiwer to regulate also 
 extends to many jihases of the business of carriage, and embraces the right to control the 
 contract power of the carrier in so far as the public interest reipiires such limitation, has 
 also been inanifested by repeated acts of legislation as to bills of lading, tariffs, and many 
 other things too numerous to mention. Kijually certain is it that the power has been exer- 
 cised so as to deal not only with the carrier, but with its servants, and to regulate the rela- 
 tion of such servants not only with their employers, hut lictween themselves. Illustrations 
 of the latter are afTorded bv the Hours of Service Act. the Safety .Xppliance .Vet. and the 
 Employers' Liability Act. Clear also is it that an obligation rests tipon a carrier to carry 
 on its business, and that coixlilions of cost or other obstacles afford no excuse and exempt 
 from no resixinsihility which arises from a failure to do so. and also that government pos- 
 •sesses the full regtilatory power to compel perfonnance of such duty. 
 
 " • ♦ * • What would W the \-alue of the right to a reasonable rate if all movement 
 in interstate cominrrce could Ik' stoppe<l as a result of a mere dispute between the parties 
 or their failure to exert a primary private right concerning a matter of interstate commerce"' 
 .Vgain. what purivise wciuld Ix- subserved by all the regulations established to secure the 
 enjoyment by the public of an efticient and reasonable service if there was no power in gov- 
 crtnnetit to prevent all service from ln-ing destroyed' I'lirlber yet. what benefits would flow- 
 to M'ciely by recognising the right. U-cause of the public interest, to regulate the relation of 
 empl>>\er and emnloye and of the emploxes among themselves, and to give to the latter 
 pectd'.ir and special rights safegM.irding their persons, protecting them in case of accident, 
 
The Right to Strike 551 
 
 and giving ethcieiit remedies fur that pun)ose, if there was no power to remedy a situation 
 created by a dispute between employers and employes as to rate o£ wages, which, it not 
 remedied, would leave the public helpless, the whole people ruined, and all the homes of the 
 land submitted to a danger of the most serious character? And finally, to what derision 
 would it not reduce the proposition that government had power to enforce the duty of oper- 
 ation if that power did not extend to doing that which was essential to prevent operation 
 from being completely stopped by filling the interregnum created by an absence of a con- 
 ventional standard of wages, because of a dispute on that subject between the employers and 
 employes, by a legislative standard binding on employers and employes for such a time as 
 might be deemed by the legislature reasonably adequate to enable normal conditions to come 
 about as the result of agreements as to wages between the parties? 
 
 "We are of opinion that the reasons stated conclusively establish that, from the point of 
 view of inherent power, tlie act which is before us was clearly within the legislative power 
 of Congress to adopt, and that, in substance and eii'ect, it amounted to an exertion of its 
 authority under the circumstances disclosed to compulsorily arbitrate the dispute between 
 the parties by establishing as to the subject-matter of that dispute a legislative standard of 
 wages operative and binding as a matter of law upon the parties. ♦ * ♦ * 
 
 "And this leaves only to be generally considered whether the right to exercise such a 
 power under the conditions which existed was limited or restrained by the private rights of 
 the carriers or their employes. 
 
 "(a) As to the carrier. — As engaging in the business of interstate commerce carriage 
 subjects the carrier to the lawful power of Congress to regulate, irrespective of the source 
 whence the carrier draws its e.xistence, and as also, by engaging in a business charged with 
 a public interest, all the vast property and every right of the carrier become subject to the 
 authority to regulate possessed by Congress to the extent that regulation may be exerted, 
 considering tiie subject regulated and what is appropriate and relevant thereto, it follows that 
 the ver\- absence of the scale of wages by agreement, and the impediment and destruction of 
 interstate commerce which was threatened, called for the appropriate and relevant remedy — the 
 creation of a standard by operation of law. binding upon the carrier. 
 
 "(b) .\s to the employe. — Here again it is obvious that what we have previously said 
 is applicable and decisive, since 'whatever u'ould be the right of an employe engaged in a 
 private business to demand such ivagcs as he desires, to leave the employment if he desires, 
 * * * * and by concert of action, to agree ivith others to leaz'e upon the same condition, 
 siicli rights are necessarily subject to limitation ti'hen employment is accepted in a business 
 charged zvitli a public interest and as to which the power to regulate commerce possessed by 
 Congress applied, and the resulting right to fix, in case of disagreement and dispute, a stand- 
 ard of wages, as we have seen, necessarily obtained. 
 
 "In other words, considering comprehensively the situation of the employer and the 
 employe in the light of the obligations arising from the public interest and of the work in 
 which they are engaged, and the degree of regulation which may be lawfully exerted by 
 Congress as to that business, it must follow that the exercise of the lawful governmental right 
 is controlling. * * * * The capacity to exercise the private right free from legislative 
 interference affords no ground for saying that legislative power does not exist to protect the 
 public interest from the injury resulting from a failure to exercise the private right. In 
 saying this, of course, it is always to be borne in mind that, as to both carrier and employe, 
 tlie beneficent and ever-present safeguards of the Constitution are applicable, and therefore 
 both are protected against confiscation and pgainst every act of arbitrary power which, if 
 given effect to. would amount to a denial of due process, or would be repugnant to any other 
 constitutional right. .\nd this emphasizes that there is no question here of purely private right, 
 since the hm' is concerned oiilx icif/i those vho are engaged in a business charged zvith a 
 public interest, where the subject dealt witli as to all tlie parties is one involved in that busi- 
 ness, and which we have seen comes under the control of the right to regulate to the extent 
 that the power to do so is appropriate or relevant to the business regulated." 
 
 In this case the right of the Government to regulate labor, as well as capital, 
 in the transportation industry, was clearly established, especially by the language 
 which I have italicized in the above quotation. This applies where the industry 
 is "affected with a public interest," even though it may be privately operated. 
 How much more clearly, therefore, would it apply in the case of a public function 
 publicly performed where continuity of service is essential to the public welfare! 
 
 The Industrial Conference convened by the President on December 1, 1919, 
 
 in its preliminary statement, said: 
 
 "The continuous operation of public utilities is vital to public welfare. .As the capita! 
 invested is employed in public use, so is the labor engaged in public servce: and the with- 
 drawal of either with the result of suspending service makes the people the real victim. 
 
552 Electric Railway Problem 
 
 While the continuous oi)eration of all utilities is conducive to the general convenience of the 
 people, that of some of them is essential to their ver\- existence. Of the latter class the rail- 
 ways are a conspicuous example and bear the same relation to the body politic as do the 
 arteries to the human body. Suspension produces practical social and economic anarchy and 
 may impose hardship even to the point of starvation upon large sections of the community. 
 The interruption in such essential public utilities is intolerable." 
 
 In its final report, issued March 6, 1920. the Conference recommended a 
 general plan for the adjustment of industrial disputes, which, witli certain modi- 
 fications, was to be made applicable to public utilities. A note attached to the 
 public utilities section of its report says: 
 
 "The Conference wishes to point out that the continuity of employment in public 
 utilities offers an opportunity for collective bargaining beyond that which has to do with 
 standards only, the usual form in general industry. The kind of collective bargaining here 
 described, and which is practicable in the case of public utilities, is a mutually advantageous 
 extension of the collective bargaining principle into the region of a positive agreement to give 
 and to undertake actual employment. 
 
 "Since the Conference issued its preliminary statement on December 19. 1919. the Con- 
 gress has dealt with the railway situation by the Transportation .-Xct, 1920, and a Special 
 Commission also has tx.'en created with respect to bituminous coal mining. .\ majority of 
 the Conference, therefore, has deemed it unnecessary to suggest any provisions for the legal 
 prevention of strikes in public utilities, in this plan. iK-lieving that the continuous operation 
 of such utilities will be secured through the acquiescence of employes in the workings of the 
 machinery created by the plan, especially when voluntarily invoked or accepted by them. 
 
 "Mr. Gregory-, however, feels that the continuous operation of railroads and other trans- 
 portation systems, of water, light, gas. telegraph and telephone plants and of groups of coal 
 mines, all essential to the convenience and frequently the ver\- e.xistcnce of the general public, 
 should he assured. He considers that the Conference has provided fair and adequate machinery 
 for the prompt adjustment of disputes between employer and employe. 
 
 "He was willing to accept a plan which would have made lockouts and strikes in these 
 essential industries unlawful during the time the proposed tribunals were seeking to determine 
 and publish the facts and settle the issues involved, and during the subsequent brief periixl 
 within which the parties to the controversy were to .iccept or reject the award made, and 
 during the period covered by the award in ca.se both parties accepted it. 
 
 "He considers that the plan adopted furnishes no real guaranty that either of the con- 
 testing forces, even after having voluntarily submitted its contentions to the tribunals, and 
 even while representatives of its own unrestricted choosing are sitting as judges and partici- 
 pating in an effort to settle the dispute by a decision which must be unanimous in order to 
 lie binding, shall not repudiate these tribunals and thereby precipitate the very situation which 
 the proposed machinery is intended to prevent." 
 
 It will be seen that tlie Industrial Conference at the start recognized that 
 the interruption of essential public utility services is intolerable, but later on the 
 majority reached the conclusion that it was unnecessary to suggest anv pro- 
 visions for the legal prevention of strikes in public utilities, believing that the 
 plan suggested for the voluntary adjustment of disputes would make coercive 
 measures unnecessary. 
 
 The subject is so important tliat I shall give an analysis of the two plans 
 proposed in New York just before tlie United States entered the war. .\ full 
 description and discussion of them was published in the Utilities Magazine for 
 August, 1917, under the title. "I'roposed C.uaranties of Continuity of Service 
 in Public Utilities in New York." This article starts off with the following 
 statement : 
 
 "In upluilding the .■\<lamson I^iw the I'liited States Supreme Court has established the 
 principle th.il the |>arami>unt public necessity for continuity of service, in a business affected 
 with a public interest and therefore subject to public regulation, gives legislative bodies, even 
 luider our constitutional restrictions, the right not only to regulate hours and conditions of 
 work, but also, in the absence of voluntary agreement between emplovcrs and employes, to fix 
 wage standards and prohibit concerted efforts to interrupt service." 
 
The Right to Strike 553 
 
 It appears that the New York Public Service Commission for the First Dis- 
 trict, following its rather unhappy experience in trying to handle the strike 
 situation in New York City in the summer of 1916, turned its attention to the 
 study of measures to prevent the recurrence of such troubles. Mr. Oscar S. 
 Straus, then chairman of the commission, and Mr. Julius Henry Cohen, who 
 had been retained as the commission's special counsel in connection with the 
 street railway strike ditTiculties, devised for the commission a "proposed plan 
 to provide for fair and reasonable wages and working conditions and to prevent 
 interruption of the service on street railroads." This plan was made the subject 
 of a series of public hearings during the month of February, 1917, as a pre- 
 liminary to its revision and formulation into a definite legislative program. 
 Another plan was worked out by the Merchants Association of New York, 
 embodied in a bill and introduced in the legislature during the 1917 session. 
 
 The first item in the commission's plan v^-as the affirmative declaration, to 
 be embodied in the public service commissions law, of the obligation of street 
 railway companies to "provide for the payment of fair and reasonable wages 
 and salaries to all employes engaged in the service"' and to "make provision for 
 fair and reasonable working conditions in the performance of such service." 
 
 The second item was an atifirmative declaration of the obligation of street 
 railway companies to provide themselves with the employes necessary to "secure 
 continuous, uninterrupted, safe and adequate transportation of persons or prop- 
 erty" and to "promote the security or convenience of employes, passengers, 
 shippers or the public." The employes which the companies were to procure 
 and have in service were to be "adequate in number, competent, and governed by 
 rules and regulations as to discipline, competency, wages, hours of work, work- 
 ing conditions, employment, promotion, benefits, retirement upon pension or 
 otherwise, discharge or termination of service or reinstatement and contract or 
 terms of employment." in accordance with the provisions of the proposed act. 
 
 The third item of the plan was to the etYect that the determination of what 
 shall constitute fair and reasonable wages and fair and reasonable conditions 
 of work might be made either (a) by mutual agreement between employer and 
 employe; (b) by the wage board to be constituted according to the provisions 
 of the proposed act; or (c) by the public service commission of the district 
 having jurisdiction over the employer. A later item of the plan which seemed 
 to have the efifect of modifying this one provided that "agreements, rules or 
 schedules regulating wages or working conditions" should be filed with the Pub- 
 lic Service Commission and be "subject in all respects to its approval." 
 
 The fourth item provided for the organization of the employes on the basis 
 that any ten or more etnployes engaged in any branch of any service over which 
 the commission had jurisdiction "may form an association or union, or a branch 
 or local of any existing association or union, and shall thereupon have the right 
 to represent its members in all negotiations with employers, and to appear and 
 be heard in any proceeding relating to wages or working conditions alTecting 
 its members, upon condition that it shall file semi-annually with the commission : 
 (a) a certified copy of its articles of association, certificate of incorporation and 
 by-laws, rules or governing regulations; (b) a full and true list of its officers; 
 
554 Electric Railway Problem 
 
 (c) a full and true statement of the nunitx-r of its members and the branches 
 of the service in which they are employed; and (d) a consent in writing, signed 
 by its duly authorized officers, to accept and abide by all decisions, awards and 
 orders of the commission or the wage board when approved by the commission." 
 
 In the fifth item it was provided that any association or union registered in 
 the manner above described might negotiate with any employer under the juris- 
 diction of the commission for the purpose of establishing a joint agreement 
 upon wages and working conditions. Upon the application of either party, the 
 commission was to designate an impartial person to preside over such negotia- 
 tions, but without power to decide or vote upon any subject-matters involved 
 in them. 
 
 The next item of the plan, and the one that proved to be one of the two 
 storm centers of discussion at the public hearings, provided that the commis- 
 sion should make suitable rules and regulations for the establishment of a wage 
 board whose duty it would be to investigate and certify to the commission its 
 findings upon all matters of wages and working conditions. The wage board 
 was to be constituted as follows: One-half its members were to be nominated 
 by the employer and one-half by the representatives of the employes. Any duly 
 registered association or union would be entitled to nominate such number of 
 representatives as the commission should determine to be "rea.sonably propor- 
 tionate" to the number of its members, with due regard to representation of 
 unorganized employes and taking iiUo account the total number of all employes. 
 If the persons so nominated by the respective parties were approved by the 
 commission, the latter was to organize and complete the wage board, provide 
 suitable acconnnodations for it. and furnish such clerical, statistical and other 
 assistance to it as might be required for the due performance of its work. The 
 members of the wage board were to receive such compensation for their services 
 as should be fixed by the commission, and the compensation so fixed was to be 
 paid by the state. In the introductory statement at the first of the series of 
 public hearings. Chairman Straus said that the conmiission had purposely left 
 open the question as to whether there should be one wage board for the entire 
 district under the jurisdiction of a commission or a separate wage board for 
 each individual utility, and upon this point particularly he invited suggestions. 
 
 The ne.\t item of the plan related to hearings and determinations. It pro- 
 vided that ail applications for the fixing of wages or working conditions not 
 established by nuitual agreement should be referred to the wage board for hear- 
 ings and findings, and that upon the rc])ort of the wage board the commission 
 siiould make a determination binding upon all parties concerned. In case the 
 wage board failed to agree, or if no wage board was established, then the hear- 
 ings were to be had before the commission itself, which woukl make its deter- 
 mination upon its own findings, but applications for a wage determination were 
 not to be made under this ])lan until a reasonable opportunity had been given to 
 both cnii)I()yfr and employe lo come to a nuuual understanding. The determina- 
 tion of what should constitute such reasonable opportunity was to be left with 
 the wage board, or in ca.se of its failure to agree, or in case no wage board had 
 been established, then to the commission. 
 
The Right to Strike 555 
 
 The next item of the plan provided that the maintenance of discipline and 
 efficiency should rest with the employer, but any employe who thought himself 
 aggrieved and who was unable to secure redress from his employer might obtain 
 through the wage board or the commission an investigation of his grievance. 
 If either of these bodies, upon investigation, found that the petitioner was justly 
 aggrieved, it was to make such order and award as it deemed fair and reason- 
 able, and for the good of the service, including the reinstatement of a discharged 
 employe, and in such case an award of back pay. 
 
 The next item referred to existing and future contracts. All existing con- 
 tract? fixing wages or working conditions were to remain in full force, and no 
 person regularly engaged in an operating service was to be engaged or retained 
 in the service for an indefinite period or upon a hiring at will, but the parties 
 were required to fix a definite period or term of service, and in the absence of 
 any other agreement it was to be understood and implied that this period or 
 term was for one year and thereafter from year to year, unless terminated upon 
 thirty days' notice. The operating service as defined included the furnishing 
 of motive power, and the classes of operatives specifically mentioned were motor- 
 men, drivers, conductors, engineers, trainmen, brakemen, firemen and switch- 
 men. 
 
 The next item of the plan covered the matter of limitations upon strikes 
 and lockouts, and this proved to be the second storm center of discussion. It 
 was provided that, pending negotiation, investigation and determination as above 
 outlined, there should be no lockout or strike on any service subject to the pro- 
 visions of the proposed act and that no action should be taken in group or concert 
 or by agreement tending to interrupt the service ; but it was expressly stated that 
 nothing contained in this provision should be construed to prevent employes from 
 organizing to improve or better their condition in accordance with the provisions 
 of the plan. 
 
 A violation of any of the provisions of the proposed act "by any person, 
 firm or corporation, officer, agent or employe of an association or union or by any 
 employer, officer or agent" was to be a misdemeanor punishable by fine, the 
 amount of which was left to be determined later on. The provisions of the plan 
 were to apply to street railways and to employes and organizations of employes 
 engaged in the service of street railways. 
 
 While the Public Service Commission plan applied only to street railroads, 
 the Merchants Association plan applied to all public utilities not engaged in 
 interstate commerce, and specifically included corporations and their employes 
 who were engaged in the work of transportation, transmission of intelligence, 
 or the furnishing of light, power, heat or water. The central feature of the 
 Merchants Association plan was the provision requiring the public service cor- 
 poration and each of its employes to enter into reciprocal contractual relations. 
 After a reasonable period of probation, which should not exceed six months in 
 duration, every person whom the corporation desired to employ permanently 
 and who on his part desired so to be employed, was to be required as a condi- 
 tion of such employment to enter into a service contract for a period of not 
 less than one vear nor more than three years, under the terms of which both the 
 
556 Electric Railway Problem 
 
 power of the corporation to discharge the employe and of the employe to with- 
 draw from the service were, during the period of the contract, definitely lim- 
 ited. No form of service contract proposed by a corporation could be adopted 
 for use until it had been approved by the Public Service Commission. This con- 
 tract was to specify the particular acts or omissions either by the corporation 
 or by the employe which would constitute violations of the agreement and the 
 fine or other penalty to be imposed for each violation. Also the contract was to 
 describe the mode of procedure for the appeal of either party from penalties 
 assessed against it under the terms of the contract. 
 
 Both the corporation and each employe were to provide funds for the pay- 
 ment of fines imposed in accordance with the terms of the service contract. The 
 employer's penalty fund was to be established in an amount to be approved by 
 the Public Service Commission and to be deposited with a trustee, also approved 
 by the commission. The employe's penalty fund was to be created through the 
 retention by the corporation of 20 per cent of his wages from the date when 
 the service contract took effect, through a period equal to ten weeks of full time 
 service, or in other words, this fund was to be made up of the equivalent of 
 two weeks' wages of the employe. The corporation was required on each anni- 
 versary of the date of the service contract to pay the employe interest at the 
 rate of 5 per cent upon the average amoimt of the penalty fund so retained 
 from his wages during the preceding year, and at the termination of the service 
 contract in any of the ways provided for the employe was to receive any balance 
 then existing in his penalty fund. 
 
 The employer or employe, as the case might be, was required to give to 
 the other notice of any claimed violation of the terms of the service contract 
 within ten days after the aggrieved party had come to know of such violation. 
 The adjudication of claims as between the employer and the employe was to be 
 effected in one of the following ways: (1) by mutual agreement and consent; 
 (2) by the board of award; (3) by the Public Service Commission on appeal 
 from a decision of the board of award; or (4) by an action in court to enforce 
 or set aside the commission's order. A board of award, to be created bv joint 
 action of each corporation and its employes, was to consist of from three to 
 nine members, one of whom was to be appointed by the Public Service Commis- 
 sion and the others in equal numhers by the company and its employes. The 
 members of the board were to serve for one year and until their successors 
 were duly qualified. Obviously, the comjjany would need no help in selecting 
 its representatives, but the plan established the machinery by which the repre- 
 sentatives of the em])loyes were to be selected. On or before December 1 of 
 each year the corporation was to distribute to all employes who had been in 
 service one year or longer cards on which each employe might write the names 
 of as many persons as the employes were entitled to appoint. These cards were 
 to be signed and delivered in a sealed envelope not later than December 20 to 
 the secretary of the corporation, upon whom the duty would rest inunediately 
 after that date to open the envelopes, to tabulate the votes, to report to the 
 Public Service Commission in a sworn statement the names of all persons voted 
 for and the number of votes cast for each and to declare elected those receiving 
 
The Right to Strike 557 
 
 the highest number of votes. To start with in every case, the number elected 
 by the corporation and by the employes respectively to serve for the first year 
 was to be three, but thereafter the number might be detemiined by a majority of 
 the members of the existing board within thirty days prior to the expiration of 
 their term of office. 
 
 A service contract could be terminated by the corporation either ( 1 ) because 
 the employe had been guilty of any misconduct defined in the contract as a 
 cause of discharge; or (2) because the business rendered the employe's services 
 no longer necessary, in which case the employe either should be given thirty 
 days' notice of his intended discharge, or should be paid two weeks' salary or 
 wages if discharged without notice; or [3) because of disability on the part of 
 the employe such as to disqualify him for rendering service for which he was 
 employed, in which case the employe was to be entitled to thirty days' salary 
 and immediate release, unless the board of award certified that his disability was 
 due to his own wrongful conduct. On the other hand, the employe could ter- 
 minate the service contract either (1) because of valid family or personal neces- 
 sity certified to by the board of award; or (2) because of disqualifying illness 
 or of unfavorable occupational effect upon his health duly certified by the board 
 of award; or (3) without penalty and without stating the cause of his with- 
 drawal, provided the employer was given not less than thirty days' notice and 
 gave his consent. 
 
 The plan stipulated that the corporation should recognize and respect the 
 right of the employe to membership in any lawful organization, and should not 
 discriminate against him because of such membership. The employe also was 
 to have the right alone or in combination with others to ask from the employer 
 concessions in wages, hours of work, or conditions of service. Any such request 
 was to be given prompt and fair consideration, and the company was not to dis- 
 criminate against the employe because of his participation in the request. 
 
 The Merchants Association plan, like the Public Service Commission plan, 
 provided for continuity of service, and prohibited any employe from combining 
 with others to cause embarrassment or interruption of the service to the public 
 which was required under the company's franchise. Any corporation that dis- 
 charged an employe during the term of the service contract with him, except as 
 provided in the act, and any employe who during his term of service wilfully 
 refused or neglected to perform the service required of him by the contract, was 
 to be guilty of a misdemeanor. 
 
 Perhaps the most important criticism of the Public Service Commission plan 
 developed at the public hearings was that made by the Committee on Public 
 Utilities and Franchises of the National Consumers' League. This committee, in 
 its memorandum, maintained that the interest of the general public in continuity 
 of service is not in fact paramount, but that the rights of the employes are to 
 be considered of equal importance. Indeed, the committee went so far as to say 
 that "from a wider point of view the public has an interest in seeing industrial 
 peace preserved which far exceeds in importance its own demands for safety and 
 continuity of service." The committee's fundamental objection was to the com- 
 pulsion that would restrict the employes' right to strike. "All forms of com- 
 
558 Electric Railway Problem 
 
 pulsion in settling industrial disputes," said the committee, "are more and more 
 held to be of doubtful benefit by officials who have the widest experience in 
 industrial mediation and arbitration. ♦ * * * There is apparently grave 
 doubt on the part of experts whether compulsion in itself will accomplish the 
 end sought, and whether public investigation and full publicity are not rather 
 to be regarded as the most effective instruments in bringing about settlements. 
 * * ♦ * What is immediately needed is machinery for a continuous and 
 comprehensive inquiry into all the conditions of labor, with full publicity for 
 all the findings." Among the committee's specific criticisms of the commis- 
 sion's draft, emphasis was laid upon the claim that the plan would unduly 
 restrict the rights of the employes. P^articular reference was made to the pro- 
 vision requiring the employes to pledge themselves in advance to abide by the 
 orders, decisions or awards of the commission. The committee also called atten- 
 tion to the disadvantages to the unions in the proposed composition of the wage 
 boards, and pointed out that, while the employer's representatives on a board 
 would obviously stand as a unit, the employes' representative would be dis- 
 organized and inevitably break up into different sections. "There is great dan- 
 ger," said the committee, "that this plan would promote the formation of artificial 
 or fictitious organizations under the control of an unscrupulous employer. It 
 would undoubtedly increase the divisions in the ranks of labor rather than pro- 
 mote the power of collective bargaining. * * * * Unorganized workers 
 are by necessity represented by the spokesmen of the unions. If, at any time, 
 they are not satisfied with the findings, it is open to them to organize and 
 make their influence felt for themselves." The committee urged the importance 
 of having no union represented on the wage board unless it included at least one- 
 fourth or one-fifth of the employes, and also urged that the public, the recog- 
 nition of whose interests was at the very foundation of the plan itself, should have 
 representation on the board. The committee suggested that the representatives 
 of each of the three parties — employer, employes and the public — should cast their 
 vote as a unit. The committee also criticised the provision of the plan calling 
 for "fair and reasonable" wages and working conditions. It contended that this 
 standard was altogether too indefinite to be satisfactorily applied, and suggested 
 that "the actual facts as to the prevailing conditions of the service" should be 
 placed at tlie disposal of the wage board. "It is an obligation upon the public 
 conscience," said the committee, "that the benefits of the franchises which are 
 granted to the street railroads should not be enjoyed exclusively by the traveling 
 public or by the corporate stockholders, but that they should be shared in fair 
 proportion by the men who do the work. There is every reason, therefore, to 
 give the boards an opportunity to consider the earnings of the companies as an 
 important factor in fixing the wage scale." The committee al.so pointed out that 
 the restriction imposed upon the employes by the prohibition of "lockouts" is 
 illusorj' so far as any benefit to the men is concerned, for without resorting to 
 a lockout the employer could still make "wholesale dismissals of individuals 
 charged with insubordination or any kind of oiTense." The committee main- 
 tained thiit the employes of a street railway company do not now enjoy any of 
 the advantages conferred tipon the company by the franchises, and alleged that 
 
The Right to Strike 559 
 
 the primary aim and benefit of the proposed plan, namely, the rendering of con- 
 tinuous service, would accrue to the companies who would thereby be saved from 
 the forfeiture of their franchises. Indeed, it was pointed out that "the em- 
 ployes of franchise companies from the nature of the service are subject to 
 special obligations and restrictions which do not obtain in private employment," 
 and it was urged that "they should be guaranteed a high level of compensation 
 and of working conditions." "As quasi-public servants," contended the com- 
 mittee, "they might well be put in the same class with the direct employes of the 
 state or municipality. Men entering public service have certain rights and pri- 
 vileges, such as security of position, in general better pay, and more and more 
 frequently a right to retirement pay. If a number of such substantial rights were 
 definitely guaranteed to the public service employes, it would go a long way, 
 without compulsion, towards avoiding the present troubles that disrupt the 
 service." The committee further suggested that the provisions of the plan were 
 insufficient to secure full and immediate publicity, and urged that the Public 
 Service Commission's power be extended so as to include express authority to 
 require from the companies reports concerning all the conditions of labor. 
 
 Mr. Samuel Gompers also appeared before the commission on behalf of 
 organized labor, and strongly opposed the compulsory features of the plan, stoutly 
 maintaining that the men could not be prevented by law from exercising their 
 "God-given natural right" to stop working. The representatives of the principal 
 traction companies of New York City also expressed their general opposition to 
 the commission's plan. Col. Timothy S. Williams, then president of the Brook- 
 lyn Rapid Transit Company, was most definite and outspoken in his criticisms. 
 He feared that instead of procuring continuity of service and the establishment 
 of better relations between the companies and their employes, the plan "would 
 be productive of unrest and dissatisfaction tending to disturb relations which are 
 now harmonious and fairly satisfactory." 
 
 "You speak of employers and employes of street railroad corporations," said he, "and 
 you arraign one against the other. * * * * As president or director of a street railroad 
 corporation I am just as much an employe as a conductor or a motornian. The real employers 
 are the numerous body of men and women and institutions that, having acquired savings, put 
 those savings at work in supplying and developing transportation. They are a substantial part 
 of what is called the public. Your plan * * * * presupposes, not natural and spon- 
 taneous harmony between these participants, but antagonism, and the doubtful peace sought 
 to be enforced by law or official fiat. * » * * Your plan may look like the short route 
 to industrial peace but it is not the natural route, nor the safe route, nor the permanent 
 route, nor is it founded on a sound principle. In its practical application it would tend to 
 breed trouble, not to allay it. * * * * No legislative reforms are likely to be so abortive 
 as those which have to do with the delicate relations between labor and capital, and which 
 on the one side may threaten fundamental principles of individual freedom, and on the other 
 side, imperil or unnecessarily shackle business and industry. The better and surer way to 
 correct industrial evils is by encouraging a more enlightened comprehension of respective 
 self-interest between employed and employers." 
 
 Colonel Williams cited the success of his own company in maintaining har- 
 monious relations with its employes. As a matter of fact, his car lines were 
 the only important ones in the city that were not affected by the strikes of 1916, 
 but since that time they have not been immune. 
 
 These two New York plans, while differing widely in details, agreed in 
 their fundamental adherence to the principle of legal compulsion for the preven- 
 
560 Electric Railway Problem 
 
 tion of the interruption of public utility service through the concerted action of 
 employes. It was against this principle that the Consumers' League and the 
 representatives of labor, and to a certain extent the companies themselves, pro- 
 tested most vigorously. From the standpoint of those interested primarily in the 
 welfare of the employes, it seemed essential that the full protection of the men 
 should take precedence over the interests of the traveling public. While it was 
 universally recognized that continuity and sufficiency of service were of great 
 public importance, there was a disposition on the part of the advocates of the 
 employes to refuse to recognize the public interest as paramount. The then 
 recent strikes on the New York City street railway systems and the threatened 
 strike on the railroad system of the United States appeared to them as mere 
 incidents in the development through a long course of years of the relations be- 
 tween labor and capital, and did not in their opinion give ground for the asser- 
 tion that the relative importance of the interests of the three parties — employers, 
 employes and the public — had materially shifted. The Public Service Commis- 
 sion's plan and the Merchants Association plan in ettect said to the employes: 
 "You must keep on working. The state will see that you are properly protected 
 in the matter of wages, hours and conditions of labor." The spokesmen of the 
 employes, on the other hand, said in substance : "Give us first the protection that 
 we ask in the matter of hours, wages and conditions of labor, and it will be un- 
 necessary for you to forbid us to strike, for then we shall have no reason to 
 strike." What to one party seemed getting the cart before the horse, to the 
 other seemed getting the horse before the cart. The proponents of the plan of 
 compulsion differed quite radically with the committee of the Consumers' League 
 in one respect : they maintained that the employes of public service corporations 
 now do as a matter of fact enjoy substantial and peculiar benefits growing out 
 of the nature of the business, and out of the privileges conferred and the obliga- 
 tions imposed by public franchises. They pointed out particularly that public 
 utilities are not by any means subject to the same fluctuations in the demand for 
 service which is characteristic of most other lines of business ; that the franchise 
 requirements of continuous service to prevent forfeiture automatically exclude 
 from consideration the possibility of lockouts or temporary shutdowns from 
 which employes in other branches of work so often suffer; and that the em- 
 ployes of public utilities, particularly of street railways, coming as they do in 
 continuous contact with the ])ublic. are in a much more favorable position for 
 securing the support of public opinion in their struggles for better wages and 
 working conditions than the employes of private industries. 
 
 A consideration of the I'ublic Service Commission plan, and of the various 
 objections to it and criticisms of it, leads inevitably to the conclusion that as 
 presented, it was defective in many respects, and that the two plans together 
 raised a fundamental issue which seems to involve primarily a struggle for 
 precedence between the interests of the public as a direct or indirect consumer of 
 public utility service, particularly transportation, and the interests of the em- 
 ployes of the public scr\'ice corporations. 
 
 An important distinction which we sometimes overlook is that between the 
 public as a consumer of utility service, and the general public constituting society 
 
The Right to Strike 561 
 
 as a whole, whose interests are, or should be, paramount in the formulation and 
 execution of all governmental policies. As a consumer of utility service, the 
 public, like any other buyer of goods, is interested in getting as much as it can 
 for as small a price as possible. The public in this narrower sense is, therefore, 
 primarily interested in good service and low rates. It has no interest in the 
 security of public utility investments, nor in their receiving a fair return, nor 
 in the guaranty of good wages, short hours, and reasonable conditions of employ- 
 ment to the employes, except as these things indirectly react upon the character 
 of the service rendered, or upon the rates to be charged for the service in the 
 future. On the other hand, the general public, of which government is the organ, 
 is as much interested in the security and reasonable profitableness of the invest- 
 ment and in the welfare of the employes as it is in the cheapness of the service 
 to the consumers. The general public includes all three of the parties immedi- 
 ately concerned and is interested in the preservation of the equities among them. 
 Indeed, every special interest is compelled ultimately, in a civilized community, 
 to rely upon the sense of justice of society as a whole acting through govern- 
 mental agencies ; and it is safe in doing so because the observance of the law of 
 justice has been proven by the world's experience to be the first rule of self- 
 preservation for political societies. The establishment of courts freed as far as 
 possible from temporary and conflicting political influences and the establishment 
 of public service commissions removed from the special financial interests of the 
 local consumers of public utility service are attempts to organize in an effective 
 way society's sense of justice. Ultimately every individual and special interest 
 has to "throw itself on the mercy of the court" ; for beyond government, there 
 is no human guaranty of any right whatever in the relations of men to one 
 another. We ought, therefore, to consider the public service commissions, the 
 courts, or any other governmental agencies established for the purpose of pre- 
 venting strikes in public utilities, as representing the interests of society as a 
 whole — the general public as distinguished from the consumers of the utility. 
 If we make this distinction there can be no doubt whatever that the interests of 
 the general public are paramount as against the interests of any one or all of the 
 three parties immediately concerned in the operation of a public utility. 
 
 From this point of view, the interest of the narrower public — the consumers 
 — appears to be coordinate with that of the employes and the employers, and 
 cannot claim precedence over them except to the extent that the welfare of the 
 consumers as such may be more important to society as a whole than the welfare 
 of either the employers or the employes. It is not clear beyond the possibility 
 of dispute that the interests of the consumers are more important than the in- 
 terests of the other parties. True, the consumers are vastly more numerous 
 than either the employes or the employers, even if we accept Colonel Williams' 
 definition of the employers as the stockholders and bondholders who have put 
 their savings into public utility investments. On the other hand, it is also a fact 
 that the interest of a street railway employe in the conduct of the street rail- 
 way business is much more important to him than the interest of the average 
 citizen in the conduct of the street railway business. To the employe the street 
 railway business is his life; to the average citizen who rides on the cars, it is only 
 
562 Electric Railway Problem 
 
 one of many factors of his life. To be sure, with the growth of cities and in- 
 creasing dependence of citizens upon street railway transportation, this particular 
 factor, except as modified by automobile competition, tends to become more and 
 more important. In comparing the interests of the riding public with the in- 
 terests of the bondholders and stockholders, we may also say that possibly the 
 average investor has more at stake in the street railway business than the citizen 
 who rides on the cars. Clearly, the interest of the employes, if we include in 
 that term all the operating men who devote their lives to the business, is more 
 intense on the average than either the interest of the investors or those of the 
 riding public. If the investors fail to earn a fair return upon their investments 
 their loss, as a rule, is only partial and incidental; if the citizens who ride have 
 to pay excessive rates or submit to inadequate service, their loss also as a rule 
 is partial and incidental ; but if the employes suffer through either insufficient 
 wages, excessive hours or improper conditions of work, their loss is not partial 
 or incidental but affects them directly "where they live." With the great increase 
 in the size of cities, the dependence of the individual car rider ujion the con- 
 tinuity of service, as well as upon the quality of service, gets to be more and 
 more vital. To many it appears that interruption of street railway service in a 
 great city affects so profoundly so many individuals and so many interests as 
 practically to constitute a paralysis of social life, thereby threatening not merely 
 the interests of the individuals who wish to ride and cannot, but the vital proc- 
 esses of society itself. The fundamental question, therefore, appears to be this: 
 "How great a calamity to the comxiumity at large is a street railway strike?" 
 While it may possibly be true that the calamitous consequences of street railway 
 strikes sometimes have been overstated, nevertheless, other things being equal, 
 they become more and more disastrous to the general public as cities grow and 
 traffic increases. 
 
 I cannot agree with the position taken by the labor leaders and the Con- 
 sumers' League in opposition to compulsion. 1 believe that contiiuiity of service 
 has become of sufficient importance to society at large to warrant the legal pro- 
 hibition of street railway strikes. As Chief Justice White well said in the 
 Adamson law decision, the rights of the employe to demand what wages he de- 
 sires, to leave his employment if he does not get them, and by concert of action 
 to agree with others to leave, "are necessarily subject to limitation when employ- 
 ment is accei)tcd in a business affected with a public interest." This being 
 "affected with a public interest" is what differentiates public utilities from ordi- 
 nary private industries. It is the increase in the consumers' interest that dis- 
 turbs the old tripartite equilibrium and tends to make the interests of the patrons 
 of the utility preponderant. Whatever may be our view as to the present status 
 of this development, it seems reasonably clear that the prohibition of strikes in 
 businesses affected with a public interest is not only pemiissible. but theoretically 
 logical and necessary. Those who object to compulsion on theoretical grounds 
 take a position that is quite untenable. It is much as if two farmers quarreled 
 over the ownership of a |)iece of land, and one of them insisted on the right to 
 barricade the public highway in ortler to prevent the other from hauling his 
 produce to town. To the general public which would prohibit him from ob- 
 
The Right to Strike 563 
 
 structing the higlnvay and would offer to decide the dispute through a court es- 
 tablished for such purposes, he would say: "No! I object to compulsion being 
 applied to me. First, make my neighbor do what I want him to, and there will 
 be no need for restraining me, for then I will not wish to close the road. Or, 
 if you do not wish to compel him to be fair, leave it to me ; for 1 can exercise 
 more compulsion by shutting him away from his market, than you can by all the 
 court decrees in the world." The strike is a form of private war — mild at times, 
 and then again not so mild. By what right should public business be interrupted 
 with impunity through these private wars? Why should they not be prohibited 
 and the disputants compelled to take their claims before a public tribunal and 
 rely for protection upon the community's sense of justice, which is the ultimate 
 protection of every man and every legitimate interest? Unsuccessful strikes 
 leave labor sore and plotting for the next struggle. Successful strikes leave 
 capital full of distrust, bitterness and fear. Shall we ask: Does war promote 
 good feeling and the spirit of cooperation? Interruptions of service not only 
 cause the temporary discomfiture of the public, but also tend to niake impossible 
 the spirit of public cooperation upon which, as everybody admits, the financial 
 success of the electric railways depends. Street railway strikes are a serious 
 public menace. They must be prevented. As a matter of right the public must 
 assume ultimate responsibility for the wages, hours and conditions of work of 
 electric railway employes, and in view of the public nature of the employment 
 the men must surrender some of the rights that attach to labor in strictly private 
 industry. It may be that the legal prohibition of the strike will become a more 
 or less academic question if the public first takes adequate measures for the ful- 
 fillment of its own responsibility towards street railway labor, but on general 
 principles it cannot for a moment be conceded that labor's "right to strike" is 
 paramount to the public's right to have local transportation service go on with- 
 out interruption. At the same time, punitive legislation is useless unless it is 
 effective, and in matters like this it can hardly be effective unless accompanied 
 by preventive legislation that is eft'ective in the first instance, and it may be 
 that proper preventive measures, while in theory preparing the way for and 
 justifying punitive measures, will in fact make the latter unnecessary. This can 
 be determined by experiment, but, as a matter of principle, after the community 
 has adopted measures which in its judgment make strikes in essential public 
 industries unnecessary, its right to prohibit and penalize them cannot be doubted 
 and ought not to be denied or given up by implication or otherwise. If the rights 
 of the einployes in a public industry cannot be protected without the use of the 
 strike, we need a change of government. The ultimate remedy for such a con- 
 dition is political, and street railway motormen and conductors have the same 
 recourse to the court of public opinion and the ballot box that other groups of 
 citizens have. 
 
Chapter XL\'I 
 
 THE PROGRAM OF THE AMALGAMATED 
 
 Mr. W. Jctt l.aiiik. former secretary of tlie National War Labor Board, 
 submitted a brief on behalf of the Amalg^amated Association of Street and Elec- 
 tric Railway Eniployes of America, had general charge of the preparation of the 
 labor case, and was himself one of the principal witnesses before the Commission 
 on labor's behalf. While he did not discuss specifically the theoretical aspects 
 of the employes' "right to strike" as against the public's right to continuity of 
 service, Mr. Lauck. on behalf of the employes, declared emphatically that the 
 public interest in the electric railway industry is paramount, as will be seen 
 from the following statement taken from ])ages 83 and 84 of his brief: 
 
 "The paramount interest in tin.- entire situation is the public interest. It is dependent 
 on the street railways. The public cannot permit them to cease operation. The transportation 
 facilities arc too vitally ImjuikI up in tl'.eir daily lives and activities. The public, therefore, 
 is forced to act. 
 
 "The present cmcrRcncy has only stimulated and brought into the foreground the signifi- 
 cant relation lietwecn the street railways and the seneral public. The realization of this truth 
 has been steadily developing. In lornior years, electric railways were looked uixjn as purely 
 private enterprises. They were regulated only on the ground that they were monopolies. 
 Their securities were, to a large extent, speculative, and oftcred. because of the monopoly 
 control of the companies and tlie extraordinary growth of towns and urban centers, unusual 
 opportunities for speculation, manipulation, and large returns. Street car passengers were 
 looked to by the companies as a source of revenue and profit. 
 
 "With the growth in urban life, however, this original conception gradually changed. 
 The trend of opinion came more and more to the conviction that the street railways were 
 social institutions. The modern view, entirely aside from the present plight of the railways, 
 has come to Ik' that the street transportation industry is a public institution serving as high- 
 ways or common carriers for the people. If this is the generally accepted view at the present 
 tiine. and the teslimuny before the Commission clearly shows that it is, the practical question 
 is: What measures shall the Commission recommend not only to rehabilitate the industry 
 financially and conserve the proiierties. but also, what constructive policies, permanently to 
 develop and maintain the most economical and efficient facilities for the nse and convenience 
 of the public. The fundamental point is. in other words, how can the street railways Iw best 
 rehabilitated, operatctl. and developed for the lienefit of the people, due regard being had for 
 the fundamental and proper interests of capital invested in the properties and of labor 
 empliiyed by the street niilway companies. The public is undoubtedly willing to pay for the 
 efficient operation of street railways on the basis of just guaranties to capital and labor. The 
 problem of the Conunission is to consider all facts and constructive proposals and to recom- 
 mend, with these just guaranties to lalxir and capital in mind, a practical scheine of reor- 
 ganization and operation of the indnstr}." 
 
 says: 
 
 "( 
 
 prudent 
 
 Going on to discuss the rights of capital. Mr. Lauck. at ])age 84 of his brief. 
 
 "Capital has the right to demand that its investment insofar as it has licen actuallv and 
 ,.. ..dciuly made and honestly administered should be not only conserved, but. if the public 
 should accpiirc any or all "f the properties, that it should reimburse the owners for the 
 .ictual values, or. on the other baud, if the public should oidy operate and not actiuire the 
 properties outriglit. that capital shoidd receive a reasonable and proper rate of return." 
 
Union Labor Program 565 
 
 With respect to the fundamental rights of labor and the interest of the em- 
 ployes in the rehabilitation of the electric railway industry, the following declara- 
 tion is made at pages 84 and 85 of the brief : 
 
 "The employes have as direct and more vital interest in the prosperity of the industry 
 than even the investors of capital. Should street railways become insolvent, the owners of 
 capital might suffer a hea\'\- pecuniarj- loss. The employes, on the other hand, would lose their 
 immediate means of livelihood. Furthermore, many of the employes have spent a number 
 of years or a lifetime in the service of the industry. They have devoted their working years 
 to the acquisition of training and experience which they could not sell as advantageously in 
 other lines of industrial employment. They may be said, therefore, to have a vested interest 
 in their positions on the street railways which is even more valuable and vital to them than 
 the vested interest which capital has is to the owners of street railway securities. 
 
 "The employes are therefore an.xious to have the industry rehabilitated and made prosper- 
 ous. They are desirous of having the public protected because the public interest is paramount. 
 They insist, however, and too great emphasis cannot be put upon their coi''cntion, that the 
 reconstructive policy undertaken must be based upon and accepted as a fundamental prelimi- 
 nary-, the rights of labor, as accepted by all civilized and leading industrial nations in the Treaty 
 of Peace with Germany, and the principles which have been accepted and proclaimed by our 
 own Government as those which should govern the relations between employers and employes." 
 
 The three fundamental planks in the Amalgamated Association's program, 
 as set forth by Mr. Lauck and the other witnesses who testified on behalf of 
 labor, are (1) "the right to organize, or union recognition;" (2) "the establish- 
 ment, on the basis of a national standard, of a living wage for the employes in 
 the industry;" and (3) "the eight-hour workday." After presenting and urging 
 the importance of these three fundainental demands, Mr. Lauck, in his oral testi- 
 mony, reaffirms the doctrine that the public interest in the electric railway in- 
 dustry is paramount. At pages 1967 and 1968 of the Proceedings, he says : 
 
 "We are advocating these principles as a part of the industrial Bill of Rights, so to speak, 
 which is a part of the new idea of democracy in industry. Of cour.se. as we are all aware, 
 out of the war has come an entirely different attitude towards industry, the idea being more 
 and more prevalent that industry- is a social institution, and must work for the common good; 
 that both labor and capital in their rights must be protected, but tliat the public interest must 
 be paramount. So it has occurred to us in the consideration of this body that here you have 
 a situation where the public interest is manifestly predominant and where there should be a 
 recognition of these principles in working out a constructive program. .\nd we have refrained 
 from asking specifically for the establishment of any rates of pay by the Commission; putting 
 in the data as illustrating w-hat should be a living wage ; but we ask that the Commission 
 recognize these principles and then they can be worked out by the management and the 
 employes in the way that seems wise and best to them, and in the way that will prevent dis- 
 locations or undue interference with the proper development of the industry. 
 
 "But we think that labor has a right to the recognition of these principles which were 
 in the War Labor Board and the Peace Treaty and we earnestly request the Commission to 
 consider them, and irrespective of the immediate financial effect, leaving it to the good judg- 
 ment of the management and employes to apply them in the best way possible, and we are 
 perfectlv content to have the employes clothed with the responsibility of cooperating to the 
 fullest extent and making them in every way fully responsible. We are fearful on the other 
 hand of failure to recognize these principles, as we all know the tendency now is in industry, 
 and especiallv on public utilities, if we do not have the fair measure of economic rights on the 
 part of employes, the tendency will be to drive the conservative leaders into more radical 
 proposals, and'mavbe that has the tendency, as in steam railroads, to the advocacy of schemes 
 which are reallv'the autocracv of labor, which we do not think is any better than the 
 autocracy of capital, but the autocracy of industr>- ought to be in the public, not in capital or 
 labor but in the public and with just guaranties to both capital and labor." 
 
 The clear inference from the statement just quoted is that the Amalgamated 
 Association is opposed to the so-called Plumb Plan advocated by the railroad 
 brotherhoods, and would regard such a plan as tending to establish the "autoc- 
 racy of labor" which, in Mr. Lauck's opinion, would be no better than the 
 "autocracy of capital." It would not be safe to infer from this testimony that 
 
566 Electric Railway Problem 
 
 the Amalgamated Association would be willing to accept a plan under which the 
 paramount interest of the public in continuity of service would be protected by 
 the prohibition of the strike, along with guaranties, deemed by the public to be 
 adequate, that the fundamental rights of labor shall be conserved. Still, Mr. 
 Lauck's declaration forms a logical basis for such a conclusion and such a policy. 
 It is perhaps fair to assume that the employes, if asked to accept this conclusion, 
 would strongly insist that before accepting it they be shown the guaranties, and 
 be satisfied that they are in fact adequate. They might take a position similar 
 to that taken by Mr. James H. N'ahey in relation to the legislation proposed by 
 the Massachusetts street railway commission, and furthermore, might main- 
 tain that if their fundamental demands as outlined by Mr. Lauck and their other 
 witnesses are conceded anti-strike legislation will be unnecessary. It is incum- 
 bent upon us, therefore, to examine in some detail the principles for which the 
 Amalgamated Association demands clear-cut recognition. 
 
 The first principle for which the Amalgamated Association contends is the 
 recognition of the union. In support of the "right to organize"' for collective 
 bargaining, Mr. Lauck cites in his brief the text of the labor clauses of the Treaty 
 of X'ersailles in which "the right of association for all lawful purposes by the 
 employed as well as by the employers" is laid down as a principle of special and 
 urgent importance. In this same connection, Mr. Lauck cites the principles 
 "which our own Federal Ciovernment adopted as an industrial code or constitu- 
 tion, so to speak, during the great war, and which were interpreted and applied 
 by the National War Labor Board," including the following: 
 
 "The right of workers to organize in trade unions and to bargain collectively through 
 chosen representatives is recognized and affirmed. Tliis right shall not be denied, abridged, 
 or interfered with by the employers in any manner whatsoever. 
 
 "The right of employers to organize in associations or groups and to bargain collectively 
 through chosen representatives is recognized and affirmed. This right shall not be denied, 
 abridged, or interfered with by the workers in any manner whatsoever. 
 
 "Employers should not discharge workers for membership in trade unions, nor for 
 legitimate trade-union activities. 
 
 "The workers, in the exercise of their right to organize, should not use coercive measures 
 of any kind to induce persons to join their organizations nor to induce employers to bargain 
 or deal therewith. 
 
 "In establishments where the union shop exists the same shall continue, and the union 
 .standards as to wages, hours of lalwr. and other conditions of employment shall be maintained. 
 
 "In establishments where union and non-union men and women now work together and 
 the employer meets only with employes or representatives engaged in said establishments. 
 the continuance of such conditions shall not Ik- deemed a grievance. This declaration, how- 
 ever, is not intended in any manner to deny the right or discourage the practice of the fonna- 
 tion of latnir unions or the joining of the same by the workers in said establishments, as 
 guaranteed in the preceding section, nor to prevent the War 1-abor Board from urging or 
 any umpire from granting, under the inachinery herein provided, improvement of their 
 situation in the matter of wages, hours of lalvir, or other conditions as shall be found desirable 
 from time to time." 
 
 In support of the right of the employes to organize in the electric railway 
 industn,-, Mr. Lauck, in his brief, says: 
 
 "The lime has |)assed when collective bargaining can or should be interpreted in any other 
 way than as to mean the recognition of trade unions or lalxjr organizations. Ai urged by 
 emplo>es. it means union recognition. They do not contentplate. neither will they accept 
 committee systems promoted and installed on the initiative of street railway officials for the 
 reason that they know that any such systems of collective liargaining do not really safeguard 
 the interests of labor, and cannot, therefore, permanently endure or lie permanently effective. 
 Thrv demand the recognition of the rights of the employes to organize into labor unions, and 
 to deal with the companies with accredited rcpn-sentatives. This does not necessarily mean 
 
Union Labor Program 567 
 
 the adoption of the closed shop principle, but does mean that the street railway managements 
 shall conduct all negotiations as to wages, working conditions, and relations with a recognized 
 labor organization. In localities where the employes of the companies are not already organized 
 into unions, it shall be the duty of railway managers not to discourage the employes to form 
 labor unions as a means of dealing with the management. 
 
 "This principle as to union recognition is no longer a debatable issue. It has been sanc- 
 tioned by the society of civilized nations. Furthermore, it is absolutely essential to that form 
 of cooperation between street railroad managements and employes which will lead to efficient, 
 economical, and stable operation, and, as a consequence, is to the highest degree of real service 
 to the public." 
 
 Air. Lauck in his oral testimony lays emphasis upon the fact that the Amal- 
 gamated does not look upon a local organization of street railway employes, 
 having no outside affiliations, as a union in the sense in which the recognition of 
 the union is laid down as a fundamental principle of street railway labor policy. 
 This point came out in the discussion of the cooperative plan of organization in 
 the Philadelphia Rapid Transit Company under the Mitten management. Mr. 
 Lauck's distinction between a real union and a local organization such as that 
 in Philadelphia is stated in his testimony at page 1881 of the Proceedings, as 
 follows : 
 
 "The Chairman : Where you get all the men organized into a society that gives them many 
 benefits and privileges, what would you call it if it is not a union of the men? 
 
 "Mr. Lauck : You miglit call it a local union ; but in the accepted term of unionism it 
 would be called by the labor representative a company union, you might say. On the part 
 of the employers, they would consider it a union. But from the strict standpoint of unions 
 or labor organizations, it would not be considered as such, because, having no national or other 
 affiliations, it would be considered an organization of employes, but not a union in the accepted 
 sense of the term. 
 
 "Commissioner Mahon : It would be considered by the labor man as being coirpletely 
 under company direction? 
 
 "Mr. Lauck : Yes. 
 
 "The Chairman: That is not so at Philadelphia, is it? 
 
 "Commissioner Mahon : VVe think so, that is our opinion. 
 
 "Mr. Lauck : They would consider it as what they would term in a colloquial sense a 
 company union. All of them are known by that name." 
 
 Mr. Lauck is of the opinion that any form of collective bargaining not based 
 on unions is futile ; and that local organizations of employes not affiliated with 
 employes in the same business in other communities cannot in the long run be 
 effective. In his opinion "company unions" or committee systems cannot stand 
 because, with the pressure from below urging the committees to present certain 
 things to the management, coupled with the fear that if they do present them 
 they will become "marked men" and incur the displeasure of the management or 
 suffer in their working relations and conditions, they go to pieces between the 
 grinding of the upper and the nether millstones. When asked whether the com- 
 pany can control its employes when the latter have the right to elect their own 
 representatives, by a secret ballot system, Mr. Lauck, at page 1882 of the Pro- 
 ceedings, makes the following statement: 
 
 "They cannot control their employes at all. I do not think they can do that, but I think 
 there is not so much danger from the employer or the company controlling its employes under 
 a system of that kind, but from the fact that the employes cannot make any impression on 
 the company, as they have no basis of action. If the company refused to accede to any 
 reasonable request, they have not the basis of strength in the organization to force the com- 
 pany in the way they would if they had a national affiliation, with the financial resources of 
 the national association, and all the strength which would come from the affiliated bodies in 
 other establishments of the same kind. 
 
 "The Chairman : They have the right to strike if they choose. 
 
 "Mr. Lauck : They could strike, but the strike would he futile because they would not 
 have any means of support beyond their own local funds and would not have the cooperation 
 
568 Electric Railway Problem 
 
 of other members in their cral't engaged in similar work in other industries, say in street rail- 
 way industry in other localities, so that the chances would l)e very much against them as 
 compared with the usual unions, which in the event ol an authorized strike would have the 
 support of the national organization, not only as to advice but as to financial resources, strike 
 benefits." 
 
 From an examination of the record it does not appear that the labor wit- 
 nesses proved, or attempted to prove, otherwise than by argument, the superior 
 benefits derived by the employes when organized in unions affiliated with the 
 Amalgamated as compared with benefits derived by employes from informal or 
 strictly local organizations. The fact that the Amalgamated Association has 
 been influential in improving wages, hours and conditions of work in the electric 
 railway industry was rather assumed than proven. Perhaps the most significant 
 fact supporting this assumption, brought out in the testimony, is that the coopera- 
 tive plan in Philadelphia under stress of war conditions had to be modified so 
 as to enable the employes to get a living wage, and in connection with that modi- 
 fication a new standard was establi.shed by agreement between the company and 
 the men to the effect that the wages paid in Philadelphia are to be determined by 
 the average wages paid in Chicago. Cleveland, Detroit and Buffalo, the four 
 cities which at the time of the agreement were supposed to be the best from the 
 standpoint of the men. It is noteworthy that the street railway employes in each 
 of these four cities are unionized. It is claimed, therefore, on the part of the 
 Amalgamated, that the employes of the Philadelphia Rapid Transit Company 
 are now reaping the fruits which were first won by the electric railway employes 
 in these other cities through the activities of the Amalgamated. Nevertheless, 
 the case for union recognition as presented to the Conmiission was based pri- 
 marily upon the declarations of policy made by the Federal Government during 
 the war and embodied in the labor clauses of the Peace Treaty rather than 
 upon new and special proofs. As we have seen, Mr. l.auck took the position 
 that union recognition "is no longer a debatable issue." 
 
 The second fundamental principle upon which the representatives of labor 
 laid stress was the establishment of a living wage. This principle was also 
 supported by the citation of the labor provisions of the Peace Treaty and bv the 
 program of the Federal (lovernmcnt as applied by the National War Labor 
 Board. Upon this jmint the Treaty states "that labor should not be regarded 
 merely as an article of coiumcrce" and that among the methods and principles 
 deemed to be of special and urgent importance for regulating labor conditions 
 in all industrial communities is "the i)ayment to the employed of a wage adequate 
 to maintain a reasonable standard of living as this is understood in their time 
 and country." The labor program formulated by the Federal Ciovemment dur- 
 ing the war included the following provisions with respect to the living wage: 
 
 "(1) The right of all workers including common latwrers to a living wage is hereby 
 declar«l. 
 
 "(2) In fixing wages, minimum rates of pay .shall be established which will insure the 
 subsistence of the worker and his family in health and reasonable comfort." 
 
 Commenting upon these declarations, Mr. Lauck in his testimony, at pages 
 1890 and 1891 of the Proceedings, says: 
 
 "Another remarkable development in this connection has been that almost without ex- 
 ception all the religious or ecclesiastical organizations of the country and of Great Britain 
 
 
Union Labor Program 569 
 
 and Europe have given their sanction to this same principle, and ihey not only give their 
 sanction, bnt are practically carrying on educational propaganda and practical measures, have 
 collected funds, and are engaged in the work of giving widespread consideration to this prin- 
 ciple, and attempting to realize its practical application in some way. 
 
 "So that it might be said that to demand a living wage for the employes of the street 
 railways, as a condition to any reports by the board is a verj' sound position, not only from 
 the standpoint of public policy of this Government, the standpoint of the public policy as 
 announced by all the leading industrial and commercial nations of the world in the Peace 
 Treaty, but it has received the universal sanction of the churches of all denominations, both 
 Protestant and Catholic churches ; it has the sanction of the leading employers of labor in 
 this country, as set forth in the principles enunciated and followed by the National War 
 Labor Board; it is the fundamental economic and political right to which labor is entitled by 
 every ethical and moral consideration ; and to deny the motormen and conductors the principle 
 of a living wage, it seems to me. in the face of these announced policies and practices of our 
 own Government, and in the face of the guaranties of all civilized nations in the Peace 
 Treaty, would he more than equivalent to. and more serious than the denial of free speech, 
 the denial of the right of assembly or religious freedom or any other civic right or liberty. 
 In other words, as we shall claim later, we claim this now as a fundamental, economic right 
 to labor which should be embodied in the recommendations of this board for the financial 
 rehabilitation of the industry." 
 
 While the Amalgamated did not ask the Commission to fix in specific figures 
 a standard or living wage for electric railway employes, it did produce evidence 
 to the effect that in the pre-war days motormen and conductors were underpaid 
 from the point of view of what is recognized in the labor movement as a living 
 wage ; that since the opening of the war their wage increases have at least no 
 more than kept pace with the increase in the cost of living; that, therefore, they 
 are still underpaid; and specifically that in October, 1919, when the evidence was 
 presented, a living wage based on a "minimum comfort budget" for a familv of 
 five would be approximately §2.000 a year, which, figured on the basis of an eight- 
 hour workday and 325 workdays per year would require an hourly wage rate of 
 77 cents. In this connection it is noteworthy that at the time of the hearings no 
 electric railway in the country was paying as high a rate as this, but that in May, 
 1920, the Cleveland Railway Company agreed to a new scale of wages with 75 
 cents per hour as the maximum rate. 
 
 In support of the claim that trainmen's wages before the war were not up 
 to a living standard, the Amalgamated produced as witnesses Mr. Arthur Sturgis, 
 an electrical engineer of Boston, who, since 1914, has devoted a great deal of his 
 time to the preparation of statistics for street railway arbitrations, and Professor 
 William F. Ogburn, of Columbia University, an eminent authority on budgetary 
 studies. Mr. Sturgis analyzed the special reports on street and electric rail- 
 ways issued by the Census Bureau for 1902, 1907 and 1912, the advance sheets 
 of the report for 1917, and the street railway statistics for 1918 presented by Mr. 
 James W. Welsh, statistician for the American Electric Railway Association. 
 On the basis of this analysis Mr. Sturgis found that the average yearly wage 
 of conductors and motormen in the different periods mentioned was as follows: 
 
 1902 $606 1917 $934 
 
 1907 655 1918 990 
 
 1912 in 
 
 Mr. Lauck in his brief said that "according to the most authoritative students, 
 annual earnings of $900 by the head of an average household were barely suf- 
 ficient prior to the war for a minimum of physical subsistence." He cites as 
 authority an investigation made for the Russell Sage Foundation by Dr. Robert 
 
570 Electric Railwav Problem 
 
 Cort Chapin and published in 1909 under the title "The Standard of Living 
 among Working Men's Families in New York City." From this work the fol- 
 lowing general conclusions are quoted : 
 
 "1. "An income under $800 is not enough to permit tlie maintenance of a normal standard. 
 
 "2. 'An income of $900 or over probably permits the maintenance of a normal standard, 
 at least as far as the physical man is concerned. 
 
 "3. "It seems probable that on an amount ranging from $800 to $900, the standards 
 prevailing among Bohemians, Russians, Austrians, and Italians may be maintained, but that 
 it is the exception rather than the rule, when the more expensive standards of the .\merican 
 and kindred nationalities are maintained on this amount. 
 
 "4. '.\ comparison of the families by nationalities shows that at almost every point a lower 
 standard of expenditure prevails among the Bohemians. Russians, .\ustrians, and Italians 
 than among the .Americans. Teutons, and Irish. The families of the former group on in- 
 comes above $700 to $800 begin to save and show a surplus * * * » while families of 
 the other group do not reach the saturation point, so to speak, below an income of $900 or 
 $1,000. 
 
 "5. 'The standard of living \'aries as the two jaws of the vise, wages and prices, con- 
 tract and relax.' " 
 
 From Lauck & Sydenstricker's book, "Conditions of Labor in American 
 Industries (1917)," Mr. Lauck quotes as follows: 
 
 "The various recent investigations of budgets of families in different ranges of income 
 appear to indicate quite clearly that the point of adi-i|uate subsistence is not readied until an 
 income of about $8(X) or $900 is provided. Tlie i)erccntagc of family income spent for food 
 remains practically the same, or is greater, in families with incomes of less than that amount; 
 in families with incomes of $800 or more, the percentage of income spent for food is found 
 to be proportionately less as income increases, indicating that only then is income sufficient 
 to allow a surplus left from food, rent. etc.. to be spent on 'incidentals.'" 
 
 At page 1826 of the Proceedings, Mr. Lauck calls Professor Ogburn's atten- 
 tion to Dr. Cliapin's conclusions in 1907, and elicits the following testimony with 
 respect to the relation of the average pre-war wage of motormen and conductors 
 to the living wage : 
 
 "Mr. Lauck : Vou rememlx-r Dr. Chapin's conclusions in 1907 as to the relations of 
 incomes at that time to the standards of living? 
 
 "Mr. Ogburn: In a general way, yes, I remember that. 
 
 "Mr. Lauck : He says an income under $800 is not enough to permit of the maintenance 
 of a normal standard ; is that correct ? 
 
 "Mr. Ogburn: Ves ; 1 think it is pretty generally accepted. 
 
 "Mr. Lauck: I am talking about before the war, now. 
 
 "Mr. Ogburn : Yes. 
 
 "Mr. Lauck : .\nd an income of $900 or a little over permits of the maintenance of a 
 normal standard, at least as far as the physical man is concerned? 
 
 "Mr. Ogburn: What I call the bare subsistence level. 
 
 "Mr. Lauck: Before the war? 
 
 "Mr. Ogbuni: Yes. 
 
 "Mr. Lauck: Mr. Sturgis testified this morning that in 1914 the average annual earnings 
 of the street railway motonnen and conductors were $8()4 ; so that on that standard of com- 
 parison it would Ik* below a subsistence level, would it not ? 
 
 "Mr. Ogbuni: Yes. considering that Mr. Chapin's figures are fairly conservative. 
 
 "Mr. I^uck : .-Xnd his figures were made in 1907, seven years before I9I4. 
 
 "Now, Mr. Sturgis testified this morning, if 1 remember correctly, that in 1907 the 
 average annual earnings of a motonnan and conductor were $655. Mr. Chapin .says, in 1907, 
 that an income under $8(X) was not sufficient to permit of the maintenance of a normal 
 standard, so that he would be underfed, undcrclothed, uiiderhoused and subnormal. Then, in 
 1914, this figure of $864, according to Dr. Chapin's standard, would be below the subsistence 
 level, and according lo your own standard or the results of your own study at that time? 
 
 "Mr. Ogburn : Yes, Chapin's figure might he a little higher than that. 1 mean it might 
 Ik- a little over $9lX) by 1014 on account of foixl having gone up. 
 
 "Mr. Linck : Tlierr were seven years there that were not provided for. 
 
 "Mr. Ogburn : Yes. 
 
 "^lr. I^uck : .■\nyhow, it would indicate that these earnings were entirely inadequate, 
 would it not, according to your conclusions as to the subsistence level? 
 
 "Mr. Ogburn ; Well, yes, one would think so." 
 
Union Labor Program 571 
 
 Mr. Sturgis presented evidence to show that the average maximum hourly 
 rate paid by 120 electric railway companies in January, 1914, was 28 cents, and 
 that the average maximum rate paid to employes of all of the 227 local divi- 
 sions of the Amalgamated on January 1, 1919, was 41.1 cents. These figures 
 were subsequently brought up to October 5, 1919, when the average was 45.32 
 cents. This indicated an increase of about 62 per cent in wages as compared 
 with an increase of 7i or 80 per cent in the cost of living during approximately 
 the same period. Referring to the change in the cost of living from June, 1914, 
 to September. 1919. Professor Ogburn, at page 1802 of the Proceedings, says : 
 
 "Yes, I usually think of it as between 75 and 80 per cent. It is questionable whether 
 you can figure it to the e.xact fraction of a per cent, but I would say for the country as a 
 whole from 75 to 80 per cent would be a fairly scientific estimate of the increase." 
 
 The evidence seems fully to support the contention of the Amalgamated that 
 wages were not increased by the National War Labor Board, and have not since 
 been increased, enough to put the motormen and conductors in a relatively better 
 position with respect to the cost of living than they were in before the war. 
 This conclusion is also supported indirectly by the testimony of Mr. Leifur Mag- 
 nusson, an economist employed in the Bureau of Labor Statistics, who appeared 
 before the Commission not as a representative of the Bureau, but as a witness 
 for the Amalgamated. Mr. Magnusson presented a statement showing, on the 
 basis of an eight-hour day, the daily earnings in ninety principal occupations 
 in 1914 and again in 1919, with the percentage of increase in each case. Mr. 
 Magnusson's tabulation is printed in full at pages 49 to 51 of Mr. Lauck's brief. 
 It shows that among the various classes of workmen listed the motormen and 
 conductors on electric railways earned in 1914, on the eight-hour day basis, an 
 average daily wage of $2.27, and in 1919 an average daily wage of $3.38, an in- 
 crease of 48.9 per cent. In 1919 the motormen and conductors were next to the 
 lowest on the list. Below them were the trapper boys engaged in bituminous 
 coal mining in the Hocking Valley district, whose average daily wage was $2.65. 
 It is noteworthy that in 1914 laborers in arsenals, greasers and couplers in 
 bituminous coal mining, laborers in navy yards, and common laborers in the iron 
 and steel industry all received lower wages than motormen and conductors, while 
 in 1919 they all received higher wages. Of the ninety occupations listed only 
 fifteen showed a smaller percentage increase in wage rates from 1914 to 1919 
 than the increase in trainmen's wages. In fact, twenty-one of the ninety showed 
 an increase of over 100 per cent as compared with the trainmen's increase of 
 48.9 per cent. While the relatively greater increase of wages in other occupa- 
 tions does not in itself prove that the increase in trainmen's wages has not been 
 proportionate to the increase in the cost of living, it points in that direction and 
 may be taken as supporting the positive testimony of such witnesses as Mr. 
 Sturgis and Professor Ogburn. 
 
 The issue with respect to wages presented by the Amalgamated simmers 
 down to the fundamental questions as to whether or not the principle of a living 
 wage should be established in the electric railway industry and as to what a 
 living wage is under present conditions. On both these points Professor Og- 
 burn's testimony is of great interest and importance. It should be stated that 
 
572 Electric Railway Problem 
 
 prior to Professor Ogburn's connection with Columbia University he served as a 
 special agent of the Bureau of Labor Statistics connected with the cost of living 
 investigations, and as director of the cost of living department of the National 
 War Labor Board, and prior to that was a professor in the University of \\'ash- 
 ington, where, in 1917, he prepared the budget accepted by the board of arbitra- 
 tion in the award to the trainmen employed on the electric railway lines of Seattle. 
 Speaking of the general question of the standard of living and the origin and 
 development of the idea of a minimum or living wage, at pages 1803 and 1804 
 of the Proceedings, Professor Ugburn says : 
 
 "111 regard to the question of the standard ot living, it has been my custom in con- 
 nection with the wage adjustments of the \\ ar Labor Board to think of the cost of living 
 in quite two separate categories, one Ijeing the category of the increase or decrease as the 
 case may be in the cost of living, and that was oftentimes used by the Board in adjusting 
 the increases. However, in some cases it was claimed by parties in dispute or in the arbitration 
 that it would be unfair to adjust wages by the amount of the increased cost of living, although 
 that might be measured fairly satisfactorily, for the reason that in the pre-war period the 
 living as enjoyed by the workingmen's family was inadequate. That was met in a number 
 of disputes and is claimed by the working i)co|)Ie quite frequently. 
 
 "Well, you see, if that point is raised, it would seem the satisfactory way to meet that 
 is to make some study as to what is an adequate standard of living. That brings up a question, 
 therefore, of a study of levels or standards of living irrespective of any increases, just a static 
 concept of how much does it take to live? 
 
 "Now. that question is of course one of immense difficulty in determining. It is one. how- 
 ever, which experts in economic and social sciences have been engaged in studying for a 
 number of years. 
 
 "In studying the c|uestion of the standard of living they have focussed their attention, I 
 should say, rather largely on what might be called a minimum subsistence level or a bare 
 subsistence level as it is sometimes spoken of. ^'ou can very readily see that there will be 
 various levels of living according to the income which a family enjoys. .■\nd .so one might 
 conceivably study a level at any particular point in the scale. But attention has been focussed, 
 I should say. most upon what is called a bare subsistence level. 
 
 "The idea originated a number of years ago on the part of social reformers and statesmen 
 who were interested in what they called setting a mim'mum. You find, for instance, in the 
 L'niled States that a good many states have set minimum wages in re^rd to the living of 
 an unmarried woman ; and you will find in sonic of the European countries and particularly 
 .•\ustralia and New Zealand that the states have set a minimum standard of living for a 
 family as well as for an unmarried woman. 
 
 "These minimum ideas have been considered quite a little by charity organization societies 
 and relief agencies in our larger cities, settlement house workers and so on. The idea seems 
 to he spreading, and according to prediction 1 wcnild think bids fair to become quite an im- 
 portant point in our national policy. The British I^bor movement seems to be very much 
 concerned with this .same idea which they phrase as a national minimum, and the platform 
 of their party states it this way : "That there shall Ix! a line drawn across society lielow 
 which no family shall be permitted to live' The idea as we express it in America is some- 
 times phrased this way, that the minimum standard of living or the minimum hare subsistence 
 level is a level below which when wage earners fall in a particular industry that industry- 
 is said to be parasitic; that is to say. the theory or policy of the minimum wage is that the 
 slates should not permit an industry to pay less than a living wage. • • * • That has 
 gone into effect so far as uimiarried women go. hut that is the theory, that the state would 
 ho justified in using its authority as a state in forcing an industr\- to pay these wages or 
 force it to desist. .'Vs I say, they have not by use of the state authority applied it in the 
 United States to families. 
 
 "That is the general positifm by which the minimum wacc concept comes into our political 
 and social life. Now. a great deal would naturally center around the (|uestion of the measiire- 
 mrnt of this point. That is to say. how can you determine what this point is? Naturally, 
 minimum wage legislation and studies will Ik- successful to the extent that they are able to 
 .scicntificallv determine a point or a standard, and by a point or a standard 1 mean to set some 
 point in which there is some scientific validity." 
 
 Professor < tpbnrn points out that the determination of the amount of in- 
 come required for the maintenance of a proper standard of living is measured 
 in various ways. He refers to a study made in Johnstown. Pennsylvania, during 
 
Union Labor Program 575 
 
 the pre-war period, by the Children's Bureau Department of the Bureau of 
 Labor. This study was subsequently extended to a number of other cities. 
 It showed that in pre-war days in families having an income of $550 the infant 
 mortality rate was about 150. whereas, in families having an income of $1,250 
 the infant mortality rate was only 65. He states that at the time of giving his 
 testimony the equivalent incomes would be about $950 and $2,200, respectively. 
 He also refers to malnutrition as a test of the standard of living and cites the 
 study made in the schools of New York City a few years ago in which it was 
 found that approximately 20 per cent of the 100,000 children examined were 
 underfed. He also refers to the results shown by the draft during the war with 
 respect to which the Provost-Marshal reports that of men between 21 and 31 
 years of age only 70 out of every 100 chosen were accepted as physically quali- 
 fied for general military duty. He admits that "the economic cause would not 
 account for all disbarments on the draft, because of various physical ailments 
 which may not be due to economic causes." but thinks that perhaps one-half 
 may be attributable to these causes. In that connection he cites a remark credited 
 to Mr. Lloyd George to the effect that "if they had had a better minimum wage 
 in England they would have had a luillion more men with which to defend the 
 country." He also refers to housing conditions as a criterion of the standard 
 of living; and here again it is largely a matter of the infantile death rate. With 
 respect to diet and "calories" as a criterion. Professor Ogburn says, at page 
 1807 of the Proceedings : 
 
 "There is just one other point on that I might speak of in connection with the question 
 of what are the criteria for determining this particular level of living, and that centers around 
 the question of food. I referred indirectly to it in speaking of malnutrition a while ago ; 
 but a diet is considered to be a highly important factor in maintaining a general well-being. 
 Of course, it is essential in what we call existence. The most convenient and common index 
 of the diet value is an energy unit called the calorv'. In other words, to keep the human 
 machine going, it has to be fed fuel, just as an engine will have to be fed coal to make the 
 machinery turn around; and this food generates these fuel units called the calory. 
 
 "The question arises, what should be the supply of this energy value to a man? It has 
 usually been set for a man at moderately hard muscular work as being 3,500 calories per man 
 per day. This is the standard. I believe, set by .^twater. and it is the standard employed, I 
 think, by the Department of Agriculture of the United States Government." 
 
 Professor Ogburn points out that there has recently been somewhat of a 
 reaction against the "calory standard" on the ground that food has other values 
 besides that of furnishing energy. He goes on to say that when a diet for a man 
 contains 3,500 calories a day it is on the average assumed to be an adequately 
 balanced diet, although it might be possible to get a proper balance of the various 
 chemicals required by the human system without having so many calories. It is 
 assuined, however, that "the ordinary housewife, not particularly trained in these 
 matters, would probably, on the average, not get an adequately balanced dietary 
 unless she computed it on a basis sufficiently liberal to furnish 3,500 calories per 
 man per day." 
 
 In Professor Ogburn's budget studies a family is assumed to consist of a 
 man, his wife and three children. Particular emphasis is laid on certain studies 
 of the Bureau of Labor Statistics from which Professor Ogburn drew the con- 
 clusion that at the time he was giving his testimony a proper diet for the average 
 family would involve an expenditure of from $700 to $750 a year for food 
 
574 Electric Railway Problem 
 
 alone. His testimony on this point is found at page 1808 of the Proceedings, 
 as follows : 
 
 "In the study which the Bureau of Labor Statistics has made, they went to considerable 
 pains to get good food figures, and they went to a large cost to get these things analyzed, and 
 this is a point which 1 am about to mention now, which 1 think is very important in coming 
 to this question of a satisfactory living standard. 
 
 "The Bureau took about 300 dietaries, which yielded 3,500 calories per man per day ; that 
 is, they analyzed these dietaries, and then they added up the price of them themselves for the 
 year 1918, approximately. 
 
 "They found in 1918 for a family of 3.35— adult male, his wife and children, children 
 being split up in fractions, according to the amount they consumed — that $575 was required 
 to purchase food for this size family. 
 
 "Food has probably increased since that time about 15 per cent, which would bring the 
 cost of 3,500 calories for this size family up to about $650 or $660. 
 
 "This particular unit of 3.35 is somewhat smaller than the unit customarily used by 
 students for measuring the family. They come nearer using one of 3.8 or 3.9. If you bring 
 it up to that figure, it will bring the cost of an adequate dietary up. then, as found in, say. 12 
 cities scattered in representative sections of the United States, to between $700 and S750 at 
 the present time ; and 1 think that is a figure which is very much worth while considering 
 because of the big importance which focKl bears in the budget, and which the other items bear 
 in their relation to food. 
 
 "I lieliove the Commission is fairly fortunate in being able to get a figure like this, 
 because if this study had not In-cn made, it is very questionable whether you could have had 
 any such good or accurate figure as this one. I therefore set a gcXKl deal of stock by this 
 particular point, that it will take on the average for the United States, in these cities, from 
 $700 to $750 for a man. his wife and three children of the conventional age stated. 
 
 "Mr. Lauck : That is just for food? 
 
 "Mr. Ogburn : That is just for food." 
 
 Professor Ogburn states that in June. 1918, he estimated the "bare subsis- 
 tence budget" at between $1,3.^0 and $1,400 as will appear from the following 
 testimony found at page 1809 of the Proceedings: 
 
 "I worked on this for the National War Labor Board in June. 1918, to some extent, and 
 I used about four or five diflferent methods. .Xt that time 1 set the bare subsistence at 
 ♦ * • » between $1,350 and $1,400 * » * •. and I did it by using this food quota- 
 tion, this methixl. 
 
 "Then 1 took three budgets, which are somewhat well recognized, and which authorities 
 have accepted. I took Prof. Chapin's budget made in New York in 1907, a very csreful 
 study; I ttxik the New York Board of Estimate budget drawn up by the City Government 
 for its own employes, and I took a budget made by the New York Factory Investigating 
 Commission, a legislative commission. I took each of tho.se budgets, and considering the 
 increa.ses in the cost of living, brought tluin up to date, so to speak; and, with the exception 
 of one, they came to Ix^twern $1.4.i0 and $1..^00. The New York Factory Investigating Com- 
 mission came to $1..120 and some o<ld dollars, but that budget was considerably inadequate in 
 some of the sundries or miscellaneous items. It left out a good many things which a family 
 would have to have in order to live. 
 
 "So that I came to the conclusion at that time that what I would call a fair subsistence 
 which wouUl he really a liare physical subsistence — and it would be very conservative, it 
 would not be an exaggeration at all — would, at that time, nm between $1,350 and $1,400, 
 judged by these four or five different standards." 
 
 In view of the increases in the cost of living between June, 1918, and (Octo- 
 ber, 1919, estimated at about 12 per cent. Professor Ogburn, at page 1811 of the 
 Proceedings, says : 
 
 "I think you can pretty well substantiate to<lay the fact that it will take between $1,550 
 and $1,600 to maintain the bare subsistence level to<lay. I believe so." 
 
 Professor Ogburn calls attention to the fact that below the "hare subsistence 
 level" arc "the charity level, being inadequate in sundries, and the pauper level, 
 where one gets in flebt and so forth." Above the bare subsistence level is 
 another level which was adopted as the basis for the Seattle trainmen's budget, 
 worked out by Professor < )gburn in 1917, which at that time came to about 
 
Union Labor Program 575 
 
 $1,500, and the "minimum comfort budget" which Professor Ogburn worked out 
 for the War Labor Board in June, 1918, which at that time came to about $1,700. 
 Referring to the standard of living for which these budgets were supposed to 
 provide, Professor Ogburn says, at page 1812 of the Proceedings : 
 
 "This budget, which we arc now discussing is supposed to dehneate a level above what 
 we call the minimum subsistence, and is variously called the minimum health and decency 
 or the minimum comfort or the minimum health and comfort. I shall refer to it as the 
 minimum comfort budget. It is somewhat more liberal in food, although the food in the 
 two budgets does not vary so very much. The rent figure is somewhat more liberal. I 
 particularly set down there a larger item for insurance and savings. That figure of insurance 
 and savings is one very debatable as to what should be set down. I have set dowii a health 
 figure nearly the same as in the minimum budget. I have given somewhat more in clothing, 
 because it does seem to me that comfort, social position and so on center around rent and 
 clothing." 
 
 The following is a general summary of the "minimum comfort budget" upon 
 which the Amalgamated bases its claim for a living wage : 
 
 Cost June, Cost July, 
 
 Item igi8 /p/9 
 
 Food $625.00 $723.00 
 
 Clothing : 
 
 M&n 92.50 101.00 
 
 Woman 87.00 94.00 
 
 Boy 13 years 57.00 62.50 
 
 Girl 8 to 10 years 37.52 42.25 
 
 Boy 4 to 7 years 39.50 44.25 
 
 Rent 220.00 240.00 
 
 l-'uel and Light 75.00 88.00 
 
 Insurance and Savings 150.00 150.00 
 
 Heahh 60.00 65.00 
 
 Furnishings 50.00 60.00 
 
 Education 20.00 20.00 
 
 Carfare 55.00 58.00 
 
 Organizations (church, labor and others) 24.00 26.00 
 
 Comforts (tobacco, candy, gifts, drinks, etc.) 43.00 33.00 
 
 Recreation 50.00 56.00 
 
 Miscellaneous (barber, stamps, cleaning, etc.).... 75.00 78.00 
 
 Total $1,760.50 $1,941.00 
 
 Some of the minor items are explained more in detail in the analysis of 
 sundries, as follows: 
 
 Cost June, Cost July. 
 
 Item igiS 1919 
 
 Organizations, labor and others $15.00 $16.(X) 
 
 Education (newspapers, magazines and books).... 20.00 20.00 
 
 Church 9.00 10.00 
 
 Health (physician, drugs and dentist) 60.00 65.00 
 
 Cleaning and Laundry 25.00 27.00 
 
 Tobacco 15.00 16.00 
 
 Gifts 8.00 9.00 
 
 Candy and Soft Drinks 5.00 8.00 
 
 Drinks 15.00 
 
 Amusements and Vacation 50.(X) 56.00 
 
 Stamps, barber, stationery, etc 15.00 16.00 
 
 Exigencies and waste 35.00 3S,(X) 
 
 It is noteworthy that the budget-makers were able to hold down the cost of 
 living to the extent of $15 per annum on account of the total disappearance of 
 "drinks" between June, 1918, and July, 1919. For a car crew this saving would be 
 $30, which, if divided up among the 166,000 revenue passengers handled by each 
 
576 Electric Railway Problem 
 
 crew, on the average, during a year, would amount to three one hundred and 
 sixty-sixths of a cent on the fare. Hooray for Prohibition ! Even at that, the 
 item amounts to $2,000,000, or well on towards half as much as the estimated 
 losses of gross revenues due to the strikes of 1919 on the big systems carrying 
 7S per cent of the'total electric railway traffic of the country. What the fellows 
 will do who were allowed the $15 a year for drinks, and used it some other way, 
 remains to be seen. 
 
 Professor Ogburn explains the "minimum comfort budget" at page 1S13 of 
 the Proceedings, as follows : 
 
 "Mr. Lauck : Would you e.xplairi that budget to the Commission for the reason that we 
 expect to use that budget as a basis tor our coiUontiou as to the principle of a living wage? 
 
 "Mr. Ogburn : Yes. The theory of a minimum comfort budget is not quite as clearly 
 delineated as the theory of a bare subsistence budget. Hut one, as I say, thinks of a bare 
 subsistence budget as being a living which all industries ought to pay their working men; 
 at least that is the theory of those who hold to the living wage theory. Whereas, the bare 
 subsistence budget does not necessarily imply that it is an adequate budget or that it is satis- 
 factory to the lalwr people or that it is even necessarily wholly desirable in a democracy. 
 Whereas, a budget that is somewhat more liberal. I think, comes nearer meeting an actuality. 
 
 "Now, the minimum comfurt budget is. 1 think, not wholly a theoretical proi>osition. 
 That is to say. it is a description of an actual situation, and the fact that it has been received 
 and commented upon rather widely and the fact that there have been various individuals 
 working at this particular level seems to indicate that there is a level which is in considerable 
 demand above what you would call a bare subsistence level." 
 
 At page 1819 of the Proceedings, Professor Ogburn goes on to explain 
 particularly the item of $150 for insurance and savings: 
 
 "I did put down in this budget $150 for insurance and savings, which I may say is con- 
 siderably larger than the families ever do .sive or put up even during the campaign of Liberty 
 Loans at this particular level. That is another departure from the actual Ijudget and is a 
 point in making the standard. 
 
 "Commissioner Meeker: Is that amount actually above the combined amount for insur- 
 ance and savings at this level? 
 
 "Mr. Ogburn : Yes. 
 
 "Mr. Lauck: What was your idea in doing that. Professor Ogburn? 
 
 "Mr. Oglnim : Perha|>s I should have stated this, that what 1 w;is doing in these two 
 cases was setting what I conceived t<i be a standard budget. The question often arises as to 
 whether a standard budget is exactly the .same as an actual budget. 1 figure that it ought 
 to be very nearly the same as an actual budget and not too purely refined ; that is to say, 
 there is no question alxiut the fact that humankind smokes, humankind drinks and so so; 
 that humankind expects certain ex|)enditures for recreation. Therefore, you cannot leave 
 tlie.se things out. Yon have to make it fairly approximate and close to the actual expendi- 
 ture. But I have varied here and there — I have put a little bit more for food and a little bit 
 more (or sickness and savings, simply as it would seem to be the concept of what a standard 
 budget should Ix?." 
 
 A little further on, at |)ages 1S20 to IS22 of the Proceedings, Professor 
 Ogburn poiiUs otii that his "Minimtim Comfort riud^jct" is, after all, a very con- 
 servative one, and intimates tli.it a little higher budget level would not do the em- 
 ployes any special harm, lie says: 
 
 "The church item is put down at $9. which is very near thi figure which families of that 
 particular income actually spend. Perhaps it may Ik a little bit more. 
 
 "Mr. I.auck : ^■ou have $J4 for church, lal>or and other organizations, have you not? 
 $9 of that for church, and the other for labor union dues and societies and so forth? 
 
 ".\lr. Ogburn; Yes. I put down $KS for organizations — lalx>r and other organizations. 
 $15 a year. 
 
 "Commissioner Ntahon: That is too low. 
 
 "Mr. < )Kl)urn : This was in the summer of 1918. Probably it was very low then. 
 
 "Mr. I-iiick: The comforts arc very conservative, are they not. or very low — $.?3 for 
 tolncco, candy, Christmas gills and everything of that kind' 
 
 "Mr. Ogluini : Yes; considering the fact that if you really look at human nature frankly. 
 
Union Labor Program 577 
 
 of course that is verj' low; there is no question about that. I think that when you get into 
 a question of the minimum comfort budget— as the questions of Mr. Lauck have been headed 
 in that direction— you really have to form the conception that there is still another budget 
 level. 
 
 "I mean to say that I do not believe that you could look at this budget and think of it 
 as an adequate budget for working people. I mean to say * * * * it is perfectly pos- 
 sible to conceive of another budget level where, if they had a telephone, or if they had a 
 nurse occasionally, when some one was sick in the house, or where they had a somewhat 
 better type of housing, where they took more opportunities in education, and were able to 
 send their children through the high school— we figure that less than 10 per cent get through 
 the high schools — I think you would have to conceive of a budget level as being above this. 
 
 "The point I make is that this minimum budget is, strictly speaking, a minimum budget 
 of a certain level, and it is not necessarily designed or set as a maximum budget at all, or 
 perhaps even what the working people would call, necessarily, an adequate budget. It is along 
 the line of those minimum budgets. 
 
 "Mr. Lauck: It really seems to provide for food and clothing to keep them warm and, 
 you might say, just removes the spectre of want or the possibility of want from the door, 
 does it? 
 
 "Mr. Ogburn : That is the idea, yes. 
 
 "Mr. Lauck : That is, they have some slight hold on the future by savings and insur- 
 ance ; they are adequately clothed so far as comfort is concerned, and fed properly? 
 
 "Mr. Ogburn : Yes. 
 
 "Mr. Lauck: But beyond that there is nothing to waste or nothing to develop or e.x- 
 pand on? 
 
 "Mr. Ogburn: Yes. 
 
 "I would like to introduce one piece of evidence here bearing upon the point I am dis- 
 cussing, which I think is of considerable value in regard to food budgets. 
 
 "\\ hat we did over at the Bureau of Labor Statistics was to take families of husband 
 and wife and three cliildren with specific incomes, say, $2,000, $1,800, $1,600, $L400, $1,200 
 and $1,000, and we analyzed their dietaries and took an average of all their foods which they 
 ate and reduced it to a permanent basis, and analyzed it ; and out of about 12 cities, Chicago, 
 Providence, New York, Denver. St. Louis, San Francisco, Seattle, Boston, St. Paul, Minne- 
 apolis, New Orleans and .Atlanta, we found that, as an average in those cities, when the 
 income is $2.000 — this is in 1918 — the purchase of calories was 3,533 ; that is the actual num- 
 ber of calories purchased when the income was $2,000. 
 
 "Commissioner Meeker: \\'ill you explain that? That is that many calories per adult 
 male? 
 
 "Mr. Ogburn : That many calories per adult male, yes. 
 
 ******** 
 
 "Mr. Ogburn : Wiien the income is $1,800 the actual number of calories purchased 
 was 3,400. 
 
 "At $1,600 the number of calories purchased was 3,278 average; that is a little over 3,200. 
 
 "At $1,400 the calories purchased were 3,217. 
 
 "When the income was $1,200, for this size family, the calories purchased were 3,015 — 
 about 3,000 calories. 
 
 "When the income was $1,000, the food that they purchased yielded 2,935 calories. 
 
 "Those, I think, are about as good figures as you will find anywhere in existence bearing 
 upon the calories purchased according to income. 
 
 "Therefore, it is only when they get pay over $1,600 and around $1,800 or $2,000 that 
 they actually buy a sufficient number of calories." 
 
 At pages 1825 and 1826 of the Proceedings, after stating that he has brought 
 his budget up to date, Professor Ogburn says: 
 
 "I figured out that $1,950 to $2,000 would be the cost, now, of what I might call the 
 minimum comfort budget. 
 
 "When vou think of that figure in terms of wages, you think the wages may sound pretty 
 big : but when you think of it in terms of the details of the budget, it really does not buy so 
 very much. 
 
 "Mr. Lauck: It is just keeping want from the door, so to speak, is it not? 
 
 "Mr. Ogburn: It is providing minimum comfort, yes." 
 
 With regard to the Seattle "minimum comfort" budget of 1917, which is 
 
 reproduced at pages 68 and 69 of Mr. Lauck's brief. Professor Ogburn testifies 
 
 at page 1827 of the Proceedings, as follows : 
 
 "Mr. Ogburn : Yes. that budget was made somewhat in the following manner : There 
 was trouble on in Seattle in regard to the railway situation out there, and I believe they had 
 
578 Electric Railway Problem 
 
 a strike of two or three weeks and they submitted it to a Board of Arbitration, of which 
 Doctor Suzzalo, President of the University, was Chairman. And Doctor Suzzalo asked his 
 department of economics and sociology to make a study of the living costs of motormen's and 
 conductors' families and set a budget in Seattle. That was in 1917, I believe. And Professor 
 Parker and myself and several of the other men conducted an investigation over the city and 
 set this figure of $1,505. .\nd they discussed this budget, 1 am told — I was not at the meet- 
 ing or on the board — but they discussed it a couple of days, I understand, and accepted it 
 witluiut a single change at that time. And tliat budget there of $1,505 in Seattle in 1917 
 was what I conceived to tje a minimum comfort budget at that time. That is to say, it com- 
 pares with my $1,700 budget somewhat later on. 
 
 "Mr. Lauck : To bring it up to date it would be appro.ximately what your minimum com- 
 fort budget would be now in terms of money? 
 
 "Mr. Ogburn : Yes. 
 
 "Mr. Lauck: Between $1,900 and $2,000? 
 
 "Mr. Ogburn: Yes, approximately that. 
 
 "Mr. Lauck: The board headed by Doctor Suzzalo of the University of Washington 
 adopted this, and there was a representative of the company on the board? 
 
 "Mr. Ogburn: Yes." 
 
 At page 1828 of the Proceedings, we find Professor Ogburn's budget conclu- 
 sions reiterated as follows: 
 
 "Mr. Lauck: So I gather your general conclusions are that wages to be adequate now 
 should be based on an income approximately of $1,900 to $2,000 after making allowance for 
 the increased cost of living since these budgetan,- standards have been worked out. 
 
 "Mr. Ogburn : Yes, I would not necessarily say that would tw adequate, it might not 
 necessarily be adequate, but it would give them a little bit more than a bare subsistence. It 
 would give them what I call a minimum comfort allowance, it would be a minimum comfort 
 budget. 
 
 "Mr. Lauck: You might say it would remove the element of inadequateness and make 
 them barely adequate. 
 
 "Mr. Ogburn: Yes, I would say that. 
 
 "Mr. Warren: It would give them the equivalent of what $1,760 would have given them 
 in June a year ago. 
 
 "Mr. Ogburn : Yes." 
 
 To those who are not entirely familiar with the theory back of the living 
 wage, the question will at once arise: Why should the electric railways pay every 
 motorman and every conductor enough to enable him to support a wife and three 
 children, when as a matter of fact he may be a single man or, if married, have 
 no children? Ubviously, a "living wage," based on a standard family budget, 
 may leave one man with thirteen children in the depths of poverty, while it en- 
 ables another, who happens to be immarried, to indulge in many luxuries. Why 
 should not the electric railways depend upon the law of supply and demand, and 
 pay what is necessary to attract an adequate number of competent men. and 
 no more? In spite of the claims advanced by the witnesses for labor that the 
 compensation of motormen and conductors prior to the war was too low, it is a 
 matter of common knowledge that the electric railways normally had waiting 
 lists. With respect to reasons for taking a family of five as the standard in 
 figuring out a living wage, I'rofessfjr Ogburn testifies at page 1831 of the Pro- 
 ceedings : 
 
 "The Chairman: Do any of the industries classify wages according to whether a person 
 is married or unmarried or whether he has a family of five, three or two? 
 
 "Commissiimer Mahim : Or seven or nine? 
 
 "The Chairman : That is right. 
 
 "Mr. Ogbuni: No. hut the point you are speaking of now is usually looked at in tb- 
 way. It is quite a job to work out these budgets and plan them out and make careful stuc! 
 and so forth, and students of social problems who work them out. work them out for .i 
 inmily of five on this tasis : That three children arc approxiinately necessary on the average 
 lor the survival of the race. That is to say, a man and wife in dying should be succeeded 
 In- two individuals, and two children therefore should grow to manhoo<l and womanhood, to 
 the marr>ing age, and if one allows the chances of death to strike off one during that period 
 
Union Labor Program 579 
 
 during which they are growing into manhood and womanhood, a man naturally thinks of 
 three children. 
 
 "The Chairman: Is that the average family in this country? 
 
 "Mr. Ogburn : X'erj- nearly. Then there is a good deal, of course, which centers around 
 the question of what about men who are not married and so on. It is supposed to be a 
 pretty good policy to encourage early marriage. It is supposed to be rather a desirable thing 
 for the health, welfare, morals and so forth of the community; and it is also considered 
 to be .somewhat better for marriage to occur early and have children to be born fairly early. 
 And for all these reasons it would seem unwise for a state, inasmuch as it concerns itself 
 with the minimum race and so on, to set anything lower than a family of five. That at least 
 has been the policy in the past. This has been discussed and w-orked out after considerable 
 research. Mr. Rountree in a chapter in his recent book^ has concerned himself with this, 
 and he takes all tlie various exceptions that arise, where a man has a large family and where 
 a man has a small family, and he figures on starting in and saving and equipping a home, 
 and the pressure of children as they come on and so forth, and he has a good deal to say, 
 and I may say the result of his conclusions particularly justify this size of family." 
 
 Later on, when Mr. Lauck himself was on the stand, he was asked as to 
 what would happen to the budget and wages, if the cost of living should go 
 down. In his reply he intimated that the cost of the budget would go down, 
 but as to wages it would be well to have an understanding in advance.^ His tes- 
 timony on this point appears at page 1930 of the Proceedings, as follows : 
 
 "The Chairman: Now, if this budget of $2,000 were adopted would there be any pos- 
 sible way by which that could be reduced if the cost of living should be substantially reduced? 
 
 "Mr. Lauck : It would fluctuate with the cost of living, yes, sir. 
 
 "The Chairman: So you believe that the budget should fluctuate with the cost of living? 
 
 "Mr. Lauck : If the cost of living is reduced, the cost of the budget would go down, 
 yes, sir. 
 
 "The Chairman : Do you believe that your organization would be perfectly willing to 
 consider a reduction in the budget if the cost of living should go down? 
 
 "Mr. Lauck : Well. I have never consulted with the organization, but, judging from 
 what I know of organizations of this kind, it would have to be understood if you recommended 
 a specific budget that it was flexible with the cost of living in the beginning, otherwise if the 
 wage rate was established I think it would be impossible to reduce it." 
 
 If once the principle of the living wage be admitted as properly applicable 
 to electric railway trainmen, the evidence submitted on their behalf with respect 
 to the income required to provide for a minimum comfort budget is pretty con- 
 vincing. Practically no evidence was offered on behalf of the public or of the 
 American Electric Railway Association to controvert these claims and it cannot 
 be said that the evidence on the budget and the living wage was materially 
 weakened by the cross e.xamination. However, in the statement submitted by 
 Mr. C. J. Joyce on behalf of Mr. Thomas E. Mitten, President of the Philadelphia 
 Rapid Transit Company, reference is made to the growing unfriendliness of the 
 public toward both capital and labor on account of the increasing cost of street 
 railway transportation. At pages 1515 and 1516 of the Proceedings, Mr. Mitten 
 says: 
 
 "Frank statement, fair dealing and honest purpose, with patience and perseverance, may 
 be counted in the long run to win the support of a community. 
 
 "The public have for so long been befooled and bedeviled that they are now in a mood 
 to question the demands not only of capital but also of labor. This feeling is growing in 
 its intensity as the citizen of inquiring mind discovers that while all about is heard the 
 demand for a living wage, yet all evidence of merchants is to the effect that the wage-earner 
 is now demanding the most expensive class of goods and buying with great prodigality. The 
 owners of automobiles among the wage-earners have become legion, and it would seem that 
 the difficulty now is as much with the higher price of gasoline as with the increased cost of 
 our daily bread." 
 
 While the public can have no reason to complain if carpenters, bricklayers, 
 foundrymen and other mechanics rendering skilled service in various occupa- 
 
580 Electric Railway Problem 
 
 tions enjoy sufficient affluance to own automobiles, it can hardly be expected to 
 "stand for" wages in the electric railway industry so high as to permit employes 
 to enjoy the luxury of automobiles so that their families will not have to ride 
 in the "poor man's carriage" which they drive. In fact, from the electric rail- 
 way point of view an employe (other than a general otticerj who would own 
 an automobile or even ride in one, might be suspected of disloyalty to his own 
 industry, as he would be giving "aid and comfort to the enemy" by supporting 
 a competitive means of transportation. Doubtless, as the Amalgamated is 
 deeply interested in the financial rehabilitation and prosperity of the electric rail- 
 ways, it would join with the management in disciplining one of its members for 
 such an offense as that. 
 
 It is by no means clear that Professor ( )gburn's minimum comfort budget 
 would enable a motorman or conductor to support an automobile unless he should 
 choose it as a substitute for a family. It is doubtless true, however, that if it 
 should appear in arbitration proceedings initiated upon the demand of the street 
 railway employes for higher wages that any considerable number of them are 
 already owners of automobiles the public would not be very kindly disposed 
 toward fare increases made necessary in order to establish for the men the prin- 
 ciple of a living wage high enough to enable a still larger number of them to 
 get cars of their own. When organized labor takes the position that labor is not 
 a commodity and that wages should not be regulated by the law of supply and 
 demand it nmst accept also the principle that, along with the living wage for the 
 employes, goes the right of the public to transportation service at a reasonable cost. 
 In this connection it is noteworthy that, on the basis of the 1917 figures, when 
 the average number of revenue passengers handled per car crew was 166,000, a 
 yearly wage of $2,000 for each trainman would mean 2.41 cents per fare for 
 trainmen's wages as compared with 1.13 cents per fare for the trainmen's wages 
 actually paid in 1917. Of course, if the efficiency of trainmen's labor, in terms 
 of revenue passengers carried, should be greatly increased by the general intro- 
 duction of the one-man safety car the increase in the cost of transportation service 
 resulting from wage increases would be correspondingly offset. 
 
 In this connection I may refer to the experience of the Michigan Railway 
 Company, which o|)erates in four cities having about 50,000 population each, and 
 also operates interurban service connecting these and other cities. .\s a result 
 of an investigation undertaken in the summer of 1919 to determine the cost of 
 transportation service on this company's lines in the city of Kalamazoo, where 
 the company is operating under a franchise rate schedule which calls for a cash 
 fare of 5 cents and provides for the sale of tickets at the rate of 6 for 25 cents, 
 I recommended tiial the flat 5-cent fare without tickets be put into effect and 
 that the system l)e completely ecjuipped with one-man safety cars. The com- 
 pany insisted that a higher fare was necessary and tinally an agreeiuent was made 
 with the City Commission to the effect that a straight 7-ccnt fare should be per- 
 mitted during the remaining three years of the life of the franchise, and that one- 
 man .safely cars should be immediately installed. This agreement was submitted 
 to the electors, and, on account of the combined opiwsition to the one-man cars 
 and the 7-ccnt fare, failed to receive the necessary immber of votes to make it 
 
Union Labor Program 581 
 
 effective. Later on, the company's employes demanded radical increases in 
 wages and the company stated that the granting of the men's demands would 
 mean a 10-cent fare. The Kalamazoo Gazette of May, 20, 1920, reports that 
 in the arbitration proceeding between the company and its men "many of the 
 employes on the stand admitted to owning automobiles." The arbitration board, 
 by unanimous vote, awarded the trainmen on the city lines an increase from a 
 minimum of 40 cents and a maximum of 42 cents to a minimum of 60 cents and 
 a maximum of 62 cents. The men had asked for a scale running from 75 cents 
 to 80 cents. On the interurban lines the scale awarded was from 65 cents to 
 70 cents, instead of the old scale of 40 cents to 48 cents and the scale demanded of 
 from 80 cents to 90 cents. 
 
 It is very probable that injustice may be done to electric railway employes 
 by virtue of the publicity given to statements such as those quoted from Mr. 
 Mitten and from the Kalamazoo Gazette. It is quite possible that the auto- 
 mobile standard of living displayed by certain street railway employes is due in 
 some cases, to financial prosperity not connected with the electric railway busi- 
 ness, and, in other cases, to the same causes that are occasionally effective in 
 enabling policemen to show signs of wealth not easily accounted for. Such ex- 
 ceptional cases do not disprove the soundness of the general demand for a living 
 wage, but unless fully explained they will surely tend to create an adverse public 
 opinion which is likely to be very damaging to the employes. It will be remem- 
 bered that in the summer of 1919 an increase of wages was awarded to the train- 
 men of the Boston Elevated Railway system, bringing the maximum compensa- 
 tion on the surface lines up to 60 cents an hour and for motormen on the rapid 
 transit lines up to 62 cents an hour. This was one of several awards to which 
 special reference was made by a number of witnesses before the Commission as 
 indicating the possibility that future increases in trainmen's wages were likely 
 to become a more important and troublesome factor than ever, both from the 
 point of view of the financial condition of the companies and from the point of 
 view of the public with respect to fare increases. Recently, the union of motor- 
 men and conductors on the Boston lines decided to apply for an increase in wages 
 from a maximum of 60 cents an hour to a maximum of 95 cents an hour. At the 
 time, it was said that the new schedule, if granted, would increase the annual 
 payroll about $4,500,000. Meantime, the Boston Elevated Railway, with its 10- 
 cent fare, had been skimming along with a narrow margin of surplus above the 
 cost of service as defined by the special act under which the system is being 
 operated by public trustees. The men's demands were referred to a board of 
 arbitration, and under date of May 4, 1920, as will appear from the Electric 
 Railway Journal of May 15, Mayor A. J. Peters made a direct appeal to Mr. H. 
 Ware Barnum, general counsel for the company and its representative on the 
 arbitration board, strongly urging that no increase be granted to the street rail- 
 way employes at the present time for reasons set forth in detail. In this letter, re- 
 ferring to the predominance of the public interest. Mayor Peters says : 
 
 "I believe it may be safely .said that tlie public interest is predominant in industrial dis- 
 putes, especially in the case of public utilities, and it is my duty as Mayor to defend the 
 public interest. This observation is more readily applicable to the case at hand, for any 
 deficit in the operation of the elevated must be met by the cities and towns which it serves. 
 
582 Electric Railwav Problem 
 
 The demands of the carmen cannot, therefore. I)e considered as an isolated unit; they must 
 rather be treated as only a part of a question in its relation to the whole. Increases in com- 
 pensation to motormen and conductors in the elevated system at the present time will cer- 
 tainly react most unfavorably, not only on the industrial situation in Boston, but on the 
 citizens as a unit." 
 
 Mr. Peters makes comparisons between the wages of certain employes of the 
 City of Boston, particularly the tiremen and policemen, and the compensation of 
 motormen and conductors on the Boston Elevated Railway system. He says : 
 
 "Both in the police and fire departments privates are on the same salary basis. They 
 enter tlie service at $1,400 a year and progress $100 a year for four years uiitil they reach 
 the ma.ximum of $1,800. The motormen and conductors, on the other hand, need work only 
 one year before the maximum is reached. Therefore, on a daily wage basis we find the salary 
 schedule over a period of four years as follows : 
 
 Police and Motormen and 
 Firemen Conductors 
 
 First year $,3.83 $4— $4.40 
 
 Second year 4. 1 1 4.80 
 
 Third year 4.38 4.80 
 
 Fourth year 4.66 4.80 
 
 I"ifth year and after 4.93 4.80 
 
 "The police receive one day off in eiglit and they receive no overtime. Firemen receive 
 one day off in three, and it should be remembered that practically all of the two days they 
 are on duty must be spent at the station house. Both receive two weeks' vacation without 
 loss of pay. 
 
 "I believe, and I think it is generally admitted, that the firemen and police are receiving 
 a fair compensation for the work performed. I have no hesitation in stating most emphati- 
 cally that I believe it is the opinion of the majority of our citizens, and 1 Ix^lievc this opinion 
 is sound, that the duties and the responsibilities of the firemen and police are greater than 
 those of the motormen and condiirtors. and without any reflection on the elevated's carmen. 
 I think it may fairly Ix- admitted that the ixilicc and fire departments demand a higher aver- 
 age of competency than is rei|uired of the motormen ,nnd conductors. 
 
 "The conclusion is obvious: The firemen and police are receiving a fair compensation 
 for the work performed: their responsibilities are greater than those of the conductors and 
 motormen, the police and fire departments recpiiring a higher average of competency: there- 
 fore, any increase in the salary of carmen which would automatically yield them a higher 
 .salary than the police and firemen is not only unwarranted, but it would work an injustice 
 to certain municipal employes." 
 
 Mayor Peters goes on to say that from January, 1910. to July, 1919, the 
 hourly wage rate of motormen and conductors was increased from 23 cents to 
 60 cents and states that "certainly no corresponding increase has been granted 
 to other public emiiloyes." He refers to the financial condition of the Boston 
 Elevated Railway system and intimates that the conductors and motormen have 
 an im|)ortant part to play in increasing the earning capacity of the svstem. On 
 this point he says: 
 
 "The Boston Klevated is not in what could be termed a prosperous condition. I lielieve 
 I voice the sentiments of a great majority of our citizens when 1 say that it would be most 
 unmoral to grant any increa.se to the employes of the elevated, were such an increase hv anv 
 possibility to cause a deficit in the elevated's finances, L'nder such conditions the primate- 
 consideration is the great public. 
 
 "The elevated carmen are at the present time receiving a good wage. and. I say this 
 only after the most mature deliberation, they should not receive any additional compensation 
 until they have shown themselves worth more by causing the elevated to show increasal 
 c.yning capacity. They must not forget that they are part and parcel of the ele\-ated system 
 They have it in their power to increase or decrease the earning capacity of the companv 
 through an improved service to the public. I'ntil they give the public a ser\'ice which enables 
 the elevated to show a greater earning power, they are not entitled to a higher wage, and 
 not until that time should ihcv be given increased compensation 
 
 "This is a doctrine which 1 believe has licen too much disregarded in the pa.st, and it 
 cannot be overestimated at the present time." 
 
Union Labor Program 583 
 
 Mayor Peters takes the position that the members of the arbitration board 
 are "invested with a public trust" and that their decision will be made "purely 
 in the interest of the public, for after all, the best interest of the public as a 
 whole is the only insurance of the welfare of individual groups of employes." 
 Without expressing any opinion as to the sufficiency of the wages paid to police- 
 men and firemen in the City of Boston, or the sufficiency of the wages paid to 
 the Boston Elevated Railway employes under the 1919 scale, we can at least see 
 that Mayor Peters' protest represents a serious public reaction against the de- 
 mands of labor in the electric railway industry when those demands become so 
 great as to threaten to put the industry itself on the "charity level" or the "pauper 
 level." Mayor Peters' protest does not solve the problem of the living wage, but 
 it surely is a signal of trouble ahead in electric railway wage disputes. 
 
 The Amalgamated represents primarily the motormen and conductors, but, 
 in response to questions by Chairman Elmquist, Mr. Lauck made it clear that the 
 principle of the living wage as advocated by the Amalgamated is intended to 
 apply to all classes of adult labor connected with the industry. At page 1948 
 of the Proceedings, we find the following: 
 
 "The Chairman : Would you have that wage apply to organized as well as unorganized 
 labor in the railroad service? 
 
 "Mr. Lauck: We are speaking in this case of motormen and conductors, but that ought 
 to be the wage applicable to any man or woman of mature years ; of course, a man primarily, 
 but the conception of a living wage should apply to any class of employes who are mature 
 and adult, you might say. in the employ of the company. 
 
 "The Chairman : Should the same wage be paid to women as to men for the same 
 class of work? 
 
 "Mr. Lauck ; Yes, that is a supplemental principle which is generally acknowledged and 
 has been during the war and has been embodied in the Peace Treaty also, of equal pay for 
 women as for men." 
 
 The third main point upon which Mr. Lauck laid particular einphasis in 
 presenting the case for the Amalgamated was the eight-hour workday. Here, 
 again, he cited the Peace Treaty and the rules applied by the National War Labor 
 Board. The Peace Treaty enumerates among the methods and principles deemed 
 to be of special and urgent importance "the adoption of an eight-hour day or a 
 forty-eight hour week as the standard to be aimed at where it has not already 
 been attained," and the industrial principles laid down by the Federal govern- 
 ment during the war include the following: 
 
 "The basic eight-hour day is recognized as applying in all cases in whicli existing law 
 requires it. In all other cases the question of hours of labor shall he settled with due regard 
 to governmental necessities and the welfare, health and proper comfort of the workers." 
 
 In his brief, Mr. Lauck quotes from President Wilson's remarks in support 
 of the Adamson law passed in 1916 to establish the eight-hour day on the steam 
 railroads of the country, but no direct testimony was oiifered in support of the 
 eight-hour day except the testimony of Mr. Lauck himself, who, after referring 
 to the authorities just mentioned, expressed, at page 1898 of the Proceedings, 
 the belief of the employes "that it is a measure which is not only on economic 
 grounds of production, but also on the larger grounds of the general public wel- 
 fare, sanctioned by the enlightened opinion of the world." 
 
 Testimony was given by Mr. Carey Ferguson, business agent of the Detroit 
 local division of the Amalgamated, and by Mr. William M. Rea, financial secre- 
 
584 Electric Railway Problem 
 
 tary of the Cleveland division of the Amalgamated, with respect to the working 
 schedules and the "spread" of the trainman's day on the Detroit and Cleveland 
 systems. These witnesses brought out the fact that, on account of the peculiar 
 characteristics of the street railway business resulting from the great fluctuations 
 in the volume of travel at ditiferent hours of the day and night, conductors and 
 motormen. in many cases, have to be on call for a much larger number of hours 
 than the actual hours of work for which they receive compensation. These 
 witnesses made it perfectly clear that the trainmen have a vital interest in the 
 arrangement of the schedules and "runs." Mr. Ferguson explained in consider- 
 able detail the distribution of the nms on the city lines of the Detroit United 
 Railway as presented in an arbitration proceeding in 1917. when the average 
 time for which the platform nu-n received pay was 9 hours and 28 minutes. Out 
 of a total of 1.639, there were 605 straight runs. 792 two-piece runs, and 242 
 three-piece runs. In discussing street railway schedules, the outside time is the 
 time within which an employe completes his day's work. In the case of a 
 straight run the outside time is identical with the p.iy time, but in the case of 
 two-piece and three-piece runs the outside time is much greater than the pay time. 
 For example, a man may start a run at 6 o'clock in the morning and work until 
 11 o'clock in the forenoon, and then go on again at 2 o'clock in the afternoon 
 and tinisli his day's work at 6:30 in the evening. In that case his outside time 
 would be 12^2 hours, while his pay time would be 9\i> hours. Mr. Ferguson 
 showed that on 1,035 of the 1.639 Detroit runs the day's work was completed 
 within 12'/o hours; 269 runs were completed in between 12V-; and 14 hours: 150 
 nms in between 14 and 15 hours; 84 runs in between 15 and 16 hours: 54 runs 
 in between 16 and 17 hours; 46 runs in between 17 and 18 hours, leaving 1 run 
 that was completed in between 18 and 18|;, hours. Mr. Ferguson called atten- 
 tion to cases where the men were relieved at 8:34, 8:39, 8:51 and 8:59 in the 
 morning to go to dinner. At page 1740 of the Proceedings we find the follow- 
 ing testimony: 
 
 "The Chairman: Is it possible to rearraiigc your schedule so that all the men can be 
 relieved at certain times? 
 
 "Mr. Kergnson : \Vc do not expect that all men can he relieved at a certain time. That 
 is ont of the question. Their contention in that respect is that they should be relieved — 
 providing they arc going to Ik- compelled to o|K-rate a nin In which a dinner hour is provided, 
 that is. a run other than what is known as a straight run — that the diinicr hour should t« 
 somewhere near the dinner time." 
 
 That similar conditions prevail in Cleveland was brought out by Mr. Rca, 
 who testified in detail as to the arrangement of runs on the princip.il car lines 
 of the Cleveland Railway system. For example, he showed that on the St. Clair 
 Avenue line, in effect in May. 1919, there were 6 night carmen who completed 
 their day's work within 8 hours; 4 men who completed their day's work within 
 from 9 to 10 hours; 1 within 12 hours; 26 within from 12 to 12'-o hours; 110 
 from 12'/!. to 14 hours; 22 within froin 14 to 15 hours; 6 within from 15 to 16 
 hours; 12 within from 17 to 18 hours, and 16 within from 18 to 19 hours. Mr. 
 Rea explained that under the terms of the trainmen's contract with the Cleveland 
 Railway Company every man was gtiaranteed a mininuim of 5 hours pay. He 
 pointed out that on the Superior .'\venue schedule, for example, there were 22 
 
Union Labor Program 585 
 
 men working for 5 hours paj- per day, or a total of 110 hours for which they 
 received compensation, ahhough it took them an aggregate of 259 hours to com- 
 plete their day's work. Referring to the Euclid Avenue schedule, Mr. Rea tes- 
 tified that the average outside time required by the men for the completion of 
 their day's work was 13 hours and 15 minutes; that the average time paid for 
 was 9 hours and 39 minutes, leaving 3 hours and 36 minutes as the average time 
 lost ; while on the Woodland Avenue line, as another exan%ple, the average time 
 lost per man was 4 hours and 44 minutes. 
 
 Commissioner Mahon stated that the schedule conditions described as exist- 
 ing in Detroit and Cleveland were fairly typical of conditions generally prevailing 
 in the big cities other than Chicago and Boston, where the eight-hour day has 
 been established. It is also worthy of note that the municipal railways of San 
 Francisco are operated on the basis of an eight-hour day. With respect to con- 
 ditions in Seattle, Mr. Thomas F. Murphine, Superintendent of the Department 
 of Public Utilities during 1919, in his report for that year, makes the following 
 statement about wages, hours and conditions of work on the Seattle Municipal 
 Railway lines: 
 
 "The wages of the railway employes have been increased approximately i3 per cent, 
 and at the present time our City Railway employes are being paid a higher wage than is 
 paid on any surface street railway line in the world. Their working conditions have been 
 improved to a point where it can be asserted, without fear of contradiction, that they have 
 the best working conditions of any railway employes in the world. Their working day has 
 been standardized to eight hours, and while we pay time and a half for overtime, the over- 
 time amounts to but approximately one per cent. All those who wish it are allowed one day 
 ofT in any eight days. Fifteen minutes' time is allowed and paid them for reporting accidents. 
 Fifty cents per day additional is allowed trainmen for instructing students. Fifty-seven per 
 cent of the runs are what is known as straight runs." 
 
 Clearly, the eight-hour day as demanded by the Amalgamated has signifi- 
 cance in two directions : First, with respect to the economical distribution and 
 use of labor power ; and second, with respect to the rate of wages to be paid. 
 
 The problem of so distributing the runs that the service will be taken care 
 of properly while at the same time every trainman gets an eight-hour workday 
 without loss of time to himself or waste of his time for the utility is by no 
 means an easy one under the operating conditions that prevail in large cities 
 with big rush-hour traffic. 
 
 If it be assumed that each trainman works 325 days in a year — and that is 
 the figure used by the labor witnesses — it will take a wage of $6.15 per day to 
 produce the income of $2,000 per year required, in Professor Ogburn's opinion, 
 for the minimum comfort budget. This means, on the basis of an eight-hour 
 day, an hourly wage of 77 cents. If, on the other hand, a man works 9^4 hours 
 a day, this means an hourly wage of only 65 cents. It will be seen, therefore, 
 that the adoption of the eight-hour workday, coupled with the living wage, means 
 an increase of 12 cents per hour, or more than 18 per cent in the labor wage rate 
 as compared with the compensation required to produce a living wage where the 
 length of the working day is approximately identical with the average day now 
 worked on the Detroit and Cleveland lines. Unless it can be shown that the 
 efficiency of labor in the production of street railway service or in the collection 
 of street railway revenues will be increased by the substitution of 8 hours for 
 9V{> hours as the standard or average working day, it is clear that the general 
 
586 Electric Railwav Problem 
 
 adoption of the eight-hour day in the electric railway business would mean a very 
 substantial increase in the labor cost of local transportation. 
 
 At pages 1591 and 1592 of the Proceedings, Mr. Lauck reiterates his view 
 that the principle of the living wage should apply not only to the motomien and 
 conductors but to all street railway employes, as will be seen from the following 
 testimony : 
 
 "The Chairman : Then you believe that the stenographers and the clerks and all the 
 employes in the street railroad service of mature age should have at least $166 a month tor 
 an eight-hour day? 
 
 "Mr. Lauck: I think that is a fundamental industrial right which they should have, and 
 I think that the opinion of the world, the universally enlightened opinion of the world, 
 would support that; that, growing out of the war. has come the conclusion on the part of a 
 large part of the public, as well as on the part of the workers, that if we are going to have 
 any measure of economic democracy at all, the fundamental, inalienable, you might say self- 
 evident — to use a principle of the Declaration of Independence — right of the worker is to a 
 living wage; and if any industry does not pay a living wage, it is parasitic and should be 
 eliminated. In other words, that industr>- exists for the common good and not for the 
 deterioration of the working classes." 
 
 Mr. Lauck stated that the employes were "anxious to have the industry re- 
 habilitated and made prosperous," and that they were "desirous of having the 
 public protected." He insisted, however, on behalf of the employes, and laid 
 great emphasis upon this contention, that any reconstructive policy undertaken 
 for the rehabilitation of the industry "must be based upon and accept, as a funda- 
 mental preliminary, the rights of labor, as accepted by all civilized and leading 
 industrial nations in the Treaty of Peace with Germany, and the principles which 
 have been accepted and proclaimed by our own Government as those which should 
 govern the relations between employers and employes." In addition to "union 
 recognition," "the payment of a living wage," and "the adoption of an eight- 
 hour day," he cited four additional points from the Treaty of Peace, namely ; 
 First, that the guiding principle in the relations between capital and labor should 
 be that "Labor is not a commodity"; second, the acceptance of a weekly rest 
 period, preferably the Sabbath Day; third, the abolition of child labor and the 
 imposition of such restrictions on the labor of women and minors as will assure 
 their proper physical development ; and fourth, equal pay for equal work without 
 discrintination between the sexes. He maintained that the recognition of this 
 labor program should go along />(ir» f>assit with the recognition of the right of 
 capital to security and a fair return. When asked whether the granting of the 
 demands of labor ntight not so increase the cost of service as to deter people 
 from using the street cars, Mr. Lauck expressed the opinion that the public would 
 be willing to pay what the service cost, either through the fares or through sub- 
 sidies from taxation. His testimony on this point is found at page 1954 of the 
 Proceedings, as follows: 
 
 "The Chairman: In your consideration of this subject has it occurred to you that the 
 adoption of this standard might so greatly increase the carfare as to largely reduce the riding 
 hahit and thus in the long run to accoinplish a very great injury to men employed in the 
 service ? 
 
 "Mr, Ijiuck : I do not see how that could work out. I think that is not a sound con- 
 cliision. • • • • Our i,|ca is that the public interest is predominant, and the public is 
 going to protect fully and guarantee the rights of capital. We think that lalxir has certain 
 fundamental right>. like capital has the right to a fair return and labor has the right to a 
 living wage. \\c think the public has accepted that principle, and we know it is the policy 
 of some of the leading nations of the world already in a practical way. We believe what- 
 
Union Labor Program 587 
 
 ever the cost of that tnay be to the public, whatever it might be, that the public is willing 
 to pay lor that. And if it would result in an excessive fare, the public might meet that in 
 the way of car riding by remission of taxes or by granting of some form of financial relief 
 or otherwise to the company. 
 
 ■'The Chairman : \\'ell, the evidence presented here seems to indicate that in all cases 
 where fares are increased competition from jitney service and other sources is stimulated. 
 Now. if the fare through the adoption of your plan should be largely increased, would it not 
 have a tendency to greatly increase the ainount of automobiles used in jitney service? 
 
 "Mr. Lauck: I think so. but that it would have any significance I do not think, for this 
 reason, that the public supports hospitals and the patients do not pay for the cost of the 
 maintenance of those hospitals, but the public has decided that the well-being of the commu- 
 nity demands that certain institutions of this kind be maintained, hospitals and similar insti- 
 tutions. Their receipts are less than their expenditures, and the public meets the deficit. 
 The public 
 
 "The Chairman : Then you meet the situation by saying that a street car fare should 
 be one to encourage the riding habit, and the public should pay the deficit out of taxation? 
 
 "Mr. Lauck: Well, my point of view is that the public will consider that: if it thinks 
 it is better for the people to ride and they will not ride at a higher fare, the public will take 
 proper measures to give the financial assistance necessary to let them ride." 
 
 Mr. Lauck was very emphatic in the opinion that labor ought not to "sacri- 
 fice" itself in any way in order either to conserve low fares or to keep the electric 
 railway industry alive. On this point he speaks at page 1955 of the Proceedings : 
 
 "Commissioner Mahon : Mr. Lauck. you do not believe that labor should pay a sacrifice 
 to keep street cars going, do you? 
 
 "Mr. Lauck : No. sir. I think there is a great deal too much tendency — that is what 
 I was attempting to bring out — to lay stress upon the sacred right of capital to a fair return. 
 We do not dispute that, of course. That has been brought up to a condition of social usage 
 and so forth. 
 
 "Commissioner Meeker : It is part of the Constitution, too. 
 
 "Mr. Lauck: It is part of the Constitution, but we think now under this new develop- 
 ment, under the war, that we are going to have industrial democracy in the right sense of 
 the words that there are certain rights of labor, and one of those is the right to a living 
 wage, irrespective of what the cost may be or what the effect may be, and we believe the 
 public will afTord it, 
 
 "Commissioner Mahon : You do not believe if modern inventions come along and dis- 
 place the street railway by something that is more convenient and beneficial to the public 
 that labor should sacrifice in the way of a low wage to conserve low- fares and keep this 
 industn.-. do you? 
 
 "^ir. Lauck: Absolutely not. and I do not think the public would expect labor to do 
 that." 
 
 Further on, in response to questions by Commissioner Gadsden, Mr. Lauck 
 admits that the immediate and arbitrary application of the principles for which 
 labor contends might result in the collapse of the electric railway industry, but 
 takes the position that these principles are to be embodied as a fundamental part 
 of the permanent policy of rehabilitation, which he assumes that the Commission 
 will recommend. His testimony on this point is found at pages 1955 and 1956 
 of the Proceedings : 
 
 "Commissioner Gadsden: Mr. Lauck. if I get your position correctly, it is that this 
 standard of living that you have described is a standard which you think the public should 
 work towards? 
 
 "Mr. Lauck: \'es. sir. 
 
 "Commissioner Gadsden : Not necessarily that it is going to be adopted tomorrow or the 
 next day or next month, but you think it ouglit to be kept in view and adjustments made 
 from, time to time in the hope of reaching that standard at a proper time. Is tliat about 
 vour thought? 
 
 "Mr. Lauck: Well, I would not make it quite that indefinite. I should think it ought to 
 be immediately, so far as realizable, put into effect. I have distinctly brought out the point 
 of view, in speaking and in our brief, that we wish the Commission to recommend or sanc- 
 tion this principle and the definite amount would be worked out between the organization 
 and the company or any adjustment agencies that would be created as the result of your 
 recommendations or other agencies. We think that 
 
588 Electric Railway Problem 
 
 "Commissioner Gadsden: What I had in mind was this — that it the standards which 
 you are advocating were put into effect immediately or in the near future they would antici- 
 pate perhaps by a great many years the adjustments of the relations between the companies 
 and the public, because we can hardly suppose that the relations between the companies and 
 the public can be worked out in a year or two years; it will take a long time. Now, if these 
 readjustments of the labor standards are put into effect in advance of that, do you not think 
 that you are going to precipitate a much greater crisis in the industry than you have today 1 
 
 "Mr. Lauck : I think if you arbitrarily and immediately apply them, it would lead to a 
 great dislocation and the utter collapse, ptrhaps. of the industry. 
 
 "Commissioner Gadsden: .And probably defeat its purpose, because some roads would 
 have to go out of business and labor would lose its employment. 
 
 "Mr. Lauck : But the point is this. We have assumed that the Commission would 
 recommend a permanent policy to rehabilitate the street railways and to work out these 
 relations with the public, and as a part of that policy there should be the sanction of these 
 principles, and as this was worked out these principles would W put into effect." 
 
 Particular attention should, perhaps, be given to Mr. Lauck's statement at 
 
 page 1894 of the Proceedings, where he warns against measures "for iminediate 
 
 relief" that do not take into consideration a complete constructive program. 
 
 He says: 
 
 "We think that any measure for immediate relief should be conditioned upon whatever 
 the final recommendations of the Commission would be. otherwise it might devolve to the 
 detriment of the public or the employes. In other words, if there were temporary relief it 
 might perpetuate the past evils to the management or the employes or the public, and it seems 
 that the evidence tends to show that there should be a complete constructive program out- 
 lined by the Commission." 
 
 Mr. Lauck was questioned rather closely by Commissioner Wehle as to the 
 attitude of the unions in the electric railway industry toward bringing about "a 
 greater effectual ization of their efforts for the company," or, in other words, as 
 to the interest taken by them in their own productiveness. In Mr. Lauck".^ 
 opinion, the acceptance of the princijjles j)ut forward on behalf of the Amalga- 
 mated would be the very thing to bring about the desired cooperation and m- 
 creased productiveness of labor. Mis testimony, at pages 1958 and 1959 of the 
 Proceedings, is as follows: 
 
 "Commissioner Wehle: Is it your opiinon that in general in organized labor the workers 
 should be brought to take an interest in their own productiveness? 
 
 "Mr. Lauck: L'ndoubtedly. 
 
 "Commissioner Wehle: How would you propose to bring that alwut? 
 
 "Mr. Lauck : l-'undanientally. I would bring it about by exactly what we are advocating 
 here : .\ basic e<|uital)le participation in the output of the industry and the granting of 
 proper hours and proiurr conditions of work. 
 
 "Commissioner Wehle : Now. assuming that you have the equitable basis and proper 
 hours and conditions of work and have those fundamental conditions that you say are a pre- 
 requisite to bringing alxiut the state of mind, what then would you .say as to the methods 
 or proper policy or the principles that should be adopted by organized lalxsr with reference 
 to the effectiveness of its own efforts? 
 
 "Mr. Lauck: 1 think there should lie the fullest cooperation on the jiart of organized 
 labor and every effort on the part of the managerial end of the business to reduce costs or 
 increase output jx-r dollar <if outlay for labor and the fullest cooperation. I think you would 
 have it. Hut you have a situation now where the cooperation of lalior will result in the 
 absorption of its efficiency, and they do not think they have a show to get it." 
 
 When pressed still further for some assurance that organized labor would, 
 in fact, respond to the need for greater productiveness, if the demands of the 
 Amalgamated were fully inet, Mr. l^iuck says at page 1965 of the Proceedings: 
 
 "I have only stated .so far that I think it would realize the maximutri effectiveness. I 
 think I could probably make it more explicit on the other side by saving that the manage 
 mcnt anil thi- public would have evcr>- right to cxixti and demand nnd insist that then- 
 should be the fullest measure of production and cooperation from lalxir. Would that answer 
 
 i 
 
Union Labor Program 589 
 
 it — that it would be an essential duty and responsihility on labor, with the realization of its 
 rights? 1 did not entirely grasp your question at the beginning, but I think it would be an 
 absolute duty of labor to fulfill its obligations by realizing maximum production." 
 
 With respect to the extent to which the productivity of labor in the street 
 railway industry hes, so to speak, within the discretion of the employes, Mr. 
 Lauck testifies at page 1967 of the Proceedings in response to questions by Com- 
 missioner Sweet: 
 
 "Commissioner Sweet : Laying aside other industries, is it a fact that the productivity, 
 meaning by that term the success, to a certain extent, of a street railroad company can be 
 influenced for good or ill by the conduct of motormen and conductors? 
 
 "Mr. Lauck; Oh, absolutely; 1 should think so. 
 
 "Commissioner Sweet : Could a motorman or conductor, without being dishonest or 
 breaking any rules that would necessitate his discharge — is there a range in connection with 
 courtesy and efforts to get business and all that sort of thing within which by extra effort 
 on his part he coulp held the business? 
 
 "Mr. Lauck: Undoubtedly, to a very great extent. 
 
 "Commissioner Sweet : Do you think it would be a good plan to give him the benefit of 
 some degree of benefits of that kind and make it an object for him to do it? 
 
 "Mr. Lauck : I think so. I think it would stimulate his interest and productivity ; in 
 other words, he would have the welfare of the institution at heart and would strive, as is 
 claimed in Philadelphia, for instance, that 
 
 "Commissioner Sweet : Then I take it that your position, Mr. Lauck, is that a man 
 who occupies one of these positions as motorman or conductor on a street railroad company 
 ought to receive a living wage anyway? 
 
 "Mr. Lauck : Yes. 
 
 "Commissioner Sweet: One that would provide ordinary proper comfort? 
 
 "Mr. Lauck : Yes. 
 
 "Commissioner Sweet: And that it might also have a stimulating effect and be of some 
 value to let him participate in what, over and above that, might be acquired due partly at 
 least to his extra efforts in the direction of courtesy and business ability? 
 
 "Mr. Lauck : Yes, and undoubtedly it would be very advantageous to the industry and 
 to the public, and if you could work that out so it could be a joint effort on the part of the 
 management and subordinates and bring about the best results, it would be the ideal condi- 
 tion to attain. 
 
 "Commissioner Sweet : That would help along the spirit and increase the spirit of co- 
 operation. 
 
 "Mr. Lauck : L'udoubtedly. yes.'' 
 
 I have reviewed the Amalgamated's positive program so far as it relates to 
 the demands of labor. Preliminary to the presentation of this program, evidence 
 was introduced on behalf of the employes to show, first, that the iticreases in the 
 wages of motormen and conductors during the war period up to 1918 were in 
 no degree responsible for the financial difficulties of the electric railway industry, 
 and second, to show that those difficulties were directly traceable to past financial 
 mismanagement. 
 
 For the establishment of the first of these two points dependence was chiefly 
 placed upon the testimony of Mr. Arthur Sturgis. to whom I have already re- 
 ferred. Mr. Sturgis found that the increase from 1902 to 1917 in the average 
 yearly wage of conductors and motorinen amounted to 54 per cent, as compared 
 with increases of 56 per cent in the average yearly salary of managers and 
 superintendents and 78 per cent in the average yearly salary of general officers. 
 He figured out that if the trainmen had received the same percentage increase as 
 the general officers their wage in 1917 would have been $1,080 instead of $934, 
 or 15 per cent more than they actually got. He also figured out that on this basis 
 the average motorman and conductor employed continuously from 1902 to 1917 
 had lost in the aggregate $1,805 as compared with what he would have received 
 if his wages had been increased from time to time in the same proportion as the 
 
590 Electric Railway Problem 
 
 general officers' salaries were increased. Mr. Sturgis figured that the electric 
 railway companies had saved off the trainmen during this period of 15 years 
 approximately $200,000,000 in the way indicated. He also showed that the num- 
 ber of conductors and motormen employed as compared with the total number 
 of employes decreased; that in 1917 only 136,000 trainmen were employed, 
 whereas, if the number of trainmen had kept pace with the number of other em- 
 ployes the electric railways in 1917 would have had 209,000 motormen and con- 
 ductors. He did not contend that additional conductors and motormen should 
 have been employed or that other employes should be discharged to restore the 
 ratio as it existed in 1902. Upon this point his testimony, at page 1777 of the 
 Proceedings, is as follows: 
 
 "I do not say that either of those two is possible or desirable. It is not, but that is what 
 would have to be done in order to restore that ratio. 
 
 "That curve is also a measure of efficiency, not direct, not absolute efficiency, but relative 
 efficiency, because the conductors and motormen in 1917, as compared to those in 19112, are 
 doing the work of 209,000 men with only 136.000 men. In other words, their efficiency has 
 increased 54 i)er cent as compared to the otlicr employes. 
 
 "Mr. Lauck : You would be willing to concede there, would you not, to be perfectly 
 frank, that this may be brought about by a better capital equipment, or by outlays of capital 
 there might be larger cars, or a larger numlwr of passengers per car mile made possible by 
 added capital investment, to be perfectly frank about it? 
 
 "Mr. Sturgis: It would he possible also by addition of trailer cars and one-man cars. 
 
 "Mr. Lauck : Yes. 
 
 "Mr. Sturgis: It would also be brought about this way. It is possible that the com- 
 panies have felt the necessity of analyzing their costs more and have increased the number 
 of their office force, as they have very largely, their clerks." 
 
 Mr. Sturgis also showed that the number of revenue passengers handled per 
 car crew increased from 118,000 in 1902 to 166,000 in 1917, or approximately 
 40 per cent, notwithstanding the fact that the average number of hours worked 
 decreased somewhat during that period. On this point, in response to questions 
 from Commissioner Gadsden, Mr. Sturgis admitted that the figures indicated 
 an increase in the general efficiency of electric railway management, but insisted 
 that this increase in efficiency resulted from the increased efficiency of the train- 
 men. The testimony on this point is found at pages 1782 and 1783 of the Pro- 
 ceedings, as follows: 
 
 "Commissioner Gadsden: Mr. Sturgis, right there, without reference to the relative 
 merits of this chart you have prepared insofar as motormen and conductors are concerned, 
 looking at the industry as a whole from the standpoint of the public, this chart would seem 
 to indicate that the electric railway industry had increased in efficiency; that is, handling 
 more passengers? 
 
 "Mr. Sturgis: Handling more passengers per car? 
 
 "Commissioner Gadsden: Yes, at a lower ratio of expense? 
 
 "Mr. Sturgis: Well, that in itself would lend to lower the ratio of expense, yes. 
 
 "Commissioner Gadsden: Yes. Irrespective of what quarrels there may be between the 
 management as to the division of that, it would seem to prove that the industry, as an indus- 
 try, has been working out for itself some verj- substantial efficiencies, would it not? 
 
 "Mr. Sturgis: These curves show essentially the same thing as was shown by the curves 
 introduced by Mr. Welsh. 
 
 "Commissioner Ga<l>den : Yes. I wanted to bring that out for the benefit of the Com- 
 mission. While we may (|uarel as to whether one class got their proper share, as an industry 
 these charts seem to go a long way toward establishing the fact that we have been increasing 
 in efficiency, have been rendering more service to the public; isn't that true? 
 
 "Mr. Sturuis : Yes, I think so. 
 
 "Commissioner Gadsden: .'\nd, of course, from the standpoint of this Commission, that 
 is a v<r>- important fact, because what we arc trying l<i bring before the public is, if this 
 ind\istry needs relief, we must be able to .show that it has itself been endeavoring to work 
 out efficient c)pcration. 
 
Union Labor Program 591 
 
 "Mr. Sturgis : Yes. I am trv'ing to bring out that same fact tliat Mr. Welsh brought 
 out, but I am going a httle bit further than he did by claiming that that efficiency is the result 
 of the motormen and conductors. 
 
 "Commissioner Gadsden : Yes, I appreciate that. 
 
 "Mr. Sturgis : 1 do not mean to say that motormen and conductors went out and 
 drummed up trade for their cars. They could not do that, but their increase, the increase in 
 the efficiency of the motormen and the conductors, resulted in an increase in efficiency of 
 the companies. 
 
 "Mr. Lauck : You are willing to concede further, are you not, Mr. Sturgis, that this 
 efficiency might have been made possible by added capital investment on the part of the 
 company in heavier equipment, but that if the wages were increased it had a practical effect 
 in not increasing labor costs on the part of the company for motormen and conductors ; in 
 other words, your main idea is to show, is it not, that as a result of this efficiency, wherever 
 emanating, the wage increases have not resulted in higher labor cost to the company com- 
 mensurate with the increase in the wage rate? 
 
 "Mr. Sturgis: Yes, that is just it, Mr. Lauck." 
 
 Mr. Sturgis made another comparison to show that the outlay for trainmen's 
 wages had not increased as rapidly as other operating expenses. He presented 
 figures showing the amount left from the average revenue per revenue passenger 
 after the payment of trainmen's wages, and also the amount left after paying all 
 other operating expenses. These figures are given at page 1784 of the Proceed- 
 ings. They are as follows: 
 
 Amount of Revenue Per Revenue 
 Passenger Left After Paying 
 
 Trainmen's All Operating 
 
 Year Wages Expenses 
 
 1902 4.22c 2.28c 
 
 1907 4.40c 2.11c 
 
 1912 4.70c 2.39c 
 
 1917 4.S9c 203c 
 
 1918 4.83c 1.74c 
 
 Mr. Sturgis admitted that the companies' margin of safety "has decreased 
 verj' much," but his testimony tended to show that this decrease was not due to 
 any appreciable extent to increases in trainmen's wages. With respect to this he 
 testifies, at pages 1784 and 1785 of the Proceedings, as follows: 
 
 "On Chart C-5 I have compared the wages of trainment with the total income of electric 
 railways from all sources, including in the total income items which have nothing to do with 
 operation.^ 
 
 "It is not a usual comparison to make by any means, but it shows that the ratio of train- 
 men's wages in 1918 was essentially the same as it was in 1902. 
 
 "In other words, in 1902 the companies had available 81 per cent of their total income 
 from all sources with which to pay all their other operating expenses, dividends and all the 
 interest. 
 
 "In 1918 they also had 81 per cent. So, as far as net income is concerned, after operat- 
 ing expenses, the wages of trainmen have no effect upon it. The increase in the wages of 
 trainmen has had no effect upon it. * * * * I say no effect — of course, in 1902 the 
 ratio is 19.4 and in 1919 the ratio is 19.8. There is an effect. 
 
 "Mr. Warren: A very slight effect? 
 
 "Mr. Sturgis : Yes." 
 
 On the basis of operating revenue collected per car crew, Mr. Sturgis showed 
 an increase from $6,180 in 1902 to $9,550 in 1917, or approximately 54 per cent, 
 which he contended was another indication of increased efficiency on the part 
 of the trainmen. 
 
 In support of the charge that overcapitalization and past financial mis- 
 management are primarily responsible for the present plight of the electric rail- 
 way industry, the testimony of Mr. Stiles P. Jones, of Minneapolis, was offered 
 on behalf of the employes. Mr. Jones, a former newspaper man and for many 
 
592 Electric Railwav Problem 
 
 years the secretary of the Minneapolis Voters League, and later secretary of the 
 Central Franchise Committee of Minneapolis, is well known as a diligent and 
 incisive student of public utilities, particularly in their public relations. In prepa- 
 ration for his testimony before the Commission he made a special investigation, 
 covering several weeks' time, into the records of overcapitalization in most of 
 the urban communities where some sort of an official valuation of street railway 
 property had been made with which the capitalization could be checked. The 
 results of his studies were submitted in the fonu of an elaborate exhibit under 
 the title "Financial Mismanagement of Street Railways."* 
 
 In earlier chapters of this report I have already laid considerable emphasis 
 upon the effect of overcapitalization in the weakening and destruction of electric 
 railway credit, and have pointed out the importance of a complete reorganization 
 of the financial structure of the industry, if its credit is to be restored and the 
 public interests properly protected. I cite Mr. Jones' testimony at this point 
 because it lays the foundation for the claim put forward by the employes that 
 they too have suffered as a result of overcapitalization and financial mismanage- 
 ment in the past, and that they will not consent to any readjustment of electric 
 railway conditions in the future except on the basis of a sound capitalization 
 based upon a thorough financial reorganization, with guaranties that the industry 
 shall not be starved and their share in the fruits of production diminished by 
 excessive and preferential claims on the part of capital. .\t pages 1S43 and 1844 
 of the Proceedings. Mr. Jones makes the following summary statement of his 
 conclusions : 
 
 "The present unfortunate predicament of the street railway industry in the United 
 States is one in large part of its own making, created primarily by past financial mis- 
 management over which the public had no control and for which in this issue it cannot 
 justly be held responsible. 
 
 "A study of the financial histor>- of many representative companies discloses an amazing 
 story of financial manipulation clear through the life of the proiJcrties. the results of which 
 have been to load them down with a staggering burden of overcapitalization to constitute a 
 pcnnancnt charge against operating revenue. The ingeiuiity of the financial management in 
 creating new sources of capitalization lias been without limit. Nothing has been overlooked 
 u|)on which to hang new issues of securities. 
 
 "The inevitable result is seen in the present undennining of the financial structure of 
 street railway investments in this countrj-. The credit of the industry is so impaired that it 
 can no longer finance its own enteqirises on possible terms. It is facing collapse through its 
 own devices. 
 
 "The methods and agencies by which this unfortunate situation has been brought about 
 frame a sonlid lackground of ruthless exploitation of a great public-serving industry to make 
 financial killings for manipulating insiders. Unwarranted promoters' rewards, excess con- 
 struction costs, consnlidations, mergers, reorganiz.itions. leases, stock bonuses, have all been 
 iTude the medium for capital inflation. I'ranchise x-alues. excess eaniings, prospective future 
 earning capacity, discounts on securities, even opcratitig deficits, have l>een capitalized to 
 further add to the liunlcn. Kver>- operating improvement, the iiu-reascd efficiency of em- 
 ployes, the growth and development of the community and of industry, have been to a large 
 extent used as a means to absorb fictitious issues. .*\nd, fitially. let us not forget the in- 
 genious device of the holding company to still further complicate a before complex situation 
 and serve as another means to pyramid capitalization and exact additional toll of the public. 
 
 "Besides destroying the fin.mcial crx'dit of the industry, the results of such practices are 
 seen in nther ways atTectinc public interests, as follows: 
 
 "1. Impaireil service — To meet the excess exactments of capital, service has had to suffer. 
 
 "2. Impaired operating eflTiciency— The effort to protect the integrity of these false values 
 has absorU'd the efforts and resources of the companies to such an extent as to make it 
 impossible for them to fulfill adequately their primary function as public-serving institutions. 
 Prior recognition of the interests of the investor has made it necessary to keep down wages 
 and labor and to postpone expenditures calculated to improve operating efficiency. 
 
 "3. Maintenance has liecn robbed to meet fi.xcd charges and pay dividends. — The interest 
 
Union Labor Program 593 
 
 of capital has been put ahead of the upkeep of the physical property, with the result of 
 diminished operating efficiency and the piling up of an enormous load of deferred main- 
 tenance, in the aggregate, to constitute another ultimate burden upon the public. 
 
 "4. The public attitude toward many individual companies and the industry in general 
 has been affected to such a point that amicable settlements, franchises, fares and otherwise 
 between the companies and tlie communities are in many cases well nigh impossible, owing 
 to the present state of the public mind. This is perhaps the most discouraging aspect of 
 the present situation as well as the most serious indictment of the past methods and policies 
 of the industry." 
 
 During the course of Mr. Jones' testimony the question was raised as to 
 whether the inevitable effect of testimony of this kind, going into the past history 
 of the industry, would not be to "undermine the whole structure of electric rail- 
 way rates in this country today?" In answer to that Mr. Lauck, at page 1847 
 of the Proceedings, says : 
 
 "J think that that is something that lias already been done, and this evidence would have 
 no effect upon it. It is my personal opinion that the past financial mismanagement has so 
 impaired the credit now that the public will insist that there be some basis of procedure on 
 the basis of fair valuation or some reorganization of the finances. I do not think anything 
 that we could submit here would furtlier add to what lias been done in that regard." 
 
 The significance of overcapitalization, so far as the employes are concerned, 
 was brought out by the testimony of Mr. Jones at page 1853 of the Proceedings, 
 as follows : 
 
 "Mr. Lauck : What is the significance of all of this overcapitalization to whatever 
 extent and from whatever cause it may arise in the past, as bearing on the question of the 
 employes of the company? 
 
 "ilr. Jones: Overcapitalization, of course, has intimate relation with many of the aspects 
 of the street railway situation, but especially towards that of labor. 
 
 "With excess capitalization the interest of the investor always in mind, the question of 
 credit uppermost at all times, with the absolute necessity of squeezing out revenue sufficient to 
 keep up credit and to pay dividends on this capitalization as a means to keep up credit, 
 labor, of course, has suffered during all times. 
 
 "Mr. Lauck: In other words, the operating results being hypothecated, so to speak, by 
 fictitious issues of capital, if that capital is to be maintained in its market values, that means 
 an absorption of revenue which would otherwise be available for the payment of increased 
 compensation, does it not? 
 
 "Mr. Tones: Exactly." 
 
 \\"hen Mr. Lauck himself was on the stand, he pointed out in further detail 
 the vital connection between ancient financial history and the present and future 
 living wage. At pages 1886 and 1887 he says : 
 
 "W'e realize that the statement is made that the data that has been presented as to the 
 financial practices of street railway corporations in the past has been criticised on the ground 
 that this is academic and ancient history and has no bearing upon the present. We wish to 
 take issue with that. W'e think this has a very great significance at the present time. 
 and as a matter of fact is of paramount significance in the consideration of the attitude of 
 the employes towards the industry in this way : That we * * * * do not wish to charge 
 the present managements with responsibility for these practices and the evils which have 
 developed from them, but we consider that they are the victims along with the employes. 
 and the employes and the management and the public are all victims of these past systems 
 of corporation finance which the street railway ind\istry is suflFering from at the present 
 time; or. in other words, the practice which has characterized past years of capitalizing 
 income that has Ix-en developed as the result of the development of urban communities or 
 the application of new equipment or the increased efficiency of employes. Because with the 
 extension of capitalization in this way, the tendency has been that when other items of 
 operating cost have increased, such as materials and supplies and all the elements going 
 into operating expenses and maintenance and repair of equipment which has been installed 
 bv managements for the purpose of securing economies in operation — that with the increase 
 in the operating ratio and these securities outstanding which have been issued without any 
 commensurate investinent values in the property and were really a drain upon operating 
 reveinies, the margin of safetv. the am.ount of revenue left after fixed charges were pnid 
 and remaining to meet new capital issues, has been gradually and gradually declining until 
 
594 Electric Railway Problem 
 
 it is practically nil at the present time, and therefore the street railway managers have not 
 had an opportunity or any basis upon which to secure new financing, and which is a direct 
 outgrowth of these previous practices. 
 
 "V\c think the employes have a very vital interest in that, as Mr. Jones pointed out this 
 morning, or as came out in the course of his testimony; that if the capital investment in 
 the properties represented an actual commitment of capital the returns would then be related 
 to the actual capital investment, and it would be evident both to the employes, the manage- 
 ment and the public as to the legitimate return in the case of this industry, and the employes 
 would have a better opportunity not only to demonstrate their equitable participation in the 
 earnings of these properties, but also to secure such participation, while if the past system 
 of corporate management would continue there would be no hope lor the employe, there 
 would l)e no hope for the public, and there would be no hope for the present management, 
 because they would all be the victims of the financier or of the interests which were floating 
 these securities or had financial control of the property. 
 
 "I think that is conceded by the testimony of the men who are intimately connected 
 with the industry and who are practical men in the industry, I mean as to overcapitalization 
 and the evil effects of it." 
 
 Again, at pages 1887 and 1888 of the Proceedings, Mr. Lauck summarizes 
 the conclusions drawn by the employes in regard to the effect of financial mis- 
 management and their own guiltlessness of the threatened ruin of the industry, 
 as follows: 
 
 "Our general conclusion • * * * as to labor and the present (inimcial plight of 
 street railways is that we consider that the extraordinary gains in revenue and so forth, 
 arising from different methods of operating, from unearned increments and mechanical equip- 
 ment, as well as from managerial ability and lalxjr efficiency in the past, have to a large 
 extent fx;en absorbed by these processes of cor])orate financing or fictitious capitalization, 
 or in other companies have been actually dissipated by improjier and misguided financial 
 mismanagement, and our conclusion is that the present deplorable financial condition in 
 which the street railway comjianies find themselves has not Ixen due to an .idvance in o|icrat- 
 ing costs arising from increasing outlays to labor but has primarily arisen from past mis- 
 management of the finances of these utilities, in the way I have just indicated; that the 
 present managements, having inherited the results of past mismanagement in the times of 
 increasing operating costs, the costs of materials and supplies and so forth, have seen their 
 margin of safety disappear and their credit disappear, and the company is placed on the 
 verge of insolvency due to these past financial malpractices. 
 
 "Payments to employes of the industry have not only had no eflFect upon the present 
 finances of the companies, but as a matter of fact the employes have not had an equitable 
 participation in the results of their own labor. Their past productive efficiency has been 
 absorbed by this fictitious capitalization, and if the past methods were to be continued into 
 the future the fruits of the lalnir of employes as yet unborn, generations yet to come to 
 work upon the railroads would still have their efficiency absort)ed and would not have a 
 chance for a fair participation in the revenues of this industry. .\nd unless the present 
 l>asis of financial management and contn)l is changed the future is without hope, as we 
 claim, to the employes or to the general public or even to the practical managements of the 
 companies themselves who have faced the actual problems, with which they are confronted 
 at the present time, of operation and making the companies go as financial concerns. 
 
 "Those are our two main negative conclusions. I might say, that have been developed by 
 Mr. Slurgis' lestimonv and by the testimony of Mr. lones, that we consider that labor has 
 not l>een responsible for increased operating costs in the teniis of motornu-n and conductors, 
 and we consider that the present financial difficulties of the railroads arc primarily due to 
 past financial misnianaRcment. And we agree very likely on the question of bringing up the 
 history of these past managements, of financing these corporations with Ex-President Taft, 
 who. I iK'licve. testified before this Conunission that they were not of any significance except 
 it liecame necessary to take judicial notice of them, and we think from our own standpoint 
 if is necessary for the Commission in relation to the employes to take judicial notice of 
 those facts in order that the employes may have an opportunity of equitable participation in 
 the future in any rccommeiulalinn which the Commission may make." 
 
 Once more, at page 1928 of the Proceedings, Mr. Lauck lays emphasis on 
 the present significance of past histon', as will be seen from the following 
 testimony : 
 
 "The Oiairman: You have stressed very pointedly the financial mismanagement of 
 these companies? 
 
 "Mr. Lauck: Yes. 
 
Union Labor Program 595 
 
 "The Chairman : What particular point do you desire to make by that part of your 
 argument ? 
 
 "Mr. Laiick : The point we had specifically in mind was, in the first place — or rather 
 speaking generally — that the past financial mismanagement of these companies has a very 
 vital significance at the present time, and that there must be some form of adjustment to 
 get it on a proper basis in order to protect the interests of the employes as well as the 
 public, and that your recommendation should cover the prevention of similar methods in 
 the future on the ground that, as employes, we do not wish to see the productive efficiency 
 of the industry absorbed by illegitimate capital issues." 
 
 The evidence presented by the organized employes and the program sug- 
 gested by them are calculated to bring sharply into consciousness the fact that 
 the labor problem is coordinate with the problem of capital. They point un- 
 erringly to the conclusion that the electric railway industry cannot be rehabili- 
 tated merely upon the basis of a readjustment in the relations between the public 
 and the investors — that labor can no longer be treated as an incidental element in 
 the cost of service for which the employing companies assume undivided respon- 
 sibility. The solution of the local transportation problem necessarily involves 
 the completion of the triangle and the establishment of direct relations between 
 the employes and the public as well as a radical change in the relations between 
 the investors and the public. This tends greatly to complicate the problem of 
 adequate service at reasonable cost, at least under private operation, for it in- 
 evitably withdraws from the realm of private initiative and ultimate private re- 
 sponsibility a big sector of operating management. I do not mean that the Amal- 
 gamated itself goes so far as to draw this conclusion. Its policy has been to deal 
 with the electric railway industry as it finds it, namely, under private operation. 
 In fact, the general tendency of the employes has been, if anything, to oppose 
 a change to public ownership and operation. The established policy of the 
 Amalgamated provides for the organization of the employes into local unions 
 with the right of collective bargaining between them and the employing com- 
 panies with respect to wages, hours and conditions of work. Although the fun- 
 damental rules and principles of the Amalgamated are not fully set forth in the 
 Proceedings, it is a fair inference, from the testimony offered, that the organization 
 considers the three principles of tuiion recognition, the living wage and the eight- 
 hour workday as not properly subjects for arbitration. It is the well-established 
 and well-known policy of the Amalgamated to submit to local boards of arbitra- 
 iton all differences between the local divisions and the employing companies 
 that cannot be ironed out by negotiation, except with respect to the fundamental 
 issues that are not regarded as arbitrable. For example, the Amalgamated in- 
 sists that the Commission shall recognize the principle of the living wage, but it 
 does not ask the Commission to make a specific finding as to a rate of wages, 
 the theory being that the establishment of specific wages will be left to local nego- 
 tiation or arbitration upon the basis of the living wage principle. 
 
 In its case before the Commission the Amalgainjated laid emphasis on the 
 contention that labor is not to be treated as a commodity, and that wages, hours 
 and conditions of work are not to be determined on the basis of the law of supply 
 and demand. At the sante time, it "shies" at the suggestion of participation in 
 management or any recognition of responsibility on the part of the employes 
 beyond their day's work and their yearly contracts, although Mr. Lauck did in- 
 
596 Electric Railvvav Problem 
 
 tiniate at one puiiit in his testimony that if a proper plan could be worked out tor 
 mutual cooperation between the management and the employes, with the latter 
 participatinfj in the profits while at the same time not risking any reduction of 
 compensation below the standard living wage, the results might be mutually 
 beneficial. 
 
 It is one of the rules of the Amalgamated that its local divisions must keep 
 their contracts with the companies, and it appears that, on the whole, the record 
 in this respect is very good; yet. the question suggests itself as to whether the 
 traditional policies of the union are not in fact based upon the assumption that 
 labor is a contmodity. The principle of the living wage applied to electric rail- 
 way labor, under the general policies of the Amalgamated, seems not to be greatly 
 different in theory from the principle underlying the action of the government 
 in fixing the price of wheat and other essential commodities during the war. 
 
 The Amalgamated Association was organized at Indianapolis in September, 
 1892. It holds a general convention every second year. The constitution and 
 general laws of the Association now in force are as revised, amended, and adopted 
 at the Sixteenth Convention held in Chicago in September, 1919. The general 
 spirit and purposes of the Association are shown by the "Preamble." the 
 "Objects." .111(1 "Our Principles." as follows : 
 
 ••PRE.A.MBLE 
 
 "W c, tlic .\rnalgatnated .Association of Street and Electric Railway Employes of .■\merica. 
 this day and date assembled in convention, in order to secure and defend our rights. ad\'ance 
 our interests as working men. create an authority wliose seal shall constitute a certificate of 
 character, intelligence and skill, build up an orRanization where all the working members 
 of our craft can participate in the discussion of those practical problems upon the solution of 
 which depends our welfare and prosperity, to encourage the principle and practice of con- 
 ciliation and arbitration in the settlement of all differences iK-twecn lal)<>r and capital, establish 
 order, insure harmony, promote the general cause of humanity and brotherly love, and secure 
 the blessings of friendship, ecpialitv and tnith. do ordain and establish this Constitution and 
 these Laws, for the govenmient of said .\ssociation." 
 
 "OBJECTS 
 
 "To place our organization upon a higher plane of intelligence, efficiency and skill; to 
 encourage the lormalion in Division .Associations of sick and death iK-nefit funds in order 
 that wc may proi>erly care for our sick and bury our dead; to establish schools of instruction 
 for imparting a practical knowledge of nnxlern and improved methods and system of trans- 
 portation and tnulc matters generally: to encourage the settlement of all disputes Ix'twecn 
 employes and employers by arbitration ; to secure employment and ade(|uate pay for our work ; 
 to reduce the hours of labor and by all legal and pro|K-r means to elevate our moral, intel- 
 lectual and social condition." 
 
 "OL'R PRIN'CIPLES 
 
 "Resolved. That wc hold it as a sacred principle, that trades utiion men above all other. 
 should set a gixxl example as goixl and faithful workmen, performing their duties to their 
 employers with honor In tlu•m^elvl■s and to their organization. 
 
 "Resolved. That we hold a reduction of hours for a day's work increases the intelligence 
 and happiness of the lalK)rer and also increases the demands for labor and the price of a day's 
 work. 
 
 "Resolved. That we hold a lilxTal education of the young to l>e a pre-eminent preparatory 
 (o life's social and industrial work, and that the principles and puri'oses of organized labor 
 ficmand free and itjmpulsory education." 
 
Union Labor Program 597 
 
 Every local division is required to pay into the treasury of the Association 
 the sum of 65 cents per month for each of its individual members. Of this 
 amount, 1 1 cents is to be used to pay the expenses of management ; 40 cents to 
 create a fund for the payment of death, disability and old age benefit claims ; 
 10 cents to create a defense fund for the protection of the members of the local 
 divisions in the event of lockouts or strikes, and 4 cents to pay the expenses of 
 the Association's official organ "Motorman and Conductor."' 
 
 The association's method of handling disputes between the employes and the 
 companies is set forth in several sections, of which the following are the most 
 important : 
 
 "Sec. 111. When any difficulty arises between the members of any Local Division of 
 this .\ssociation and their employers, regarding wages, hours of labor, or any other question 
 that may result in a strike or lockout, the dispute shall be first taken up by the executive board 
 of the Local Division, or by a committee appointed by the Local Division for that purpose, 
 and they shall make a thorough investigation and seek, through conferences with the company, 
 to get the matter satisfactorily adjusted. The committee, after having finished the work of 
 negotiation with the company, shall submit a full report to a meeting of the Local Division. 
 
 "Sec. 112. If by compliance with Sec. Ill, the committee has been unable to secure a 
 settlement of the matters in dispute satisfactory to the Local Division, and the Local 
 Division believe that the matters in dispute are of such importance that a strike should be 
 ordered, the question of a strike shall be submitted to a secret ballot vote of the entire mem- 
 bership of the Local Division. If necessary to reach the entire membership of the Local 
 Division the ballot shall be taken by referendum, ballots being prepared and so distributed to 
 give every member an opportunity to vote. If two-thirds of the membership voting upon the 
 <|uestion decide in favor of suspending work, the Local Division shall at once notify the 
 International President. The International President, upon receipt of such notice, shall pro- 
 ceed to the scene of dispute in person or by deputy, and in conjunction with the committee of 
 the Local Division shall make a thorough investigation and attempt to settle the matter in 
 dispute. In case of failure thus to secure a settlement he shall then, in conjunction with the 
 Local Committee, prepare propositions of arbitration defining the points in dispute and the 
 basis upon which they shall be arbitrated. If the company refuses to accept arbitration as 
 tendered, the International President or his deputy shall then conmuniicate with the member- 
 ship of the General E.xecutive Board in writing or by telegram and obtain the consent of a 
 majority of the General Executive Board before endorsing the strike." 
 ******** 
 
 "Sec. 116. Local Divisions going on strike without the consent of the General Executive 
 Board shall forfeit all right to assistance and be subject to expulsion from the .Association." 
 
Chapter XLVII 
 LABOR'S PARTICIPATION IN MANAGEMENT 
 
 It appears from the year book of the Amalgamated Association of Street 
 and Electric Railway Employes, issued January 1, 1920, that most of the big 
 city systems are now aftiliated with that organization. Of the 62 principal cities 
 and systems listed in Tables I, II, I\' and V in Chapter XXVIII of this report 
 those where the Amalgamated does not have local divisions are Xew York (^ rapid 
 transit and surface lines of Maniiattan, The Bronx and Queens), Philadelphia, 
 Baltimore, Milwaukee, the Twin Cities, the Kansas Cities, Indianapolis, the 
 Lehigh Valley Transit system (Alltntown. Bethlehem, etc.), Dallas, Houston, 
 Fort Worth, Harrisburg. New Bedford and Terre Haute.' 
 
 The Amalgamated did not inckule participation in management as a part of 
 the labor program which it laid before the Commission, and this subject, though 
 frequently referred to in the examination of the witnesses, was not fully pre- 
 sented to the Commission in its broad aspects. But a great deal was said about 
 the Philadelphia Cooperative Plan, and Mr. James D. Mortimer also explained 
 the labor policy of the Milwaukee Electric Railway and Light Company and the 
 other companies under his control. 
 
 The Cooperative Plan of the Philadelphia Rapid Transit Company was put 
 into effect in 1911 by the Stotesbury-Mitten management. It has commanded 
 public attention to an unusual degree because of the extraordinary results attrib- 
 uted to it. In fact. Philadelphia has shared with Cleveland through the war 
 period the distinction of a fair degree of electric railway prosperity on the basis 
 of the 5-cent fare. and. next to the Cleveland service-at-cost plan, the Phila- 
 delphia Cooperative Plan, undoubtedly, has been the subject of more favorable 
 comment than any other local experiment in street railway operation in recent 
 years. Not only has the Philadeli)hia Rapid Transit Company maintained the 
 5-cent fare, but since 1917 it has paid dividends at the rate of 5 per cent per 
 annum on its common stock. The Mitten management in Philadelphia has been 
 held up to the country as a shining exam])le of what can be done through efficiency 
 and cooperation in the way of operating economies and the curtailment of the cost 
 of service. L'nquestionahly. Mr. Mitten's management, at least from certain 
 points of view, has been plu-iiomenally successful. Xevertheless. it does not 
 meet with favor from the .\malgamated. as it does not carry out the fundamental 
 principle of the labor program, namely, union recognition and collective bargain- 
 ing with a local organization of employes aftiliated with the International. The 
 opinion of Mr. Liuck. si)caking for the .Vmalgamated, is given at page 1936 of 
 the Proceedings, as follows: 
 
 "I think that the Phil.nlrlphi.T fdnii of oriniin^.ition from the statulpoint of the employes 
 cannot result in periniiiu-m m»Kl to the employes unless throuKh the eulightoncd policy ot the 
 
 598 
 
Participation in Management 599 
 
 company itself. I tliink it means in fact the same thing as the Standard Oil plan. If it is 
 pursued under an enlightened paternalistic policy it may work for a time. But when there 
 comes a time when the employes attempt to secure something from the company, I think the 
 whole organization will go to pieces. I think it is not effective at all from the standpoint of 
 the employes." 
 
 On the other hand, the Philadelphia management has been subjected to 
 severe criticism from the point of view of the American Electric Railway Asso- 
 ciation because of the fact that Mr. Mitten, through the war period, has given 
 wide publicity to the favorable financial results achieved in Philadelphia with the 
 5-cent fare. In fact, the experience of the Philadelphia Rapid Transit Company 
 under its present management has proven to be a serious stumbling block in the 
 campaign carried on by the electric railways of the country for a higher fare 
 as a necessary remedy for their present financial difficulties. It cannot be said 
 that the Mitten management has exhibited any tendency to hide its light under a 
 bushel, and under the circumstances, it is not unnatural that the attention of 
 both organized labor and organized capital should be focussed upon it. It is 
 perfectly clear that the apparent financial success of the Philadelphia Rapid 
 Transit Company during the present electric railway crisis is a fact that demands 
 explanation. 
 
 Mr. Mortimer was produced as a witness by the American Electric Railway 
 Association to challenge the low-fare claims of both Philadelphia and Cleveland 
 on the score that certain elements of cost were being neglected in both those cities, 
 which, if taken care of, would prove that the fares collected have been less than 
 the true cost of the service. He testified on the basis of his personal studies 
 and also on the basis of the investigations made by the Bureau of Fare Research 
 of the American Electric Railway Association under the direction of the Asso- 
 ciation's Committee on Cost of Service, of which, for two years, he was chair- 
 man. I have already discussed, in Chapter XI of this report, Mr. Mortimer's 
 claim that under the Tayler plan the Cleveland Railway has been compelled to 
 neglect making any provision for its "liability to effect future replacements." 
 With respect to the Philadelphia situation he is equally emphatic, as will be seen 
 from his testimony at pages 1993 to 1995 of the Proceedings, as follows : 
 
 "It it be assumed that the fair value of the railway property of the Pliiladelphia Com- 
 pany is four times the gross earnings that would call for, we will say, a minimum valuation 
 of $120,000,000. It is generally found that, in recent appraisals where property has been 
 fairly well maintained, the liability to effect future replacements is measured by about IS per 
 cent 'of the original cost. Now, 15 per cent of $120,000,000 is $1&000,000, and $18,000,000 
 would be the fair measure of the present liability of the Philadelpliia Company to effect future 
 replacements over and above expenditures made for current maintenance. 
 
 "It has a reserve of about $1,200,000, so that there is a deficit in its depreciation reserve 
 of $16,800,000 in round figures. 
 
 "That there is some justification for figuring adequate reserves in the case of the Phila- 
 delphia company must be considered in the light of the leases under which the Philadelphia 
 company operates. I think this lease is probably typical. Section 21 of the Union Traction 
 Company lease to the Philadelphia Rapid Transit Company, which refers to maintenance and 
 replacement and the condition of the property when it shall be turned back to the Union 
 Traction Company, which I will read for the record : * * * * 
 
 " 'It is the true intent and meaning of this agreement that the railway system herein 
 demised bv the Union Traction Company shall be at all times kept in the same general good 
 repair and condition in which the same now is or will be upon the completion of the con- 
 templated improvement and fully equipped with the best and most improved equipment for 
 operating the same. Rapid Transit Company shall at the expiration or other termmation of 
 the lease render to the Union Company all the property and premises in the same good order 
 
600 Electric Railway Problem 
 
 and condition in which they now are. with the streets upon which the various lines of railway 
 are laid paved in the same good condition.' 
 
 "But that is not all. 
 
 ■■ "The Transit Company accepts the premises as being in all respects fully equipped in a 
 modern manner as a first class street railway system with all the proper and necessary rail- 
 ways, machinery and so forth, and the Transit Company shall on the termination of the lease 
 deliver to the Union Company the entire system fully equipjied and in a thoroughly first class 
 manner in all respects with all improvements which may be then in general use on similar 
 first class street railways of like extent, and in case the Union Company shall object as to 
 the class of property that is being turned ever or any part of it as not Ix-ing in first class 
 condition or that they are not equipped as provided for or intended to be provided for by the 
 lease, then any question of dispute shall be detennincd by arbitrators and if said arbitrators 
 find in favor of the Union Company an award shall be made in favor of the Union for such 
 an amount of money as shall enable the Union to properly equip such system in accordance 
 with the true intent and meaning thereof.' 
 
 "Those provisions contain a very heavy contingent liability, because the cost to the Phila- 
 delphia company of settling under these leases may var>' over a substantial range depending 
 upon the extent to which the art may have changed previously to the termination of the 
 leases. 
 
 "Now, if we fake the income account of the Philadelphia Rapid Transit Company for the 
 year 1918 and reconstruct it by making a depreciation allowance of say 2'A per cent on 
 S120,00il.000 property value, $3.00(1,000 per annum, we would have substantially a further 
 deduction of $3,(XX).'lXK). or more accurately $2,7(:0.000 from the net income of the Phila- 
 delphia company in order to place it upon the same basis of comixirison as we have made the 
 analyses of costs of Milwaukee and Cleveland. If that $2.70(1,(KK) is deducted from the net 
 income they would have had net earnings insufficient to pay the interest .-ind rentals by about 
 5;i,000,0(K) a year, and instead of caniing a dividend of 5 per cent on the capital stock, they 
 would have incurred a deficit of about 4 per cent on the capital stock. 
 
 "Now, it may be objected that the valuation of $120,000,(100 is a purely gratuitous offering 
 on my part. But that was placed at a minimum figure for the purpo.se of minimizing the 
 computations to lie made from depreciation. Now, if the property be valued we will say at 
 $1S2,000,(M10, which is considerably in excess of the net jiar value of all the securities out- 
 standing, including the stock and Imnds of the Philadelphia Rapid Transit Company, that is an 
 amount equiN-alcnt to 4i4 times the gross earnings, then the allowance for depreciation becomes 
 $3,800,000. instead of $3,000,000. The deficit is more largely increased and the rate of return 
 on the $1.^2.000.000 Ix-comcs 5 per cent instead of the former 7 i>er cent return on $120.0(».000. 
 These returns have been computed on the basis of maintenance expenditures of 14'^ per cent 
 for the year 1918. Cleveland expended 20 per cent and Milwaukee expended nearly 17 per 
 cent for maintenance, and we under-exiH-nded. 
 
 "If Philadelphia current maintenance expenses were increased by roughly 5 per cent, 
 there wi>uld have In'on an increase in o|)crating expenses of alxiut one and a half million 
 dollars or some figure comparable with what can properly be saved by our rerouting and the 
 elimination of duplicate service and things like that in the operation of the Philadelphia 
 Railway. 
 
 "Now. it is interesting to note that. I do not believe that there is anyone that feels that 
 a .^-cent cash fare is ade<iuate for the operation of the Philadelphia street railway system, if 
 measured from the standards with which the cost of service is usually approached The 
 actual receipts were ."i6 cents per revenue passenger. If there be added to the cost of ser\Hce 
 the minimum amoimt of depreciation, namely. $,1.fHX).000 or $2.7O0.O(X). rather, and the amount 
 required to pay the dividend upon the capital stock of the Philadelphia Rapid Transit Com- 
 pany, all of which has lieen i>aid in evidently, the cost per passenger instead of lieing 5.6 cents 
 goes up to 6.2.1 cents per revenue passenger. .\nd if the maintenance expenses were further 
 increased bv an additional S per cent of the operating revenue, the cost per passenger would 
 go up to 6..S.'> cents per revenue passenger, thus obtaining figures with which we are generally 
 familiar in the study of electric railway costs in I^^IS conditions." 
 
 The Philadelphia Rapid Transit report to the stockholders for 1919 shows 
 that the appropriation for maintenance and renewals, formerly 15 per cent of 
 gross earnings, was increased in 1919 to 16 per cent. This report also shows tiiat 
 the net paid-in capital stock of all the companies in the system, plus the funded 
 debt, amounted to $129,106,906.84, upfin which rentals, interest and dividends 
 were paid in the apgre^'ate sum of $11,114,941.51, or the equivalent of 8.6 per 
 cent on all paid-in cajMlal. The surplus for the year, after payment of divi- 
 dends, was $216,586.80. The company refers to the average fare paid as 3.98 
 cents, but iti arriving at this figure it uses the total inimbcr of revcinie and trans- 
 
Participation in Management 601 
 
 fer passengers and the earnings from passenger service only, while Mr. Mor- 
 timer's figure of 5.6 cents for the year 1918, described by him at page 1989 of 
 the Proceedings as the "average receipts per revenue passenger" is evidently 
 computed on some other basis. If he had used revenue passengers exclusive 
 of the 3-cent exchange tickets and the gross revenues from all sources, he would 
 have gotten 5.4 cents, which would seem to be the maximum figure to be derived 
 by any method of computation, and that includes revenues from freight service 
 and non-operating income as well as passenger revenue. The Electric Railway 
 Association's challenge of the facts claimed by the Philadelphia Rapid Transit 
 Company is not very convincing. It still leaves a great deal about the financial 
 results of the 5-cent fare to be explained. 
 
 One possible explanation was brought out in the cross-examination of Mr. 
 Mortimer, beginning at page 1995 of the Proceedings, where we find the fol- 
 lowing : 
 
 "Commissioner Beall : Mr. Mortimer, can you tel! us anything about tlie distribution 
 of population in Philadelphia compared to certain other cities? Is it not a little more 
 favorable for the loading of street railway cars? 
 
 "Mr. Mortimer: Well, it is generally recognized that Philadelphia has a peculiar dis- 
 tribution of population. I first heard about that in 1907 when it was said that all the people 
 who worked downtown lived outside and all the people who lived downtown worked outside, 
 so that it resulted in rather favorable conditions from a traffic standpoint. It gave loaded 
 cars both ways. That is evidently still the condition. Philadelphia's remarkable industrial 
 development in the last four or five years — people who have seen the service and watched it 
 carefully say that the rush hour cars are loaded both ways, in other words, the amount of 
 empty car mileage which has to be made is at a minimum, due to the peculiar relative dis- 
 tribution of population and industries." 
 
 Still, Philadelphia was Philadelphia in 1910, and the company was "on the 
 rocks" then, in spite of the 3-cent exchange tickets and in spite of the low wages 
 and pre-war prices. The company's relative prosperity under the five-cent fare 
 in these troublous times still demands an explanation. Beyond doubt, it is not 
 due to an absence of overcapitalization or to the conservatism of fixed charges ; 
 for it is notorious that the Philadelphia Rapid Transit Company has been strug- 
 gling along ever since it came into existence in 1902 under a tremendous burden 
 of rentals to the underlying constituent companies. This fact was made clear 
 to the Commission by the testimony of more than one witness. It is practically 
 acknowledged by Mr. Mitten himself, but he places the blame for the over- 
 capitalization upon the public as will be seen from the following extract from 
 his annual report to the stockholders for the year 1919 : 
 
 "The Philadelphia Rapid Transit Company was formed in 1902 to take over the lease- 
 holds and property of the Union Traction and underlying companies and to provide money 
 with which to acquire and develop the franchises shortly theretofore passed in favor of 
 certain interests which threatened to destroy the then existing street railway system. 
 
 "The General .Assembly had in the early '60s made legislative grants to a large number 
 of separate companies, each entitled to charge a separate fare. To this mistaken policy of 
 establishing competition, where economic law says no real and permanent competition can 
 e.\ist. many of today's difficulties may be traced. These numerous companies, which had been 
 separately financed, were brought together, at great cost, in order to offset the work of the 
 Genera! .Assembly, so that a street car ride might be possible over all lines for a single fare. 
 
 "In order to bring together the properties now operated by the Philadelphia Rapid 
 Transit Company, the prospective profits of the original grantees had to be paid, and the 
 franchises and property of the Omnibus Company, General, purchased. These were all 
 necessary and conserjuently legitimate charges, now represented in one form or another in 
 the sum which goes to make up the total investment upon which charges are paid in interest 
 and rentals to underlying companies. 
 
602 Electric Railway Problem 
 
 "In 1892 the substitution of electric traction for horse power made further consolidation 
 necessary. At this time additional paving requirements were exacted by the city. 
 
 "Philadelphia's first modern pavement oi consequence was provided at the expense of the 
 street car system. Paving costs, including interest payments on the original cost, and main- 
 tenance and renewal |)ayments under 19»l7 asreement. now represent $1.750.IKX) per annum 
 (equal to b'A on almost $30,000,000), all of which are included in P. R. T. charges and 
 consequently borne by the car riders of today, as their yearly contribution to street paving— 
 not a proper cost of the transportation of passengers on electric cars." 
 
 Mr. Mitten ascribes the relative prosperity of the Philadelphia Rapid Tran- 
 sit Company to the effective cooperation of labor with the management. In 
 short, he advances the cooperative plan as a solution of the labor problem. In 
 his letter of October 2 to Chairman Elmquist, he says: 
 
 "Cooperative eflfort. with a force of well-trained employes, of which 85% receive the 
 ma.ximum rate and 5S'Tc are more than .i yoars in senice. is here found adequate to overcome 
 obstacles seemingly insurmountable elsewhere.'' 
 
 In his 1919 report, he says: 
 
 "Cooperation between men and management, so much to be desired and so seldom secured, 
 has here proven to be the keystone of accomplishment in establishing confidence and con- 
 tentment and overcoming increased costs by greater efficiency and increased production." 
 
 When the stockholders of the Philadelphia Rapid Transit Company appealed 
 to Mr. E. T. Stotesbury ten years ago to take hold of the company and see what 
 could be done to pull it out of a desperate situation, he called Mr. Mitten from 
 Chicago to undertake the active management. The Philadelphia situation was 
 undoubtedly acute. In Mr. Mitten's statement before the United States Com- 
 mission on Industrial Relations at its public hearings in Philadelphia in June, 
 1914, he said: 
 
 "In 1910 a situation developed in Philadelphia that was most serious. There had been 
 a strike in 1909, followed by one in the spring of 1910. These strikes had been attended by 
 riot and bloodshed and cost the Company and the City millions of dollars, while the motor- 
 men and conductors lost more than a half million dollars in wages alone The street car ser\-ice 
 was demoralized, due largely to the bitterness of feeling between the rival factions into which 
 the motormen and conductors were divided. 
 
 "The discipline was lax and the factional feeling lictween the members of the ri\-al organi- 
 zations which then had a large memlK-rship here had served to increase the accidents. The 
 schedules were interrupted because of the strikes and these general bad conditions, and the 
 cars were in a deplorable condition. In fact, I can think of no situation worse than that which 
 existed early in 1910 when 1 was asked to come here to see what, it anything, I thought could 
 be done with the situation. 
 
 ******** 
 
 "The Company's credit was seriously impaired because of these ver>- bad conditions, and 
 its most serious problem perhaps was the providing of funds necessary for the rehabilitation 
 of the property, which, as I said, was in deplorable condition. The financial part was ar- 
 ranged so that new cars might t)c purchased and the property rehabilitated : and then the 
 new Management took hold of the property with the understanding that within five years 
 it would produce an adequate system of surface transportation to the Public and such in- 
 crease<l wages and improved working conditions for the men as cooperative eflfort might make 
 possible : but to the stockholders it promised nothing in the way of returns until both of the 
 other questions had been s.itisfactorily disjxised of. 
 
 "Then, of course, the purchase of cars and the bringing of the system up to a state of 
 operaliiiK cflficirncy, so f.ir as physical conditions were concerned, having been provided for, 
 the wages of the men and the handling of labor were my problem. 
 
 "I found that the men were then receiving 2\.Sl'7r of the gross passenger receipts in pay- 
 ment of wages and death tx-nefils and such things as were done for the men in wages and 
 that which corrrsp<indi-d to remuneration for services. I recognized that there were great 
 possibilities in that peRxntage of the gross, if I could secure the cooperation of the men so 
 that we might together strivT to a comtTHin end instead of working in opposite directions. 
 T knew that by the purchase of cars perhaps twice as large as those which were then being 
 operated, the time-table cost must necessarily drop as compared with the earnings. I knew 
 
Participation in Management 603 
 
 that we were pretty sleepy, and that with proper help from the men, the cars could be speeded 
 up to the advantage ol the Public and certainly to the advantage of the men, because of the 
 possibilities of the wage scale which existed in this percentage of the earnings. 
 
 "So 1 worked oiit a plan which contemplated the puttmg of 22'k of the gross passenger 
 receipts into a fund from which wages should be paid — wages and all other items which went 
 to the men in the way of compensation; and then I planned to have a Cooperative Committee, 
 choosing that instead of a grievance committee, because I hoped, as has proved to be the 
 case, to avoid the grievance by removing the cause of a trouble before it became a grievance. 
 
 "I developed the Cooperative Plan, setting up that 22% of the gross passenger receipts 
 should be placed in this fund, and providing for the establishment of a Cooperative Com- 
 mittee composed of a representative of the men from each depot, together with the superin- 
 tendent of each depot. The situation at that time was that, so far as I could learn, about 
 one-half of our men were members of the Amalgamated Association with which 1 had had con- 
 tractual relations in the City of Chicago. The remainder seemed to be about equally divided 
 between the members of a local organization called the Keystone, and those who did not seem 
 to be affiliated with any organization. Here was a situation that was the source of a great 
 deal of disturbance in the force. The members of the rival organizations were knocking each 
 other, and I determined that nothing really could be accomplished unless I could get unity 
 of effort. Having had some success with that in the past, I was quite certain that I could 
 get the same thing here. 
 
 "In order that the attitude of the company, in view of this very mixed situation, should 
 not be in any way misunderstood, 1 stated in the Cooperative Plan Booklet (issued in August, 
 19n ) that the Management did not take a position either for or against organized labor. 
 I did say that the condition then existing could not go on with any hope of satisfactory results 
 to the Public, to the men, or to the Company, and I set forth a plan in this booklet by which, 
 if two-thirds of the men by secret ballot determined that a contract should be made by the 
 Company with organized labor on the basis of the Cooperative Plan, the Company would 
 make such a contract; but while it could not require any of its men to belong to a labor 
 organization, it could, if so large a majority as two-thirds of its men desired that a contract 
 be made with a labor organization, pay from the 12% Fund the sum of the dues of every 
 man. My thought, as then expressed, was that by so doing we would eliminate the continual 
 trouble caused by the collectors of dues at the stations, of organizing upon the cars, and 
 would eliminate absolutely the necessity of wearing union buttons. This condition was causing 
 a great deal of difficulty because in one section the men would wear the button of one 
 organization and the men in another section would wear the button of another organization, 
 and very often we would get two men on the same car wearing different buttons and both 
 working at cross purposes. 
 
 "The representatives of both the Amalgamated and the Keystone organizations agreed 
 to the Cooperative Plan ; and I had said in the booklet that at the request of either one of 
 the organizations such a vote would be taken. At the request of the .Amalgamated such a 
 vote was taken at Horticultural Hall, November 2, 1911. The result was signed by the 
 Judges and everybody was satisfied as to its being a secret and fair vote. The affirmative 
 vote was not quite two-thirds, but was 353 votes short of polling the required two-thirds. 
 But before any move was made beyond the taking of the vote, a split-up occurred in the 
 Amalgamated Association here locally, so that I had a condition to deal with where there 
 were three sorts of buttons being worn by the men — the Amalgamated, the Keystone, and 
 the buttons worn by the split-ofT organization, which followed a local leader here, Mr. Pratt. 
 In none of these factions did there seem to be 259?- of the total, while a number equal perhaps 
 to about 40% were wearing no buttons at all. 
 
 "I then notified the men that the vote being as it w^as and the situation as it was, we 
 would deal with the men as individuals, the plan providing that at any time should one-third 
 of the men by petition so request, another vote would he taken, that being, to my mind, a 
 precaution that the men should have as against unfair dealing on the part of the Management. 
 or a change in the Management. 
 
 "The plan was put into efTect, and, at the outset there was so much bitter feeling between 
 the men that it was very difficult to know just how to get representatives from the depots to 
 act upon the Cooperative Committee. -As a start I had them selected by the superintendents. 
 Then in .\pril. 1912, I had the men themselves suggest the names nf those whom thev desired 
 to represent them, bv signing their names. -At that time about 87% of the men signed their 
 names, but the division followed almost tlie division of the original leadership, which gave me 
 such a situation that to have selected the first man or the man having the highest vote at 
 each depot would not have given a fair representation. In other words, the Cooperative 
 Committeeman would have been the representative of one lot of men and not of the other. 
 So I took the men that had the highest, and also the next highest number of signatures at 
 each depot. Then some months later we adopted a voting machine by which each man could 
 vote by secret ballot ; and still continued the plan of selecting the first and second Cooperative 
 Committeeman from each of the depots. This method has gone along to the place where 
 now it is our plan to take such a vote at each depot as nearly once a year as possible, giving 
 the men the opportunity of recall. 
 
604 Electric Railway Problem 
 
 "Of our 14 depots, 12 have had elections for Cooperative Committeemen within the past 
 12 months, two more remaining to be taken. As showing the interest of the men in the se- 
 lection of the Cooperative Committee, approximately 98'/<- of the men vote. Something over 
 80% of the men in the 12 depots who have voted, have voted for the men who have been 
 elected." 
 
 At the original election of November 2, 1911, to which Mr. Mitten referred, 
 the vote was 4.276 in favor of a contract with the Anialganiated and 2.366 against 
 it. All but 302 of the men qualified to vote participated in the election. In this 
 case, the majority did not rule, as the company had stipulated a two-thirds affirm- 
 ative vote as a condition precedent to its recognition of the union. 
 
 As a part of this same testimony before the Industrial Relations Commis- 
 sion, Mr. Mitten explained the system of discipline and discharges under the 
 Cooperative Plan as follows: 
 
 "The basic principle of discipline under the Cooperative Plan is that the penalty for the 
 infraction of any rule shall be no more severe than is found by cxiiericnce to be necessary to 
 insure proper service to the public and the maintenance of proper discipline. One of the 
 first things in that regard which we found necessary to change was to do away with the 
 practice of requiring motomicn or conductors to make apology in person. This was quite a 
 favorite way of punishing the men in the old days, and perhaps a very unfair attitude to take. 
 That has never been done under the C(x>|)erative Flan, and has never needt-d to be nsortcd to. 
 The old practice of discharging men as a punishment and thereafter reinstating them through 
 the influenc of others, irrespective ul tlie merits of their case, is not now permitted. I'ormerly 
 it was not so much a (|uestion of whether a man was properly discharged, but of how in- 
 fluential his friends were in getting him back. It became very difficult to have the men under- 
 stand, under the new i)lan. that a discharged man was discharged, and that it did not mean 
 merely a susjicnsion. Under the Cf>f)perativi- Plan, discharge is resorted to only as the last 
 resort, the Cooperative Committee l>einR most effective in preventing the di.scharge of motor- 
 men and conductors by advising them to mend their ways and assisting in presenting all the 
 facts to the Superintendent of Trans|X)rtation in order to insure a thorough understanding 
 of the true merits of the case. 
 
 ".■\fter all, in considering a method of discipline, the character of the service to the 
 public, namely, the decreased accidents, greater care in the operation of cars, and more 
 courtesy to the public on the one hand, and the few discharges on the other, constitute per- 
 haps the fairest and best analysis. Cooperative Committeemen do not so much get a man 
 returned to duty alter the man has Imjcu discharged, because we do not discharge the man 
 until sure that he must lie discharged: but they do prove most effective in correcting by sug- 
 gestion to the men those things which must lead to discharge if continued. The result of 
 this plan and the work of the Cooperative Committee is perhaps best evidenced, as I say, 
 by the quality of the discipline now maintained, which I think must be agreed by everybody 
 to be far superior to that ever attained here before, as against the number of men whom we 
 find it necessary to discharge in maintaining that standard of discipline. 
 
 "In 1911, 1,V)3.S men were dismissed. That was 1 in every 5. In 1912. 8,^5 were dismissed, 
 being 1 out of 8. In 191.^ SM> were dismissed, or 1 out of every 12. In 1914, 334 were dis- 
 missed, or I out of 20. 
 
 "As liearing uixm the worth-whilcncss of the job, the resignations are significant: In 
 1911. 1..190 men resigned: in 1912. 913; in 191.1. 9.';6: in 1914, 337. 
 
 "With the aid of the Cooperative Committee, a book of niles was prepared on the lines 
 that I have descrilx-d, this I think being the first instance where rules for the government of 
 the men have been prepared by the officers and the men's representatives jointly." 
 
 Mr. Mitten also explained that the "runs" were distributed and the hours 
 of service fixed largely by the men themselves, as will be seeti from the following: 
 
 "Under the Cooperative Plan, the make-up of the runs or hours of service is handled 
 practically by the men themselves. You have on the one hand 22*^ of your gross passenger 
 receipts which represents that sum which you have agreed to pay for the .service. On the 
 other hand, you have a rniuireil mmilH-r of cars on the street at the hours necessary to prop- 
 erly serve the Public Those two facts In-ing established, you may largely leave it to the men 
 as to how the runs shall l>c made. In the street railway business, to properly care for the 
 needs of the Public, you must cover a peak load in the morning and a peak load in the evening. 
 To cover those two peaks in Philadelphia re(|uires a space of from 13 to 14 hours. There- 
 fore, to economicaltv use the 22'^' 1 iind. .i cnnsidcralile miuuIht of ibe runs must havi' .t hole 
 in them, as the men say; that is. cover the morning peak, a rest, and cover the evening peak 
 
Participation in Management 605 
 
 "When \vc came here, quite a number of the runs covered a i)eriod of 16 hours over all. 
 \Ve determined that that could be done in 14 as a maximum. They were operating an in- 
 sufficient number of cars in the evening hours. It. therefore, became necessary, in order to 
 serve the Public, that we materially increase tlie number of cars in the morning and in the 
 evening. We have increased the rush hour service in car-seating capacity 50% as compared 
 with that operated when we came here. Then, as I say, determining what service we must 
 give to the Public, there being no question of what we are to pay for it, there is no reason 
 why the Cooperative Committeemen should not have pretty much the voice as to how the 
 division of runs is to be made. If there is lost motion, or we have to pay for work not 
 performed, that must naturally be reflected in the rate of wage the ll'"r Fund will pay. So 
 that the Superintendent of Time Tables, determining from his traffic checks the service re- 
 quired, puts the cars upon tlie street. The Cooperative Committeemen from the depot, from 
 which those cars will be operated, then come in and go over the division of the runs, and that 
 is the decision made in each instance. So that if you will be sure in the first instance that the 
 men. through the desire to make a large wage, be not permitted to run such hours as inter- 
 fere with their effectiveness in avoiding accidents, and if, on the other hand, the runs are not 
 made to allow so few hours of service as to make the men's wage inadequate, the Company's 
 or the Management's end of it is practically covered. In that way. we pay not less than 9 
 hours minimum for a regular week-day run. No man is required to work a run that covers 
 more than the 14 hours over all, in which there would be a large hole in the middle." 
 
 In April, 1910, under the old management, and as a part of the strike settle- 
 ment, the company promised to pay the men during the five years beginning July 
 1, 1910, a scale of wages ranging from a fixed minimum of 22 cents per hour 
 for the first year of employment up to a variable maximum ranging from 23 
 cents in 1910 to 25 cents in 1914. In announcing the Cooperative Plan in 
 August, 1911, based upon the establishment of a fund of 22 per cent of the gross 
 passenger earnings out of which trainmen's wages would be paid, the manage- 
 ment said : 
 
 "Cooperation on the part of motormen and conductors by taking a personal interest in 
 raising blockades, maintaining schedules, careful collection and accounting of fares, avoidance 
 of accidents and observance of the Company's rules, together with the introduction of im- 
 proved operating methods and of a large proportion of cars having almost double the seating 
 capacity of those displaced, will, it is confidently expected, make possible such an increasing 
 wage over that contained in the Company's published promise, as will result in a maximum 
 wage of 28 cents per hour in the year beginning July 1. 1915. 
 
 "The graded scale of wages as set forth in the Company's published promise of April, 
 1910. will be extended as soon as the maximum wage therein provided for has been accom- 
 plished. 
 
 "The old argument against the graded scale, by which it was contended that the Company's 
 interest was to dismiss the older and higher priced men to make room for the lower priced 
 new employes, has not to be here considered, as the Company cannot reduce its cost by any 
 change in the scale of wages paid, it being distinctly obligated to. and actually is. commencing 
 July 1. 1911. setting aside in a separate fund 22% of its gross passenger earnings. All pay- 
 ments to motormen and conductors will be made from this fund, and the sum accumulated 
 therein will be added to that increased wage which was promised in the Company's published 
 notice of April. 1910." 
 
 As a matter of fact, the 22 per cent fund raised the maximum wage rate 
 to 31 cents on July 1, 1915, instead of the 28 cents forecasted in the company's 
 1911 announcement, and the wage was further increased to 43 cents as of July 
 15, 1918. At this point the scheme broke down, as the 22 per cent fund was no 
 longer sufficient to meet the wage advances inade necessary by the increase in the 
 cost of living. A number of the employes struck in 1918. and the company was 
 brought before the National War Labor Board. The company's story of what 
 happened is contained in its booklet entitled "The Co-operative Plan — 1911-1918," 
 as follows : 
 
 "Tlie principle of the Cooperative Plan, as originally established, i.e.. that employes may 
 belong to any union or other organization without 'let or hindrance.' has proven to be the 
 rock of its dependence and the disarming of its opponents. Of the two attempted strikes. 
 
606 Electric Railway Problem 
 
 neither proved effective in causing serious interruption to service. The attempt in the present 
 year was so timed as to take full advantage of the depleted force occasioned by the Draft re- 
 quirements of the Government. It afforded the most striking demonstration of the effectiveness 
 of cooperative effort txtween the Company and employes, in that the cars necessary to provide 
 the extra service to war workers were at once manned and operated for several weeks by 
 volunteers from all departments of the Company so effectively that when called upon to 
 answer the complaint made to the War Labor Board at Washington, the Management was able 
 to prove by the representatives of the shipyards, arsenals, etc.. that service had not been 
 internipted and was being adequately supplied, .^s a consequence, the War Labor Board 
 dismissed the complaint, following our voluntarily undertaking to adopt the wage scale then 
 being established by the War Labor Board to govern the cities of Chicago, Cleveland, Detroit 
 and Buffalo, and our further undertaking to give the objecting employes opportunity of con- 
 tinuous employment during good behavior." 
 
 The elimination of the 22 per cent fund in the Philadelphia Cooperative Plan 
 as revised in 1918, and the adoption in place of it of a wage standard dependent 
 entirely upon the wage achievements of the organized employes in four other 
 cities, seems like the complete abandonment of the incentive upon which the orig- 
 inal plan of 1911 was built and as a result of which it achieved its notable suc- 
 cesses. The Cooperative Plan, as it now stands, provides the machinery for co- 
 operation, but apparently leaves the distinctive motive for it out. The procedure 
 is as follows : 
 
 The business of the company is divided into classes or departments, and each 
 department is sub-divided into "contact groups" or "branches." Differences be- 
 tween employe and employer are settled through the medium of (1) branch 
 committees, (2) department comnxittees. {^) general committees, and (4) boards 
 of arbitration. The rule is laid down that "the workers shall have a free and 
 indei)endent vote for representatives for proper collective bargaining." At each 
 depot station or division two branch committeemen are elected by the workers. 
 Each worker votes for only one candidate and the candidates receiving the 
 highest and the next highest number of votes, respectively, are declared elected. 
 The employer also appoints two representatives for each depot, station or divi- 
 sion. The committeenTeii elected by the workers constitute the Branch Commit- 
 tee for Employes and those appointed by the company constitute the Branch 
 Committee for Employer. The cominitteemen representing the employes are 
 elected to serve for the period of one year. It is declared that "it shall be their 
 duty well and truly to represent their fellow employes and to give all matters 
 under consideration or discussion their best thought and the benefit of their 
 knowledge and experience." At least once in every three months there is an 
 opportunity for a meeting of workers at each branch, when reports are made by 
 the local committmnen. The dates for elections and the hours when the polls 
 will be opened are so arranged as to give every qualified voter at the local depot, 
 station or division an opjiortunity to vote, but the different election dates are 
 arranged in such order and sequence as to provide always on the several com- 
 mittees for a working majority of members who are familiar with the nature and 
 routine of the business transacted. Notice of any branch election must be posted 
 conspicuously in the local branch 21 days in advance of the election date. Elec- 
 tions for committeemen are by .secret Australian ballot under the supervision of 
 an election conmiittee of three members chosen by and from the Department 
 Committee for Employes. To qualify as a voter an employe must have been 
 six months in the company's service, must be regularly assigned to duty and may 
 
Participation in Management 607 
 
 not occupy an official position of any character with the company. In order to 
 be eligible to selection as a committeeman an employe must be regularly assigned 
 to duty and must have been continuously in the employ of the company for not 
 less than two years. Candidates for election as committeemen must file with 
 the secretary of the general committees, not less than 13 days in advance of the 
 election, official nomination papers signed by not less than 7 workers qualified 
 to vote at the branch. A worker is not expected to sign more than one nomina- 
 tion petition at any election, and no employe who may properly be said to repre- 
 sent the employer is to be chosen as a representative of the workers. 
 
 The business of the company is divided into 5 departments, namely : Trans- 
 portation, rolling stock and buildings, electrical, way, and general offices. Each 
 department is to have a Department Committee for Employes and a Department 
 Committee for Employer. The committee for employes consists of all of the 
 branch committeemen elected by the workers at the several depots, stations or 
 divisions of the department. An equal number of persons appointed by the 
 company in each department constitutes the committee for the employer. The 
 department committee for employes and the department committee for employer 
 each elects a chairman, but the secretary for the general committees or his author- 
 ized representative acts as secretary for the several department committees with- 
 out vote. Stated meetings of each department committee are held in alternate 
 months throughout the year and special meetings may be held at the call of the 
 secretary or upon the request of 5 members submitted in writing to the secretary. 
 No less than two-thirds of the members of any department committee shall con- 
 stitute a quorum for the transaction of business at any regular or special meeting 
 of that committee. 
 
 The members of each Department Committee for Employes annually elect 
 two of their number to represent the department on the General Committee for 
 Employes. An equal number of representatives appointed by the president of 
 the company constitute the General Committee for Employer. 
 
 Any point of difiference between employer and employes originating at a 
 local branch is first taken up by the branch committees; if not settled by them it 
 is taken to the department committees ; and if not settled there it is taken to 
 the general committees. The powers and duties of the general committees are 
 set forth as follows : 
 
 "It shall be the duty of the General Committees to devise ways and means for furthering 
 the efforts of the various Department Committees for the greatest possible good, to promote 
 harmony and good fellowship among all employes of the Company, to formulate plans for sub- 
 mission to the several Department Committees, and to render ever>- assistance within their 
 power toward advancement of the interests of the employes and the betterment of the service. 
 
 "Further, the General Committees shall possess the power to review, modify or reverse any 
 findings or decision of the Department Committees, and may, in their judgment, change any 
 portion of this Plan or any modification thereof or the composition of any of the Committees, 
 or any of their various respective functions, 
 
 "The scope and authority of the General Committees shall be superior to that of the De- 
 partment Committees and their decisions in all matters shall be final and binding, except as 
 hereinafter provided.'' 
 
 Each of the general committees elects its own chairman, but the secretary 
 for the general committees is appointed by the president of the company. It is 
 the secretary's duty to keep accurate minutes of the meetings of all committees 
 
608 Electric Railway Problem 
 
 and for this purpose an assistant secretary is to be employed. Regular meet- 
 ings of the general committees are held on the third Tuesday of each month and 
 special meetings may be held at the request of the chairman of either of the 
 general committees. Here, also, two-thirds of the members of each general com- 
 mittee are required for a quorum for the transaction of business. All com- 
 mittees, whether representing the employer or the employes, vote as a imit. 
 Upon this point the plan makes the following provision : 
 
 "In the discussions of the Department Committees and of the General Committees it is 
 intended that Employes shall sit on one side of the table, so to speak, and Employer on the 
 other side, throughout the collective targaining contemplated by this Plan. 
 
 "Ihe majority of any Committee of Employes shall be the voice of that Committee. 
 
 "The majority of any Committee of Employer shall be the voice of that Committee. 
 
 "Whenever the minds of the majorities of any Committees meet, the controversy shall be 
 settled. 
 
 "While it is intended that there shall be full and free discussion in order to arrive at an 
 amicable understanding and settlement of controversies, whenever it is necessary to take a 
 vote to ascertain the voice of any Committee, the Committees for the Employes and for the 
 Emplo\er shall have the right to retire and cast their vote in secret caucus. In such secret 
 caucus all such votes shall be taken by secret ballot, .said ballots to be returned unopened to 
 the Secretary for the Committees. The Secretary shall count the ballots under the observa- 
 tion of both Committees and announce the result in open meeting." 
 
 In case a grievance cannot be settled through the general committees, a 
 board of arbitration is established consisting of one arbitrator chosen by each of 
 the general conmiittees and a third by the two so chosen ; but in case they are 
 unable to agree upon the third arbitrator then the Provost of the University of 
 Pennsylvania, the Chairman of the Public Service Commission and the President 
 of the Chamber of Commerce are requested to serve as additional arbitrators or 
 to appoint their own personal representatives to act as such additional arbitrators. 
 In any case a decision of a majority of the members of the board of arbitration 
 is binding. 
 
 Separate from the machinery of collective bargaining an organization is 
 established known as the Cooperative Welfare Association, membership in which 
 is open to employes over 16 years of age who have been in the service of the 
 company for at least one year. There is no initiation fee but one dollar per 
 month is deducted from the pay of each member as dues, which will entitle the 
 members to life insurance, sick benefits and pension. Prior to 1918 the com- 
 pany paid approximately $yO,0(X) a year into the various funds representing sick 
 benefits, pensions, death benefits, and other benefactions. Under the new plan the 
 Cooperative Welfare .Association takes care of all these things and the company 
 contributes a lump sum of $10,000 per month to the cost of carrying on the Associa- 
 tion's activities. In case the income derived from the membership fee of one dollar 
 per month and the company's contribution of $10.0iX) \wr month proves to be insuf- 
 ficient to meet the .Association's c.xiienditures, the menibershii) dues are to be in- 
 creased sufficiently to prevent a deficit, but there will be no increase in the amount 
 paid by the company until the total amount paid monthly by the members equals the 
 company's contribution. After that, all increases are to be borne equally by the 
 company and the employes. A blanket policy has been isstied by the Metropolitan 
 Life Insurance Compatiy insuring the lives of those employes who desire to avail 
 themselves of this protection through the Cooperative Welfare Association. A 
 certificate of insurance in the sum of $1,000 is given to every member of the 
 
Participation in Management 609 
 
 Association and this certificate remains in effect so long as the member continues 
 in the employ of the company and retains membership in the Association. A 
 special feature of this insurance is a provision that, in case of total and perma- 
 nent disability occurring before the member has attained sixty years of age from 
 causes arising after the certificate of insurance was issued, the insured will be 
 entitled to receive the $1,000 covered by the policy in monthly or yearly install- 
 ments. The plan also provides for sick benefits payable at the rate of $1.50 
 per day commencing with the eighth day's illness and continuing for a period 
 not exceeding 100 days in any consecutive 12 months. Pensions of $40 per 
 month are payable to incapacitated employes who have reached 65 years of age 
 and have been continuously in the service for 25 years, but meritorious cases of 
 long service falling short of these requirements are to be given special con- 
 sideration. 
 
 The affairs of the Cooperative Welfare Association are administered by a 
 cooperative council consisting of the combined membership of the two general 
 committees for collective bargaining, but the administration of the Association 
 is to be entirely separate and distinct from the function of collective bargaining. 
 The council acts as trustees of insurance for the Association and authorizes the 
 expenditures of all moneys, including payment of sick benefits. It also passes 
 upon the issuance of insurance certificates and the validity and merit of all appli- 
 cations for pensions. The president of the Association, who also acts as chair- 
 man of the cooperative council, is elected annually from the membership of the 
 Association by majority vote of all the members of the several department com- 
 mittees for employes. The secretary-treasurer of the council and his assistant 
 are appointed by the president of the company. 
 
 The new Cooperative Plan as above outlined was accepted by the company's 
 employes. On December 1, 1918, out of 9,073 employes eligible for membership 
 in the new Cooperative Welfare Association, the applications of 8,399, or more 
 than 92 per cent, were on file. 
 
 In his annual report for the year 1919, Mr. Mitten's enthusiasm for the Co- 
 operative Plan and his confidence in its results show no signs of flagging. He 
 states that with a maximum rate of 58 cents per hour the wages of trainmen in 
 Philadelphia averaged $5.51 per day as against $5.00 per day in Cleveland and 
 $5.10 per day in Detroit where the maximum rate was at that time 60 cents per 
 hour. He explains that this result "has been possible of accomplishment by close 
 cooperation between men and management in time-table making, and in better 
 spacing of cars — thus giving improved service to the public and minimizing waste 
 in schedules." Then he adds : "Salesmanship is here demonstrated by the efforts 
 of motormen to pick up all the fares, and by the alertness and courtesy of con- 
 ductors who endeavor to make the car ride a more agreeable experience." It 
 would appear, nevertheless, that the higher average daily wage with a lower 
 maximum hourly wage could be attained only by the employes working longer 
 hours, or else by a larger proportion of them drawing the maximum rate of pay 
 than in the other cities mentioned. As a matter of fact, the average pay time 
 in Philadelphia and Detroit is approximately 9% hours. In the supplementary 
 statement addressed to Chairman Elmquist under date of October 2, 1919, and 
 
610 Electric Railway Problem 
 
 spread upon the Proceedings at page 2003, Mr. Mitten makes the following com- 
 parison between Detroit and Philadelphia with respect to the working hours of 
 motormen and conductors: 
 
 "Philadelphia's surface lines have no three-piece nins. 
 
 "The system comiirises 2,473 regular runs, of which 1,323, equalling 53.5%, are straight 
 runs and 1,150, equalling 46.5'(, are two-piece runs. 
 
 "The average over-all time per nni is 11 hours, 33 minutes 
 
 The average pay-time is 9 hours, 30 minutes 
 
 The average lost time is 2 hours, 3 minutes 
 
 The pay-time is divided as follows : 
 
 Hours per Day .\'o. of Runs Percentage 
 
 8-9 611 24.7 
 
 9-10 1285 S1.9 
 
 10-11 530 21.4 
 
 11-12 47 2.0 
 
 Avg. 9.5 hrs. ^l 100.0 
 
 "Ninety-seven per cent of all car operating time is worked as a part of regular runs, 
 leaving only three per cent to be assigned as trippers. The average pay-time on regular runs 
 is 9.5 hours, re(|uiring 307 days' work per annum to earn the system average for motormen 
 and conductors of $1,690 per year. 
 
 ".'\ccording to the tigurcs taken from Wednesday's testimony for Detroit in 1917. therein 
 stated to he slightly improved for 1919. the comparison of over-all time at Detroit and Phila- 
 delphia is as follows, the average pay-time of both cities being 9.5 hours : 
 
 Dktroit Philadelphia 
 
 Coinf<li-lcd 
 
 within \o. Runs Per Cent Xo. Runs Per Cent 
 
 13 hours 865 62.5 1808 73.1 
 
 14 " 195 14.2 513 20.7 
 
 15 " 147 10.6 135 5.5 
 
 16 " 77 5.7 17 .7 
 
 17 " 51 3.7 None None 
 
 18 " 46 3.3 None None 
 
 19 " 1 ... None None 
 
 1382 100.0 2473 100.0" 
 
 The available evidence with respect to the practical workings of the Phila- 
 delphia Cooperative Plan seems to prove beyond reasonable doubt that, at least 
 for the time being, the results obtained have been beneficial to both capital and 
 labor, and that the public also has received benefits. The Philadelphia Rapid 
 Transit L'ompaiiy, after fourteen lean years for its stockholders, tinaliy began to 
 pay dividends in 1916, and, in spite of Mr. Mortimer's testiiuony, I think the 
 weight of evidence is clearly to the effect that the Philadelphia property is in 
 much better condition with respect to its capital account than it was in at the 
 time when the new management took hold in 1911. That the condition of the 
 men has been greatly improved in that period can hardly be doubted. Wages 
 have been increased approximately 150 per cent, and the evidence submitted 
 with respect to labor turn-over clearly indicates that the men are much better satis- 
 fied than they were in the old days. 
 
 So far as the public is concerned, it is still enjoying, in the post-war period, 
 the benefit of pre-war fares, and it has also enjoyed substantial continuity of 
 service luider the present management. However, it is ajiparent that a critical 
 situation exists in Philadelphia today as between the company and the city with 
 
Particitation in Management 611 
 
 respect to tlie construction and utilization of additional rapid transit facilities. 
 The city has pledged itself to an expensive program of elevated and subway con- 
 struction and the company, wary as a result of its own experience and the experi- 
 ence in other large cities with rapid transit lines, is not disposed to assume the 
 capital burdens of the new construction upon terms that satisfy the city. There 
 is undoubted evidence that the traffic situation is getting out of hand in Phila- 
 delphia, and it is not at all clear what the future developments may be with re- 
 spect to fares and service. 
 
 Mr. Mitten's job has been that of many an imported street railway manager, 
 namely, to make the common stock pay dividends. In undertaking this he has 
 had the advantage of the public knowledge that in Philadelphia the common stock 
 represents actual cash put into the property by the stockholders. Mr. Mitten's 
 fundamental job at Philadelphia has been to build up the property and the busi- 
 ness so that the Philadelphia Rapid Transit Company would be able to meet its 
 obligations to the underlying companies and still earn a return upon its own 
 superimposed investment. That from this point of view he has pursued a wise 
 policy and has been an efficient and successful electric railway manager cannot 
 be doubted. 
 
 W'e cannot blink at the fact, however, that from the points of view of both 
 labor and the public, Mr. Mitten's management has been successful only to the 
 extent that the furtherance of the employes' welfare and the improvement of the 
 service to the public have been necessary to the welfare of the capital which Mr. 
 Mitten represents. The Philadelphia plan is based upon the theory of coopera- 
 tion and the glossing over of the antagonism between capital and labor and be- 
 tween capital and the public in the electric railway industry. So far as the 
 public is concerned, the Philadelphia plan does not have the merit of the Cleve- 
 land plan, which was based upon a conservative determination and specific limi- 
 tation of the demands of capital. From the standpoint of labor it does not have 
 the merit of the free and coordinate exercise of power that is enjoyed by the local 
 divisions of the Amalgamated on systems that are fully organized. With the 
 elimination of the wage fund scheme for enlisting the effective cooperation of 
 the employes there seems to be no special guaranty of the continuation of labor 
 efficiency except as it is brought about by the momentum of the past, continued 
 skill in management, and the avoidance of friction through the cooperative com- 
 mittee system. The long-existing deadlock between the company and the city 
 with respect to the construction and operation of much-needed rapid transit 
 facilities, unless it is broken soon, is likely to undermine the Cooperative Plan 
 and destroy, or at least greatly diminish, its benefits. In other words, Phila- 
 delphia has not yet solved the traction problem. 
 
 It will be noted that under the Cooperative Plan as worked out in Phila- 
 delphia the employes have what might be termed a near-share in the management, 
 but this is a long way from the participation for which the railroad brotherhoods 
 are striving. In Philadelphia everything emanates from the representatives of 
 capital and so long as labor's mind goes along with the management's mind both 
 parties are happy and cooperation is effective. 
 
 Another plan which theoretically calls for a greater degree of participation 
 
612 Electric Rmlwav Problem 
 
 in management is that w liich has been put into effect by the companies subsidiary 
 to the North American Company, as described by Mr. Mortimer. It will be 
 remembered that when the Milwaukee street railway employes demanded higher 
 wages the Milwaukee Electric Railway & Light Company called their attention 
 to the rates of fare prescribed by public authority and suggested that they lay 
 their claims directly before the state railroad commission, with the result that 
 capital and labor made common cause to force the hand of the public to pay 
 higher fares. The Milwaukee employes are not affiliated with the Amalgamated 
 but have a union of their own with branches in the several companies of the 
 North American group. Mr. Mortimer describes the Milwaukee labor organiza- 
 tion at page 1999 of the Proceedings, as follows: 
 
 "We have no local of the .Xmalgamafed .Vssociatioii in Milwaukee. The company has a 
 general labor contract with the Employes Mutual Benefit Association, which gives to that 
 association all the powers of collective bargaining that would pertain to any contract with the 
 .Vmalgamatcd .\ssociation, and while U. iireMini;il)ly. is desigr.ed to avoid :i strike, it ha> n'>t 
 been etTcctivc in preventing a strike. We had a strike of the employes on January 1st of this 
 year. 
 
 "The union embraces all crafts and all the employes of the Milwaukee Electric Railway 
 & Light Company and its associate companies * • « ♦ operating in the southeastern 
 section of Wisconsin. The parent chapter has also issued charters to otlier companies in which 
 the same interests are financially interested. So that whatever advantage that interstate 
 support may be. they have this support." 
 
 Mr. Mortimer looks upon the labor problem as a very serious one. He has 
 noted the spirit of unrest that makes it hard even for the national otticials of the 
 union to hold the locals in check. He sees the need for a keener sense of respon- 
 sibility on the part of the employes. At pages 1786 and 1787 of the Proceedings, 
 he says: 
 
 ".\sidc from the problem of increased revcnui>. one of the most pressing problems con- 
 fronting the railway is that of labor. It has been the experience in the last few years that 
 the strikes on electric railways have been frei|uent and of vaning duration. Their causes 
 have been numerous. Ihiring the last four or live months it has Ix'en increasingly difficult 
 for the international officers of the unions to control the local unions, and there have been a 
 numlier of street railways that have had sporadic strikes and outbreaks and threats from 
 the national officers to rule the locals out of the national unions because of failure to adhere 
 to their labor contracts. That spirit or feeling is fairly general throughout lalwr, prompted 
 partly by the increa.'ie in the co.st ot living and partly by some ol the spirit of unrest that has 
 apparently been wafted across the ocean. The rises in hourly rates for the same number of 
 hours per day worked resulting from some of these recent wage aw^irds have Ix-on larger 
 than the cost of living exjierienced since the award of tlie National War L.ibor Hoard. Some 
 of these hourly increased rates of wages may be justified on the shorter number of hours 
 worked a day and tlie fewer days |ht month, but as a general pro|Hisition I think most students 
 of the latvir prolilem will indicate that soincthing different from the present day scheme of 
 arbitration will have to In- develoiH-d. And 1 know in the electric railway business that we 
 need a much keener responsibility on the part of the workmen in their duties to the employer 
 and in their duties to the public, to the end that service may be maintained at a minimum 
 cost and that it may be o|Hnited with miiiinunn interruptions, that the convenience of the 
 public may not Ix- disturbed." 
 
 He also suggests the idea that wages should be based upon the productivity 
 of the employe. This thought is elaborated at pages 1787 and 1788 of the Pro- 
 ceedings, where he says: 
 
 "It is also desirable as far as possible to incorporate the element of productivity as a 
 basis of wages. That looks as though it might l)c difficult in the railway business, but it is 
 not as difficult as it might appear at first glance. The Iniiiunen forming a part of the employes 
 making up the principal group have primary control over the regularity of speed and the 
 ability to maintain fast schedules and thus influence the cost of platform labor per car mile. 
 U.sually they are l>aid on the lasis of hours, that is a rate per hour, and the faster the cars 
 
Participation in Management 613 
 
 are operated the less will be the expense of producing the service. They also have control 
 over the power consumption through care in operating the car, care in braking, care in starting 
 and care in shutting otf power when the same is not required in order to make its schedule. 
 It is conceivable that the schedule-makers could design a time schedule that would appreciably 
 reduce the cost of platform labor per car mile, but would require the cars to operate so fast 
 that they would not have time to stop for passengers. That that is not an exaggeration is 
 disclosed by the experience of the old St. Louis Transit Company under the operation of the 
 late Mr. A. B. duPont. He was pressed, because of his increase in operating expenses, by 
 the management ; and he concluded, of course, that the way to reduce operating expenses 
 for giving the same car mileage was to run the cars faster. So he ran the cars so fast that 
 they did not have time to pick up any passengers and the result was that the passengers 
 usually went to the street intersection with a brick in their hand and if the car did not stop 
 for them they threw the brick at the car. The damage to equipment was considerable, and 
 it finally resulted in the imposition of a license tax on the system, a gross receipts tax of 2%. 
 It was thought that by imposing that tax it would require the cars to stop and it also would 
 placate somewhat public opinion at the outrages that had been committed on them. 
 
 "Another element in which the trainmen are primarily interested is the revenues per 
 car mile. So a productivity system of wages can be arranged whereby an agreed hourly rate, 
 graduated, if you please, can be provided as a minimum, and in addition thereto a system of 
 participation in the savings which the employe may effect, first by reason of decrease in in- 
 juries and damages; second, by the saving in power consumption; third, by increasing the 
 schedule speed ; fourth, by the maintenance of equipment over which the trainmen have con- 
 trol, and fifth, through increased revenues per car mile. Such a system when extended can 
 be made to develop one for the administration of discipline, .^n employe may start out at the 
 beginning of the month with 1.000 points to his credit, and for each infraction of rules or 
 justified complaints on the part of the public deductions can be arranged so that his participa- 
 tion in the aggregate profits for the month, profits resulting from the savings under these 
 standards, will be reduced, but his saving, that is, the money that is taken from him should go 
 to the other employes of the group so that it cannot be said that the employer is disciplining 
 the men for the purpose of increasing his net earnings. 
 
 "It is also possible to put all accounting work on a productivity basis, and there are some 
 psychological aspects to that. Fundamentally and individually, workmen, be they male or 
 female, are desirous of being placed on an individual basis of compensation. Now, that is 
 strongly urged against by certain classes of organized labor. But it has been our experience 
 that where there has been this gain-sharing plan in certain departments we have had detnands 
 from other departments — from the employes of those departments — that they be installed. In 
 other words, my actual experience with operations of that kind is different from the general 
 published results. 
 
 "I am not suggesting that this will fundamentally take care of increases in wages, because 
 there are no economies which employes can effect, at least in sufficient magnitude, to com- 
 pensate them for the increased cost of living, either actual or imagined. But they are small 
 elements which tend to develop care on the part of workmen and which in turn have their 
 influence in adding to the life of the physical property under their jurisdiction and tend 
 to develop a certain amount of individual pride and individuality. 
 
 "Commissioner Sweet : That would stabilize the labor market to a certam extent, or 
 have a tendency in that direction? 
 
 "Mr. Mortimer: Yes. it does tend to stabilize the market. It holds out to employes first 
 a certain return for the month in the way of wace compensation and in addition it offers to 
 them a speculation, and desire to speculate is inherent 
 
 "Commissioner Sweet: A reward for extra good conduct? 
 
 "Mr. Mortimer : W'ell, it is a reward for extra good conduct, but it * * * * 
 originates from that same brain cell that causes men to go into the desert for the discoverv 
 of gold mines. There is an intense curiosity invariably displayed as to what the results of 
 the earnings from the gain-sharing plans are going to be for that particular month; and it 
 has the further advantage that through the operation of the plan you can disclose some of the 
 most intimate details of operation to the employes and show to them the influence of changes 
 in conditions and of their own conduct upon the results for the month." 
 
 Although he does not say so in so many words, it is evident that Mr. Mor- 
 timer is describing methods which have been employed in connection with the 
 companies over which he has had charge. Even representation on the boards of 
 directors has been conceded to labor, as will appear from Mr. Mortimer's further 
 testimony at pages 788 and 789 of the Proceedings: 
 
 "Commissioner Meeker : Would you extend the sharing plan to a share in the manage- 
 ment of the industry? 
 
 "Mr. Mortimer: Yes. VVe have done that in most of our companies. We have provided 
 
614 Electric Railway Problem 
 
 for the election of a representative of labor to the board of directors. * * * * We first 
 provided in our group lor the election by the Employes' Mutual benefit Association of a 
 representative on the board of directors of the Union Electric Light & Power Company, 
 the electric utility in St. Louis. The by-laws provide for seven directors. One of those 
 directors is now a direct representative of the Employes' Mutual Benefit Association. The 
 Employes' Mutual Henctit .\ss(xiation first asked tor representation upon the board of direc- 
 tors and we acceded to that rc(|uest. 
 
 "Commissioner Meeker : How long has that plan Iteen in operation ? 
 
 "Mr. Mortimer: That election took place, I think, in March of the current calendar 
 year. The employe was chosen by a process of primary nominations at which two were 
 selected to run for the election, and then an election was had to eliminate one or the other 
 and the man chosen to represent the Employes' Mutual Benefit .\ssociation on the board of 
 directors is one of the watch euRineers in the .-Kshley Street power station, and he sits in at 
 each of the monthly txiard meetings. The same thing is now in process of working out in 
 the Wisconsin Gas & Electric Company. 
 
 "Commissioner Meeker: Does this employes' representative have the same power as 
 other directors? 
 
 "Mr. Mortimer: .Absolutely. He has absolutely the same powers, the right to vote and 
 the right to discuss questions of all kinds. 
 
 "Commissioner Meeker: Does he have to have a share in the capital of the industry, 
 or 
 
 "Mr. Mortimer: Yes. the law requires that the directors be shareholders in the states in 
 which we operate. That is not true of all states. .And in this case he was qualified by the 
 company transferring one share of stock to his name, so that he is legally entitled to sit as a 
 member of the board of directors. It is all being worked out in the case of the Wisconsin 
 Gas & Electric Company, and in the case of the Milwaukee Electric Light Comjiany certain 
 changes of our articles of incorporation will have to be ntade, but that will be done, I hope. 
 
 "Commissioner Meeker: This employes' representative was chosen by the Employes' 
 Mutual Benefit .Association? 
 
 "Mr. Mortimer: Chosen by the memlnTs of the Employes' Mutual Benefit .Association, 
 which embraces all of the employes of the company." 
 
 Mr. Mortimer tlicn describes more fully the functions of the Employes' 
 Mutual Benefit Association and its relation to the company. .\t page 789 of the 
 Proceedings, he says: 
 
 "It is an organization that has two principal purposes in life: one is to administer sick 
 bi'nefits and death iK'netits, provide medical and surgical attendance for the employes, and 
 also to provide additional insurance of Ik^iIi life and sickness and accidents. ofl:'-duty types. 
 In respect to certain of its insurance benefits where the rate is flat and that business does 
 not carry itself, the premiums are not sufficiently high, it is necessary for the cniiipanv to ma^e 
 contributions. Its other principal function is that of collective bargaining, and in that respect, 
 of course, it needs no contributions by the company. 
 
 "Commissioner Meeker: By collective bargaining, you mean settling upon the wage and 
 hours ? 
 
 Mr. Mortimer: .\nd conditions of laWir, yes." 
 
 The effect of the profit-sharing features of the Milwaukee plan is described 
 more fully at page 790 of the Proceedings, as will be seen from the following 
 extract : 
 
 "Commissionor Meeker: Before you leave the question of labor relations, I would like 
 to ask a little bit further alM)UI this gain-sharing plan that you have. Do the employes 
 actually have an appreciable control over accident prevention? 
 
 ".\lr. Mortimer: They do. 
 
 "Cummissioncr Meeker: Do you think you have statistical demonstration of that? 
 
 "Mr. Mortimer: \'es, we think we have. 
 
 "Commissioner Meeker: Your actual rate has Ixen cut down since this plan was put 
 into operation? 
 
 "Sir. Mortimer: Our actual disbursements for injuries and damages have been mate- 
 rially less since this plan was effected. 
 
 "Commissioner Meeker: How long has this plan been effective? 
 
 "Mr. Mortimer: This plati applicable to trans|x<rtation in conjunction with our employes 
 has l>een applicable since June, 1915, a period of four years. 
 
 "Commissioner Meeker: Have you statistics which would boar upon this subject? Of 
 course, other causes have been operating to cut down the accident rates; the general safety 
 
Participation in Management 615 
 
 movement and the workmen's compensation movement and other movements. Do you think 
 your experience is Ijetter than the experience of other companies in a similar line of business? 
 
 "Mr. Mortimer: I know in many cases the electric railways have experienced an increase 
 in the cost of injury and damage settlements. 
 
 "Commissioner Meeker : However, that verges on quite another question, the compe- 
 tence of administration of compensation laws and increases in rates which have been quite 
 general in all the compensation states and various other matters. 
 
 "Mr. Mortimer: But, Mr. Commissioner, the injuries and damages to which I refer 
 and upon which these calculations are based relate to injuries and damages to the public and 
 have no relation to workmen's industrial injury compensation." 
 
 Mr. Mortimer frankly states that, in his opinion, most public utility operators 
 would like to appro.ximate the labor standards set up by the Amalgamated, if they 
 could only see their way clear to get the necessary revenues, and that under state 
 regulation or a service-at-cost plan, there ought to be no real trouble between 
 the companies and their employes. At pages 1999 and 2000 of the Proceedings, 
 he says : 
 
 "Our view of that angle of the business is relatively simple. In the administration of 
 a public utility, there never ought to be any opportunity for any substantial dispute between 
 the employer and the employe affecting hours, wages or working conditions. That ought 
 to be the case where state regulation administers rates and service and controls security 
 issues, or under a cost-of-service plan. State regulation is only another expression for cost 
 of ser%-ice ; our so-called cost-of-ser\'ice plan being automatic rate regulation. 
 
 "The employe is. of course, entitled to adequate compensation, and that can be measured 
 from a number of different viewpoints. I think that most public utility opsrators. if they 
 could see their way of collecting the revenues from the public would be favorable towards 
 very closely approximating the standards which have been submitted to this commission by 
 the representatives of the Amalgamated Association." 
 
 He then describes the new Wisconsin law that grew out of the Milwaukee 
 strike of January 1, 1919. On this point his testimony is found at page 2000 
 of the Proceedings: 
 
 "Fundamentally, in public utilities, the question of wages, hours and working conditions 
 is a public problem. The way the law stands in Wisconsin at the present time, it ought to be 
 practically impossible to have a strike if both parties will follow the procedure that is laid down. 
 
 ".■\s a part of the Governor's reconstruction plan, he created the Board of Conciliation, 
 consisting of three men, selected in the usual way — one representing the employers, one 
 representing the employes, and one representing the public. 
 
 "Commissioner Sweet: How was that last one selected or appointed? 
 
 "Mr. Mortimer : These men are nominated by the Governor and confirmed by the 
 Senate : but they are chosen from these respective groups. 
 
 "Mr. Warren: It is a permanent board, is it? 
 
 "Mr. Mortimer: Yes, it is a permanent board. * * * * With respect to ordinary 
 industrial disputes, other than public service corporations, the Board of Conciliation may 
 assume jurisdiction upon the request of either party. That takes the place of the former 
 arbitration provision under the Wisconsin industrial commission law, which perinitted arbi- 
 tration by the industrial commission only w'ith the consent of both parties. 
 
 "With respect to public service corporations, however, the law requires that the Board 
 of Conciliation take jurisdiction and then it shall rnake its findings and immediately certify 
 them to the Railroad Commission. The Railroad Commission reviews such findings, and 
 modifies or confirms them and makes its determination. If it finds that the public service 
 corporation can pay the increased wages, and earn a reasonable return, then it shall order 
 such wages effective and that order is binding upon the public service corporation. 
 
 "If it finds that the public service corporation is unable to pay these increased wages 
 without causing it to earn less than a reasonable return, then the Railroad Commission shall, 
 by order, fix such rates or charges as shall permit the corj'oration to earn the increased 
 wages and produce a reasonable return. 
 
 "That is intended to avoid industrial disputes among public service corporations." 
 
 It is not entirely clear what effect this new conciliation law will have upon 
 the relations between the company and its employes in Milwaukee. Apparently, 
 however, the law has been worked out in such a way as to create a solidarity of 
 interest between them, or at least to weaken the motives of both capital and 
 
616 Electric Railway Problem 
 
 labor to resist each other's demands. Under these circumstances, a fine spirit 
 of cooperation for mutual self-help ought to be exhibited, but it is doubtful 
 whether the public can find protection in this harmony of purpose. In Phila- 
 delphia the public still has the protection of the five-cent fare, but in Milwaukee 
 there is no limit except the company's need as interpreted by the Railroad 
 Commission. 
 
 Neither the Mitten plan nor the Mortimer plan goes very far toward effec- 
 tive and responsible participation in management, except in minor details that 
 primarily affect the interests of the employes. Neither plan has assimilated the 
 thought behind the Plumb Plan. The latter has been severely criticized because 
 it would make the employes predominant in the management of the railroads. 
 It would not be so much a participation of the employes in management as a con- 
 cession by the employes of a right to the public to participate in a minor way in 
 the management for which the employes themselves were primarily responsible. 
 Up to this time capital has been primarily responsible for street railway manage- 
 ment. 
 
 The Amalgamated program recognizes the fundamental divergence of in- 
 terests between capital and labor, and jirovides for the establishment of an equi- 
 librium through the exercise of organized power on either side. It does not over- 
 look the antagonism, but it prescribes rules under which the fight is to be carried 
 on. It adniits that the two contending forces have a common interest in the 
 continuance and prosperity of the business, but it recognizes the conflict between 
 them when it comes to a division of the fruits of production. It recognizes 
 capital, and in turn demands recognition for labor, on the theory that two great 
 powers equally disciplined and equally strong can in the long run get on better 
 with each other than they could if one was maintained on a military basis and 
 the other not. Tlie .Xmalgamated not only recognizes the conflict of interests 
 between labor and capital, but also recognizes a pretty clear-cut division of func- 
 tions, and aims to preserve to each of the parties freedom of action in its own 
 part of the field. 
 
 The Philadelphia plan and, to a certain extent, the Milwaukee plan assume 
 that the fundamental and i)rimary interest in the electric railway business is the 
 interest of capital, and the cooperation of labor is sought and the right of par- 
 ticipation in management is given, so far as it is given, primarily as a means of 
 inducing labor to yield itself efficiently to exploitation for the benefit of capital. 
 The idea back of the riunib I'lan is that capital is an inert thing, and that the 
 primary interest in the business is the interest of the workers themselves, who 
 produce the service as a means of gaining a livelihood. The Plumb Plan points 
 to the socialization of capital and the concentration of responsibility for manage- 
 ment of industry in the producers. Labor is regarded as the dominant factor 
 in the situation, and if this idea were accepted and practically applied in the 
 electric railway industry, capital and labor would exchange places. Capital 
 would work for labor and would be paid a wage determined by the law of supply 
 and demand, or else by some more or less arbitrary etiuitable standard based 
 upon the theory of a fair return which corresiionds in a general way to the prin- 
 ciple of the living wage. 
 
Participation in Management 617 
 
 "Participation" in management appears to assume an identity of interest 
 and it is doubtful whether the results aimed at, from the point of view of labor, 
 when participation in management is suggested as a method of solving the labor 
 problem, can be realized unless participation becomes control. This is analogous 
 to the relation between capital and the public where we hear so frequently the 
 gospel of cooperation preached. This idea is often carried so far as to suggest 
 that the city should be represented on the board of directors of the local electric 
 railway company. The inherent weakness of this plan is the fact that a funda- 
 mental and irreconcilable conflict of interest exists as between the companies 
 and the public, and that minority representation in the management is based 
 upon the theory of partnership and community of interest, which is a super- 
 ficial view of the relations of the two parties. The inevitable result is either 
 discord and partial paralysis in management, where unity should prevail, or else 
 the surrender by the city's representatives of the public point of view and the 
 acceptance of the fundamental aims and purposes of capital as the dominating 
 interest to which both parties become subservient. Of course, it would be foolish 
 to deny that between capital and the public, and also between capital and labor, 
 there are rather wide fields for cooperation ; but in either case, the giving to an 
 opposing interest of a share in the innermost councils of the company and a 
 partial and subordinate responsibility for its policies is not calculated to bring 
 beneficial results. Probably great good can be accomplished by cooperation be- 
 tween employers and employes in the formulation of rules, the handling of dis- 
 ciplinary problems and the layout of operating schedules, and, of course, in this 
 industry, as in every other, as Mr. Morris L. Cooke suggests, the initiative of 
 the employes should be enlisted for the improvement of operating methods. But 
 participation in management in the larger affairs is more likely to emphasize the 
 underlying antagonisms or else to create an artificial and one-sided unity of 
 policy. If the time comes when labor takes control of industry, it will then have 
 responsibility for management, and capital will have to take a back seat. If 
 government assumes complete control of the electric railways, both labor and 
 capital will have to accommodate themselves to public management, with such 
 degree of participation as may prove to be feasible and compatible with the public 
 interest. 
 
Chapter XL\'III 
 ELECTRIC RAILWAY EMPLOYES AS CIVIL SERVANTS 
 
 Public regulation of wages, hours and conditions of labor, without the as- 
 sumption of a coordinate public responsibility for revenue resources, is theoreti- 
 cally unsound and practically impossible as a permanent policy. Public resrula- 
 lation of rates, unless the public has authority to question the essential validity 
 of operating costs, including the wages paid, is an "optical delusion." .A ser%-ice- 
 at-cost plan that automatically passes wage increases on to the public in increased 
 fares or in deficits to be made up out of taxes is a cost-plus scheme to which 
 the public cannot afford to consent. It the public insists on having its dealings 
 with the management, under a contract specifying the rates for service, and 
 leaving capital to handle labor as best it can. then the public service is subjected 
 to the vicissitudes of private industrial warfare, and an intolerable condition 
 arises. If government prohibits and penalizes the strike under private manage- 
 ment, it nms counter to the deeply-ingrained prejudices of labor which sees a 
 condition of involuntary servitude come in when the right to strike goes out. 
 Under the new conditions of rising costs and corporate poverty, the labor problem 
 under private management becomes knottier than ever. The obvious necessity 
 of establishing direct public relations with labor suggests public ownership and 
 operation of tlie electric railways as the solution of the labor i)roblem as well as 
 of the problem of credit. Why not cut the Ciordian knot by making tlie electric 
 railway employes civil servants? 
 
 Unhap])ily, this program does not in itself insure the effective cooperation 
 of labor on ideal terms. It does not necessarily assure the employes the living 
 wage, for many classes of public employes are notoriously underpaid, especially 
 in times like these when living costs go up rapidly while public salaries and 
 wages lag far behind. This program does not in itself insure efticiency in the 
 application of Iabor-i)ower to the production of transportation service, which is 
 now so imperative a need; for examples of inefficient labor on public work are 
 by no means intro(|U(.iu. It does not even guarantee the continuity of service 
 so important to the public in the electric railway industry, for even policemen 
 have been known to strike and soldiers to mutiny. Yet. under public ownership 
 and ojieration. properly administered, the labor problem could be attacked di- 
 rectly, instead of in a round-about way through the companies, or as a companion 
 of the problem of credit. Once numicipal ownership and operation were achieved, 
 capital would no longer enter iiUo the situation as a private problem, and atten- 
 tion could be focussed directly on labor relations. It is to be presumed that if 
 the better day for labor which Mr. I.auck depicted as growing out of the war and 
 the world ui)heaval is realized, government will become more democratic and 
 
 618 
 
Labor Under Civil Service 619 
 
 more responsive to the Just demands of the workers. More and more, the evils of 
 governmental inefficiency, indifference and oppression will disappear. At least we 
 must all hope so. Furthermore, we thus far have the example of the San Fran- 
 cisco and Seattle municipal railways upon which labor appears to have been re- 
 ceiving good pay and working efficiently under satisfactory conditions and with 
 the eight-hour workday. 
 
 The labor problem is not solved by service-at-cost or by state regulation. It 
 is not solved by the Philadelphia Cooperative Plan, nor by the Amalgamated 
 program alone. Civil service rules, as ordinarily administered, can hardly be said 
 to offer a solution of the problem ; yet, with modifications to suit the exigencies 
 of transportation service, they may be very helpful in solving it under public 
 management. In this connection, reference may be made to the provisions of the 
 Fowler municipal ownership bill, introduced in the New York legislature by 
 Senator Fowler in March, 1920. This bill was a revision of a bill drafted in 
 1918 by a committee appointed by the New York State Conference of Mayors 
 and Other City Officials. It did not become law. Nevertheless, its provisions 
 with respect to responsibility for management and discipline are of considerable 
 interest. Provision is made that for every utility publicly owned and operated 
 a municipal utility director shall be appointed or designated by the municipal 
 governing board. The director's powers with respect to the personnel of the 
 utility force and the character of the rules to be prescribed by the governing 
 board are set forth as follows: 
 
 "The municipal utility director shall have full authority to appoint, promote, discipline, 
 remove or discharge any or all officers and employes engaged in the supervision, acquisition, 
 establishment, construction, enlargement, maintenance or operation of any municipal utility 
 under the control of such director, subject to rules and regulations as to the manner of 
 employment, training, competence, discipline, working conditions and compensation, including 
 pensions of such officers and employes. Such rules and regulations shall be adopted by the 
 municipal board and may be modified or changed from time to time. Such rules and regu- 
 lations shall be consistent with law governing officers and employes of a utility of the same 
 kind and class as the municipal utility, and with the provisions of the civil service law 
 and rules, except as to removal or discharge; but no such officer or employe shall be 
 removed or discharged for political reasons, nor without written charges and a public 
 hearing, to be held upon reasonable notice. Such rules and regulations shall provide means 
 for the adjustment of disputes between the employes and the management without interrup- 
 tion of the utility service. They may provide for the creation of representative committees 
 of employes to act with the management in matters relating to the appointment, discipline 
 and discharge of employes and with respect to the efficient operation of the utility with 
 due regard to the public welfare in the matter of service and the cost of service. Such 
 rules and regulations shall provide for the payment of just and reasonable compensation 
 for the services rendered by the employes and officers of the utility, and may provide for 
 collective bargaining between the employes and the municipal utility director with respect 
 to wages, hours of labor, and other conditions of work." 
 
 It cannot be said that the labor problem has been sohed in any final way 
 in connection with municipally operated utilities in the United States, but un- 
 doubtedly it could be solved by a direct concentration of public attention upon it. 
 Thus far it has attracted comparatively little notice and no concerted effort 
 has been made to work out a solution along other than traditional lines. Organ- 
 ized labor sometimes takes the position that the municipality under public opera- 
 tion is not much different from any other employer. This attitude ignores the 
 fact that under public ownership the demands of capital are largely subordinated. 
 Of course, the fare-paying public is interested in getting service as cheaply as 
 
620 Electric Railway Problem 
 
 possible, and for that reason desires to hold both labor cost and capital cost down. 
 However, the farepayers do not constitute the governmental public, whose fun- 
 damental interest at all times, even though it is not always clearly recognized, is 
 to see that justice is done and the conditions of a sound, economic, social and 
 political life maintained. 
 
 In view of the inevitable importance of public ownership and operation as 
 a potential remedy for the existing ills of the electric railway industry, it is un- 
 fortunate, perhaps, that the Commission was not able to make a thorough in- 
 quiry into the problem of labor relations on publicly operated utilities. 
 
Chapter XLIX 
 SERVICE VERSUS PROFITS 
 
 We have now surveyed the two great coordinate problems in the electric rail- 
 way industry — the problem of securing capital through credit, and the problem 
 of securing labor through cooperation. Neither of these problems can be solved 
 by itself. Unless the capital funds required for the construction and expansion 
 of electric railway facilities can be secured, labor has no chance either to serve or 
 to be rewarded in the operation of electric railways. On the other hand, unless 
 the cooperation of labor can be enlisted in rendering efficient service at reason- 
 able cost the capital already invested in electric railway facilities will be starved 
 and ultimately lost and new capital cannot be secured for the expansion of facil- 
 ities which the growth of population and the increase of traffic demand. 
 
 It has been demonstrated from every point of view that the electric railways 
 perform an essential public function and that they exist primarily for public 
 service. It is an axiom oft repeated by those who speak for all the parties con- 
 cerned — capital, labor, and the public— that the full necessary cost of electric rail- 
 way service, of the amount and quality which the public interest demands and 
 secures, must be paid by those who use the service or by the general public on 
 whose behalf it is rendered. Heretofore, in the initiation of street railway en- 
 terprises capital has taken the lead. Funds are put up before work begins and 
 labor entering into construction is capitalized before operation starts and revenues 
 begin to come in. Although chronologically capital comes first as a matter of 
 practical necessity, its reward, under the procedure thus far followed, comes 
 last. It is the farepayers' residuary legatee. Out of operating revenues the 
 costs of operation, including the wages of labor, are paid first and capital has 
 taken what is left. The position of capital in the enterprise, therefore, has 
 been a speculative one. The representatives of capital, having the management 
 in their own hands, have necessarily adopted a policy of keeping the reward of 
 labor for its share in the production of service down to the lowest practicable 
 limit, and also of keeping the quantity and quality of service rendered to the 
 public as far within the cost of the service as possible. Capital has enjoyed the 
 advantage of constitutional guaranties enforced by the courts, except as it may 
 have limited its potential revenues by voluntary contract. It has never accepted 
 "the fair return" as the full measure of the profits it seeks. It wants this, plus 
 something more. Even under these modem service-at-cost arrangements, it de- 
 mands a fixed return, and a chance for speculative profit too. Theoretically, 
 capital's constitutional guaranty of the right to charge rates that will yield it a 
 fair return while it is devoted to public service is offset by the right of the public 
 through the police power, to require that service shall be rendered at reasonable 
 
 621 
 
622 Electric Rmlway Problem 
 
 rates, with not only the cost of the service but the value of the service to those 
 who make use of it taken into consideration. In the electric railway industry 
 labor has undoubtedly been treated as a commodity, and when purchased and 
 paid for its claims have, for the most part, been regarded as completely liqui- 
 dated. Capital claims the right to make up past losses, but labor has no way 
 of being recouped for insufticient wages which in the past it may have im- 
 prudently accepted. Back pay, where it is awarded in labor settlements, does 
 not ante-date the tiling of the claim for advanced wages. 
 
 Labor now demands that it shall be put on a par with capital to the extent 
 that "the living wage" shall be given at least the same consideration as "the fair 
 return" in all electric railway settlements. It is a fact of tremendous signifi- 
 cance in this entire problem that a great body of law and precedents has been 
 built up in support of "the fair return" on the basis of capital's constitutional 
 guaranties, while, on the other hand, laws and precedents in support of "the living 
 wage" have to fight their way to recognition without the support of the consti- 
 tution. From the point of view of economic theory, social justice, and political 
 expediency, however, it seems clear that labor's claim to the living wage must 
 be fully recognized. If this be admitted, we have two fundamental elements 
 in the cost of street railway service, namely, the cost of labor on the basis of the 
 living wage, and the cost of capital on the basis of the fair return, and the public, 
 for whom the service is rendered, must count upon paying for the service a sum 
 sufficient fully to cover both of these elements of cost. 
 
 Nevertheless, it is true that local transportation is a public ser\'ice. The 
 cars are not run primarily for the purpose of enabling capital to make a profit 
 or labor to make a living. Neither capital nor labor has any right in the electric 
 railway business except as it is rendering public service. The electric railway 
 problem, obviously, cannot be solved except on the basis of public service, and the 
 public cannot expect to get the service without providing for the adequate reward 
 of both capital and labor. I'luler |)rivatc management, capital will continue to 
 claim something more than a lair return, and labor may properly demand a living 
 wage, and, if it assumes a share in the responsibility of the industry to the public, 
 it may demand something more. But it is always to be kept in mind that, in 
 the very nature of the case, transportation or any other public service must be 
 rendered at the lowest practicable cost ; and, therefore, under public management 
 "the fair return" and "the living wage" will he the measures of the cost of capital 
 and labor, respectively. The public nature of the business and the exigencies 
 of the present period of high costs combine to suggest that transportation service, 
 to be cheap, must be rendered on the basis of community self-help, rather than 
 community dependence upon private initiative. 
 
Chapter L 
 
 THE FOUR CHOICES 
 
 In seeking a solution of the general problem of electric railway transporta- 
 tion, it seems clear from the standpoint of the public that the first thing to be 
 determined is the character of the public relations of the industry. Four courses 
 are open to us : First, we may abandon the theory of public interest in the in- / 
 dustry and slip the leash of public control, leaving the electric railways to go 
 their way as a private industry and work out their own salvation as a speculative 
 business enterprise. Second, we may continue and perfect the theory and prac- O- 
 tice of public regulation under the police power by giving the regulatory com- 
 missions a free hand, with contractual obstacles and statutory limitations of juris- 
 diction removed, at least so far as they relate to the value of the property, the 
 rate of return to capital, the wages, hours and working conditions of labor, the 
 extent and quality of the service to be rendered, and the rates to be paid therefor. 
 Third, we may establish a more intimate contractual relation between the com- i 
 panics and the public, based upon some type of service-at-cost arrangement, with 
 the public in control oi the quantity and quality of the service, and with the fares 
 to be paid by the car riders or the deficits to be made up by the taxpayers deter- 
 mined from time to time by some automatic or semi-automatic plan without the 
 intervention of the discretionary power of public regulatory bodies. Fourth, we 
 may reject entirely the policy of private ownership and operation and proceed 
 to pay oS the investors who have loaned their money in aid of public credit and 
 to assume full and direct public responsibility for the production of the service. 
 True, this fourth and last course is subject to two possible modifications. We 
 might provide for the solution of the problem of capital through public owner- 
 ship, while maintaining private operation to wrestle with the problem of labor; 
 or, on the other hand, we might assume responsibility for the solution of the labor 
 problem through public operation, leaving private ownership to wrestle in a limited 
 way with the problem of capital. Obviously, each of these several courses is 
 subject to almost infinite variation in the details, but it is safe to say that any 
 general solution of the problem based upon evidence presented to the Commis- 
 sion will have to follow the thought underlying one or another of these four 
 main courses; and it may be that differences in local conditions, physical, eco- 
 nomic, legal and political, will justify the adoption of different courses in dif- 
 ferent communities. 
 
 623 
 
Chapter LI 
 ABANDONMENT OF THE PUBLIC INTEREST NO REMEDY 
 
 Some of the witnesses before the Commission raised a doubt as to the future 
 of the electric railway industry and suggested that the electric railways may 
 even now be getting obsolete as public utilities. It was even suggested that all 
 the special burdins now levied upon the electric railways because of their privi- 
 leged status in the public streets be removed, and that the regulation of their 
 rates by public authority be abandoned in order that they may be in a position 
 to gird themselves for the battle to the death with their new competitor, the 
 automobile. It was suggested that only in this way will it be possible for the 
 electric railways to prove whether or not, in the economy of modern society, 
 they have a right to survive. It will no doubt be universally admitted that a 
 policy of public regulation or public ownership that would retain in perpetuity, 
 or for a long period of time, an instrument of service after it had become obso- 
 lete and relatively unserviceable or relatively uneconomical, would be most un- 
 fortunate. However, the overwhelming weight of evidence before the Commis- 
 sion is to the effect that the electric railway is still the most economical and effi- 
 cient agency for local transportation ser\-ice and that no rival transportation 
 agency is yet in sight that could even hope to supplant the electric railway com- 
 pletely. While it may be that the electric railway is becoming obsolete in cer- 
 tain locations and for certain types of transportation service, the enormous aiul 
 increasing volume of the service that it actually renders, and the vast and in- 
 creasing sum that the public is willing to pay for the service it renders, arc sufli- 
 cient proof of the claim to continued recognition as a public utility. 
 
 To most of the witnesses who appeared before the Commission it would be 
 unthinkable that the public should now "wash its hands of" the electric railwavs 
 and relegate them to the status of a purely private industry. This course woul<i 
 withdraw from capital the promise of a fair return and would withhold from 
 labor the hope of a living wage; and so far as the public is concerned, it would 
 leave its vital transportation interests subject to the caprice of economic fortune- 
 and the uncertaiiUy of private industrial struggle. The policy of "hands oft" 
 is clearly impossible so long as the rails and the wires occupy the highways, 
 unless we are willing also to give up the predominance of the public interest in 
 the streets themselves. It does not follow from this conclusion that no public 
 burdens now laid upon the electric railways should be removed, or that no equal 
 ization of the restrictions of regulation shall be effected as between the electric 
 railways and their c(>m|H-titors. The fact that we cannot afford to withdraw 
 the strung hand of governmental control does not mean tlKit we must hold the 
 electric railways by the throat while their competitors rob them. But the logic 
 
 624 
 
Abandonment of Control 625 
 
 of the situation demands that public policy go forward, not backward; that the 
 electric railways, instead of being relieved of public regulation, be brought more 
 and more closel}- under supervision. The need now is that the public, having 
 grasped the function of regulation, shall not stop with interference and the 
 paralysis of private initiative, but shall go forward to the acceptance of public 
 responsibility. It is not less public regulation, but more public initiative that is 
 needed. 
 
I Chapter LIl 
 
 COMMISSION REGULATION NOT ADEQUATE AS A 
 SOLUTION OF THE PROBLEM 
 
 The second course open to vis in seeking a general solution of the electric 
 railway problem is along the lines which have already been developed to a con- 
 siderable extent by the exercise of the police power through permanent regula- 
 tory commissions. In Chapter XLVI of this report I reviewed the state regu- 
 lation movement and its successes and failures as shown by the evidence pre- 
 sented to the Commission. 
 
 Dependence upon the police power as a means of solving the electric rail- 
 way problem does not necessarily mean unrestricted state regulation, but under 
 certain conditions it might lake the form of local regulation, and under certain 
 other conditions it might take the form of a combination of local and state regu- 
 lation through cooperative governmental action. Thus far, however, the gen- 
 eral regulatory movement in recent years has been mainly in the direction of 
 exclusive state regulation, and when the regulatory method is put forward as 
 the solution of the problem, it is ordinarily understood to mean regulation by 
 state commissions unrestricted by the terms of local franchise contracts. In 
 attempting to assess the availability of this remedy we are compelled to make 
 answer to these questions: How does it safeguard the interests of capital? 
 How does it safeguard the interests of labor? How does it safeguard the in- 
 terests of the public? 
 
 From the point of view of capital, unrestricted state regulation can offer 
 no guaranty except the right to charge just and reasonable rates, coupled with 
 the obligation to render adequate service, in the hope that under these condi- 
 tions the electric railway industry may be able to rihahilitate itself and reestab- 
 lish its credit. Capital may demand the right to earn a fair return upon the fair 
 value of the pro])erty devoted to the public service, always subject to the funda- 
 mental limitation recognized in the law that rates shall be reasonable also from 
 the point of view of the public. There is considerable discord among the voices 
 representing capital with respect to the benefits derived from our .systems of state 
 regulation up to the present time, but the undercurrent of thought among the 
 company representatives seems to be that state regulation is the lesser of two 
 evils, and that on account of the recognized public nature of the business, the 
 legal precedents already cstabli.shed, and the political temper of the times, some 
 sort of public regulation nnist be accepted, and, if so, state regulation is much 
 preferable to local regulation. 
 
 To answer the demands of capital in the present status of the industry, 
 and to solve the problem of electric railway credit, state regulation would at 
 
 626 
 
Commission Regulation Inadequate 627 
 
 least have to be less restricted and more comprehensive than it has been hitherto. 
 Obviously, it cannot fully protect capital where its jurisdiction is limited by the 
 obligations of municipal franchise contracts with respect to construction, service, 
 and rates. From this point of view, therefore, state regulation, in order to be 
 a sufficient remedy for existing difficulties, must be freed from these local re- 
 strictions and be put in a position where it can move rates either upward or 
 downward and can establish and modify standards of service from time to time. 
 Furthermore, in view of the proven weaknesses in the general financial structure 
 of the electric railways, state regulation cannot be elYective in permanently re- 
 storing credit unless it is extended, as suggested by Mr. W. E. Creed, to cover 
 the authority to compel reorganizations and the scaling down of securities and 
 fixed capital obligations to a point where they will closely correspond with the 
 recognized financial facts. Moreover, state regulation, to be measurably effec- 
 tive as a means of restoring credit, would need to be so extended as to have 
 control over the public burdens imposed upon the electric railways through taxa- 
 tion and otherwise, and also so as to have ultimate control of the wages, hours 
 and conditions of labor, upon which operating expenses so largely depend. 
 
 In brief, state regulation cannot solve the electric railway problem from the 
 point of view of capital and credit, unless it is made much more comprehensive 
 than it is at the present time, and even then capital cannot be guaranteed the 
 enjoyment of a fair return or the ultimate security of the investment, except as 
 the revenues derived from the service at rates that are not in excess of the reason- 
 able value of the service to the public are sufficient to pay the expenses of opera- 
 iton and yield the required profit for the investors. It must be admitted, how- 
 ever, that the idea of state regulation, even as applied to the electric railway 
 business, might be so developed as to include as a part of the rate schedule the 
 imposition of standby charges upon the communities served or upon individual 
 properties receiving the benefit of the service, and that this source of revenue 
 supplementary to the revenues derived from fares might yield a substantial part 
 of the cost of local transportation. The right of state commissions to assess 
 against municipalities the cost of public utility service directly chargeable to the 
 general public has been firmly established in the case of water and lighting 
 utilities. For our present discussion the most important precedent is the charge 
 levied against municipalities for fire service rendered by a private water com- 
 pany. This service, ordinarily, involves the consumption of small quantities of 
 water, but it assumes large expenditures in the preparation for, and in the main- 
 tenance of. readiness to serve. In just what form such an extension of the rate- 
 fixing authority of the state commissions with respect to the electric railway in- 
 dustry could or should be exercised has not thus far been suggested in detail, 
 but the theory of such a policv must not be confused with the idea of public sub- 
 sidies. State regulation through the police power does not contemplate the 
 granting of subsidies, or the imposition of deficits upon the taxpaying public. 
 The idea here under discussion is that state regulation, being responsible for the 
 assessment of the cost of service upon those who consume or benefit 'by the 
 service, may conceivably include in an electric railway rate schedule certain 
 charges against property or against the communities calculated to cover the cost 
 
628 Electric Railway Problem 
 
 of the portion of the service that is rendered for the benefit of property or for 
 the benefit of the public at large. There could be no guaranty that the revenues 
 derived from the rate schedule would be sufricient to pay the full cost of the 
 service. Furthermore, it is not a part of the function of state regulation to com- 
 pel potential consumers to consume, and this consideration may present a serious 
 obstacle to the assessment of a readiness-to-serve charge in the manner just sug- 
 gested, for, in the electric railway business, individual property owners do not 
 maintain physical connections with the electric railways, voluntarily arranged for 
 and continued, as is true in the case of most other public utilities. 
 
 Another extension of the scope and authority of the regulatory commissions 
 that is essential from the point of view of capital is the power to regulate com- 
 petitive agencies of public transportation service, either through the total exclu- 
 sion of competition, or at least through the imposition upon competitive agencies 
 of the same burdens and service obligations that apply to the electric railways. 
 
 Thus, it will be seen that from the standpoint of capital the exercise of the 
 police power as a means of solving the electric railway problem is dependent 
 upon a concentration of authority and responsibility in the established regulatory 
 commissions, and a great expansion of their functions ; and even on this basis, 
 capital must accept reorganization and the reconstruction of its permanent obliga- 
 tions, and in the end continue to assume the risk that as an unsubsidized utility 
 the electric railways may prove unprofitable. In other words, state regulation 
 will have to go a great deal farther than it has gone, and the result will still be 
 in doubt. 
 
 From the point of view of labor, state regulation cannot offer a solution of 
 the electric railway problem unless the commissions are given authority to pre- 
 scribe the wages, hours and conditions of work, and to compel the employing 
 companies to meet the requirements as prescribed. Moreover, as capital's right 
 to a fair return is a fundamental constitutional condition of the exercise of the 
 police power, so, if labor is to be protected by a plan based upon the use of the 
 police power, it must also receive either constitutional or statutory guaranties of 
 the living wage or of some other standard of compensation corresponding to "the 
 fair return" to ca|)ital. Moreover, dependence upon state regulation as the ex- 
 clusive means of solving the electric railway problem involves the acceptance of 
 the principle laid down by the United States Supreme Court in upholding the 
 Adamson Law. to the effect that labor, as well as capital, when accepting em- 
 ployment in an industrj- affected with a public interest becomes subject to public 
 regulation. 
 
 From the ()oint of view of the public, exclusive state regulation violates 
 the general principle of municipal home rule and specifically restricts the power 
 of the municipality to deal as it sees fit with a public function, primarily local 
 and in many ways interrelated with the public functions for which municipalities 
 arc deemed to be responsible. Moreover, exclusive state regulation deprives the 
 people of the community, who pay for the service, of the right to prescribe the 
 extent and (|uality of the .service for which they are paying, and removes to a 
 public body, responsible, so far as it is responsible at all. to a much wider con- 
 stituency, the control of one of the most intimate public functions of urban com- 
 
Commission Regulation Inadequate 629 
 
 muiiity life. As a practical matter, the municipalities feel that local transporta- 
 tion ought to be responsive to the needs and to the will of those for whom the 
 service is designed ; that transportation issues are, in the fundamental and appro- 
 priate sense, political questions; that their removal from the arena of municipal 
 politics represents an unjustified curtailment of municipal powers and results in 
 an atrophy of some of the vital organs of the local body politic ; and that the state 
 commissions, through their remoteness from the people constituting the local 
 public, tend more and more to become subservient to the influence of organized 
 capital which has the means and knows the ways of creating the atmosphere 
 about them. These particular objections on the part of the local public to ex- 
 clusive state regulation can be overcome only by a substitution of local regu- 
 lation, or by the establishment of complete political control over the state com- 
 missions. Either of these modifications of the state regulation policy meets with 
 the violent opposition of capital. 
 
 Perhaps the most important consideration in favor of the policy of state 
 regulation is that it provides an official tribunal, presumed to be impartial, by 
 which the value of the property devoted to public service can be definitely estab- 
 lished for rate-fixing purposes. The theories of public utility valuation advanced 
 by different parties in interest are so various that it is generally impossible to 
 arrive at a determination of the amount of the investment upon which capital 
 is entitled to earn a fair return, except through the exercise of the informed 
 judgment of a public body before which the conflicting claims and the evidence 
 in their support can be laid. Under most conditions a fair value could not be 
 arrived at through negotiation, for this one reason if for no other, namely, that 
 electric railway properties have been subjected to so many complex obligations 
 as to leave the management without power to negotiate a value unless the sum 
 total of the values already pledged is accepted by the public as an irreducible 
 minimum. It is at least doubtful, in view of the evidence laid before the Com- 
 mission and of other well-known or highly suspected facts, whether it is at all 
 practicable to establish a fair value by negotiation except in certain unusual cases. 
 
 The advantage of a definite valuation procedure as a part of the machinery 
 of state regulation is offset in a measure by the fact that valuations established 
 in this way are generally valuations for rate or capitalization purposes. They 
 do not fix the purchase price at which the electric railway property may be 
 acquired by the community, nor do they provide a means by which the value of 
 the property can be in whole or in part amortized out of earnings for the benefit 
 of the public and to facilitate the transfer of title to the community. Even here, 
 the state commission may be used, as it is in Wisconsin, as an agency for deter- 
 mining the value of the property for public purchase when the community has 
 determined, under the option given it by the indeterminate permit law, to take 
 over a private utility ; but this does not provide a means by which the muni- 
 cipality can prepare long in advance for the municipalization of an electric rail- 
 way through contract. It can hardly be doubted that the policy of unrestricted 
 state regulation, in the main, assumes the permanency of the existing ownership, 
 and does not concern itself with an ultimate transfer of ownership to the public. 
 \\'hile it cannot be said that the system of unrestricted state regulation is directly 
 
630 Electric Railwav Problem 
 
 opposed to ultimate public ownership, it is clear that in most cases a system of 
 state regulation tends automatically to tie the hands of the community in its ef- 
 forts to take over the utilities for public ownership and operation. 
 
 In conclusion, it is clear that we have not yet anywhere worked out a system 
 of regulation, through the police power, adequate to meet completely the present 
 crisis in the electric railway industry, and that no plan based upon this principle 
 has thus far been suggested that is not subject to fatal objections from the stand- 
 point of capital, from the standpoint of labor, or from the standpoint of the 
 public. Undoubtedly, there is great merit in the regulatory theor}-, but in its 
 practical application it involves so high a degree of political and administrative 
 intelligence and integrity as to leave us with the conviction that a community, if 
 it can successfully apply the regulator)- policy to the existing requirements of the 
 electric railway situation, is capable of any achievement not inherently impossible. 
 
Ckapter LIII 
 WHERE SERVICE AT COST FALLS SHORT 
 
 The third course open as a means of solving the electric railway problem is 
 the establishment of new contractual relations between the companies and the 
 government upon the basis of service at cost. On the public side these contracts 
 may be entered into either by the municipalities or by the states. In general, the 
 theory of the service-at-cost contract is that the amount of capital invested in the 
 public service and the annual rate of return upon it shall be fixed by agreement ; 
 that operating expenses shall be controlled by some arbitrary device such as an 
 annual budget or a car mile allowance, supplemented by a certain degree of dis- 
 cretionary interference by the supervising authority, or else by some sliding scale 
 or bonus scheme to give the management incentive for economy ; that the property 
 shall be maintained at all times in good operating condition ; that rates shall be 
 flexible and shall be adjusted automatically or semi-automatically from time to 
 time s'o as to produce revenues sufficient to cover the full cost of the service ; and 
 that the community shall have the option to take over the property for public 
 ownership and operation upon payment of the recognized capital value. 
 
 I have analyzed at considerable length, in Chapter XLI of this report, 
 service-at-cost plans that have been worked out in various communities. They 
 differ in many important details, and in some cases they depart considerably 
 from the outline just given. 
 
 In considering the availability of service at cost as a means of solving the 
 electric railway problem we must again answer these questions : How will it 
 safeguard the interests of capital? How will it safeguard the interests of labor? 
 And how will it safeguard the interests of the public? 
 
 The service-at-cost plan is the solution chiefly urged by the representatives 
 of capital at the hearings before the Commission. Like state regulation, the 
 service-at-cost plan recognizes the essential importance of the determination of 
 the amount of the investment, but depends for this determination upon negotia- 
 tion and agreement. The theory of service at cost is based, not upon the exercise 
 of the police power, but upon contract, and, therefore, at the outset no service- 
 at-cost plan can be put into effect unless the company accepts the proposed valua- 
 tion. This was true even in Cleveland where the company's capital stock was 
 cut down to 55 per cent of par as the result of a long and bitter struggle and a 
 final compromise with respect to the value of the property. This fundamental 
 element in the service-at-cost plan obviously affords to the capital already invested 
 a protection that is theoretically much more complete than the protection afforded 
 by public regulation under the police power. Whether or not this protection be- 
 comes practically effective depends upon the company's ability to induce the 
 
 631 
 
632 Electric Railway Pkokle.m 
 
 public, as the price of service or as the price of peace, to accept and guarantee a 
 valuation satisfactory to the investors. Theoretically, also, the service-at-cost 
 plan gives to capital a much better assurance of a fair return than is afforded by 
 state regulation. In the first place, the service-at-cost plan fixes, once for all, 
 either the minimum or the absolute rate of return, while state regulation fixes 
 the rate of return on occasion and may change it from time to time as conditions 
 or policies change. It is true that some of the witnesses favoring the service- 
 at-cost plan as a protection to capital insisted that the allowed rate of return be 
 subject to future adjustment with changes in the money market, but it was 
 brought out, upon cross-examination, that capital would object to the plan if 
 there was to be a possibility that the rate of return would be adjusted downward. 
 Finally, capital finds in the service-at-cost plan a much better ultimate protection 
 of its investment than it receives under state regulation, for in some cases the 
 established capital value fixes the ultimate purchase price, and in all cases it 
 tends to establish a presumption that if the property is acquired the price paid 
 will be no less than the value recognized in the contract. The whole tendency 
 of the service-at-cost plan is to give security to the investment and to the annual 
 return upon it, and, at the same time, to eliminate the opportunity for specula- 
 tive profits. Still, service at cost does not give absolute assurance to capital 
 unless it is accompanied by positive and permanent guaranties. 
 
 In the discussion of service-at-cost plans before the Commission, it became 
 clear that under private management the representatives of capital, notwith- 
 standing their devotion to the service-at-cost principle, are unwilling to accept a 
 diet of bread and water seven days in the week and fifty-two weeks in the year. 
 They ask for security at a fixed rate of return and a chance to earn something 
 more as a reward for efficient management or as the result of fortunate develop- 
 ments in the industry. A service-at-cost plan that gives an ultimate guaranty 
 to the capital invested and assumes the obligation to pay tlie fixed rate of return 
 would reduce the entire investment to the basis of mortgage bonds, and would 
 practically eliminate capital so far as its active participation in the enterprise and 
 its controversy with opposing interests are concerned. Those who spoke for 
 capital in the proceedings before the Commission are not yet quite ready to accept 
 this position for it. It is true that no one of the service-at-cost plans thus far 
 put into practical operation has gone to the length of relegating capital to this 
 acquiescent and inactive condition. 
 
 From the facts that were brought out in the lestmony it is manifest that the 
 service-at-cost plan, if it is fully to satisfy the demands of capital and fully to 
 restore electric railway credit, must either go farther in the direction of public 
 guaranty, or else must draw back from the fundamental theory of service at cost 
 and provide for a speculative opportunity in addition to an assured minimum 
 return. In other words, from the point of view of capital, service at cost must 
 either go farther and reduce the investment to the status of carefully protected 
 mortgage bonds, or else it must draw hack with respect to the limitations it now 
 places upon the reward of the investor. Moreover, without a downright public 
 guaranty, capital is still subject, under the .service-at-cost plan, to the risk that 
 the enterprise may he a losing one at any rates of fare that may be charged; 
 
Service at Cost Falls Short 633 
 
 while, on tlie other hand, if the contract contains no maximum fare Hmit, it is 
 relieved of the limitation prescribed by the courts, in dealing with the police 
 power, that the rates charged shall not exceed the fair value of the service to the 
 public. Theoretically, subject to these final uncertainties of the financial success 
 of the enterprise, the service-at-cost plan relieves capital of all worry about ad- 
 vancing wages, the increasing cost of materials, the results of inefficient manage- 
 ment, the public's demands for more and better service, and the delays of regu- 
 lating commissions. All these are swallowed up in the cost of the service and 
 the bills for them are passed on to the car riders or to the taxpayers, as the case 
 may be. 
 
 \\'hat does service at cost do for labor? The plans thus far worked out do 
 not complete the triangle of public utility relationships by establishing a direct 
 connection between the public and the employes. At the same time, the motive 
 of capital to exploit labor by refusing to pay a living wage, or to grant the eight- 
 hour day, or to provide comfortable and convenient conditions of work, is greatly 
 weakened wherever the service-at-cost principle is strictly applied. When the 
 motive for efficiency and economy is restored to the management, representing 
 capital, through concessions to the speculative interest, then the old inherent an- 
 tagonism between capital and labor is to that extent revived, but, on the whole, 
 the service-at-cost plan tends to make the demands of labor more or less a matter 
 of indifference to capital, as it is fully recognized that whatever labor costs enter 
 into the cost of service will be taken care of without impinging upon the security 
 of the investors, and their assured return. For better or for worse, the service- 
 at-cost plan makes the public acutely conscious of the problem of wages, hours and 
 conditions of work as an element in the cost of transportation service, and although 
 the plan does not provide for a direct interference by the representatives of the 
 public in the adjustment of the relations between labor and capital, it stimulates 
 public interest in these relations and tends collaterally to the adoption of mea- 
 sures to subject the demands of labor to public scrutiny and official determina- 
 tion. In its immediate effect, the service-at-cost plan undoubtedly strengthens 
 the position of labor to the extent that it weakens or removes capital's opposition 
 to labor's demands, while at the same time providing an automatic readjustment of 
 revenues to supply the "wherewithal" to meet labor's requirements as fixed by 
 agreement or by arbitration. Under the service-at-cost plan labor shares with 
 capital, though not on an equal basis, the ultimate risk that the enterprise may 
 not be financially self-supporting. 
 
 From the public point of view, theoretically, the service-at-cost plan pro- 
 tects the car riders from the burden of an excessive return to capital, and gives 
 them the right to have as much service and as good service as they are willing 
 to pay for. It also gives the community the right to acquire the property at a 
 fixed price for the purpose of embarking upon the policy of public ownership 
 and operation. It might provide for the amortization of any elements of dead 
 capital or even for the reduction of the "capital value" and the purchase price 
 below the true value reflected by the physical property; but amortization of living 
 capital is not strictly a part of the theory of service at cost, except as it may 
 take place to a limited extent in anticipation of future obsolescence. It cannot 
 
634 Electric Railway Problem 
 
 be denied that the public may receive important benefits from the adoption of the 
 service-at-cost plan, but these possible benefits are likely to be measured by the 
 vigor and intelligence displayed by the community in driving the initial bargain, 
 and by the alertness and efficiency contiimously displayed thereafter by the com- 
 munity's representatives in administering the terms of the agreement. 
 
 From the public point of view, service at cost is a "gold brick" unless the 
 contract is worked out on a basis of full public information and recognized 
 equity. It is admitted by everyone that public cooperation is essential to the 
 success of a service-at-cost plan or any other plan for the rehabilitation of the 
 electric railways. The absence of public cooperation affects not only the in- 
 terests of capital and the interests of labor, but even reacts adversely upon the 
 interests of the public itself ; yet the testimony of Secretary Baker and other wit- 
 nesses familiar with the long struggle that finally ended in the acceptance of the 
 Tayler plan in Cleveland proves beyond peradventure that service at cost is not 
 a patented and standardized article of commerce to he purchased on the market 
 by any community wiicnever it feels the need of a readjustment of its relations 
 with the local electric railway system. Service at cost, from the public point of 
 view, can be successful only as it in fact subordinates the special interests of 
 both capital and labor to the predominant interests of the public. This does not 
 mean that service at cost must pay less than the full measure of the fair return 
 and the living wage, but that if the public interest is to be protected, it cannot 
 tolerate the survival of the motive of exploitation in either capital or labor as an 
 active factor in the detennination of their compensation for the service they ren- 
 der in supplying local transportation. 
 
 Service at cost, if worked out and adopted in a way that protects the public 
 interest, necessarily means the assumption of much greater public initiative and 
 public responsibility for the character and the cost of transportation service. 
 It is, in its necessary characteristics, a long steji in the direction of public owner- 
 ship and operation. W'ithout doubt, any community that succeeds in negotiating 
 a just service-at-cost contract, and that through a series of years succeeds in 
 administering the contract in such a way as to protect the public interest, without 
 infringing upon the just claims of both capital and labor, is eminently qualified 
 to undertake and make a success of public ownership and operation. It seems 
 inevitable that under a service-at-cost contract either the community will take 
 a more and more active part in the management, and will assume a greater and 
 greater responsibility for the supply of capital required from time to time in the 
 expansion of the enterprise, or else it will gradually slip back into a subordinate 
 position while the speculative interest of capital and the self-serving spirit of 
 labor revive. The public cannot tolerate an offensive and defensive alliance 
 between capital and labor to make the electric railways, under service at cost 
 or any other plan, a private enterprise designed primarily for the benefit of those 
 engaged in it. instead of a jiuhlic utility designed primarilv for the benefit of 
 those who need the service. 
 
Chapter LIV 
 
 PUBLIC OWNERSHIP AND OPERATION THE ULTIMATE 
 
 SOLUTION 
 
 When a housewife finds through a long succession of sad experiences that 
 the problem of "domestic help" is destroying the peace of the family and threat- 
 ening it with financial ruin, her best course, and in some cases her only course, 
 is to set the children to work and organize the family group on the basis of self- 
 help without the intervention of "servants." In that way the family is enabled 
 to "carry on" without being dependent upon the hired girl. If the silver is stolen 
 it will have to be by a burglar, not by the scrub-woman ; if the potatoes are burned 
 and the dishes broken criticism will lose its edge because responsibility will not 
 rest upon an outsider ; if the meals are not on time, or if the washing is unfin- 
 ished, the blame cannot be laid at the door of "striking" domestics. The family 
 learns the lesson of self-help, is educated in initiative and responsibility, and pays 
 for what it gets and gets what it pays for. This is the true service at cost. 
 
 Municipal government has often been described as community housekeeping, 
 and. without question, the city has many lessons to learn from the well-ordered, 
 domestic household. Not the least of these is the lesson that when the public 
 welfare and happiness are dependent upon the efficient performance of a par- 
 ticular community function, and all indirect methods of getting it performed 
 end in failure or bring intolerable collateral results, then the only proper thing 
 to do is to perform the function directly. 
 
 It may be assumed that the essential public necessity of electric railway 
 service has been proven, and that in any case the public must take the ultimate 
 responsibility for procuring the service that it cannot get along without. In its 
 very nature the electric railway industry is aiifected with a public interest and 
 cannot possibly be left to be carried on as an unregulated private business. It 
 has been shown that thus far various systems of public regulation have been 
 tried and found wanting, as proven by the fact that never before was the electric 
 railway industry in such a desperate condition as now, and never before was the 
 danger of the ultimate impairment or destruction of the service so imminent as 
 now. It may be admitted that the service-at-cost plan as worked out in Cleveland 
 has thus far proven to be a more satisfactory arrangement than any other worked 
 out under private management ; yet the Cleveland plan already shows signs of 
 breaking down. Capital is demanding that some of the very fundamental things 
 in it. upon which its acceptance by the public was based, shall be changed. The 
 public, on the other hand, looks upon the plan as defective because it gives the 
 city no authority to intervene in labor disputes and no final control of extensions, 
 and thus leaves the public without adequate protection in the two most funda- 
 
 635 
 
636 Electric Railway Problem 
 
 mental factors of transportation service, namely, continuity of operation and con- 
 tinuous expansion of facilities. Even with its faults, the Cleveland plan was 
 achieved only through a decade of fierce campaigning with unexampled per- 
 severance, financial resourcefulness, and political genius in command on the 
 public side. It is doubtful whether there is a single municipality in the United 
 States today prepared to pay the cost of procuring a settlement on the Cleveland 
 basis, and certain it is that few, if any, electric railway companies, even in their 
 period of critical distress, would be willing to concede such a settlement without 
 a bitter and prolonged struggle. Granting the merits of the Cleveland plan — 
 and they are many, both from the standpoint of the public and from the stand- 
 point of capital — it is doubtful whether elsewhere the parties can afford to go 
 through the painful and expensive process necessary to achieve such a settle- 
 ment, especially when it does not establish a permanent policy or furnish a final 
 solution. From the point of view of the cost of the service it can hardly be 
 questioned that the cost of capital under private ownership is becoming prohibi- 
 tive, and that the advantage of the use of public credit as a means of supplying 
 transportation service is becoming greater all of the time. Likewise, the labor 
 problem presses forward more and more as one that cannot be solved in a man- 
 ner consistent with the public interest without public intervention. All of these 
 things point to the conclusion that public ownership and operation of electric 
 railways, at least to the extent that they are rendering essential transportation 
 service to urban communities, is inevitable. 
 
 Having admitted that the electric railway is an essential public industry in 
 times of peace as well as in times of war, and having found no method by which 
 the legitimate interests of capital and labor can be fully protected under private 
 management without the sacrifice of some of the essential characteristics of pub- 
 lic service, we find ourselves in the position of the housewife who reluctantly 
 dismisses the hired girl and organizes the family to operate the kitchen and tht 
 laundry. In one case, as in the other, the new program presents many ditticultics. 
 Perhaps the housewife has pottered around for a score of years without learning 
 how to cook. Perhaps the city, likewise, has pottered around for a generation 
 or two without having learned how to administer j)ublic affairs. Politicians in 
 public life arc among the most ready to pay tribute to their own incompetence 
 and lack of initiative. They shun responsibility and a man's job. Most of 
 them oppose the policy of municipal ownership, and their opposition is due, 
 in great measure, to their consciousness of their own unfitness to undertake big 
 things on behalf of the common weal. If big things are to be undertaken, then 
 there is danger that big men will be asked to do them, and then they will be out 
 of power. So long as government is primarily a series of interferences and 
 exactions, and so long as public moneys are spent on jobs where the performer 
 docs not have to make good, any ordinary fellow with ambition to become a petty 
 tyrant is qualified for public office. 
 
 It is a trite saying that the men of initiative and force and ability are at the 
 present time engaged, to a ver>' great extent, in the game of money-making, 
 and that so long as men of constructive ability remain private-minded they will 
 seek to retain the opjiortunities for initiative and profit that have heretofore 
 
The Ultimate Solution 637 
 
 characterized the electric railway field as a private industry. They have sought, 
 and to a considerable extent still seek, the responsibility for doing things, while 
 the politicians in public life shun the acceptance of public responsibility for these 
 things, although the responsibility for local transportation service is inherently 
 and inescapably public. The greatest obstacle in the way of a solution of the 
 electric railway problem is the shrinking of public men from the burdens of 
 constructive responsibility for the performance of public work, and this will- 
 ingness of private men to assume responsibility for public work in the hope 
 and expectation of being able to exploit the public need for private gain. Still, 
 the time has come when the public must face the responsibility that it can no 
 longer shirk. 
 
 It is not now a question of a nice consideration of the difficulties in the way 
 of the public performance of a public function for the purpose of determining 
 whether or not the public function is to be publicly performed. With the break- 
 down of private agencies for the performance of the function, public ownership 
 and operation become inevitable. The first step toward the solution of the 
 problem is the acceptance of the conclusion that it must be worked out directly 
 through public agencies. With that necessity admitted, the attention of the coun- 
 try and the experience and ability of the leaders of capital, of labor, and of 
 government can be concentrated upon the specific measures to be adopted, upon 
 the removal of the natural and artificial difficulties from the path of public owner- 
 ship and operation, and upon the specific constructive measures necessary for the 
 effectualization of the new policy. 
 
 It is only the most hardy and unthinking optimists who look upon the tran- 
 sition from private to public ownership and operation of the electric railways 
 as a step easy of achievement. Immense difficulties — legal, contractual, financial, 
 administrative and political — stand in the way. Thus far our governmental struc- 
 ture and the public law have been devised, in large measure, for the very purpose 
 of preventing governmental agencies from assuming public responsibility for 
 enterprises which are now recognized to be public utilities. Street railway sys- 
 tems have been permitted to expand and consolidate under private ownership 
 without respect to the boundary lines of municipalities and other political sub- 
 divisions. Street franchises have often been granted for long periods of years, 
 or even in perpetuity. Electric railway companies and their superior holding 
 companies have not been prevented from issuing securities in excess of the value 
 of their property and from assuming permanent capital obligations that are 
 utterly inconsistent with the financial soundness of the electric railways as a 
 public utility. Municipal debt limits have been established and debt-incurring 
 powers exhausted for other purposes. Municipalities still retain boundary lines 
 that are not coterminous with the boundaries of the communities of which they 
 are supposed to be the organized political expression, and boundary lines that 
 do not include complete transportation units. Civil service rules and other 
 methods designed to enforce upon those temporarily in control of governmental 
 departments the efficiency and nonpartisanship which they naturally shun have 
 built up barriers against the free development of constructive policies in public 
 administration. These and other difficulties, most of them self-imposed, will 
 
638 Electric Railway Problem 
 
 have to be overcome in preparation for the full assumption by the public of direct 
 responsibility for local transportation as a public function. 
 
 With these artificial difficulties removed, there is nothing inherent in the 
 construction and operation of electric railways that calls for so high a degree 
 of knowledge, technical skill, perseverant watchfulness, fair-mindedness, and 
 political sagacity as is required for the successful protection of the public interests 
 either under a scheme of unrestricted state regulation or under a service-at-cost 
 plan. If only a fraction of the brains and energy now being devoted to attempted 
 solutions of the electric railway problem through the avoidance of public owner- 
 ship and operation were directed toward the removal of the existing obstacles 
 in the way of that policy and to the definite formulation of constructive measures 
 to make the policy successful, it cannot be doubted that the most important dif- 
 ficulties in the way of an ultimate solution of the electric railway problem, just 
 to capital, fair to labor and conducive to the public welfare, would quickly dis- 
 appear. 
 
 The history of the electric railway industrj' and its present condition are 
 sufficient proof that no mere policy of opportunism will suffice to solve the prob- 
 lem. What is needed is a definite, comprehensive, constructive policy, and no 
 such policy has been suggested that does not have public ownership for its ulti- 
 mate goal. It is said that the electric railways are so sick that they cannot sur- 
 vive the delay while the public ownership ])rograni is being worked out, and that, 
 therefore, the iminediaie necessity is to give them emergency help to tide them 
 over until a permanent constructive policy can be adopted. Many suggestions 
 for immediate or emergency assistance have been made. Doubtless, some of 
 them can he carried out without serious prejudice to the permanent solution. 
 Exceptional public burdens can be lifted for a temporary period; temporary fare 
 increases can be granted within limits that do not seriously restrict the use of 
 the cars; equality of regulatory treatment can be meted out to competing jitneys; 
 one-man safety cars can be installed and other economies in operation effected; 
 the assessment plan can be used or public credit loaned, where the constitution 
 permits, for the construction of extensions and the provision of additional facil- 
 ities; the powers of regulatory commissions can be extended; and. under certain 
 favorable conditions, service-at-cost contracts can be workctl out on a sound 
 basis as a step in the direction of ultimate public ownership and operation. The 
 promptness with which these various forms of relief can be administered varies 
 largely with the legal conditions prevailing in different communities, but it is 
 of the greatest importance that these emergency measures, local and temporary 
 in their nature, shall not he taken on a basis that is inconsistent with a permanent 
 constructive policy, or that will delay the practical working out of .such a policy. 
 The work that will take the longest for its completion ought to be undertaken 
 without delay. So many obstacles have been put in the wav of the policv of 
 public ownership and operation upon a sound and efficient basis that no time 
 should be lost in connneiuing the work of removing the.se obstacles. 
 
 The electric railway problem is extremely urgent. The communities are 
 unre.idy to assume the responsibilities that rightfully belong to them. If they 
 stand heli)lcss to undertake the function of local transportation and yet see that 
 
The Ultimate Solution 639 
 
 it is an essential public function, they will be compelled to make whatever terms 
 the companies and the employes demand of them. Such a condition of help- 
 lessness in the face of public necessity is a confession of governmental incom- 
 petence, so inconsistent with the claims of democracy as an instrument of com- 
 munity welfare that it cannot for a moment be made by or on behalf of the muni- 
 cipalities and the commonwealths of America. 
 
 What, then, are the main outlines of the program of preparation for the ulti- 
 mate solution of the electric railway problem through public ownership and 
 operation ? 
 
 At the outset, the fundamental difficulty in the establishment of new rela- 
 tions between the public and the industry, namely, the determination of the 
 private investment used in the public service, which is to be recognized and 
 protected, must be overcome. In valuation it is no easy thing to arrive at an 
 authoritative figure, but public purchase has the advantage of all other processes 
 in which valuation is a factor in this respect, namely, that when the purchase 
 price has been fixed and paid the matter is settled for all time, and the commtmity 
 can then take such measures as it may find necessary to reduce and ultimately 
 wipe out the capital obligations incurred as an incident of the purchase. In the 
 case of public acquisition the value of an electric railway may be fi.xed by nego- 
 tiation, but the chances of an agreement upon a figure that is just from the 
 public point of view are, in most instances, slight, for the reasons that I have 
 already given. Therefore, it is an essential and fundamental element in the 
 program of preparation for public ownership that in all cases a procedure shall 
 be established by which the value of the property may be determined on a just 
 and reasonable basis and title to the property taken, without the consent of the 
 present owners. This can be accomplished under the right of eminent domain, 
 but it is clear that ordinary condemnation proceedings, however adequate for the 
 acquisition of parcels of real estate for street or park purposes, may not be 
 adequate for the determination of value of so vast and complex a property, made 
 up of so many technical elements, as a street railway system. Under certain con- 
 ditions, where a fully equipped state public service commission exists, it may be 
 practicable and advisable to confer upon this commission the power and the duty 
 to determine the fair value of the property and to fix the purchase price to be 
 paid for it. Under other circumstances, it may be desirable to establish a special 
 condemnation procedure for this purpose. This particular part of the program 
 is beset with difficulties and some danger, but it ought not to be impossible to 
 devise a procedure that will give reasonable assurance of a just result. It must 
 be remembered that the property of an electric railway is already devoted to 
 public service, and that there should be no presumption against the public in the 
 establishment of values when the property is being taken merely to be continued 
 in the same use under public auspices. 
 
 As illustrating some of the possible provisions of a public utility condemna- 
 tion law, I refer again to the Fowler Municipal Ownership Bill introduced in the 
 Xew York State Senate in March, 1920. This bill provides that whenever a 
 municipality desires to acquire a privately owned public utility it may make appli- 
 cation to the state public service commission for a determination of the fair 
 
640 Electric Railway Problem 
 
 value of the utility property. In such a case the municipality will have full 
 access to the books, records and accounts of the utility to be acquired, and free 
 access to the utility property for the purpose of securing any information useful 
 in the determination of the amount of the owner's investment in the property, 
 the present condition of the property, the revenues derived from its operation, 
 the cost of such operation, and the value and adaptability of the property to pub- 
 lic use, and the nmnicipality as well as the owner of the property is given the 
 right to present evidence on these several matters at public hearings to be given 
 by the commission before it makes a determination of value. The bill also pro- 
 vides that the commission in fi.xing the value of the property "shall take into 
 consideration the fact that the property to be acquired is already devoted to the 
 public service and is subject to the obligations and limitations imposed upon it by 
 the laws of the state and the valid franchise contracts under which the property 
 is being operated" ; and that it "shall also take into consideration, among other 
 things, the amount of capital honestly and prudently invested in the original acqui- 
 sition, construction or installation for utility purposes of the property subject to 
 acquisition by the municipality, the present condition of such property, its depre- 
 ciation from all causes and its adaptability and potential usefulness for municipal 
 utility purposes." Under the terms of the Fowler Bill a finding of fair value 
 by the public service commission, if offered in condemnation proceedings by any 
 party in interest, would constitute prima facie, though not conclusive, evidence 
 of such value. 
 
 After adequate provision for the determination of the value of electric rail- 
 ways for public purchase through the exercise of the power of eminent domain, 
 or by local arbitration or agreement subject to the approval of the proper state 
 authority, has been made, it is essential that effective provisions shall be made 
 for the use of public credit to whatever extent may be required in procuring the 
 funds to effect the purchase. This may be accomplished through a revision of 
 debt limitations, or possibly through the enactment of legislation similar to the 
 Washington and the Wisconsin laws which I have described in Chapter XLII 
 of this report. In any case, the financial measures adopted to make public 
 acquisition of the electric railways practicable must be generous and complete. 
 If they are so restricted or inadequate as to destroy or seriously impair the eco- 
 nomic advantage in the use of public as compared with private credit, they will, 
 of course, tend to prevent the accomplishment of the purpose for which the 
 entire program is designed, and will handicap the policy of public ownership 
 and operation at the start. 
 
 In view of the extraordinarj' development of large electric railway systems 
 which not only supply local urban transportation in the strict sense of the term, 
 but also .suburban and intcnirhan service through areas which often include many 
 municipalities, it is necessary, as another step in preparation for the realization 
 of the jwlicy of public ownership and operation, to confer upon municipalities 
 the right to own and operate transportation lines not only within their own cor- 
 porate limits hut within their immediate environs, and in many cases to go further 
 and provide for the establishment of transportation areas coterminous with the 
 territories .served by existing electric railwav svstems. or at least coterminous 
 
The Ultimate Solution 641 
 
 with the largest areas in which the public interest requires that electric railway 
 transportation be operated as a unit. In some cases, no doubt, state operation 
 will be more advantageous than either municipal or district operation. While 
 the problem of determining by what public agencies the electric railways shall 
 be owned and operated presents some difficulties, it is by no means insuperable. 
 It may be solved in different ways in different commonwealths. 
 
 Another essential step in the preparation for public ownership and opera- 
 tion is legislation under which individual communities not yet ready to take over 
 the electric railways may enter into contracts with them on some basis akin to 
 service at cost, under which the continuation and development of transportation 
 service may be assured while the city, the district or the state is preparing to put 
 into full effect the policy of public ownership and operation. 
 
 Another essential step in the program is the enactment of legislation under 
 which the wages, hours and conditions of work on publicly owned and operated 
 electric railways may be determined, with adequate guaranties that the just in- 
 terests of labor will be protected, and that labor shall have the right to collective 
 bargaining and participation in management to the e.xtent that the exercise of 
 these rights is found to be compatible with public interest. Such legislation 
 should provide for the modification of civil service rules, where they e.xist, so as 
 to make them fully adaptable to the requirements of the transportation service. 
 
 Still another step is the enactment of legislation giving to the communities 
 which assume responsibility for the operation of the transportation service the 
 right to determine how the cost of that service shall be paid, whether wholly 
 from the collection of fares, or in part from the levy of standby charges upon 
 property or persons benefited, or wholly or in part from general taxation ; also, 
 whether the rate schedule shall be established on the basis of the uniform flat 
 fare, or on the basis of the distance tariff, or otherwise. Street railway trans- 
 portation being an essential element of the city plan, and the social aspects of 
 street railway rates being of vital public importance, it is essential that the com- 
 munity where the service is rendered should have these matters within its control. 
 
 It is unfortunate that the present acute crisis in electric railway transpor- 
 tation should have arisen at a time when the country was so poorly prepared on 
 the basis of experience to adopt public ownership and operation as a general 
 policy. It is a well-known fact, however, that most of the chief cities of Great 
 Britain went to public ownership and operation a good many years ago. Lon- 
 don County, Birmingham, Glasgow, Liverpool, Manchester, Edinburgh, Belfast, 
 Leeds, Sheffield, Cardiff and 100 other cities and towns of Great Britain and 
 Ireland own and operate the tramway systems upon which they depend for local 
 transportation service. In London the tubes and the bus lines are privately 
 owned and operated. Private companies own and operate altogether about 100 
 tramway systems in the United Kingdom, but outside of Bristol, Dublin and 
 Cork, company operation is confined for the most part to small and medium- 
 size towns, or to special lines rendering suburban service. 
 
 The Proceedings include very little first hand testimony with respect to the 
 financial condition of the British tramways. In my own testimony I called at- 
 tention to the statement of Sir Eric Geddes, made in the House of Commons 
 
642 Electric Railway Problem 
 
 in March, 1919, introducing the government bill for the establishment of the 
 Ministry- of Ways and Communications, to the ettect that the municipal tram- 
 ways were earning 7 per cent on their capital. Some doubt was thrown upon 
 the accuracy of Sir Eric's statement by reference to a paper read at a convention 
 of the British Tramways and Light Railways Association, July 25, 1919, by 
 Mr. William L. Madgen, Director of the British Electric Traction Company, 
 Ltd., a holding concern that has an interest in 25 or 30 electric tramway proper- 
 ties in different parts of England. A digest of Mr. Madgen's paper and of the 
 comments upon it by other speakers at the convention was placed before the 
 Commission by the Executive Secretary. It appears at pages 2046 to 2054 of 
 the Proceedings. The burden of Mr. Madgen's paper was that the tramways 
 in Great Britain are a starved industry, as a result, primarily, of governmental 
 rate restrictions. Mr. Madgen used the tramway statistics published by the 
 Board of Trade from returns for the fiscal year 1913-1914. and pointed out that 
 while the gross profits Were shown by these returns to be 7.03 per cent, this 
 figure would be reduced to 3.03 per cent if 4 per cent were taken out for depre- 
 ciation. Whether the statement made by Sir Eric Geddes, like Mr. Madgen's 
 statement, was based upon the returns for the last year before the war does not 
 appear. At any rate, the first purpose of Mr. Madgen's paper was to prove that 
 the British tramways need more revenues, and that the way to get them is to 
 increase the initial fare. He argues that the straight distance tariff in use in 
 Great Britain, giving very low fares for short rides, has the effect of encourag- 
 ing congestion of population and preventing the tramways from getting enough 
 revenue. It is well known that most of the municipal tramway systems have 
 increased their fares during the war period, but Mr. Madgen's discussion of the 
 present condition of the British tramway industry applies, primarily, to the con- 
 ilitiun of the private companies, which, as he claims, are unable to provide new 
 capital for extensions because their revenues are too restricted to maintain their 
 credit. Mr. Madgen admits that "municipal corporations can obtain loans upon 
 favorable terms because they offer to investors the security of the rates" (taxes), 
 but he adds: "They are naturally loth to increase municipal indebtedness for 
 the extension of services which arc not likely to be rennnicrativc unless such 
 services are obligatory. Tramway companies cannot obtain capital for exten- 
 sions unless they show that their existing enterprise is giving a reasonable re- 
 turn." He also says: "While a number of the municipal tramway systems 
 show good financial returns, they are nevertheless starved, because the bulk of 
 their net receipts are appropriated in aid of the rates (taxes), instead of being 
 utilized in the imprnvtmcnt of the service." It appears from this that the 
 trouble with the particular municipal tramways referred to is that thev are 
 profitable, but that the profits are appropriated for the relief of taxes instead 
 of being put into extensions. 
 
 At page 2M7 of the Proceedings, in the digest of Mr. Madgen's paper, refer- 
 ence is made to a report by Mr. J. M. McElroy, General Manager of the Tram- 
 ways nepartment of the City of Manchester. As a matter of fact, this report 
 was submitted in February. 1914. that is. in the pre-war period. The statement 
 in the Proceedings is as follows: 
 
The Ultimate Solution 643 
 
 "Mr. McEIroy, in Iiis report on the Manchester tramways, showed that the extensive 
 iinprovements recommended could be financed from the tramway net receipts if the City 
 Council would refrain from appropriating 100,000 poimds per annum for the benefit of 
 the borough fund." 
 
 A similar statement appears in the abstract of Mr. Madgen's paper published in 
 the Electric Railway Journal for August 30, 1919. Mr. McElroy is misquoted. 
 What he actually said in his Manchester report was that the proposed improve- 
 ments could be financed from the net receipts of the municipal tramways if the 
 City Council would refrain from appropriating more than 100,000 pounds per 
 annum for the reduction of taxation. It is well known that the City of Glasgow 
 has paid off its entire tramway debt out of profits and that other British cities 
 have made great progress in the same direction. The evidence is clear that the 
 financial condition of the municipally owned and operated tramways in Great 
 Britain, after five years of war, is infinitely better than the financial condition 
 of the privately owned electric railways of this country after going through a 
 much shorter period of war strain. The Glasgow tramways have not only paid 
 for themselves out of earnings, but have also paid the regular taxes upon the 
 property and have coi^tributed several million dollars to the "Common Good" 
 for the relief of other taxpayers. 
 
 While transportation conditions in Great Britain are undoubtedly different 
 in many important respects from conditions in the United States, it cannot be 
 denied that municipal ownership and operation of tramways has proven to be 
 successful in the United Kingdom, and that no tendency has showh itself there 
 to go back to private ownership or private operation. For what it may be worth, 
 the experience of the British cities supports the policy of public ownership and 
 operation here suggested as offering the solution of the electric railway problem 
 in America. 
 
SUMMARY' 
 
 I. The street railway is an essential public industry, as shown (a) by its 
 magnitude; (b) by its relation to the public streets; (c) by the fact of public 
 regulation, and (d) by the present appeal tor i)ublic help. 
 
 II. The witnesses for the electric railways, those for the state commissions 
 and the municipalities and those for the general public agree in the main that 
 the street railway as an industry is in a desperate financial condition. They also 
 agree that a fimdaniental requisite for relief is the restoration of its credit, so 
 that the new capital for continued expansion of transportation facilities will be 
 induced to flow into the business. 
 
 III. Labor is universally recognized as a vital factor in the street railway 
 business, hut the tendency is to treat the labor problem primarily as a problem 
 of operating expense and et^kiency. and to give little or no consideration to the 
 human elements in it. The employing companies are interested in not paying 
 more for labor than they have to pay, just the same as they are interested in 
 keeping other expenses down. With them it is a question of financial results, 
 and they sometimes fail to grasp the full value of loyalty and intelligent coopera- 
 tion on the part of the men. I'Vom the public point of view quality of service 
 and continuity of oi)eration are of primary importance. .Ml these things depend 
 in a great measure upon the will of the workers, and require conditions of em- 
 ployment that will attract competent and reliable men and that will prevent 
 industrial dissatisfaction and disputes, which lead to deterioration or interrup- 
 tion of service. 
 
 I\'. .\ fundamental conception of the street railway problem, therefore, 
 will include as coordinate requirements the need for credit with which to get 
 capital, and the need for an etTective sjiirit of cooperation with which to enlist 
 the continued and etVicicnt support of labor. 
 
 V. Under normal conditions and conservative management credit would 
 be an easy nuitter for the street railways because of (a) their steady, assured 
 and rapicUy, increasing revenue; (b) the conspicuous location of their property 
 and activities; (c) their small need for working capital; (d) the fact that a 
 depreciation reserve wouUl be available to provide a portion of the funds needed 
 for additions and improvements, and (e) the fact that refunding operations 
 could be carried through as a matter of course, although the rate of interest 
 paid might be either greater or less, as the condition of the market demamled. 
 
 \'!. Tlie testimony put forward on behalf of the electric railways with 
 respect to the amount of new capital rcquiretl each year in the industry was in- 
 ex.ict and incnnclusive. l-'rom the point of view of exaggeration the inexact- 
 ness was partly due to a confusion of the needs of the electric railway with the 
 needs of all utilities taken together, |)artly due to the use of capitalization 
 
 M4 
 
Summary 645 
 
 figures, and partly due to the adoption of a yearly average for the entire period 
 from 1902 to 1917. Moreover, no consideration was given to the reduction of 
 the demands for new capital on account of the abandonment of lines and the 
 slowing down of traffic development under increased fares. On the other hand, 
 from the point of view of conservatism, little or no consideration seems to have 
 been given to the fact that under present price conditions a much greater amount 
 of capital is required to perform a given amount of work, nor to the fact that 
 in an era of high prices new capital is required in the process of making re- 
 placements, even where no extension or enlargement of facilities takes place. 
 
 VII. As a matter of fact, the amount of new capital required in the 
 electric railway business at the present time is not even approximately shown 
 by the evidence. Nevertheless, it is clear from the testimony that the restora- 
 tion of credit is essential to the full performance of the function of the street 
 railway (1) because of the increasing demands of population and traffic, requir- 
 ing extensions and additions from time to time; (2) because of the continuing 
 adjustment of the capital account to the higher price level, and (3) because of the 
 run-down condition of many properties which demand immediate rehabilitation, 
 for which no reserves have been accumulated. Even though rehabilitation be 
 not considered a proper capital charge, it can be effected under existing condi- 
 tions only through the use of new capital to take the place of invested capital 
 that has been destroyed or lost. 
 
 VIII. Upon the assumption that street railway credit is gone, our search 
 for a remedy must begin with an analysis of the fundamental and immediate 
 causes for its disappearance. Why, in any industry so favorably situated from 
 the point of view of credit, has credit been lost? The causes for its disappear- 
 ance must be sought in the financial policies which have been followed by the 
 industry itself, or in the attitude of the public toward it in the process of regu- 
 lation, or in changed economic conditions. 
 
 IX. From the point of view of the financial policies of the industry as 
 they afTect credit, the first thing that demands attention is the almost universal 
 practice of initial overcapitalization, particularly in the early years of electrifi- 
 cation. The bad ultimate effects of overcapitalization have been accentuated in 
 many cases by the process of converting stock into guaranteed securities, either 
 through the issuance of bonds or through the assumption of rental charges in 
 connection with the consolidation of properties, so that as time has gone on a 
 greater proportion of the return upon the investment has taken the form of 
 fixed charges. This policy has tended to reduce the "margin of safety" upon 
 which private companies have to depend for new capital and to destroy the 
 financial flexibility necessary for the preservation of solvency in a period of 
 distress. 
 
 X. Not only by initial overcapitalization and the assumption of exces- 
 sive fixed charges have the electric raihvay companies pursued an unsound 
 financial policy, but also by the fact that seldom, except through duress in the 
 case of receiverships and reorganizations, have they written oflf any of the 
 excess capital originally issued. Their policy, with few exceptions, has been 
 
646 Electric Railwav Problem 
 
 to swell the capital account and to perpetuate in it any items representing in- 
 tangible values or "capitalized hopes" that have once gotten into it. 
 
 XI. The companies have pursued an unsound financial policy in still 
 another respect. Not only have they been overcapitalized at the beginning and 
 have subsequently refused or neglected to write off their excess capitalization, 
 but thev have also generally neglected to build up a depreciation reserve equal 
 to the difference between the legitimate investment in the plant when new and 
 its condition when it has worn down to the normally depreciated condition of an 
 old but efficient operating property. Thus, by the process of wear and tear, 
 even the legitimate initial capitalization has become inflated to the extent of the 
 normal accrued depreciation not represented by depreciation reserves. 
 
 XII. Still further, the companies, in many cases, have pursued a policy 
 of artificially maintaining credit by paying dividends when ordinary mainten- 
 ance and essential replacements were neglected or deferred, with the result that 
 the physical property, representing the capitalization, has been further impaired, 
 and is now in a condition where a complete general rehabilitation is necessary 
 if adequate service is to be given. 
 
 XIII. In many localities the electric railways have been overbuilt from 
 the point of view of an industry expected to be financially self-sustaining. This 
 overbuilding has resulted from several causes: (1) the construction of compet- 
 ing lines in the same community; (2) the premature extension of lines for the 
 special benefit of tracts of real estate in which the companies, or the men who 
 controlled their policies, were directly interested; (3) the construction of new 
 lines in thin territory as a result of the ambition of imscrupulous or ovcr- 
 optiniistic promoters to get rich quickly through the exploitation of the gulli- 
 bility of the investing public: (4) the use of progressively heavier cars and 
 heavier track construction in the equipment, extension and rebuilding of lines. 
 While these causes of overbuilding have their origin for the most part in pol- 
 icies for which the companies themselves have been responsible, the local author- 
 ities have often "made the motion" or "seconded" it as a result of their con- 
 ception of public needs or personal advantage. 
 
 XIV'. As a result of overcapitalization and its attendant evils based upon 
 the idea that the street railway was a fruitful field for speculative investment, 
 the street railway industry fell into the control largely of investment bankers, 
 whose profits were dependent upon the volume of securities turned out and a 
 frequent turnover in the companies' financial arrangements. These policies led 
 to absentee ownership of street railway securities and the formation of holding 
 companies for the inflation and exploitation of street railway credit. The sound 
 principle of simple corporate organization, direct financial responsibility, and 
 community ownership of community cnlerprises was entirely lost sight of. so 
 that the underlying support of local pride and local interest in the successful 
 construction and operation of transportation facilities resjionsive to local needs 
 was lost. Thus the comiianies themselves abandoned and alienated the most 
 substantial source of ultimate credit for a public utility. 
 
 X\'. From the point of view of public rel.ations and the responsibility of 
 the public through its govermnental agencies for conditions that have helped 
 
Summary 647 
 
 to destroy the credit of the street railways, the first thing to be mentioned is 
 the fixed five-cent fare, which, in the earlier days, was generally made a condi- 
 tion of street railway franchises. The fixed fare, which had no particular rela- 
 tion to the necessary cost of service and certainly provided no flexibility for the 
 adjustment of the fares to the changes in the cost of service, either up or down, 
 was the cornerstone of speculation in the industry at a time when a guaranteed 
 five-cent fare over a long period or in perpetuity was supposed to represent an 
 opportunity for enormous profit. In urban areas the fixed fare was a tempta- 
 tion to speculation and overcapitalization. It aided and abetted the street rail- 
 way companies in the adoption and pursuit of the unsound financial policies 
 above described. 
 
 XVI. As a result of the arbitrary and corrupt methods often pursued by 
 street railway promoters in securing franchises with the five-cent fare provision 
 in them, and on account of the enormous overcapitalization which street railway 
 promoters indulged in. the public was led to believe that the street railways, 
 out of their use of public property as rights of way, were exploiting the public 
 and reaping unreasonable rewards. The public, claiming the rights of partner- 
 ship, invoked the taxing power as a means of diverting to the public treasury a 
 portion of the earnings of the business, and in communities where new fran- 
 chises or renewals of old franchises were sought, the granting of these "favors" 
 was made the occasion for loading upon the companies financial burdens and 
 obligations which it was thought would in some measure be compensatory for 
 the value of the privileges granted. 
 
 XVII. But the public was not satisfied to use the taxing power alone. It 
 demanded adequate service as well as a share in the profits. As the franchises 
 granted were in most cases irrevocable, and as the street railways could not be 
 subjected to effective competition, the public laid hold of the police power as a 
 weapon for enforcing the obligations of monopoly and compelling the com- 
 panies to extend and improve their service. Thus the companies found that, 
 though limited to the five-cent fare, they were not free to scamp the service at 
 will in order to swell their profits, but could be compelled to enlarge and improve 
 it indefinitely, at least so long as they were financially able to do so, and largely 
 without regard to the amount of profits left for the investors. 
 
 X\'III. The public also, as a result of its observation of the evils of over- 
 capitalization and speculation in public utilities, including the electric railways, 
 created the public service commissions and conferred upon them authority to 
 regulate new issues of securities and prohibited the issuance of securities not 
 representing new cash put into the business for capital purposes. At the same 
 time the commiissions were not authorized to reorganize the companies and cut 
 down the capitalization already outstanding. Thus the public required a new 
 and more conservative method of financing with respect to capital additions, 
 without a reconstruction of the existing financial base. The companies, there- 
 fore, no longer had the advantages, precarious and unsound though they were, 
 of the old methods of financing, while at the same time they were unable to 
 issue new securities upon a basis independent of the inflated securities already 
 out. The "margin of safety," within the limits of a reasonable return upon the 
 
648 Electric Railway Problem 
 
 investment, was in many cases noticeably decreased as a result of this incomplete 
 and imperfect form of public regulation. 
 
 XIX. The causes for the decline of street railway credit thus far enu- 
 merated have arisen out of the financial policies adopted by the street railways 
 themselves or out of the policies of regulation adojHed by the public, and so far 
 as these policies were unsound those responsible for their adoption and con- 
 tinuance must share the responsibility for the present condition of street rail- 
 way credit. Still another set of causes can be found by an analysis of economic 
 conditions. 
 
 XX. For a long time the public tried to secure the benefit of competition 
 in the street railway business, not recognizing that it was a monopoly by nature. 
 But with the appeal to the police power to compel improved service, the public 
 recognized in a more or less formal and legal way the existence of monopoly 
 as a necessary fact, just as this recognition was becoming general, the develop- 
 ment of the automobile brought into the field for the first time an effective and 
 dangerous competitor of the street railways. In other words, when the public 
 got around to recognize the existence of monopoly in local transportation service 
 the development of the automobile partially reestablished the condition of com- 
 petition which, in theory, had just been discarded. In many communities it has 
 been fully recognized that the two methods of local transportation cannot sur- 
 vive on a self-sustaining basis as coni])ctitors. The inroads made by this new 
 form of transportation upon the actual traffic and revenues of street railways 
 in many comnumities. and the resulting uncertainty as to the future of the elec- 
 tric railway, reacted seriously upon the credit of the industry. 
 
 XXI. In the old days, the profits of street railway operation were depen- 
 dent in large measure upon low wages, long hours, and unsatisfactory conditions 
 of work for the employes. Gradually, as time went on. the employes, in part 
 as a result of general public favor, became more and more organized, and were 
 in a position to demand higher wages, shorter hours, and more expensive pro- 
 tection and privileges from their employers. This tendency, of course, has been 
 greatly accentuated since the beginning of the war and as one of the results of 
 war conditions. N'evertheless, the tendency existed before the war, and the un- 
 certainty of the labor element in its relation to the management was a factor of 
 increasing importance in disturbing the hopes of those wiio had gone into the 
 street railway business as speculators, and had cajiitalized the future. Disap- 
 pointed hopes in the industry, even when such hopes were at the beginning il- 
 legitimate or unwarranted, had a tendency to restrict the credit of the industry 
 and to cool the ardor of new investors to go into it. 
 
 XXII. All these forces conspiring together to impair street railway credit 
 would have cfTectively destroyed it long before the war, if it had not been made 
 so nearly indestructible by the character of the industry it.self and by the enor- 
 mous (levelopmeiu of the demand for urban transportation. It is by no means 
 surprising that the Great War put the finishing touches on the job. The funda- 
 mental basis of credit at all times is security for the investment and its present 
 and prospective net earning power. Any sudden great expansion in the cost of 
 service that is not accompanied by a corresponding increase in revenues must 
 
Summary 649 
 
 adversely affect the present earning power of the investment, and if the prospect is 
 for the permanence or long continuance of these adverse conditions, then they 
 result in reducing the ultimate security and the prospective earning power of the 
 investment. The effect of the war upon general economic conditions has been to 
 increase the cost of materials entering into street railway construction, maintenance 
 and operation probably to an even greater extent than wages have increased. It 
 is now generally expected that, because of world-wide economic changes, the high 
 prices of materials, the high cost of living, and the consequent relatively high 
 wages will continue for a considerable period, at least for a period longer than 
 the companies can hope to survive and perform their functions without the use 
 of credit. 
 
 XXIII. Having admitted the necessity for credit in the street railway 
 business, and having analyzed the causes that have led to its disappearance, we 
 come to a discussion of the question : How can credit be restored ? A variety 
 of remedies have been proposed by witnesses speaking on behalf of the electric 
 railways, on behalf of the regulating commissions, or on behalf of the general 
 public. It is agreed with practical unanimity that the electric railways have come 
 to be essentially public agencies, and that the function of local transportation is 
 so vital to the welfare of every urban community as to make it a community 
 problem. It is generally agreed that if credit cannot be restored under private 
 ownership and operation it is inevitable that public ownership and public opera- 
 tion, one or both, will have to come. The fear expressed by many of the wit- 
 nesses that the results obtainable from public ownership and operation would be 
 unsatisfactory from the point of view of economy and efficiency was not strong 
 enough to make these witnesses admit that they would prefer to have the electric 
 railways disappear rather than be owned and operated by governmental bodies 
 as a public function. 
 
 XXIV. The testimony reflected the fundamental divergence in the eco- 
 nomic theories and points of view of the witnesses. Many expressed confidence 
 that under public ownership the street railways would not be economically and 
 efficiently operated, and viewed with strong aversion the possible ultimate neces- 
 sity for the adoption of public ownership as a general policy. Other witnesses, 
 taking the point of view that local transportation is an essential public function, 
 expressed the belief that public ownership is not only inevitable because of the 
 inherent difficulties of continuing private ownership and the practical impossi- 
 bility of restoring private credit in the business, but also because public owner- 
 ship and operation are inherently logical and desirable with respect to such a 
 function as local transportation. 
 
 XXV. There is a general agreement that the public relations of the electric 
 railway industry prior to the war and before the present acute crisis arose were 
 unsatisfactory; that, in fact, the electric railway industry got started wrong; 
 that it got "in bad" with the public ; that the cooperation of the public is essen- 
 tial to the full performance of electric railway service upon a sound financial 
 basis; and that to restore the credit of the companies and to enable them to 
 function, an entirely new deal is required. 
 
 XXVI. The first requisite for the restoration of credit in the view of the 
 
650 Electric Railway Problem 
 
 witnesses for the electric railways is a readjustment of the relation between reve- 
 nues and expenses so as to increase the margin available for return on capital. 
 Obviously, this can be accomplished only (1) by an increase in revenues or (2) 
 by a decrease in expenses. 
 
 XXVII. The electric railway companies propose to increase their revenues 
 first by increasing the unit fares. In this way they hope ( 1) to escape from the 
 principle of the fixed fare, as embodied in the five-cent limitation, and (2) to 
 secure an immediate increase in earnings. 
 
 XXVIII. The proposal to increase unit fares raises two vital points: (1) 
 the effect of straight fare increases upon revenues, and (2) the effect of straight 
 fare increases upon the usefulness of the street railway as a public utility. As a 
 remedv. fare increases are useless unless they provide additional revenue, and in 
 fact they may injure credit if they indicate the inability of the electric railways 
 to earn the full cost of service at any fare that may be charged. From the 
 public point of view, fare increases are a failure if they result in a serious and 
 progressive curtailment of the use of street railway service. 
 
 XXIX. As an alternative to straight fare increases, the adoption of a 
 zone system or distance tariff is put forward by some of the witnesses as a means 
 for raising more revenue through ( 1 ) the cultivation of short haul traffic and 
 
 (2) the establishment of charges for long rides proportional to the cost of the 
 service rendered. This proposal raises a fundamental question as to the rela- 
 tive effects of the uniform fare policy and the zone fare policy upon the distribu- 
 tion of population and business and upon the development of realty values. 
 
 XXX. Another proposed measure for increasing the margin available for 
 return on capital is the removal of special tax burdens and franchise obligations 
 from the electric railways, leaving them either upon the same basis as other in- 
 dustries, or giving them special exemptions on account of the importance of the 
 function they perform and their peculiar relations to the [)ublic and the public 
 streets. This proposal raises certain grave questions: (1) the sufficiency of the 
 relief that could be granted in this way; (2) the legal and financial difliculties, 
 from the point of view of the government bodies, in the way of giving uj) 
 these sources of revemie; and (3) the political difficulty of relieving a public 
 utility from these burdens or of granting it s|)ecial exemptions while it remains 
 in private hands. 
 
 XXXI. Still another means proposed for increasing the margin available 
 for return upon capital is the adoption of operating economies such as ( 1 ) a re- 
 arrangement of car schedules for the elimination of duplicating or unnecessary 
 service, excessive layovers, etc.; (2) a rerouting of cars for the elimination of 
 useless or dead car mileage and the avoidance of street congestion aTid delays; 
 
 (3) the skip stop for increasing speed and decreasing power consumption; (4) 
 the training and supervision of motormen in the saving of power; (5) the use 
 of light one-man safety cars as a means of decreasing platform expense, power 
 consumption, accideiu exjjcn.se and track and car maintenance; {6) the elimina- 
 tion of collusive contracts for the ])urchase of materials and supplies, or power; 
 and (7) the abandonment of electricity as a motive power and the use of gaso- 
 line or alcohol in its place along the lines promised by Henry Ford. 
 
Summary 651 
 
 XXXII. It is also proposed on behalf of the electric railways that jitney 
 competition be curtailed or abolished, and that the street railway be given pro- 
 tection as a legalized monopoly in the rendering of local transportation service. 
 This proposal raises ( 1 ) the question as to whether or not automobile buses 
 may under certain conditions be more economical and efficient as a means of 
 transportation than the electric railways are, and (2) the question as to how far 
 the public may properly go in restricting competition in order to give the electric 
 railways under private ownership and operation a monopoly. 
 
 XXXIII. Another suggested method of enlarging electric railway income 
 is by the establishment of cooperative relations between the management and the 
 employes. In this way it is contended that the interest of the employes can be 
 enlisted in efficiency and economy and in the sale of transportation service, and 
 the losses through "knocking down" of fares and through strikes minimized or 
 entirely done away with. 
 
 XXXIV. The serious objection to high fares or, in the alternative, the 
 abandonment of electric railway service altogether in certain communities has 
 led to the suggestion that the revenues of the street railways be supplemented out 
 of taxation, on the ground that business men and property owners receive great 
 benefits from electric railway service even where they never ride on the street 
 cars. It is the idea that these subsidies from taxation should be made to pre- 
 vent the abandonment of unprofitable lines or to keep the fares down to a reason- 
 able level on lines that could be made self-supporting with high fares. On 
 account of constitutional difficulties in the way of subsidizing private enterprise, 
 and on account of inherent objections to such a policy, this plan may not be 
 practicable in some jurisdictions except under public ownership or public man- 
 agement. 
 
 XXXV. As a means of getting the electric railway business upon a con- 
 servative basis, the abandonment of duplicating and unprofitable lines is sug- 
 gested. This plan involves the difficulties and disadvantages inherent in a plan 
 for taking away transit facilities from communities or portions of communities 
 whose development and present social and industrial arrangements are largely 
 dependent on them. It also raises a question as to where the line is to be drawn 
 with respect to street railway extensions. To what extent do the obligations of 
 monopoly within a given transportation area require a symmetrical and complete 
 development of transportation service, with little or no regard to the profitable- 
 ness of individual lines? 
 
 XXXVI. On the part of the public the suggestion is made that capital in 
 the electric railway industry has received too great a return in the past, and that 
 the restoration of street railway credit requires among other things a complete 
 reorganization of the financial structure of the companies and the scaling down 
 of their fixed charges to a conservative basis. It is urged that bankruptcy in 
 many cases may be absolutely necessary as a condition precedent to the restora- 
 tion of credit on a sound basis. 
 
 XXX\TI. The witnesses generally recognize the improbability that the 
 credit of the electric railways can be completely restored by any one of the mea- 
 sures heretofore mentioned taken by itself, and that even a combination of as 
 
652 Electric Railway Pkublem 
 
 many of them as are compatible with one another may not be effective for this 
 purpose. A fundamental readjustment of the relations between the electric rail- 
 ways and the public is regarded as essential. 
 
 XXXVIII. There is general agreement that the first fundamental step in 
 such a readjustment in each particular case is the determination of the amount 
 of the investment upon which the electric railway should be permitted to earn a 
 return. This raises a multitude of different questions as to the correct principles 
 of valuation, as to which there are radical differences of opinion. In general, 
 the companies claim value on the basis of reproduction cost of the physical 
 property at the time of the determination without any deduction on account of 
 depreciation, and with large additions for intangibles to cover superseded prop- 
 erty and past deficiencies below a liberal rate of return from the beginning of the 
 enterprise. In the reproduction cost, they include liberal structural overheads, 
 together with big allowances for such items as promoter's remuneration, broker- 
 age and preliminary expenses in the organization and development of the project. 
 Specifically, they maintain that the purchasing power of the dollar having de- 
 creased under war conditions, the valuation should be made on the basis of the 
 "last-minute" prices. If the historical cost method is used as an alternative to 
 the reproduction cost method of fixing present value, the companies would in- 
 clude every dollar that has gone into the enterprise from the beginning, regardless 
 of the present condition of the property, plus the capitalized services of pro- 
 moters and bankers and deficiencies below a liberal return from the beginning 
 of the enterprise cumulated at comjjound interest. The public, on the other 
 hand, inclines toward the amount of capital actually and prudently invested in 
 existing useful property less accrued depreciation as the proper measure of the 
 capital to be recognized as the basis for the proposed new relationship between 
 the communities and the companies. Here is the big problem to be solved before 
 any fundamental readjustment of the status of the electric railway industry can 
 be effected. 
 
 XXXIX. The next step in the proposed readjustment is the determination 
 of the rate of return to be allowed upon the recognized investment. It is gener- 
 ally admitted that under private management, the rate of return must be sufficient 
 in connection with the security offered to induce investors to put new capital into 
 the electric railway industry as it is required from time to time. Here we are 
 confronted with several specific problems: (1) Shall the rate of return be fixed 
 for a long period uf years or shall it be flexible so as to adjust itself to changing 
 market conditions? (2) Shall the same rate be allowed upon the capital already 
 in the industry as may be required to induce new cai)ital to flow into it? (3) 
 Shall the rate of return be definitely limited and guaranteed, or shall a leeway 
 be left for the encouragement of economical management? (4) Is a rate of 
 return that will induce private cajiital to flow into the street railway industry at 
 the present time so high as to be prohibitive? The rate of return applied to the 
 valuation determines the compensation of capital, so that the two factors must 
 he considered together in the determination of the basis for the final result. 
 
 XI.. One suggestion is that the new deal between the public and the elec- 
 tric railways shall merelv be the removal of contractual restrictions and the trans- 
 
Summary 653 
 
 fer of all remaining local powers of regulation to the state commissions so that 
 thev can take full responsibility on behalf of the public for so regulating the 
 industry as to keep it solvent and efficient. This plan is met by certain objec- 
 tions : ( 1 ) that electric railway transportation is primarily a local function ; 
 (2) that under private management financial success is impossible without the 
 good will and cooperation of the people who ride and the local authorities in 
 control of the streets; (3) that each municipality, as a matter of right and of 
 good public policy, should determine the amount and character of the local trans- 
 portation service to be rendered and the way it is to be paid for; and (4) that 
 exclusive state regulation may interfere with the development of a policy of 
 ultimate municipal ownership based upon contractual relations between the muni- 
 cipalities and the companies. Another objection to exclusive state regulation 
 may be that it falls short of meeting the present situation where a guaranty of 
 earning power or, at least, of power to pay the allowed return on capital is essen- 
 tial to the restoration of electric railway credit. / 
 
 XLI. The inherent lirriitations upon the security of the investment, and ihe 
 uncertainly that the companies will earn a fair return without a guaranty, have 
 given great impetus to the service-at-cost plan based upon contracts with the 
 municipalities or the states, under which the companies will be practically guar- 
 anteed a fixed return upon their investment, either through a flexible system of 
 fares, or through a fixed fare supplemented by public subsidies or otherwise. It 
 is recognized that the service-at-cost plan as exemplified in the Cleveland street 
 railway settlement of ten years ago has worked greatly to the advantage of the 
 company in the preservation of its credit, and has been more beneficial to the 
 public than any other plan thus far tried in this country over a considerable 
 period of time on an important scale under private ownership. The service-at- 
 cost plan, with all its proven merits in the Cleveland case, has not worked so well 
 elsewhere. Its success seems to depend upon certain factors which are largely 
 peculiar to Cleveland: (1) a conservative initial valuation and a relatively low 
 rate of return on the investment; (2) an unusual degree of local pride and con- 
 fidence in the justness of the settlement, making public and official cooperation 
 with the company possible and effective; (3) a policy with respect to replace- 
 ments that prevents the inflation of the capital account in a period of rising 
 prices: (4) a relatively low fare to start with, so that, when costs increase, the 
 fares will not become excessive. A general objection to the service-at-cost plan 
 is that it is calculated to weaken the motive for efficiency and economy in opera- 
 tion under private management and to put upon the public regulatory authorities 
 the responsibility for enforcing these street railway virtues by indirect means to 
 the same extent as they would be called upon to enforce them directly under 
 public management. Another objection is that, even under so good a service-at- 
 cost plan as the one in force in Cleveland, it has been deemed necessary to in- 
 crease the rate of return upon capital to seven per cent.- Moreover, the Cleve- 
 land plan, after being modified from time to time in favor of the company, is 
 tending more and more toward a perpetuation of private management and a 
 weakening of public control, which is everywhere becoming more and more vital 
 to the public welfare. It is to be noted also that the service-at-cost plan sub- 
 
G54 Electric Railway Problem 
 
 stitutes a semi-automatic control of rates for the continuous power of regulation 
 by state commissions, and establishes local control of service, so that under this 
 plan the necessary functions of the state commissions with respect to street rail- 
 ways are reduced nearly to the vanishing point. 
 
 XLII. The final solution advocated by many of the witnesses, and ad- 
 mitted by the rest as the ultimate alternative, in case their particular plans do 
 not succeed, is public ownership and operation by the municipalities, by the 
 states, or by specially created transportation districts. It is admitted that public 
 ownership and operation, under adequate constitutional and statutory provisions, 
 would be able to provide the credit necessary to enable the electric railways to 
 continue functioning. 
 
 XLIII. We now come to the question of labor. During the war the supply 
 of labor was short in the street railway business as in many other industries. 
 It cannot be said, however, that there has ever been for a prolonged period any 
 particular difliculty in securing men to operate street railways. The condition 
 at the present time is that the wages paid are nominally much higher than they 
 were before the war, and that during 1919 there was an epidemic of strikes, 
 resulting in great losses of revenue and generally in radical advances in wages, 
 sometimes with a provision for back pay. While the National War Labor Board 
 was in existence, there was a national agency to which both parties could appeal 
 for the arbitration of wage questions. Now that the War Labor Board has 
 gone out of existence, no such agency will be present to meet the problems that 
 arise as the contracts between the local divisions of the Amalgamated Associa- 
 tion and the employing companies expire from time to time. The industry is 
 more thoroughly unionized than it ever was before, and the men are in a stronger 
 position by reason of the fact that a strike is not relatively 60 serious a matter 
 from the public point of view as it used to be before the advent of the automo- 
 bile. At the present time a pretty good sized city can get along for a few days 
 without street railway service, and the interruption of this service is less likely 
 to stimulate the social disorders that in former times almost universally attended 
 a street railway strike. It is perhaps increasingly dititicult for the coiupanies 
 to "break" strikes. If the cost of living goes on climbing, or even continues at 
 its present high level, it is to be expected that as their yearly contracts expire 
 many of the unions will demand further increases in wages, and that this will 
 drive the companies that arc not already in bankruptcy closer to the verge of it, 
 if the men's demands are granted. This may follow, irrespective of any fare 
 increases, because it is not yet certain that during the ])resent era of high prices, 
 the street railway industry as a whole can be made to pay the full cost of service 
 that is involved in higher wages along witii the high prices paid for materials and 
 money, l-'rom the point of view of the l.ihor problem, therefore, the present 
 conilition of the street railway industry contains the seeds of trouble not only 
 for the people financially interested in the industry, but also for the general 
 public. For the latter there is the double danger of increasing cost of service 
 on the one hand, and of paralysis of service through industrial conflicts on the 
 other. 
 
 XLIV. Perhaps the major cause of the labor difficulty, aside from the 
 
Summary 655 
 
 general increase in labor costs, is the fact that heretofore in the relations between 
 the public and the companies as fixed in the franchises, the employes have been 
 for the most part ignored. The companies have undertaken for a consideration 
 to perform a public function and to deliver service, and the public has had no 
 direct relation with the men, leaving them to be employed and discharged by 
 the companies, without any public interference. But the recognized necessity 
 for continuous service has brought things, during the war period, to a pass 
 where it is seen to be essential that the employes of the street railway companies 
 acquire a full sense of public responsibility and get away from the position of 
 mere wage earners in private employment, with no concern as to the relations 
 between their employers and the general public. 
 
 XLV. One of the remedies proposed is the establishment of public trib- 
 unals through which wages and the hours and conditions of labor may be fixed 
 by public authority, coupled with the enactment of laws to prohibit and penalize 
 strikes in the street railway field. This remedy is generally opposed by organ- 
 ized labor which regards "the right to strike," even in industries where continuity 
 of operation is essential to public convenience, as their indefeasible ultimate guar- 
 anty of adequate wages and satisfactory conditions of work. 
 
 XLVI. Another remedy is based on the right claimed by the Amalgamated 
 Association of Street and Electric Railway Employes to the universal recogni- 
 tion of the union, a living wage, and the eight hour day, with the relations be- 
 tween the companies and the employes determined by contracts annually renewed, 
 with arbitration of any difTerences by special boards of arbitration established 
 from time to time in the local communities, and with the men reserving the right 
 to strike in case the companies refuse to grant their fundamental demands or 
 refuse to submit to arbitration any differences that may arise, or refuse to abide 
 by the results of an arbitration. 
 
 XLVH. Another remedy proposed is to give the employes the right to par- 
 ticipate in the management. This would change in part the present relationship 
 between the men and their employers. Those who propose this plan advocate 
 it on the theory that participation in management would give the men an interest 
 in efficiency, economy and continuity of service, and a sense of responsibility 
 both to the public and to the investors which, as mere employes, they cannot feel. 
 
 XLVIII. Another remedy proposed for the labor problem in the electric 
 railway industry is public ownership and operation, under which the employes 
 would become civil servants and have all the advantages and be subject to all the 
 restrictions which inhere in that relationship. 
 
 XLIX. The street railway problem as a whole cannot be solved merely by 
 the solution of the problem of credit and it cannot be solved merely by the solu- 
 tion of the labor problem. Each reacts upon the other. Both must be included 
 in a coordinate way in the final solution, and any solution arrived at must meet 
 the fundamental requirements that the street railways exist primarily for service 
 rather than for profits, since they have become a public function absolutely essen- 
 tial to the public welfare and for which the community itself must assume the 
 ultimate and final responsibility for self-help. 
 
 L. In seeking a solution of the electric railway problem the only possible 
 
656 Electric Railway Problem 
 
 choices are these: (1) to abandon the theory of public interest in the industry 
 and abrogate the practice of public regulation with respect to it, leaving the elec- 
 tric railways to work out their own salvation as a private speculative business 
 enterprise; (2) to continue and perfect the theory and practice of public regula- 
 tion by the complete elimination of contractual relations, at least so far as they 
 relate to the value of the property, the rate of return to capital, the extent and 
 quality of ser\ice to be rendered and the compensation therefor; (3) to estab- 
 lish a more intimate contractual relation between the companies and the public 
 than has heretofore existed, based upon some form of the service-at-cost plan, 
 with service controlled under most conditions by the municipalities, and fares 
 regulated more or less automatically without the intervention of state commis- 
 sions; or (4) public operation or both public operation and public ownership. 
 
 LI. Quite a number of witnesses complained of the bad effects of public 
 regulation as it has heretofore been practiced, and it was even suggested that all 
 restrictions be removed from the electric railways in order that they might battle 
 to the death with their new competitor, the automobile. The idea was that only 
 by such removal of restrictions can the ultimate relative merits of the electric 
 railway and the gasoline motor car be tested out. The overwhelming weight of 
 testimony, however, was clearly adverse to such a policy. To most of the wit- 
 nesses it would be unthinkable that the public should "wash its hands of" the 
 electric railways and relegate them into the position of a purely private industr>-. 
 
 Lll. The policy of complete and exclusive state regulation, freed from the 
 limitations imposed by municipal contracts, could hardly be carried out to its 
 logical conclusion except on the assumption that the municipalities have no 
 special local interest in electric railway service, and that the present status of 
 private ownership and o|)eration is to be continued indefinitely. Moreover, state 
 regulation, as it has thus far been developed, holds out no adequate assurance 
 that it will be able to restore and niaintain the credit of the electric railways, or 
 that it will be able to preserve continuity of service through a solution of the 
 labor problem. At best, state regulation gives the industry an opportunity to 
 earn a fair return upon the investment if the industry can be made self-sustain- 
 ing from the rates. Public regulation can give no guaranty, and in an emergency 
 like the present one is compelled gradually to withdraw the hand of control and 
 permit the companies to do whatever seems necessary to enable them to work 
 out of their financial difiiculties. 
 
 LI IF. A contractual relationship fixing the investment value of the prop- 
 erty, and the allowed rate of return to the investors, with provisions assuring 
 to the companies that their investment will be protected and their annual return 
 upon it earned or paid, might have the effect of restoring the comjianies' credit 
 and of enabling them to go on in the performance of their functions. This solu- 
 tion of the problem involves the elimination of the element of risk and of chance 
 for reward, which lie at the very foundation of private initiative. The service- 
 at-cost plan is pre-emineiUly suited to public enterprise in which the idea of profit 
 is entirely absent. When it takes the fonn of a contract between the municipality 
 or the state and the electric railway, it is designed as a means to avoid the neces- 
 sity of public ownership and operation, on the thcor}- that private ownership and 
 
Summary 657 
 
 operation are better. It is admitted on all sides that most serious evils have re- 
 sulted from the treatment of the electric railways as a speculative industry, and 
 that both from the public point of view and from the point of view of the in- 
 vestors, ultimate salvation lies in security. The fundamental purpose of the 
 service-at-cost plan is to remove the speculative element, but in doing so it re- 
 moves the very condition which is put forward as the chief reason for a continu- 
 ation of private management in the case of an industry which is universally recog- 
 nized to have become a public function. 
 
 LIV. The character of the electric railway industry, the impossibility of 
 leaving it to be carried on as a private business, the failure of public regulation 
 to solve the problem advantageously either for the electric railway companies or 
 for the public, the inherent limitations of the service-at-cost plan, the imprac- 
 ticability of dealing effectively with the Jabor problem under private management, 
 and the fact that the cost of capital without the support of public credit has 
 become prohibitive, all point to the conclusion that, with respect to local transpor- 
 tation, public ownership and operation are an ultimate necessity. A program of 
 public ownership and operation will not be easily carried out. A careful and 
 prolonged consideration of the problem reveals no easy solution of it. It is clear, 
 however, that the industry cannot be put upon its feet and the public interests 
 served except through the adoption of a definite, comprehensive and construc- 
 tive policy. No such policy has been suggested that does not have ultimate public 
 ownership as its goal. It is, perhaps, unfortunate that the prejudice of control- 
 ling public opinion against public ownership of public utilities, and the immense 
 vested interests in the electric railways and other utilities, have during the past 
 erected legal, contractual and financial barriers in the way of the adoption of this 
 policy. Even in a crisis these barriers cannot be overcome without great diffi- 
 culty. In the present state of the laws governing municipal action, and in the 
 present state of municipal finances, it is quite obvious that public ownership of 
 the electric railways as a general program cannot be effected short of a consider- 
 able period of years, unless it is brought about by a compelling emergency that 
 brooks no delay. Whatever temporary measures may be recommended or adopted 
 for immediate relief, it is essential that such measures shall not in any way in- 
 terfere with the adoption of a program looking to the pennanent solution of 
 the problem, and that there should be no postponement of the initial steps in the 
 work that will take the longest. For this reason, a declaration should now be 
 made of the ultimate necessity of public ownership and operation, and public 
 attention should now be directed toward the specific problem of legal, financial 
 and administrative preparation for it. It seems clear that, no matter how soon 
 the program is initiated, the necessity for its application will arrive before the 
 communities are fully prepared. 
 
APPENDIX A 
 
 LOCAL TRANSPORTATION ISSUES IN 
 
 NEW JERSEY 
 
 BY 
 
 DELOS F. WILCOX, Ph.D. 
 
 (1) Letter to Messrs. Read and Bugbee, June 2, 1920. 
 
 (2) Letter to Governor Edwards, July 19, 1920. 
 
 (3) Local Transportation Issues: 
 
 I. — Public Service Railway Company's Attack on the Jitneys a Move toward 
 Higher Trolley Fares. 
 II. — Public control over Public Services at Stake in the Present Crisis. 
 III. — Conflicting Theories of Valuation and the Results They Bring. 
 IV. — A Definite and Constructive State Policy Needed. 
 
i 
 
7' Appendix A 
 
 (1) LETTER TO MESSRS. READ AND BUGBEE 
 
 Elmhurst, N. Y., 
 June 2, 1920. 
 Hon. William T. Read, State Treasurer, 
 Hon. Newton A. K. Bugbee, State Comptroller, 
 V'aluation Commissioners, 
 Trenton, N. J. 
 Dear Sirs: 
 
 I am writing you as members of the Valuation Commission appointed by the 
 legislature by Chapter 351 of the Laws of 1920, providing for the valuation of 
 street railway property in New Jersey. 
 
 In 1918 I was engaged as chief expert for the New Jersey State League of 
 Municipalities in the proceedings before the Board of Public Utility Commis- 
 sioners upon the application of the Public Service Railway Company for emer- 
 gency relief. In that proceeding the summary of the Cooley valuation was pro- 
 duced by the company at the request of the Commission, but was not proven by 
 the testimony of Dean Cooley or any of his assistants. It was marked as an 
 exhibit in the case, but we had only a limited opportunity to examine it. The 
 Commission, in its orders of July 10 and September 25, 1918, disregarded the 
 Cooley appraisal on the ground that it had not been proven and was not properly 
 in evidence. 
 
 Again, in 1919, when the Public Service Railway Company filed its zone 
 report and asked the Commission to fix permanent rates, I was engaged by the 
 City of Newark and the Associated Municipalities as chief expert representing 
 the municipalities. In this 1919 proceeding (still pending) the Public Service 
 Railway Company, as you doubtless know, submitted the Cooley appraisal and 
 supported it by the evidence of Dean Cooley himself, his associate. Professor 
 Henry C. Anderson, and the various real estate experts who were employed by 
 Dean Cooley to appraise the Public Service Railway lands. The company also 
 introduced expert testimony in support of or supplementing this appraisal by rep- 
 resentatives of the engineering and utility management firms of Ford, Bacon & 
 Davis, The J. G. White Management Corporation, Stone & Webster and Sander- 
 son & Porter; also a number of other witnesses, both consulting engineers and 
 men engaged in the financing of public utilities. On the part of the municipal- 
 ities we made an analysis of the actual cost of the Public Service Railway prop- 
 erties, so far as it could be ascertained from the books and records now avail- 
 able, and also made an analysis and criticism of Cooley's valuation. Our esti- 
 mate of the fair present worth of the property for rate purposes was a little 
 under $60,000,000. The Stone & Webster man who testified in February of this 
 
 6-^1 
 
662 Appendix A 
 
 year put the value up to $180,000,000. and another engineer, Mr. Harold Almert, 
 who fixed the fair value at $165,000,000. indicated that he was restrained from 
 making it $220,000,000 or $230,000,000 merely by the knowledge that such a 
 valuation would necessitate a rate of fare so high as to defeat itself. 
 
 The wide range in the estimates of value presented by the various witnessc> 
 before the Commission are accounted for primarily by differences in theories 
 of valuation. It is my understanding that one of the fundamental function> 
 of courts and public service commissions before which testimony in rate cases 
 is taken is to weigh all of the evidence, take into consideration all of the perti- 
 nent and proven facts, decide what are the correct and le,tjal rules in the appli- 
 cation of the several methods of appraisal and finally determine, on the basis 
 of all these factors, what in their judgment is the fair present value for rate 
 purposes of the property devoted to the public service in the case before them. 
 This function of the court or the commission is a governmental function of 
 the highest type. It requires independence, public responsibility, a full and 
 unprejudiced consideration of the claims of the company and the rights of the 
 public. The performance of this function at the present time is peculiarly 
 difficult because of the unsettled condition of valuation law, the conflicting 
 precedents and, above all, the extraordinary conditions which now prevail as a 
 result of war prices. 
 
 With all of these things in view, I have read with profound astonishment 
 the provisions of Chapter 351 of the Laws of 1920, under which the Governor, 
 the State Treasurer and the State Comptroller are designated as a commission 
 to procure the valuation of street railway property in New Jersey. Tliis law, 
 as I read it, is based upon the fallacious assumption that the fair value of a 
 public utility property for rate purposes is a fact which any firm of experienced 
 and competent engineers can go out and ascertain, whereas the truth is. as I 
 have already pointed out, that the determination of the value of such a property 
 is not an engineering but a governmental function, and depends upon the weigh- 
 ing of a great number of difTerent facts by a body clothed with governmental 
 power and public responsibility. If I read the valuation act correctly, it directs 
 the Valuation Commission to farm out to some engineering firm for a price the 
 performance of this governmental fuTiction. Your Commission seems to be 
 directed to make provision for government by contract. It would be no more 
 radical departure from established governmental procedure if Congress, weary- 
 ing of the delay of the United States Supreme Court in deciding the constitu- 
 tionality of tlie N'olstead .Act. should pass a law directing the President, the 
 Comptroller of the Currency and the Secretary of Labor or three other e.xecu- 
 tive officials to employ a legal firm, of experience and standing in the examina- 
 tion of constitutional (|uestions. to look into the circumstances imder which 
 the Eighteenth .-\mendment and the X'olstead Act were adopted and to render 
 an exhaustive and final opinion upon their constitutionalitv, with the provision 
 that upon the delivery of this opinion to the exeiulive commission api>ointed 
 for the purpose, it should be immediately transmitted to the Supreme Court 
 with the instruction that the court should accept and be bound by the opinion 
 so prepared and delivered. If this comparison is thought to be far-fetched. 
 
Transportation Issues in New Jersey 663 
 
 we can make another that will illustrate my point just as well. The Interstate 
 Commerce Commission has for several years been engaged in the valuation of 
 the railroads of the United States. The work is not completed, and yet there 
 is urgent need for the fixing of value as a basis for the immediate readjustment 
 of freight and passenger rates. It would be an almost exact parallel to the 
 provisions of the New Jersey law if Congress had directed an executive com- 
 mission of three men to make a contract with an engineering firm to make a 
 valuation of the railroads of the United States, with the provision that when 
 the valuation was completed and nicely bound up in a volume or series of 
 volumes, with a blue ribbon on it, it should be delivered to the executive com- 
 mission and by that commission transmitted, without examination or the exer- 
 cise of any act of judgment, to the Interstate Commerce Commission and there- 
 after should be accepted by the Interstate Commerce Commission as the basis 
 for rate fixing. 
 
 It is almost unbelievable that a legislature representing the people of a 
 great and enlightened state like New Jersey should have put upon the statute 
 books such an outrageous measure. I am not a constitutional lawyer, but if 
 there is anywhere tucked away in the articles of either the Federal Constitution 
 or the State Constitution of New Jersey any guaranty of protection for the public 
 in the valuation of public utilities and the fixing of public utility rates, I feel 
 sure that this act runs contrary to that guaranty. 
 
 I speak in this emphatic manner because for many years in public employ- 
 ment and in the pursuit of my profession I have been striving for the establish- 
 ment and recognition of sound public policies in the public utility field, and 
 because, in connection with the proceedings still pending before the Board of 
 Public Utility Commissioners, large expense has been incurred in the prepara- 
 tion and presentation of a case based upon our conception of public rights and 
 fair and just regnlation. and because I see that it is now proposed under this 
 law that your commission shall hand over to some engineering firm — it may 
 be for all the pubHc knows one of the firms that have already supplied witnesses 
 in support of the Public Service Railway's contentions in this very case' — the 
 governmental function of determining the value of the property for rate pur- 
 poses, by which determination the public bodies of the state of New Jersey, to 
 which the municipalities have to look for justice, shall be bound. As I read 
 the new law, there is no provision for public hearings or proof or cross-exam- 
 ination of witnesses, and your commission is not even authorized to retain the 
 valuation report in its possession long enough to read it. The determination 
 will be the determination of an engineering firm hired to perform a public 
 function, without supervision, without responsibility, without public hearings 
 and even without testimony.^ 
 
 I have seen in the newspapers the report that the Governor has declined 
 to serve on the commission, and it is for this reason that I am addressing this 
 letter to you as the other members of the commission.^ 
 
 Very truly yours, 
 
 DELOS F. WILCOX. 
 
(2) LETTER TO GOVERNOR EDWARDS 
 
 July 19, 1920. 
 
 Hon. Edward I. Edwards, Governor, 
 Trenton, New Jersey. 
 
 Dear Sir: 
 
 A few weeks ago, as you probably know, I addressed a letter to Hon. 
 Williani T. Read and Hon. Newton A. K. Bugbee as members of the Street 
 Railway \'aluation Commission designated by Chapter 351 of the laws of 1920. 
 I did not address that communication to you as Chairman of the Commission 
 for the reason that your definite refusal to act in that capacity had come to my 
 attention. 
 
 1 am now transmitting to you as Governor a review of the local trans- 
 portation issues in New Jersey as I see them. Not being a resident of the 
 state, 1 ought to explain my connection with the problem. 
 
 Several years ago, at the request of Senator Carlton B. Pierce, I drafted 
 an indeterminate franchise bill which was introduced in the New Jersey legis- 
 lature in 1912 and at one or two subsequent sessions, but never got through. 
 It was strongly opposed by the Public Service Corporation. Later, at the 
 time when the Public Service Newark Terminal project was under discussion, 
 1 was invited by the Newark Evening News to make a report upon the project 
 and upon the numerous franchises then under consideration by the Board of 
 Street and Water Commissioners of the City of Newark. My report appeared 
 in a series of articles published in the News in July, 1913. In January, 1918, 
 after the Newark Terminal had been in operation tor two years and had failed 
 to solve the transit problem in Newark, I was asked by the News to make 
 another survey. In the intervening years Port Newark had been developed 
 and jitney competition had come in as new factors in the problem. My second 
 report was published in the News as a series of articles in April, 1918. In 
 March of that year the Public Service Railway Company, taking advantage 
 of the decision of the Court of Errors and Appeals in the Collingswood Sewer- 
 age Case, had filed with the Board of Public Utility Commissioners an appli- 
 cation for permission to abandon the five-cent fare and install a seven-cent 
 fare, with a charge for transfers. The New Jersey State Leagxie of Munic- 
 ipalities determined to oppose this application, and I was employed as its chief 
 expert in the proceeding. Hon. Marshall Van Winkle and Hon. George L. 
 Record were the counsel for the League in this case. Again, in 1919, when 
 the Public Service Railway Company submitted its zone report and filed with 
 the Utilities Hoard an entirely new schedule of rates, based upon the zone 
 
Transportation Issues in New Jersey 665 
 
 plan, I was retained by the City of Newark and the Associated Municipalities 
 as their chief expert in general charge of the case, under the direction of Hon. 
 Frank H. Sommer, their special counsel. 
 
 As a result of this series of employments I have been pretty familiar with 
 street railway developments in New Jersey during the past few years, and 
 feel that I owe a certain responsibility to the state and municipal authorities 
 which at least demands that I lay before you, as Governor, a review of the 
 Public Service Railway rate proceedings, with a statement of what I conceive 
 to be the most important issues involved. 1 might also add that during the 
 past few months I have been engaged in a study and analysis of the entire 
 street railway situation of the country for the Federal Electric Railways Com- 
 mission. In this connection I have had an exceptional opportunity to familiar- 
 ize myself with the claims being advanced by all the principal parties to the 
 electric railway controversy : the companies themselves, the banking interests, 
 the employes, the public service commissions, the municipalities, and the spe- 
 cial students of the problem. As a result of this study, coming on top of my 
 prolonged connection with the New Jersey proceedings, I am fully convinced 
 that nowhere in the country is the electric railway problem more important, 
 more complex and more difficult than in the State of New Jersey. As every- 
 where else, the valuation of the property devoted to public use is the essential 
 first step in the formulation of an adequate public policy with respect to local 
 transportation service. For this reason, and also because of the confusion 
 that has been injected into the situation by the recent passage of the Street 
 Railway Valuation Act, I have taken considerable pains to analyze and set 
 forth the conflicting claims of the Public Service Railway Company and of 
 the municipalities as presented in the record of the rate case. 
 
 The review transmitted herewith I have entitled, "Local Transportation 
 Issues in New Jersey." It is divided into four sections, as follows: 
 
 I. Public Service Railway Company's attack on the jitneys a move toward higher trolley 
 
 fares. 
 II. Public control over public services at stake in the present crisis. 
 
 III. Conflicting theories of valuation and the results they bring. 
 
 IV. A definite and constructive state policy needed. 
 
 Respectfully, 
 
 DELOS F. WILCOX. 
 
(3) LOCAL TRANSPORTATION ISSUES IN NEW JERSEY 
 
 PUBLIC SERVICE RAILWAY COMPANY'S ATTACK ON THE JITNEYS A 
 MOVE TOWARD HIGHER TROLLEY FARES 
 
 The Public Service Railway Company is trying to put the jitneys out ot" 
 business. It has filed complaints in the Court of Chancery against 36 jitney 
 operators in as many ditTcrent numicipalities. In these complaints it alleges 
 that it is suffering immeasurable and irreparable damages from jitney com- 
 petition and prays that the defendants be enjoined from continuing such com- 
 petition." The company alleges that its business represents an investment of 
 more than $150,000,000 and that, largely as a result of the unlawful com- 
 petition and interference with its business by the jitneys, it is not earning a 
 fair return upon this investment. 
 
 This move against the jitneys is undoubtedly preparatory for a ten-cent 
 trolley fare. The claim of an investment of more than $150,000,000 falls in 
 very nicely with the legislative plan clearing the way for an unsupervised and 
 unchecked valuation to be made by some firm of friendly engineers, skilled 
 in the art of giving substance to the intangible, and is obviously calculated to 
 secure ultimate official recognition of a value so high as to place the Public 
 Service Railway forever beyond the pale of effective regulation. The correct- 
 ness of these conclusions will be made clear by a review of the statistics of 
 jitney competition in Newark, of the evidence in the Public Service Railway 
 rate proceedings before the Utilities Board, and of the terms of the street 
 railway valuation act of 1920. 
 
 Danforth Called Jitneys a Godsend in 1918 
 
 In the Emergency Rate case, General Manager Richard E. Danforth testi- 
 fied on May 17, 191S, that in his opinion the jitneys at that time were taking 
 in at least a million dollars a year in competition with the Public Service Rail- 
 way lines. Me added that during the preceding 12 or 15 months the rush-hour 
 con»pctition had been a "godsend" to the company, because it did not itself 
 have the facilities to handle the traffic. If, during the most critical period of 
 the war. jitney competition at the rush hour could be described as a "godsend" 
 to the Public Service Railway Company, what must it have been under such 
 circumstances to the public! 
 
 Immense Growth of Jitney Traffic in Newark 
 
 Licensed jitneys have now been operating in New jersey for a period of 
 four years. The statistics of jitney traffic in the City of Newark, as reported 
 
 666 
 
Transportation Issues in New Jersey 667 
 
 to the city treasurer, are full of import to the Public Service Railway Com- 
 pany. The figures are as follows : 
 
 Total Xiiiiihei- of Average Xiimber of 
 
 Twelve Months' Period Jiliicy Passciiyers Passenycrs per Day 
 
 June, 1916, to May, 1917 6,559,678 17,971 
 
 June, 1917, to May, 1918 10,342.673 28.336 
 
 June, 1918, to May, 1919 24,323,265 66.639 
 
 June, 1919. to May, 1920 39.868.377 108,930 
 
 The Newark jitneys carried 490.000 passengers in June, 1916, 3,000,000 
 in June, 1919, and 3,837.000 in .May, 1920.= When the Public Service Rail- 
 way Company put in the seven-cent fare in October, 1918, the jitney traffic 
 jumped; when the Public Service Railway Company had a six-day strike in 
 March, 1919, the jitney traffic jumped again; when the Public Service Rail- 
 way Company installed the experimental zoning scheme in September, 1919, 
 the jitney traffic jumped higher yet — in fact, it reached a maximum of 
 4,005,000 in October, 1919. But with the restoration of the flat seven-cent 
 fare last December jitney traftic in Newark fell oiif a little. It had a big 
 slump in February, 1920, the month of snow and ice ; but in May, as we have 
 seen, it was up again almost to the October maximum. 
 
 The evidence is clear that jitney competition is no longer regarded by 
 the Public Service Railway Company as a godsend. On the contrary, its 
 increase is viewed with great alarm and the jitneys are regarded as a major 
 obstacle in the way of Public Service Railway prosperity. Not only do the 
 jitneys take an immense amount of traffic which the street cars would other- 
 wise get, but while jitney competition continues the Public Service Railway 
 Company does not dare to inaugurate further increases in the trolley fare ; 
 for such increases, under existing conditions, would defeat themselves by driv- 
 ing away a still greater amount of traffic to the Railway Company's competi- 
 tors. In connection with its zoning studies the company had occasion to inves- 
 tigate the amount of traffic that the jitneys were then carrying and to estimate 
 the effect of jitney competition under the proposed zone system of fares on 
 the street cars. On April 24, 1919, in the course of his testimony before the 
 Utilities Board, Mr. Danforth said: 
 
 "My estimate is that jitneys today are doing a business at an average of four million 
 dollars a year, and that means that they are carrying eighty million passengers. That is 
 nearly 25 per cent of the number of passengers Public Service expects to carry under the 
 zone rate of fare. In other words, one out of every five people are using jitneys, and the 
 disturbing feature is that these are the short riders, that the jitneys are operating along 
 street railway lines and on street railway tracks where there is the greatest amount of 
 passenger traffic and they run only so far along the line as they can afford to run and break 
 even. They take our short-haul business and they leave for the Railway the long-haul 
 business." 
 
 Indeed, during the study of the company's zoning plan made by the ex- 
 perts for the Associated Municipalities, a memorandum prepared by Mr. Dan- 
 forth under date of April ll, 1919, came into the possession of Dr. Robert H. 
 Whitten, and was introduced by him in evidence in his testimony on behalf 
 of the Municipalities. In this memorandum Mr. Danforth estimated that the 
 total number of jitneys in operation in the principal cities served by the Public 
 
668 Appendix A 
 
 Service Railway Company on April 1, 1919, was 793, of which 328 were in 
 Newark, 220 in Jersey City, 77 in Hoboken, 39 in Paterson, 20 in Passaic, 
 53 in Elizabeth, 5 in New Brunswick, 6 in Plainfield and 45 in Camden. 
 
 "A check of the passengers carried by jitneys," said this memorandum, "seems to indi- 
 cate that buses operating along trolley lines earn $7,300 per year per bus in the lariger 
 cities. • * * * Taking a conservative figure, it is safe to assume that 750 buses would 
 earn in excess of $4,000,(KX) per annum and carry 80,000,000 passengers. If this number 
 c'l passengers were carried on Railway cars under the zone system, allowing for the average 
 ride of each jitney passenger of Ijj miles, the revenue derived from such passengers would 
 be $4,800,000. It is safe to assume that at least one-half of these passengers (surely those 
 riding in non-rush hours) would be carried in cars now operated by Railway." 
 
 On this basis Mr. Dan forth figured out that the Railway Company would 
 need to incur a total additional operating expense of only $1,360,000 to enable 
 it to take care of all the jitney traffic, from which it would derive an additional 
 gross revenue of $4.i^<00.000, leaving $3,440,000 as the estimated figure repre- 
 senting the net profit that would come to the Railway Company from the elim- 
 ination of jitney competition. This, Mr. Danforth said, would be nearly one 
 cent for each cash passenger then being carried by the railway. 
 
 Low Fares for Short Rides under Zone Plan Were Expected to Overcome 
 
 Jitney Competition 
 
 It was the theory of the Utilities Board, and, indeed, of all parties in the 
 case who looked with any favor at all upon a zoning plan, that low fares for 
 short rides would tend to develop the short-haul traffic and curtail or elim- 
 inate jitney competition; but the zone fare experiments put into effect in Sep- 
 tember and November, 1919, proved to be egregious failures from every point 
 of view. Neither of these plans had the eft'ect of attracting short-haul traffic. 
 and while they were in operation the jitneys throve as never before. The 
 zone plan was put into effect with improvised facilities for collection; the fares 
 charged were unsatisfactory and unjust; the scheme was too inflexible and 
 not properly adjusted to local conditions in different communities; the service 
 was slowed down; and, in general, public opinion was outraged. Under these 
 circumstances the zoning idea did not get a fair trial and the hope of meeting 
 jitney ci)m|ii-titi(iii tlirdiiijh a zone system of fares went glinmu'ring. 
 
 Flat Nine-cent Fare Hardly Sufficient, Said McCarter a Year Ago 
 
 The Public Ser\-ice Railway Company, in its famous zone report filed with 
 the Utilities Board in March. 1919. had proposed a schedule of fares that, 
 .iccnrding to the company's estimates, would yield a passenger revenue of 
 $25,390,000 for the year ending June 30, 1920. with an income of $7,162,000 
 after the payment of operating expenses, taxes, and allowances for deprecia- 
 tion reserve. With bond interest, rentals and other fixed charges estimated at 
 $5,350,000, the company figtired that under the proposed rates it would earn 
 a surjjius of $1,812,000 available for dividends on its common stock, held by 
 the Public Service Corporation. On July 29, 1919, while the company's orig- 
 inal zone application was still being considered, Mr. Thomas N. McCarter, 
 President of the Corporation and also of the Railway Company, came before 
 
Transportation Issues in New Jersey 669 
 
 the Utilities Board with the statement that an award of the National War 
 Labor Board, made a short time previously, had the effect of increasing the 
 company's pay rolls to the extent of $1,175,000 a year over the pay rolls taken 
 into account in the zone report. At that time Mr. McCarter said: 
 
 "If we are to make up this additional amount and at the same time provide any measure 
 of return, such as has been contemplated throughout the proceeding, to the Railway Company, 
 to accomplish that end, if indeed that will do it. will take a 9-cent fare with a penny for 
 a transfer. Now, if the Commission says so, we are ready to put that rate into eflfect, but 
 I deprecate it. I think in the first place * * * * it does not produce enough money, 
 but if it did, it means that the company would fall short of performing its functions to a 
 large number of people, because the estimate of traffic is that whereas the rate filed under 
 the zone system contemplates something like 308,000,000 passengers carried, under the sug- 
 gested 9-cent flat fare with a penny for a transfer the number of passengers, according to 
 our best light, would only be 242,000,000. While the money might be produced to keep the 
 ship going, the company would not perform its functions simply to the extent and in the 
 manner that it would like to perform its functions, and this would be the parting, as the 
 Commission can readily see, from all idea of a zoning system. It would be going into a 
 higher flat fare than has ever been tried anywhere e.xcept in Boston where they now have 
 a 10-cent fare, and I think in Pittsburgh they now have a 10-cent fare, but as to Boston, it 
 is far from satisfactory to the public." 
 
 Zone Plan in the Discard and Company Losing Money under Seven-Cent Fare 
 
 The ill-fated zoning experiment, with the three-cent minimum charge for 
 a mile ride, the abolition of transfers and the rapid piling up of fares for long- 
 distance riding, was put into effect in September, 1919, as an alternative to 
 the flat 9-cent fare which, in the company's opinion, would have been barely 
 sufficient to "keep the ship going." To provide what the company regarded 
 as the minimum return that would enable it to remain solvent required a sur- 
 plus in excess of fixed charges of approximately $2,000,000 a year, or $167,000 
 per month. The surplus for August, 1919, while the company was preparing 
 to put the zone experiment into eflfect, A'as $54,000; in September, with the 
 zone plan in eft'ect for 17 out of 30 days, a deficiency of $130,000 was incurred; 
 in October, the deficiency was $305,000, and in November, $255,000. The 
 7-cent fare was restored on December 7, 1919, and although December was 
 generally a month of high traffic on the electric railways of the country, the 
 Public Service Railway still earned a deficiency of $14,000 in that month. In 
 Januar)-, 1920, the deficiency was $109,000; in Februar}-, $141,000, and in 
 March, $64,000; but in April the tide turned again and showed a surplus of 
 $108,000. If from the date when Mr. McCarter appeared before the Utilities 
 Board stating that a 9-cent flat fare would scarcely be sufficient to enable the 
 Public Service Railway to keep on its feet, until April 30, 1920, a period of 
 9 months, the company had earned the minimum which Mr. McCarter re- 
 garded as necessary, it would have earned approximately $2,350,000 more than 
 it actually did earn. In other words, during the 9 months of experimentation 
 following Mr. McCarter's declaration of July 29, 1919, the company was accu- 
 mulating a deficiency at the rate of $3,140,000 a year below the minimum which, 
 according to his claims at that time, was necessary to keep the company in 
 healthy financial condition. But this includes the bad months when zone fares 
 were in effect. If we take only the first four months of 1920, with the seven- 
 cent fare in effect during the entire time, the shortage was accumulating at the 
 rate of about $2,600,000 a year. 
 
670 Appendix A 
 
 Now, it so happens that in the niontli of April, 1920, a new wage increase 
 was granted, ettective the first of May, which, according to the company's 
 statement, will increase the pay rolls to the extent of $1,200,000 annually. 
 Under the new wage schedule, unless the company succeeds in effecting im- 
 portant economies, it will claim an increase of approximately $3,800,000 in 
 annual net income, over what it has been earning recently with the seven-cent 
 fare, as the minimum necessary to keep the ship going." 
 
 Ten-cent fare in Prospect if Jitneys Are Eliminated 
 
 If Mr. Danforth's 1919 estimates were correct, the recovery for the street 
 cars of the entire amount of the trafVic then being taken by the jitneys would 
 pretty nearly make up this deficiency without the necessity for a further in- 
 crease in the fare. But obviously, the Public Service Railway would not get 
 all of the present jitney traffic, even if the jitneys were entirely eliminated, 
 as much of this traffic originates at points where street car facilities are now 
 inadequate. Also, it must be kept in mind that the surplus over fixed charges 
 demanded by the I'ublic Service Railway Company in its zone report and in 
 its subsequent applications for immediate relief, is not by any means a meas- 
 ure of what it claims that it is entitled to earn under the established principles 
 of regulation. It is not 4 per cent on its common stock, but 8 per cent upon 
 the entire value of the property operated by it, that measures the company's 
 claim. The value for rate purposes fixed by its various witnesses has a range 
 of many millions, but the average would be at least $150,000,000, and that is the 
 minimum investment figure set up in its bills of complaint against the jitnevs. 
 Eight per cent on this amount would be $12,000,000 a year, or $4,728,000 
 more than the minimum amount upon which Mr. McCarler's nine-cent fare 
 estimate was based. Obviously, even with the jitneys eliminated, while present 
 operating costs continue, the Public Service Railway Company is headed for 
 reorganization or for a fare of ten cents or more." 
 
 The Public Service Railway Company, the Public Service Corporation and 
 Mr. Thomas N. McCarter personally are playing for great stakes. They do 
 not dare to increase the fare above seven cents under present conditions, be- 
 cause, while jitney operation continues, the siiort-haul street-car riders, if they 
 are driven from the street cars by a further increase in fares, will have two 
 alternatives — they may walk, or they may take a bus. If the buses are driven 
 out their only choice will be to walk. Without a doubt the falling oflf in street 
 car traffic as a result of a further increase in street car fares will be mucli less 
 if active jitney competition is eliminated than it would be with buses running. 
 
 With Competition Gone No Known Limit on Value of Service 
 
 It may be also that the I'ublic .Service Railway Company has another thing 
 in mind. Tlierc is an old and theoretically well-established rule of the courts 
 an<l the regulator)' commissions to the eflfect that charges for a public utility 
 service must not be higher than the service is reasonably worth, liven though 
 till- rnmpany ni.iv m.t \<r earning a fair return u])on the value of the property 
 
Transportation Issues in New Jersey 671 
 
 devoted to public use, its charges are restricted by this upper hniit. The rule 
 in this respect was stated by Mr. Justice Swayze in his celebrated opinion in 
 the Passaic Gas Case, where he says : 
 
 "On the one hand, a just and reasonable rate can never exceed, perhaps can rarely 
 equal, the value of the service to the consumer. On the other hand, it can never be made 
 by compulsion of public authority so low as to amount to confiscation. A just and reasonable 
 rate must ordinarily fall somewhere between these two extremes, so as to allow both sides 
 to profit by the conduct of the business and the improvements of methods and increase of 
 efficiency. Justice to the consumer ordinarily would require a rate somewhat less than the 
 full value of the service to him; and justice to the company would ordinarily require a rate 
 above the point at which it would become confiscatory." 
 
 In this opinion Justice Swayze assumes that the value of the service will 
 always be greater than the cost of the service, but in 1913, when the Passaic 
 Gas Case was decided, nobody could foresee the tremendous revolution in the 
 condition of public utility service that has since come about as a result of the 
 war. It is now very far from certain that in the street railway business the 
 reasonable value of the service to the car rider is always greater than its cost. 
 Under these circumstances the commissions and the courts will be called upon 
 to establish criteria of the worth of street railway service, and v^fhat criterion 
 could be so readily applied or have so plausible a basis as the fares charged by 
 competing jitney buses for rendering similar service? So long as the jitneys 
 remain in active competition with the street railways, ready to carry passen- 
 gers at a five-cent fare, even though their operations be restricted to the com- 
 paratively short-haul business, they tend to establish a standard price, a limit 
 beyond which, under the principles of rate regulation, the electric railways 
 may not be permitted to go, at least for the short hauls. And with the zoning 
 plan down and out, the uniform flat fare has to be fixed at a point where it 
 will not be unreasonable even for those who ride short distances. 
 
 The Public Service Railway Company, therefore, has a triple purpose in 
 trying to drive the jitneys out. First, and most obviously, it will regain some 
 of the traffic which the jitneys have taken away from it ; second, it will be rid 
 of the active competition that tends to make further fare increases ineffective 
 and disastrous to the company ; and third, it will remove from sight, and ulti- 
 mately from mind, the competitive service that tends to fix the maximum value 
 above which local transportation fares may not go under the rules laid down 
 by the courts and the utilities commissions. 
 
 Public Service Railway Claims Franchise Value Equivalent to Watered Stock 
 
 The people of New Jersey have supposed that they were free from the 
 danger of the capitalization of franchise values as a basis for rate-fixing. It 
 is generally assumed that the question was settled in favor of the public and 
 against the companies in the Passaic Gas Case, but in that case the company 
 did not exhaust its devices. It carried the case to the United States Supreme 
 Court, but discontinued it before argument, and the United .'-itates Supreme 
 Court has not finally determined the extent to which franchise values are to 
 be taken into consideration in fi.xing rates. In the Consolidated Gas Case, 
 
672 Appendix A 
 
 indeed, the court held that the company, under the laws of New York, was 
 entitled to earn a fair return on nearly $8,000,000 of franchise value the same 
 as on any other portion of its property. What the court would do with the 
 consolidation and franchise values of the Puhlic Service Railway system, cap- 
 italized in the old days of 20-to-l exchanges about which Accountant Mark 
 Wolff has given such vivid testimony, lies on the lap of the gods. That the 
 Public Service Railway Company does not itself admit the correctness of the 
 conclusion reached by the courts of New Jersey in the Passaic Gas Case with 
 respect to franchise values was demonstrated at the hearing before the Utilities 
 Board in the pending rate case on February 27, 1920. when Senator Edmund 
 W. Wakelee, counsel for the company, formally placed upon the record the 
 following statement: 
 
 "The Supreme Court of this state held in the Passaic Gas rate case that franchises of 
 utility corporations, including the right to use the public highways in their business, are 
 property, but property of such a peculiar kind that their value should not be taken into 
 account in estimating the value of the |)ri)i)erty of such corj'orations for the purpose of 
 fixing rates (84 N. J. L. 46J). The Court of Errors reversed the judgment of the Supreme 
 Court (84 N. J. L. 581). Subsciiuently. upon rehearing the Court of Errors reversed its 
 decision (87 N. J. L. ,^97) and adopted the opinion of the Supreme Court as its opinion. 
 * • • * The SupreiTie Court of the L'nitcd States, however, has held that such franchises 
 are property and their value must be taken into account in ascertaining the value of the 
 property of a public utility coriKiration. for the purpose of ti.xing rates. 
 
 "In this state of the law we insist that the \'alue of the franchises of Public Service 
 Railway Company must be taken into account in ascertaining the \'alue of its property in 
 the present hearing: that if the value of such franchises is not taken into account rights 
 of the Railway Company secured by the constitution of this state and of the United States 
 would l)e violated. The value of such franchises can best be ascertained by including them 
 in the value of all the property of the corporation to which they appertain ; that the best 
 evidence of the value of the property of such a corporation, including all the elements of 
 its property, is shown by leases and consolidation agreements, leases for 9(X) years being 
 substantially sales, and prices fixed by voluntary- sales of property are universally recognized 
 as the best evidence of value. In this matter the consolidation agreements in evidence and 
 leases show the value of the projicrty now owned by Public Service Railway Company at 
 the time when such leases and consolidation agreements were made, respectively, and the 
 company insists that the best evidence and plenary evidence of the value of its property at 
 the time when those leases and consolidation agreements were made is contained therein." 
 
 Clearly, the Public Service Railway Company does not intend to miss a trick. 
 
 The company has already been freed by action of the legislature, of the 
 Utilities Board and of the courts from the fare limitations which it and its 
 predecessors voluntarily assumed in consideration of the franchises granted 
 to them by the municipalities. These franchises in almost everv case run in 
 perpetuity. With jitney competition removed, the franchises will be not only 
 perpetual and free from rate limitations, but also, to all intents and purposes, 
 exclusive. The L'tilitics Board will have no effective power of rate regulation 
 for the reason that no matter how high the tares may go the contpanv, on the 
 basis of its excessive valuation, will be able to claim that it is not earning more 
 than it is entitled to. l-'urthermore, with the jitneys out of the way. it will 
 be very ilitlicult. it not impossible, for the Utilities Board to establish an upper 
 limit above which the fare would be considered as more than the service is 
 worth. The result will be that the people of New Jersey for all time to come 
 will iiavc the choice of riding on the Public Service Railway cars at whatever 
 
Transportation Issues in New Jersey 673 
 
 rates of fare the company may choose to charge, or of providing their own 
 private vehicles if they do not prefer to walk. 
 
 Regulation Should Be Effective Before Monopoly is Granted 
 
 From what has been said it might be inferred that monopoly in trans- 
 portation service is regarded as an evil and that, particularly, jitney competi- 
 tion should be stanchly preserved. This does not follow. Local transporta- 
 tion service should be developed in an orderly and economical way. Jitneys 
 ought not to be permitted to destroy the electric railway when they are unable 
 to take its place. Common carrier service by motor buses should be developed 
 as an auxiliary to the street car, not as a competitor with it. Nevertheless, a 
 private monopoly upon which a great conmiunity is dependent for an essential 
 public service, when such a monopoly has manoeuvred itself into a position 
 w'here it cannot be effectively regulated in the public interest, is intolerable. 
 The Public Service Railway Company aspires to monopoly; and indeed mo- 
 nopoly in local transportation service has great advantages from the viewpoint 
 of ability to render adequate service at minimum cost. But before New Jersey 
 establishes or reestablishes monopoly in the hands of the Public Service Rail- 
 way Company it otight to make sure that the service will in fact be adequate 
 and that the cost will in fact be kept down to a minimum. The state cannot 
 have any such assurance until the value of the company's property devoted 
 to public use and the rate of return to be allowed upon it have been established 
 upon a reasonable and conservative basis ; nor until son^e guaranty of operat- 
 ing efficiency and of timely expansion to meet the community's increasing 
 transit needs is secured. Otherwise, the company will be in a position to flout 
 the community in any effort that it may hereafter make through the Utilities 
 Board or any other agency for the protection of essential public rights. 
 
 II. 
 
 PUBLIC CONTROL OVER PUBLIC SERVICES AT STAKE IN THE 
 
 PRESENT CRISIS 
 
 Shall New Jersey establish a local transportation monopoly, hoping that 
 effective regulation will follow, or shall it establish effective regulation first 
 and then see about monopoly afterwards? 
 
 Most of the electric railways of the country are undoubtedly in financial 
 distress. Their present critical condition is due in part to financial misman- 
 agement and in part to public hostility that has developed out of their sordid 
 past; but even the best of management, coupled with the greatest good will on 
 the part of the public, would not entirely relieve them of the difliculties grow- 
 ing out of the extraordinary times upon which they have now fallen. Still, 
 the weakness they have developed under the new conditions resulting from the 
 war has proven beyond a doubt that their financial structure is unsound and 
 
674 Appendix A 
 
 that their public relations from the beginning have been wrong. The electric 
 railways themselves everywhere are demanding relief from the voluntary con- 
 tracts which they made in their days of prosperity or hope of prosperity, and 
 are saying that as public servants they cannot continue to "carry on" upon the 
 old terms and conditions. They assert that if they are to fulfill the function 
 of an essential public utility they must be given a new deal all around. 
 
 Danger that Cost of Street Railway Service Will Become Prohibitive 
 
 The investors have already been hard hit by a tremendous shrinkage in 
 the market value of their securities and the credit of the industry has practi- 
 cally disappeared. On many street railway properties maintenance is being 
 neglected and service curtailed. With credit gone, the expansion of street rail- 
 way facilities is necessarily at a standstill, and with revenues insufficient, phys- 
 ical properties are drifting toward a state of general disintegration. If this 
 process continues the old investors will suffer further loss, and the street rail- 
 ways themselves will ultimately go to pieces unless arrangements are made for 
 their general rehabilitation — and that means an enormous amount of new capi- 
 tal which cannot be secured at all without further guaranties from the public. 
 Wages are still going up and the prices of materials are not yet coming down. 
 Scarcitv of free capital and the insecurity of street railway investments are 
 pressing to drive the cost of money for street railway purposes to a new 
 high level. All these things combine to bring the cost of street railway service 
 nearer and nearer to the point where it will become prohibitive. The financial 
 condition of the local transportation industry is chaotic, and everywhere there 
 is a sense of impending danger, not only of irretrievable losses to the investors, 
 but also of the failure of an essential public function at a time when the nor- 
 mal demands upon it are greater than ever. As the census returns for 1920 
 come in, it becomes apparent that in spite of war and pestilence and the slack- 
 ening of immigration the tide of population toward the cities is still running 
 strong throughout the country. This means that urban transportation prob- 
 lems are necessarily becoming more critical from year to year and that the 
 financial paralysis of the electric railway cannot but have a far-reaching effect 
 upon the entire group of social, economic and political problems that have their 
 origin in urban congestion. 
 
 Companies' Financial Embarrassment Threatens Breakdown of Regulation 
 
 Under these conditions there is grave danger that the very distress in 
 which the street railway companies now find them.selvcs and the unreadiness 
 of the public to assume any efifcctive initiative in the solution of the trans- 
 portation problem will result in a complete breakdown of regulation. Urban 
 comnnmities everywhere are likely to find themselves in the position where 
 they recognize the essential character of local transportation service but are 
 unwilling to do anything about it in the direction of self-help. In that case 
 the financially-broken companies will be in a stronger position than they ever 
 were before, and the new street railway settlements brought about under these 
 
Transportation Issues in New Jersey 675 
 
 circumstances are likely to be upon the terms and conditions which the com- 
 panies prescribe. For once poverty will be power. 
 
 Control versus Cooperation 
 
 There is great confusion in the public mind as to the true relations 
 between the community and the public utilities. We find everywhere, either 
 latent or active, a sharp antagonism growing out of the fact that the public is 
 primarily interested in service, while the companies necessarily have their eye 
 on profits. At the same time the cry is raised by the so-called conservative 
 elements of the community — the "boosters" — that the real interests of the com- 
 munity and of the companies are identical and that cooperation should be the 
 watchword. This plea for cooperation has a strong appeal to those who are 
 impressed with the disadvantages of constant bickering and recrimination, but 
 still remain firm believers in the theory that public utilities should be privately 
 owned and operated. But to those who look more deeply into the relations 
 between the community and the street railway companies it is apparent that 
 cooperation is not the final word. It is impossible to escape from the fact 
 that the community and the utility corporation cannot work together as part- 
 ners unless one of them is to keep silence and "go along with" the other. The 
 conflict between the motive of service and the motive of profit is irreconcil- 
 able — one or the other must be subdued. It is for this reason that the public 
 cannot tolerate a public service corporation in any other position than a sub- 
 ordinate one. The proper relation of the community to its public servants is 
 one of control, and whatever cooperation is practicable or necessary must be 
 effected on that basis. 
 
 It is not the people of New Jersey alone who are confronted with this 
 complex and baffling problem of utility control ; yet the Public Service Cor- 
 poration of New Jersey and the Public Service Railway Company stand at 
 the very forefront in the street railway world and present to the people of the 
 state a problem quite unique in importance, though not entirely different in kind 
 from the electric railway problems of other states. Where else can we find such 
 a vast number of municipalities, comprising three-fourths of the population of a 
 great commonwealth, bound together in common dependence upon a compact 
 family of private corporations, not for transportation service alone, but for three 
 services of such transcendent importance as transportation, gas, and electric light 
 and power? New Jersey is the Argonne Forest in the battle line between the 
 Allies loosely joined together in the struggle for democracy and the Central Pow- 
 ers representing the alleged efficiencies of centralization and absolutism. 
 
 The Old Question: Shall Corporations or the Government Prevail? 
 
 While the great battles of the World War were fought to make the world 
 safe for democracy, the state of New Jersey has a big fight on its hands to achieve 
 democracy for itself and save it for the world. In this period of upheaval, when 
 every civilized nation is seething with unrest and when the common people who 
 earn their bread each day and have little or no reserve for periods of sickness, 
 unemployment and old age, have everywhere become restive toward militarism, 
 
676 Appendix A 
 
 capitalism and the restraints of government, the future of democracy depends 
 to an extraorcHnary degree upon the ability of the English-speaking peoples, and 
 particularly upon the ability of the Americans, to solve their social, economic 
 and political problems through orderly processes of evolution instead of being 
 led or driven into disorderly and futile processes of revolution. The Civil War 
 was fought, more than anything else, to prove the superior authority of the nation 
 as a whole, imbued with a determination to protect the common welfare, over a 
 great, concentrated, arrogant property interest that would recognize no political, 
 social or industrial rights unless they were subordinated to the perpetuation of 
 slavery and to the continued exploitation of a subject race by the capitalists of 
 the South. Following the close of the Civil War. partly as a a result of economic 
 disturbances and the violent readjustment of values through changes in the pur- 
 chasing power of money, and partly through the subordination, for the time being, 
 of all political issues not related directly to the abolition of slavery and the main- 
 tenance of the Union, a period ensued during which the railroads and other great 
 corporations developed enormous power in the nation and often used it, unhap- 
 pily, for sinister purposes. Thirty years or more ago the great political interro- 
 gation was this: Are the corporations, representing private interests, to remain 
 more powerful than the government itself, representing the public interest, or 
 will some way be found to subdue their political and industrial arrogance and 
 compel them to serve the public? Through a long series of political and indus- 
 trial conflicts the country was in the process of answering that question when the 
 World War broke upon us and our thoughts were turned to military and inter- 
 national issues. The big war. with its tremendous wastes; with its world-wide 
 upsetting of economic conditions ; with the standard of values everywhere changed 
 and the commercial and industrial world shaken to its foundations, has been the 
 occasion for the revival of the old interrogation with a new sense of national peril 
 imless the (|uestion can be answered effectively and answered right. 
 
 Complete Subordination to Public Interest Theoretically Admitted in 
 
 New Jersey 
 
 The public utility corporations are our much restricted, much distressed, 
 much feared and much hated servants. They perform the most intimate public 
 functions of urban civilization. We cannot dispense with their services unless 
 wc arc willing to help ourselves, and as communities we seem to be weak in 
 muscle and untrained in mind to do the work that must be done. In New Jersey 
 the corporations engaged in the exploitation of the public need for local trans- 
 portation and for light, heat and power have taken on the liverv of heaven; they 
 have christened themselves public servants, and in apparent humility have pro- 
 claimed their enterprises undertaken and perpetually carried on for the public 
 pood. We have the I'ublic Si'n'icc Corporation, the Public Scn-ice Gas Company, 
 the Public Scn-ict- F.lectric Company, the Public Scn-icc Railroad Company and 
 the Public Scn-icc Railway Company — the Public Scrz'ice family. Indeed, the 
 companies collectively have come to refer to themselves and to be referred to 
 simi)ly as Public Sen-ice. which naturally would connote their complete identi- 
 fication with the public interest. Theoretically, the case for public control and 
 
Transportation Issues in New Jersey 677 
 
 for the absolute subordination of private interest to the pubHc welfare in connec- 
 tion with these utiHties is placed beyond the need of argvnnent by the admissions 
 of the very companies engaged in the performance of these several functions. 
 Yet the history of the State of New Jersey during the past seventeen years sug- 
 gests the pertinent and persistent question as to whether these public servants, 
 with all their insignia of humility, may not have become public masters and may 
 not now be striving, as potently as ever, to perfect and maintain their public 
 mastery. 
 
 Origin of State Regulation 
 
 It was only a few years after the organization of the Public Service Cor- 
 poration of New Jersey that the unbearable arrogance and inefficiency of public 
 utility corporations everywhere gave rise to the movement, originating in Wis- 
 consin under the leadership of Senator La Follette and in New York under the 
 leadership of Governor Hughes, for the establishment of political machinery 
 through which the strong arm of the state, clothed with the powers of sov- 
 ereignty, could effectively curb the private-mindedness of these public servants 
 and effectively promote in them the habit of diligence about the public business 
 in which they were supposed to be engaged. The theory that gave rise to the 
 enactment of the state public utility laws and to the creation of state utility com- 
 missions was that the essential nature and the public character of utility services 
 should be established beyond peradventure, and that public service corpora- 
 tions should be clothed with the dignity and the responsibility of public servants 
 and should be given the public protection corresponding to their position. It was 
 the theory of state regulation that every public utility should be required to render 
 adequate public service at reasonable rates, and should at the same time be put 
 in a position of reasonable security against the destruction, impairment or seizure 
 of its property devoted to public use, and be given a reasonable assurance that so 
 long as its property continued to be devoted to the public use it would be per- 
 mitted to earn a fair return upon it. 
 
 While the general principles of state regulation are reasonably clear, their 
 enunciation leaves for determination in each individual case a number of issues 
 of fundamental importance and extraordinary difficulty. What is adequate ser- 
 vice? \Miat is the value of the property devoted to public use? What is a fair 
 rate of return upon it? What public cooperation shall be given the utility? 
 What is a reasonable charge for the service rendered? These are the big ques- 
 tions that plague regulatory commissions everywhere. These are the rocks upon 
 which the good ship Public Regulation, imless steered by wise and valiant helms- 
 men, founders. 
 
 Failures of Regulation in Present Emergency 
 
 Since 1911 the theory and practice of public utility regulation by a state 
 commission has been on trial in New Jersey, but it was not until early in 191S 
 that the full jurisdiction of the Utilities Board over the charges of street railway 
 companies was established by the courts of the state. Prior to that time it had 
 been supposed that the municipal contracts limiting the rates of fare were bind- 
 ing upon the railway companies and could not be abrogated by the Utilities Board 
 
678 Appendix A 
 
 itself. Therefore, it cannot be said that with respect to local transportation rates 
 the theory of state tegulation has had any trial in New Jersey under normal 
 conditions. During the past two years, since the problem of fare fixing was 
 dropped into the lap of the Utilities Board, the electric railways everywhere 
 have been contending with abnormal difficulties. All the schemes of public regu- 
 lation and control under private ownership are breaking down because of their 
 inability to cope with the extraordinary conditions growing out of the war. Even 
 in Massachusetts, where the state commission was supposed to have full juris- 
 diction and where the financial problem of the electric railways was recognized 
 as critical several years before the era of abnormal war costs, state regulation 
 has signally failed to solve the problem in a way to satisfy at one and the same 
 time the legitimate needs of the investors and the imperative requirements of 
 the community with respect to this supremely important public service. State 
 regulation has nowhere been entirely successful in meeting the crisis. In some 
 cases the authority of the commissions has been too much restricted ; in other 
 cases the commissions may not have acted with enough promptness and decision ; 
 in still others, it may be, a solution of the problem lay not so much beyond the 
 authority as beyond the inherent power of the commissions. It is not surprising 
 that the supreme test of state regulation in New Jersey came with the rate pro- 
 ceedings initiated by the Public Service Railway Company in 191S and 1919. 
 
 The "Public Service" Family and the State 
 
 The operating companies in the Public Service family render essential public 
 services in more than 140 municipalities, ranging from small villages up to the 
 great metropolitan cities of the state. They collect revenues amounting to more 
 than $60,000,000 a year. Their net capitalization is in the neighborhood of 
 $300,000,000. The Public Service Railway Company is the most important of 
 the operating companies, not only because its §25,000.000 of annual revenue is 
 greater than the revenue of either the gas company or the electric company, but 
 also because the relative importance of street railway transportation is even 
 greater when consideration is given to the number of financial contacts between 
 the different utilities and the public. (las and electric light and power consumers 
 pay for their service monthly ; the car riders pay their bills whenever they ride. 
 The number of electric meters in use on the Public Service Electric Company's 
 system at the end of 1919 was a little less than 200.000 and represented about 
 2,400.000 individual financial contacts with the consumers during the year. The 
 number of gas meters in use on the Public Service Gas Com])any's system was 
 53S.00O, representing more than 6.000.000 financial contacts in a year. But the 
 number of electric railway rides given by the Public Service Railway Company 
 was about 390,000,000, of which nearly every one represented a separate financial 
 contact with a car rider. Street railway service is the most democratic of utility 
 services, and street railway fares always bulk large in the public eye. 
 
 In the common parlance of denunciation, the Public Service Corporation of 
 New Jersey "owns the state." and the Public Service Railway Company, more 
 than cither of the two other principal subsidiary companies, typifies that ownership 
 and control. It is not altogether uncommon in the United States to find a town 
 
Transportation Issues in New Jersey 679 
 
 built up by a single industry, with "the company" dominant in the business, social 
 and political affairs of the community. For example, Bethlehem dwells in the 
 shadow of the Bethlehem Steel Company. In much the same way New Jersey as 
 a state lives in the shadow of the Public Service Corporation. Here, if any- 
 where, the question as to whether the government shall control the utilities, or 
 the utilities control the government, is acute and persistent. 
 
 Fighting to Avoid Reorganization 
 
 The management of the Public Service Corporation belongs to what is known 
 as the "old school" in public utilities. It stands for the "consolidation of the 
 gains" made in the early days of electric railway development by the bold buc- 
 caneers who sought to exploit for profit the rapidly growing need for urban 
 transportation on the basis of a purely private enterprise. Back of the Public 
 Service Railway Company lies a decade or more of financial manipulation that 
 takes rank among the historic street railway scandals of the country. The Public 
 Service Corporation was organized in 1903 as a means of preventing the collapse 
 and reorganization of the old street railway companies, which were then on the 
 brink of financial ruin. The principal trolley lines now included in the Public 
 Service Railway system have not gone through the bankruptcy and reorganiza- 
 tion which, in view of their financial history, would have been appropriate for 
 them. They have been saved thus far, and this gives the key to an understanding 
 of the present trolley situation in New Jersey and of the extraordinary difficul- 
 ties which surround the efforts of the state to establish an effective policy of 
 public regulation. 
 
 Let us now turn to a more detailed consideration of the fundamental issues 
 with which state regulation is confronted in its relation to the Public Service 
 Railway Company. 
 
 Public Service Railway's Record of Inadequate Service 
 
 First, what is the adequate service which the communities of Nev.- Jersey are 
 entitled to demand from the company? In 1913, prior to the outbreak of the 
 European War, traffic congestion at Broad and Market Streets in the City of 
 Newark had reached a point where it seriously interfered with the free move- 
 ment of the Public Service Railway Company's cars during the rush hours, which 
 are always the hours of greatest need in the local transportation field. Out of 
 this condition, out of the desire of the Public Service Corporation to house itself 
 and its subsidiaries conveniently and conspicuously, and out of its desire to 
 secure ample railway terminal facilities on private property adjacent to the Morris 
 Canal, against the day when the canal would be abandoned and its right of way 
 could be secured for rapid transit purposes, grew the Public Service Newark 
 Terminal project — splendid, expensive and, from the point of view of public 
 service, unsatisfactory. The Public Service Newark Terminal did not solve the 
 problem of adequate trolley service in the New Jersey metropolis. The re- 
 routing of cars at the time of the opening of the terminal in 1916 gave partial 
 and temporary relief to the Four Corners, but signally failed to provide adequate 
 street car facilities for handling the immense traffic that originates at the Tubes 
 
680 Appendix A 
 
 station. Again, after the United States entered the war, the development of 
 ship building and other war activities on the meadows and at Port Newark 
 found the Public Service Railway Company unprepared to handle the new 
 trafific created by these new industrial developments. It was not until September, 
 1918. when the war was nearly over, that the company, tiianks to advances made 
 by the Uijited States Shipping Board, finally got a line open to Port Newark. 
 In the early months of that year, when the workers at Port Newark had no street 
 railway facilities, it was a sight for gods and men to see the rout of humanity 
 overflowing jitney buses, automobile trucks and every imaginable type of vehicle, 
 swarming up Bay Avenue in its daily exodus from Port Newark. 
 
 A "Brilliant Future" Predicted Four Years Ago 
 
 I am not familiar in detail with the failures of the Public Service Railway 
 Company to render adequate service in other communities to which its lines 
 extend, but these failures in the city of Newark will suffice to explain in part 
 the hearty welcome that has been extended to the jitneys and the extraordinary 
 development of jitney traffic. In the summer of 1916, just after the Newark 
 Terminal was opened. Professor Mortimer E. Cooley, in submitting to the Public 
 Service Corporation his report on the value of the Public Service Railway prop- 
 erty, made the following remarkable statement : 
 
 "The property of the Public Scr\'ice Railway Company has been created by the merger 
 of a number of smaller projicrties; some of them have been purchased outright, while others 
 are tieing operated under long-term leases. A number of additions by new construction have 
 been made since the merger. • • • » Jhc company is also building what is probably 
 the largest electric railway terminal in the country. When completed, it is expected to solve 
 the transportation problem in Newark lor the next twenty or twenty-five years. This ter- 
 minal is one illustration of how the management is planning for the future of these gre.it 
 properties. * » • • 
 
 "The properties in general are well located, well constructed, and well maintained, and, 
 judging from general observation, their management is all that could be desired. 
 
 "The possibilities for extensions and growth of these properties are almost unlimited. 
 With a few exceptions the municipalities served by the company have in the past had a very 
 large increase in population each year, and all indications point to a continuance of these 
 conditions, ♦ » • » 
 
 "A very careful study of the conditions surrounding this property, made during the past 
 year, leads to the belief that few, if any, electric railway properties in the United States 
 can anticipate a more brilliant future than that of the Public Service Railway Company." 
 
 Surely it cannot be said that the Public Service Railway Company, in the 
 enjoyment of perpetual franchises, located in so exceptional a street railway 
 tralVtc area, and supported by the powerful hand of the Public Service Corpora- 
 tion, could not have been expected to provide the facilities reasonably required 
 for the satisfaction of the transportation needs of the City of Newark and its 
 si.ster municipalities. It is clear that state regulation, through the Utilities Board 
 or otherwise, signally failed to compel the Public Service Railwav Company to 
 perform its full function as a trans])ortation utility endowed with jjerpetual and. 
 to all intents and ])uri)oses, exclusive franchise rights in the public streets of 140 
 nninicipalities. Under these circumstances, and within a year after Dean Cooley 
 filed his report, jitney competition had become a "godsend" to the Public Service 
 Kailw.iy. as Mr. Danforth said, because of the inability of the railway to render 
 the retjuired service. 
 
Transportation Issues in New Jersey 681 
 
 It is obvious that the Public Service Railway is not entitled to a complete 
 monopoly on the score of the transportation facilities and service which it has 
 heretofore furnished. 
 
 III. 
 
 CONFLICTING THEORIES OF VALUATION AND THE RESULTS 
 
 THEY BRING 
 
 I have referred to adequacy of street railway service as the first test of the 
 effectiveness of public regulation where monopoly is to be recognized. 
 
 The second fundamental test of regulation comes in the establishment of the 
 value of the property devoted by the utility to public use. This is everywhere 
 the crucial question in the adjustment of the public relations of a street railway 
 or any other public utility company. Without a determination of the value that 
 the public is bound to recognize, there is no proper basis for the determination 
 of reasonable rates and no proper basis for the control of capitalization, there is 
 no criterion for fixing the burdens of ta.xation, and above all no measure of the 
 community's ultimate obligation to the investors in case it should become neces- 
 sary to transfer the utility from private to public ownership. 
 
 Escape from Five-Cent Fare Limitation Looked Forward to for Years 
 
 The Public Service Railway Company is the heir of a numerous and motley 
 group of street railway corporations. It has 119 names in its family tree. From 
 the predecessor companies to which the municipalities had given franchises it 
 inherited the privileges and the obligations of the 5-cent fare and the free trans- 
 fer. The aggregate price paid for the consolidation of street railway properties 
 from the bank of the Hudson opposite New York to the bank of the Delaware 
 opposite Philadelphia into a single operating unit was enormous. The rental 
 burdens, assumed for periods ranging from 900 years to perpetuity, amount to 
 more than $2,800,000 a year, and, coupled with the interest charges on bonds 
 secured by the property of the constituent companies, make up a total of more 
 than $5,000,000 a year of fixed charges. With these heavy burdens upon its 
 back, the Public Service Railway Company began to feel years ago the limitation 
 of the 5-cent fare, and it was a hope of the Public Service Corporation that state 
 regulation as established by the Utilities Act of 1911 would eventually result in 
 the release of the Railway Company from the fare limitations contained in the 
 municipal contracts. For several years the Public .Service family watched quietly 
 but expectantly the development of regulatory policies as outlined by the Utilities 
 Board and as prescribed by the courts. 
 
 The Cooley Valuation Procured in Anticipation of the Opportunity to Use It 
 
 In 1915, without any particular purpose, as Mr. McCarter subsequently 
 maintained, but still with an eye to the time when the jurisdiction of the Utilities 
 Board over the rates of fare prescribed by the franchise contracts should be 
 
682 Appendix A 
 
 established, the Public Service Corporation determined to have a valuation made 
 of the railway property owned or controlled by the Public Service Railway Com- 
 pany. Without waiting for a rate proceeding, the Corporation engaged the ser- 
 vices of Professor Mortimer E. Cooley, Dean of the Colleges of Engineering and 
 Architecture of the University of Michigan. 
 
 Cooley's History and Characteristics as an Appraisal Engineer 
 
 Dean Cooley is a celebrated engineer whose career as a street railway ap- 
 praiser was initiated more than twenty years ago in the valuation of a portion 
 of the Detroit Street Railway property for the municipal ownership commission, 
 of which Hazen S. Pingree was the head. It is noteworthy that while Tom 
 Johnson was still a street railway corporation magnate, Pingree was fighting the 
 public's battle for low fares and municipal ownership in Detroit, and it was in 
 the Pingree school that Dean Cooley got his start. However, since 1899 he has 
 come to have a very keen and sympathetic interest in the point of view of the 
 corporations. In his testimony before the Federal Electric Railways Commis- 
 sion, where he api)eared as a witness for the American Electric Railways Asso- 
 ciation on July 17, 1919, he made the following statement : 
 
 "There is not ver)- much trouhle now in valuing a property. Valuation has been very 
 much simplified, very much organized, and it is not a difficult matter to procure results and 
 they are reasonably accurate; but the great difficulty — and I myself think it is the keynote 
 of all our trouble today — is ignorance, sheer ignorance and lack of understanding by the 
 public, veo' largely, but not confined to the public — a lack of understanding by the railroads 
 themselves of the fundamental principles that are involved in all questions of \-aluing prop- 
 erty, and especially all <iuestions that are involved in fixing rates. If we could have a 
 campaign of education which would make perfectly clear these things that are now misunder- 
 stood, I think the trouble would di.->appear almost wholly. 
 
 "I am convinced of that, and 1 have twen trying to do my part in dispelling that 
 ignorance, but it is ver>- difficult. The attitude of the public mind is such that you cannot 
 approach them; you cannot make them listen to you; they won't believe you, and I do not 
 know that they arc to be altogether blamed for it, because they have been sorely tempted 
 in the past. I think the public utility companies all admit today that their own conduct in 
 the past has. to some extent, merited the difficulties that they now find themselves in. I make 
 no defense, and the utilities themselves make no defense, of the mistakes that they have made 
 in the past, but the utility companies, as a nilc, now see what mistakes they have made, and 
 are trying their lx.'st to remedy them. Hut the public is not yet willing to meet them any- 
 where near half way; and so I say it is a case of ignorance — a greater amount of ipiorance 
 on the part of the public than it is on the side of the utility." 
 
 Further on in this same testimony Dean Cooley dwells at considerable length 
 upon the expenses preliminary to the commencement of construction and the 
 losses and expenses subsequent to the completion of original construction, about 
 which he conceives the public to be ignorant. He refers to the profits of the 
 general contractor and of the sub-contractors; to liability and fire insurance ex- 
 penses, and to interest and taxes during construction. He ])oints out that "there 
 are profits going to somebody all the way through the building of this property," 
 but says that the public does not understand this and that it does not "want any- 
 body to get a profit." Continuing the discussion of so-called overhead expenses, 
 he says: 
 
 "The question of the promotion of an enterprise and of promoter's profits is another red 
 rag to the bull, and it is in connection with these promotion costs and promoter's profits 
 that the public thmks that a gox] deal of the water has gotten into the capital account." 
 
Transportation Issues in New Jersey 683 
 
 He says that when all of the items of overhead expenses in connection with the 
 construction of a railway are added in, they actually come up, in certain instances, 
 to as much as 50 or 60 per cent on the base cost. 
 
 Cooley Admits Actual Investment is Proper Basis for Valuation 
 
 Dean Cooley 's attitude with respect to the fundamental basis of valuation is 
 emphasized by his testimony given on April 30, 1919, before the New Jersey 
 Utilities Board, where he was referring to his own appraisal of the Public Ser- 
 vice Railway property. In discussing the relation between reproduction cost and 
 actual or historical cost, he said that in his opinion the actual cost, if it could be 
 ascertained, would far exceed the reproduction cost as he found it. 
 
 "Because of the fact that it is impossible in most cases to determine the actual money 
 invested in the property," said he, "we have to approximate to it and the best approximation 
 that any of us know about is the cost of reproduction, and the cost of reproduction is 
 assumed among engineers to be the nearest approximation to the actual money in the property. 
 
 "By investment in this case, as I have it in mind. I mean the expenditures of money 
 from the time the original properties were conceived, all of the moneys, down to the present 
 time, including not only the money put into construction, that is, into the construction of the 
 physical property, but including the moneys that were required to develop tlie property and 
 make it a going concern and including the moneys that were lost by obsolescence and super- 
 sedence of old elements by new elements due to the development of the art; including all 
 of the elements, all of the moneys that have been expended for one purpose or another 
 from the time the properties were conceived down to the present time. \\'hen you have 
 aggregated all those I am very certain, as certain as I can be, that the aggregate of those 
 costs would far exceed the reproduction cost today." 
 
 A perusal of Dean Cooley's testimony before the New Jersey Utilities Board 
 and the Federal Electric Railways Commission leaves the impression that, as a 
 result of his wide experience and his many contacts, he has developed a state 
 of mind where he always feels that valuations are too low, that something has 
 been missed, that a company's property represents a greater actual investment 
 than any figp.ire that can be arrived at by the reproduction-cost method in nor- 
 mal times. 
 
 The Cooley Appraisal Purely Ex Parte 
 
 .■\.t any rate, and irrespective of the qualifications or characteristic tendencies 
 of the engineer engaged to do the work, the Public Service Corporation, without 
 the official knowledge of the Utilities Board or of the Municipalities, and with- 
 out seeking their cooperation or approval in any way, proceeded, in 1915, to 
 procure for its own purposes an elaborate valuation of the Public Service Rail- 
 way property, a project upon which it is said to have expended in the neighbor- 
 hood of $150,000. The summary of this valuation, contained in Dean Cooley's 
 report to Thomas N. McCarter, president of the Public Service Corporation, 
 comprises 149 typewritten pages. The summary itself is not dated, but internal 
 evidence shows that it must have been filed some time subsequent to July 12, 
 1916. The appraisal to which it relates was made as of December 31, 1915, and 
 is alleged to have been based upon average unit prices extending over the five- 
 year period from 1911 to 1915, inclusive. The details of this appraisal are con- 
 
684 Appendix A 
 
 tained in upwards of 80 volumes, more than filling three sections of a bookcase 
 kept in the Public Service Railway offices in the Newark Terminal Building. 
 
 A year and a half after the comjjletion of this appraisal, the event that had 
 been foreseen and prepared for took place. The highest court in New Jersey 
 held that the Utilities Board was not bound to respect the rates which had been 
 established in municipal franchise contracts. The hour had come! 
 
 Emergency Relief Without Valuation in 1918 
 
 But when the Public Service Railway Company in March, 1918, startled the 
 State of New Jersey by a demand for a 7-cent cash fare with a charge of 2 cents 
 for each initial transfer and 1 cent for a transfer on a transfer, the company took 
 the position that immediate financial relief was imperative and that it could not 
 wait for the slow ])rocesses of valuation and a regular rate proceeding. At that 
 time, in his testimony before the Utilities Board, Mr. McCarter said: 
 
 "Tlie difficulty experienced by public utilities in readily readjusting their affairs lies in 
 the fact that the ordinary proceclure for securing permission for changes in rate schedules 
 is necessarily subject to delays and fro(|ueiitly involves expensive valuations, and unless some 
 way can be found to readily restore the normal proportion lietween cost of producing service 
 and the price for which it is sold, the ability of the utilities for meeting these war-time 
 demands for service will be seriously impaired. 
 
 "Some way should t>e found of readjusting the rates of the utilities on a basis designed 
 solely to meet the increased cost of doing business. If these readjustments are directed 
 solely to meeting increased cost of producing service, they can be speedily and properly 
 made effective without recourse to the more exhaustive in(|uiries." 
 
 Up to that time the Public Service Railway Company had paid dividends 
 ranging from % of 1 per cent in 1908 to a ma.xinuim of 3 per cent in 1916. The 
 company's <lemand in the emergency case was that it be restored to the financial 
 condition of its banner year. 1916. without the expense and delay of a valuation 
 and a regular rate proceeding. The Utilities Board, however, had unofficial 
 knowledge of the existence of the Cooley valuation, and it was ujwn the reciuest 
 of the Board, not upon the initiative of the company, that the summarv of the 
 appraisal was offered by Mr. McCarter, Init without the usual proofs. The nuini- 
 cipalitics not only criticized the Cooley appraisal on its merits, but objected to its 
 consideration by the Board in the absence of any testimony by the appraiser him- 
 self. In the se(|uel, the Board accepted the theory of emergency jurisdiction, 
 disregarded the appraisal, and gave the company such temporary relief as in the 
 Board's judgment was necessary to enable the conip.iny to function. 
 
 Cooley's Appraisal the Only One Made 
 
 At the same time the Hoard directed the c(im|):my to make a study of the 
 zone system and to submit later on a scheme of zone fares calculated to give a 
 better distribution of transportation charges, in proportion to the costs of service, 
 among the different classes of riders. The company's zone report was filed in 
 March, 1919, and at the same time a new schedule of rates, based upon the zone 
 
Transportation Issues in New Jersey 685 
 
 plan, was filed to become effective April 1, unless suspended for a period of three 
 months by the Utilities Board acting under the provisions of the utilities law. 
 The new rates were in fact suspended and hearings were commenced, with the 
 company and the Board in evident agreement that the proceeding was to be treated 
 no longer as an emergency, but was to take the regular course for the establish- 
 ment of permanent rates on the basis of a valuation of the property. Dean Cooley 
 and his chief assistant, Professor Henry C. Anderson, were brought on from 
 Ann Arbor and put on the witness stand to prove the valuation. It was assumed 
 that the new rates could be put into effect by the company on July 1, 1919, unless 
 the Utilities Board reached a decision in the case before that time. Under the 
 circumstances, the municipalities found themselves taken by surprise and unpre- 
 pared with a valuation of the railway property to set up against the ex parte 
 valuation which had been made by Dean Cooley. The time available before the 
 first of July made it absolutely impossible to think of duplicating the work which 
 Cooley and his staff had taken about a year to do under the most favorable condi- 
 tions. The Utilities Board itself took no steps to make an independent valua- 
 tion. As the matter turned out, the time for the presentation of evidence by the 
 Alunicipalities was extended through the courtesy of the Public Service Railway 
 Company, but the assurance that the zone rates would not be put into effect on 
 July 1 was not given until shortly before that date. From these circumstances 
 the result was, and still is, that no inventory and appraisal of the Public Service 
 Railway property, other than the Cooley appraisal, has been made by anybody, 
 and all the calculations of reproduction cost by the experts for the Utilities Board, 
 by the experts for the Associated Municipalities, and by the later e.xperts for the 
 Public Service Railway Company itself hark back to Cooley's work. This is a 
 fundamental fact that must be constantly kept in mind in a discussion of the 
 Public Service Railway Rate Case and the issues that it involves. 
 
 The only other fundamental valuation studies made in connection with the 
 case were the study of actual cost taken from the books of the company, and 
 the analysis of the capitalization of the company and its constituent, underlying 
 and predecessor companies, both of which were made by Accountant Mark 
 Wolff on behalf of the municipalities. Therefore, the fundamental elements of 
 proof offered in evidence as to the value of the Public Service Railway property 
 were three : 
 
 (1) Cooley's reproduction cost appraisal as of December 31, 1915; 
 
 (2) Wolff's actual cost study up to March 31, 1919; and 
 
 (3) Wolff's analysis of capitalization up to December 31, 1918. 
 
 Each of these was a datum from which different witnesses started in the develop- 
 ment of their final estimates and conclusions. 
 
 In general it may be said that a reproduction-cost appraisal is always highly 
 theoretical and speculative and that the reproduction-cost method for that reason 
 is especially conducive to wide differences of opinion and to extremely divergent 
 results. If a company's books of account had always been properly kept from 
 the beginning, an actual cost study and an analysis of capitalization would be 
 much less subject to hypothesis, speculation and estimate than a reproduction- 
 cost study necessarily is. In the case of the Public Service Railway system, 
 
686 Appendix A 
 
 however, the companies in the system had not kept their books in a uniform 
 manner and many of the construction cost records were missing. For this reason 
 the actual construction cost data taken from the books had to be supplemented, in 
 certain cases, by recourse to taxation reports and miscellaneous sources of in- 
 formation. Mr. Wolflf's analysis of capitalization, for similar reasons, was neces- 
 sarily incomplete in certain details. 
 
 Basic Figures Resulting from Three Valuation Studies 
 
 The general results of the three fundamental studies may be briefly stated 
 as follows : 
 
 Reproduction cost new of the exii?ting physical property as found by Cooley 
 as of December 31, 1915. plus the additions to capital from that date to January 
 31. 1920. $.^8,165,858. 
 
 Actual cost new (partly estimated) of both superseded and existing physi- 
 cal property as found by Wolff from the beginning of street railway construc- 
 tion in New Jersey up to March 31, 1919, less such "withdrawals" as had been 
 written out of capital account by the companies themselves, $93,662,873. 
 
 Total net capitalization of the Public Service Railway Company and its con- 
 stituent, underlying and predecessor companies as found bv Wolff on December 
 31, 1918. $160,514,150. 
 
 In dealing with these fundamental figures, the methods used and the claims 
 made on behalf of the Municipalities differed radically from the methods used 
 and the claims made on behalf of the Public Service Railway Company. 
 
 The Original Cooley Appraisal Completed to Date 
 
 Cooley's reproduction-cost appraisal was the storm center of the case. The 
 original figure for the property contained in the inventory of December 31, 1915. 
 was $79,318,040. This included the land upon which the Public Service Newark 
 Terminal is built, but not the Terminal Building itself. The additions to the 
 capital account of the Public Service Railway Company from the date of the ap- 
 praisal up to January 31, 1920, including the cost of the Terminal Building, 
 amounted to $8,847,818. Cooley and .\nderson themselves, and the other wit- 
 nesses for the company, took the 1915 reproduction-cost figure as a base, but used 
 the actual cost in dealing with the additions to property subsequent to that date, 
 and thus adopted a combination of reproduction cost and actual cost in arriving at 
 their final figures. ( )n the basis of the original pre-war reproduction-cost ap- 
 praisal, plus actual additions to capital subsequent to December 31, 1915, the 
 Cooley and Anderson figure for the physical property comes up to the $88,165,858 
 to which I have referred. To this they added 30 per cent to represent intan- 
 gibles under the name of development cost. In this way is reached the first and 
 most conservative final result presented by any of the witnesses for the company 
 based upon the reproduction-cost method. This figure is $114,615,615. If 
 Cooley's inventory and the fundamental assumptions and methods used by him in 
 his ()rigin.il appraisal arc accepted as fully correct, then this figure represents 
 reproduction cost new of the Public Service Railway plant and business on the 
 
Transportation Issues in New Jersey 687 
 
 basis of average prices from 1911 to 1915 inclusive, with actual cost new for 
 additions to physical property since 1915. 
 
 Cooley's Figures Revised to Take Account of War Prices 
 
 In view of the economic changes due to the great increase in prices that took 
 place subsequent to 1915, Cooley and Anderson saw fit to present certain other 
 and higher figures. In the first place, they adjusted the original appraisal by the 
 modification of the unit prices to an average for a new five-year period extend- 
 ing from 1914 to 1918 inclusive. With this adjustment a figure of $100,272,168 
 is reached for the physical property, to which a 30 per cent or $30,081,650 is 
 added for intangibles or development cost. The resulting final figure, $130,- 
 353,818, represents the reproduction cost new of the plant and business of the 
 company on the basis of assumed average prices covering both the pre-war and 
 the war periods. 
 
 Cooley and Anderson also made an adjustment of the original appraisal on 
 the basis of average unit prices for the five-year period extending from 1915 to 
 1919 inclusive, the result being a figure of $107,796,149 for the physical property 
 and $32,338,844 for intangibles, making a total of $140,134,993, representing the 
 reproduction cost new of the plant and business on the basis of prices averaged 
 over a period including pre-war, war and post-war years. 
 
 Still another adjustment of their original appraisal was made by Cooley 
 and Anderson on the basis of prices as they prevailed in the year 1918, applied 
 to the property contained in the inventory of December 31, 1915, plus the actual 
 additions to capital subsequent to that date. On this basis the result is a figure 
 of $126,738,347 representing the reproduction cost new of the physical property 
 at strictly war prices, and a figure of $38,021,504 for development costs, making 
 a total of $164,759,851. 
 
 In addition to this, the land experts who valued the real estate in the original 
 Cooley appraisal testified to a subsequent increase of $1,401,212 in its value up 
 to the end of 1919, and it was claimed by the company that this alleged increase 
 in the value of the land should be added to the figures presented above. 
 
 New Experts Called to Prove Cooley Conservative 
 
 In rebuttal to the testimony off'ered on behalf of the Municipalities the Pub- 
 lic Service Railway Company produced certain additional valuation experts, 
 namely, William H. Blood, Jr., of Boston, connected with the Stone & Webster 
 Corporation ; Harold Almert, of Oiicago, formerly connected with H. M. Byl- 
 lesby & Company; Horace L. Howell, representing the late George Weston, who 
 at the time of his death was connected with the Philadelphia Rapid Transit Com- 
 pany; Howard H. Crowell, of the Electric Bond and Share Company, of New 
 York; and Martin Schreiber, chief engineer of the Public Service Railway Com- 
 pany and member of the Valuation Committee of the American Electric Railways 
 Association. 
 
 Mr. Blood took the Cooley and Anderson figure for reproduction cost new 
 of the physical property at 1918 prices and added 10 per cent to it to get the 
 
ggg Appendix A 
 
 cost at 1919 prices. Thus he arrived at $139,326,709 for the reproduction cost 
 new of the physical property, with $41,798,012 for intangibles or development 
 cost, getting a final figure of 5181.124.721 representing his idea of what it would 
 have cost to reproduce the plant and business under 1919 price conditions. In 
 his testimony, he adopted the round figure of $180,000,000. 
 
 Mr. Almert. for the physical property, took Cooley's reproduction-cost figure 
 based on 1918 prices, namely, $125,883,621, and a '•parallel" figure of his own 
 amounting to $132,073,000; added 30 per cent to each of them for development 
 cost, and then compromised on a final figure of $165,000,000, as his estimate of 
 the reproduction cost of the Public Service Railway plant and business on the 
 basis of war prices. He states, however, that this includes only a portion of 
 the development costs. If he had put them all in, he would have gotten a final 
 figure of from $215,000,000 to $230,000,000. He thought that such a figure 
 would be higher than the company would consider fair and that it might em- 
 barrass the commission to use it. 
 
 The results reached by the late Mr. Weston were presented by Mr. Horace 
 L. Howell, one of his assistants, who testified that Mr. Weston, taking the original 
 Cooley appraisal of 1915 as a basis, redistributed it to correspond with the classi- 
 fication in a recent Chicago appraisal with which he was most familiar; added 
 certain percentages to the difltercnt classes of property to represent the increase 
 in cost up to 1919. and arrived at $139,734,713 as the reproduction cost new 
 of the physical property included in the original Cooley appraisal of 1915, to 
 which, if he had lived, he would have added his estimate of going value. Pre- 
 sumably, also, he would have added the money invested subsequent to 1915 in 
 additions and bettennents amounting to $8,847,818, and the increase of $1,401,212 
 in the value of the real estate to which the company's land appraisers testified. 
 This would have given him approximately $150,000,000 for the physical property, 
 and if he had used 30 per cent for development cost or going value, following 
 Dean Cooley's lead, his total value would have reached approximately $195,000,000 
 on the basis of reproduction cost new of the plan and business under 1919 
 conditions. 
 
 Mr. Howard H. Crowell, taking the reproduction cost of the physical prop- 
 erty on the basis of average unit prices for the five-year period from 1915 to 
 1919 as estiniated by Cooley and .Anderson, namely, $106,941,423. said that he 
 would add to this sum $9,500,000 for consolidation value and $23,841,764 for 
 development cost. This would give him a little more than $140,000,000, which 
 he said would be less than the true rei)roduction cost value, as there were certain 
 additional elements, with respect to which he had no data, that should be taken 
 into consideration. The item of development cost used bv Mr. Crowell was the 
 item of alleged losses to the Public Service Railway Company and its constituent 
 companies subsequent to May 31, 1^*03. when the Public Service Corporation first 
 came into control of the system. It will be seen that Mr. Crowell did not include 
 development cost as such for the period prior to 1903. but put in $9,-^00,000 for 
 the value of the consolidations that were brought about during that period. 
 
Transportation Issues in New Jersey 689 
 
 Public Service Railway Claims "Created Value" 
 
 Mr. Martin Schreiber did not attempt to set up a final valuation figure, 
 either independently or on the basis of Cooky's original appraisal. His testi- 
 mony was directed toward the proof of valuation methods as set forth in the 
 report of the Committee on Valuation of the American Electric Railway Asso- 
 ciation of which Philip J. Kealy, President of the Kansas City Railways Com- 
 pany, was chairman. Mr. Schreiber read copious extracts from this report into 
 the record and stated that they represented his own opinions. Among other 
 things, he put forward as his own the claims made by the Committee that the 
 "cost of consolidation" and "created value" were elements in going concern value. 
 For example, in the Committee's definition of created value, which he accepted 
 as his own, the following appears : 
 
 "Having pioneered the growth of the city or commonwealth and enhanced the value of 
 both private and pubhc property, the utility itself should be justly credited with part at least 
 of the value so created." 
 
 It is obvious that the Public Service Railway experts entered upon a gen- 
 erous rivalry to see which of them could produce the highest valuation on the 
 reproduction-cost basis. \\'ith their estimates ranging over so wide a field, it is 
 not easy to characterize and summarize in a brief way the company's case. I 
 have just referred to a final element introduced by Mr. Schreiber under the 
 name of "created value." No definite figure representing this item was pro- 
 duced in the case, but it illustrates perhaps as well as anything could the attitude 
 assumed by the company toward the valuation of its property. "The sky is the 
 limit" seems a conservative characterization of the company's claims. The theory 
 of "created value" is that the street railways have been pioneers in the building 
 up of the urban communities of the state, and that their construction has resulted 
 in a vast increase in the value of real estate in the communities which they serve. 
 The Public Service Railway Company says : "See, we made the State of New 
 Jersey. We created these land values. They ought to belong to US7— of least 
 in part." And so the company's chief engineer was put forward as an expert 
 witness to describe the work of the V'aluation Committee of the American Elec- 
 tric Railway Association, and to spread upon the record the wonderful qualifica- 
 tions of each member of that committee, and seriously to press upon the Utilities 
 Board the validity of the valuation methods and claims for which the Association 
 as a whole stands, including as a climax of fatuous arrogance this item of 
 "created value." While certain parties might still question the allegation that 
 the Public Service Corporation and the Public Service Railway Company own the 
 State of New Jersey, they can no longer question, in the light of this testimony, 
 that these companies claim to own it. 
 
 Although the definite figures set up by the different witnesses for the com- 
 pany, as a result of their computations of value, differed among themselves by 
 a great many millions of dollars, there were certain continuous threads of approx- 
 imate consistency running through the company's case as presented, and by pick- 
 ing up these threads we may perhaps get a general picture of what valuation looks 
 like from the Public Service Railway Company's point of view. Here again we 
 
690 Appendix A 
 
 have to go back to Dean Cooley, who may be described as the bell wether among 
 the company's valuation experts, although it must be said that in this case a num- 
 ber of the youngc-r wethers either in a spirit of frolicsomeness or in a desire to 
 demonstrate their right to the succession when the time comes for the bell to be 
 hung on another neck, went quite beyond their leader. 
 
 Company Claims That Fair Present Value is Identical with Reproduction 
 
 Cost New 
 
 The tirst fundamental claim put forward by the company's witnesses is that 
 fair value or present value is synonymous with reproduction cost new at present 
 prices. This is the tirst great fundamental issue in the determination of the 
 method to be followed in making a valuation of public utility property for rate 
 purposes. The question is : Shall the value be determined by the amount of 
 money actually invested by the company and its predecessors in proper capital 
 expenditures in connection with the enterprise? Or, shall it be determined by 
 the estimated cost of reproducing or replacing the existing property? On this 
 point Dean Cooley wavered a little, as will be seen from his testimony in the 
 Public Service Railway Rate Case, on April 16, 1919, as follows: 
 
 "Now, if we could get that actual hi.'itorical cost we would do it, we would be glad 
 to do it. Because we cannot do it we get the repro<hiction cost which we assume is the 
 nearest thing to the historical cost that is possible and it stands for the historical cost in 
 the absence of some other figures." 
 
 A little further on Mr. Herrmann, counsel for the Utilities Board, asked this 
 question : 
 
 '■^'ou think the criterion of value, then, is the present value or cost to reproduce regardless 
 of what was actually put into the property?" 
 
 To this Dean Cooley made the following reply : 
 
 "No, 1 tried to make an explanation a moment ago that the money that has actually gone 
 into the property, that has honestly gone into the projK-rty, is the proper Irasis. Now. we 
 do not know what that money is, we cannot find out, and we tried to do our best to find out, 
 and we substitute for it the cost of reproduction, which we can find out. We base that 
 cost of reproduction not uixin any particular date which may involve low prices or which 
 may involve high prices, but we try to take it over a jieriod which will properly represent 
 the time and conditions, fair conditions. We tried to be fair, in other words, in determining 
 what is the cost of reproduction of this property and in this particular instance we took 
 five years." 
 
 I have already quoted Dean Cooley's testimony in the New Jersey case to the 
 effect that in his opinion the actual cost, if all the elements could be found, would 
 he greater than the reproduction cost. On July 17, 1919, he was testifying on 
 this same subject before the Federal Electric Railways Commission. He was 
 explaining his view of the necessity for a contingency item in a reproduction cost 
 appraisal. He had remarked that he "could talk for hours on the things that 
 happen that make a contingency item necesary." His attention was then called 
 to the fact that the Interstate Commerce Commission in its railroad valuation 
 work, after the (|uestion of contingencies had been argued for a long time, de- 
 cided against making any allowance for the item. He admitted that he had not 
 
Transportation Issues in New Jersey 691 
 
 been aware of this ruling, but when his attention was called to it, he apparently 
 jumped to the conclusion that the I. C. C. valuations are based upon actual cost, 
 for he made the following comment : 
 
 "You would not have to fix any contingency item at all if you could get the historical 
 cost of the property, if you knew what the property first cost, starting from the very begin- 
 ning. You can take that cost out of the books, and that, of course, is the thing to take, 
 because it represents the money invested ; but, unfortunately, you cannot do that with the 
 old properties, at least. You may do it with the newer properties. So, we proceed in the 
 best way we know how, to approximate that cost, and it is my belief that this so-called cost 
 of reproduction method is the fairest appro.ximation to what would have been the book costs 
 if you could have had them, if you could get them. 
 
 " * * * * In making the statement that I just now made. I was assuming normal 
 times, normal conditions, conditions that existed well before the war, and did not have in 
 mind the extreme costs of labor and materials that we now have to bear." 
 
 Historical-Cost Method Rejected on "Mexican Dollar" Theory 
 
 Thus it will be seen that Dean Cooley wavers back again on this question of 
 the use of the reproduction-cost method. He used it in his original Public Service 
 Railway appraisal as a substitute for historical cost on the ground that it was 
 impossible to ascertain from the books just what the investors had put into the 
 property. At the same time, to prove the conservatism of his method, he an- 
 nounces with great positiveness his conviction that if all of the actual costs en- 
 tering into the development of the property could be ascertained they would be 
 immeasurably greater than the reproduction cost. Then in his statement before 
 the Federal Electric Railways Commission he qualifies this opinion by saying that 
 it refers only to normal times, not to the present period of extreme prices. What 
 then does he suggest as the proper valuation method to be followed at the present 
 time? 
 
 In his testimony before the Utilities Board, and again in his testimony before 
 the Federal Commission, he calls attention to the extraordinary price conditions 
 that now prevail as a result of the war, and takes the position that under these 
 exceptional conditions historical cost would not be a proper criterion of present 
 value. In this connection he introduces his spectacular "Mexican dollar" theory, 
 and states that in view of the decline in the purchasing power of money either 
 the pre-war valuation of a public utility property should be doubled, or else the 
 pre-war rate of return should be doubled, in order that the investors may con- 
 tinue to receive a return having the same effective purchasing power that they 
 received before the war. 
 
 Thus Dean Coole\' raises a most extraordinary issue in connection with the 
 valuation, under present conditions, of a street railway property for rate pur- 
 poses. In one breath he maintains that the reproduction cost method and the 
 historical cost method should produce about the same results, but in the next 
 breath he asserts that in normal times the actual historical cost, if you could get 
 all of it, would be immeasurably greater than the reproduction cost new of the 
 existing property. In the third breath he tnaintains that in this abnormal period 
 the historical cost method should be chucked overboard in order to give the 
 
692 Appendix A 
 
 investors the benefit of the war prices as reflected in reproduction cost at the 
 present time. 
 
 Shall Utilities Board Underwrite Purchasing Power of the Dollar? 
 
 All ])arties admit, as they must, that the necessary increase in the cost of 
 operating a street railway, resulting from higher wages and from higher costs 
 of materials, consumed in maintenance and operation, must be recognized and 
 provided for as a part of the cost of service. Current expenses, beyond a doubt, 
 actually and properly reflect fluctuations in wages and material prices, whether 
 such fluctuations be due to the law of supply and demand, to changes in the pur- 
 chasing power of money, or to other causes beyond the control of either the op- 
 erating company or the regulatory authorities. This leaves the question open as 
 to the treatment of invested capital. The Public Service Railway Company in- 
 troduced the evidence of a Chicago engineer. Cecil Frederick Elnies. to show that 
 the general purchasing power of the dollar, as shown by the index of wholesale 
 commodity prices issued by the Department of Labor, decreased from 100 cents 
 in 1913 to 42 cents in December, 1919. By the same token, the index for March, 
 1920. shows that the value of the dollar had dropped below -K) cents. It is clear 
 that on this basis the security holders of the Public Service Railway Company 
 who received $100 in interest and dividends prior to the war, while now receiv- 
 ing the same number of dollars, will be getting only about 40 per cent as much 
 purchasing power as they did six years ago. The question is this : Shall the 
 investors in a street railway property receive a guaranty at the hands of the pub- 
 lic through the process of regulation so as to protect them from losses which they 
 incur through a decrease in the purchasing power of money? The Public Service 
 Railway and its witnesses in a vibrant chorus answer. "Yes." 
 
 Fixed Investments Shrink or Swell With Changes in Value of Money 
 
 It is not doubted by anyone familiar with economic laws that persons having 
 capital invested in bonds or guaranteed stocks bearing a fixed rate of interest 
 over a long period of years or in perpetuity automatically lose a part of their 
 capital through a decrease in the value of money. Nominally, thev have as 
 much property as before, but actually the dollars by which tiie property is mea- 
 sured are not worth so much. It cannot be denied, either, that the inunense 
 shrinkage in the intrinsic value of all fixed investments, arising out of such a 
 tremendous economic upheaval as the world has been going through during the 
 past few years, results in great and undeserved losses to individuals. Yet, credit 
 has its basis in contract, and rather than destroy credit by starting a general 
 disturbance of contractual relations, it would appear that any solution of the 
 problem of stability in values must lie with the general government through some 
 process of stabilizing the dollar, as suggested by Professor Irving Fisher. It is 
 wholly inipracticablc for special authorities like the Utilities Board or other jmb- 
 lic or private institutions dealing with ])roperty rights established under special 
 contractual relations to try, in a hit or miss fashion, to guarantee the purchasing 
 |)Ower of money. When the value of the dollar depreciates the bondholder and 
 
Transpoktatiox Issues in New Jersey 693 
 
 the guaranteed stockholder suffer a shrinkage in their investments. They do not 
 have to wait for somebody to act. The shrinkage takes place and they are the 
 losers. If. on the other hand, the dollar appreciates in value, a bondholder or a 
 guaranteed stockholder takes a profit because the dollars to which he is entitled 
 under his contract are worth more than they were when the contract was made. 
 This applies to the principal of the investment, in case it is liquidated at a time 
 w-hen there has been a change in the value of money, and also to the interest 
 and dividends received as the annual return upon the investment. Everywhere 
 the holders of bonds, mortgages, preferred stocks and securities guaranteed by 
 lease, lose or gain as the value of the dollar goes down or up. On the other 
 hand, the owners of the equity in a property are affected in exactly the reverse 
 way. Suppose, for example, a street railway with an actual investment of $100,- 
 000.000, of which $75,000,000 was furnished by the bondholders and $25,000,000 
 by the stockholders. See how values are switched from one class of security- 
 holders to the other by fluctuations in the purchasing power of the dollar : 
 
 Bondholders' Stockholders' 
 
 Total Interest Interest 
 
 Original cost $100,000,000 $75,000,000 $25,000,000 
 
 Value when purchasing power of money is cut 
 
 in two 200.000,000 75,000,000 125,000,000 
 
 Value when purchasing power of money is 
 
 doubled '. . . . 50,000,000 75,000,000 Wiped out 
 
 It cannot be doubted that a violent change in the purchasing power of money 
 such as has taken place during the past five years has the result, in unregulated 
 industries, of switching enormous values from one set of security-holders to 
 another. The adjustment proposed by Dean Cooley and the other witnesses for 
 the Public Service Railway Company would produce this same effect in a regu- 
 lated industry. No one denies that this result is deplorable and that the welfare 
 and orderly development of society demand a greater stabilization of values, if 
 that is possible of attainment. But the Cooley plan would not stabilize values 
 at all so far as individual security holders are concerned. It would be different 
 if the Public Service Railway property were owned by a single corporation, with 
 the lessor companies entirely eliminated, and with no bonds or preferred stock 
 outstanding against the property. Then we should have a situation where, upon 
 the assumption that the dollar's purchasing power has shrunk one-half, either a 
 doubling of the pre-war valuation or a doubling of the pre-war rate of return 
 would tend to reestablish the effective value of the property in the hands of its 
 real owners, the common stockholders. But even under such ownership the rate 
 of return would need to be readjusted continually to keep pace with the fluctua- 
 tions in the dollar's purchasing power, if stability in values was to be maintained. 
 
 Results of "Mexican Dollar" Theory Applied to Public Service Railway 
 
 Valuation 
 
 As a matter of fact, on December 31, 1915, the date as to which Dean Cooley 
 found the reproduction cost new of the physical property of the Public Service 
 Railway to be $79,318,040, there were bonds and guaranteed rental stocks out- 
 standing against this property amounting to nearly $103,000,000. In this case, 
 
694 Appendix A 
 
 tlie common stock, held by the PubHc Service Corporation of New Jersey, repre- 
 sented a negative or minus equity of more than $23,000,000. if the rental stocks 
 and the bonds be taken at their par value. The only basis upon which the Public 
 Service Corporation could claim any value whatever for the stock of the F'ublic 
 Service Railway Company which it owned at the time of the original Cooley 
 appraisal would be the existence of intangible values over and above S23.00O.00O. 
 or capitalized earning power in excess of bond interest and fixed rentals. I do 
 not say that the Public Service Corporation put no money into the Public Service 
 Railway Company. What I say is that whatever cash it may have invested in 
 the purchase of Public Service Railway common stock or in contributions to the 
 Public Service Railway Company's capital account went to make good the prop- 
 ertv of the underlying security holders, either to the extent that the underlying 
 securities were originally excessive, or to the extent that the property represented 
 by them had been subsequently depleted. 
 
 I have referred to the figure $79,318,040, as the reproduction cost new of 
 the l^liysical property as found by Dean Cooley as of December 31. 1915. An 
 analysis of the Cooley appraisal reveals the fact, however, that cash working 
 capital of $926,403. and "promoter's remuneration." "cost of money" and "organ- 
 ization and development of the project." which are commonly treated as intan- 
 gibles, to the amount of $8,633,132, were included in this figure. It also reveals 
 that in arriving at the value of land used for rights of way Dean Cooley's ap- 
 praisers had in most cases found the market value of adjoining lands, and then 
 multiplied it by two and a half to get the assumed value of the right of way lands 
 for railway purposes, thus adding nearly $2,000,000 in excess of the market value 
 as found by themselves. The analysis also shows that Dean Cooley and his staff, 
 following the methods which they themselves laid down, found, upon examination 
 of the property, an accrued depreciation amounting to $8,543,426. This was 
 pure, observed, physical depreciation, and included nothing on account of obso- 
 lescence. It did not even include depreciation of the labor elements entering 
 into track and roadway construction, although Dean Cooley himself admitted on 
 cross-examination that labor ought to be depreciated along with the materials 
 going to make u]) the physical property. Beyond the shadow of a doubt, the 
 amount of accrued dejircciation revealed by Cooley's appraisal was much too 
 low, and yet not a dollar was deducted from reproduction cost new on that 
 account. 
 
 It is perfectly clear that the value of the physical property, by a proper 
 application of the reproduction-cost theory, with depreciation deducted, even on 
 tl>e basis of Cooley's inventory and unit prices, was under $60,000,000. although 
 the bonds and guaranteed rental stocks outstanding against it were, as we have 
 seen, nearly $103.00X000. Surely, under these conditions, the position of the 
 Public Service Corporation as the holder of the comiuon stock of the Public 
 Servii'e Railway Company was hopeless under ]ire-war conditions. 
 
 Losses Incurred by Underlying Security Holders 
 
 Now let us see what the application of Dean Cooley's theory would result in. 
 In his testimony before the Utilities lioard on Mav 9. 1910, Mr. McCartcr him- 
 
Transportation Issues in New Jersey 695 
 
 self introduced two exhibits showing the outstanding bonds and guaranteed ren- 
 tal securities with an estimate of their market value on December 31, 1915, and 
 again on May 1, 1919. The par value of these securities as shown was $103,- 
 445,650. Their market value, on December 31, 1915, was given as $93,004,555, 
 and their market value on May 1, 1919, as $75,116,665, showing a shrinkage 
 during the war period of $17,887,890. It appears, therefore, that the holders of 
 these contract securities lost, in terms of market value, nearly $18,000,000 during 
 the three years and four months following the date of the original Cooley ap- 
 praisal. But this does not in any degree measure the actual loss of these security- 
 holders resulting from the depreciation of money during the war period. If they 
 had sold their securities on May 1, 1919, they would have received nearly $18,- 
 000.000 less in money than they would have received for them on December 31, 
 1915; but still more important is the fact that each dollar received in 1919 would 
 have been a depreciated dollar, with only half the purchasing power of the dollar 
 of 1915. This means that the market value of these underlying Public Service 
 Railway securities on May 1, 1919, represented a purchasing power of less than 
 $40,000,000 measured in the money of 1915, as compared with the $93,000,000 
 representing their market value at the earlier period. 
 
 Truly these are great losses, and by them the holders of inflated stocks and 
 bonds have expiated a multitude of sins. Yet the Public Service Railway Com- 
 pany has at all times refused to admit that the rentals paid for the underlying 
 properties were, in the pre-war days, unjust or unreasonable. From its point 
 of view, therefore, if Dean Cooley's theory is correct, the bondholders and the 
 guaranteed stockholders ought to receive, under post-war conditions, the same 
 purchasing power in the return upon their investment that they received before 
 the war. It is said that the valuation of the entire property comprised in the 
 Public Service Railway system should be doubled for rate purposes, or else that 
 the rate of return should be doubled. At one point in his cross-examination. 
 Dean Cooley assented to the proposition that the leases by which these under- 
 lying stocks and bonds are secured should be modified and the rentals increased 
 for the purpose of protecting the holders of these securities from the losses in- 
 curred by them through the depreciation of the currency. But Mr. McCarter 
 and the Public Service Railway Coiripany proved cold to this suggestion, and it 
 was not pressed. 
 
 Minus $23,000,000 in 1915 Becomes Plus $57,000,000 in 1920 
 
 Let us assume that the value of all the property owned and used by the 
 Public Service Railway Company in 1915 was in round figures $80,000,000, ac- 
 cording to Dean Cooley's estimate of reproduction cost, and let us further assume 
 that on account of the depreciation in the currency this same property is now 
 worth, in the "Mexican dollars" of today, double this sum, and that $160,000,000 
 is now to be established as the basis for rate making, as against the $80,000,000 
 which, under this assumption, would have been correct six years ago. Who gets 
 the benefit of the stabilization of values for which Dean Cooley and the other 
 Public Service Railway witnesses contend? Obviously, the entire benefit falls 
 into the lap of the Public Service Corporation as the holder of the common stock 
 
696 Appendix A 
 
 of the Railway Company. As we have seen, this stock, according to Cooley's 
 valuation, represented a negative or minus equity of about $23,000,000 in the 
 money of 1915, but by the automatic legerdemain of a depreciation in the currency 
 it is now proposed that this negative equity shall be transformed into a positive 
 equity of $57,000,000 in the money of 1920. Thus the Public Service Railway 
 Company as a whole would be protected against the losses resulting from a 
 decrease in the purchasing power of money, but the bondholders and guaranteed 
 rental stockholders would have no share in this protection. Under this plan the 
 benefits conferred upon the investors by an attempt of the Utilities Board to 
 stabilize the intrinsic value of the Railway property, and thus overcome the 
 shrinkage in the purchasing power of money, would be "hogged" by the Public 
 Service Corporation, and the real owners of the property, namely the bond- 
 holders and the stockholders of the lessor companies, would be left to "stew in 
 their own juice." The contracts which they made under entirely different eco- 
 nomic conditions would be held inviolable, while the 5-cent fare contracts with 
 the municipalities, made under conditions just as dissimilar from present con- 
 ditions, have already been abrogated for the benefit of the Corporation. When 
 the investments were originally made uiuler public authorization and for public 
 use, there was an implied contract to the cttect that the return to capital should 
 be based upon the amount of the investment as measured in dollars. This con- 
 tract also, under Dean Cooler's theory, would be abrogated in favor of the Cor- 
 poration by the substitution of reproduction cost new at war prices for actual 
 or historical cost. 
 
 Mr. McCarter's Share in Proposed War Profit $1,333,000 
 
 In the zone fare case in April. 1919, Mr. Thos. N. McCarter testified that 
 he personally owned approximately 5.000 shares of the stock of the Public 
 Service Corporation. These shares have a par value of $100 each, so that Mr. 
 McCarter's holdings in the Corporation amount to a total of appro.xiniately 
 $500,000. Moreover, he stated that for every share which he held he had paid 
 $100 or more, but he did not say whether the payments were in cash, in property 
 or in services. As the securities of the Corporation are not issued under the 
 supervision of the Utilities Board, and as the Corporation's books are not open 
 to public inspection, the record in the rate proceedings does not show to what 
 e.xtent the Corporation's stock represents a cash investment. But it is clear that 
 any switching of value from the underlying securities of the Public Service Rail- 
 way Company and its subsidiaries to the common stock held by the Public 
 Service Corporation would directly benefit Mr. McCarter to the extent of his 
 interest in the common stock of the Corporation. On December 31, 1919, the 
 amount of this stock outstanding was $29,999,600. If Mr. McCarter's half 
 million dollars was common stock, it represented, therefore, a one-sixtieth in- 
 terest in the Corporation. I'nder Dean Cooley's theory of valuation on the 
 basis of war prices, to be used for the purpose of stabilizing the investors' hold- 
 ings, .something like $SO,000.000 of value, as measured in the currency of today, 
 would be switched from the underlying security holders to the Public Service 
 Corj)oration, and Mr. McCarter's personal share in this "war profit" would be 
 
Transportation Issues in New Jersey 697 
 
 approximately one and one-third million dollars. Obviously, the public and the 
 regulatory authorities must take with a grain of salt the valuation theories ad- 
 vanced by Mr. AlcCarter and the witnesses employed by him. 
 
 Cooley's Theory of Valuation Disproved by Market 
 
 Under the public utility law of New Jersey, and under the Constitution of 
 the United States, the owners of the Public Service Railway property have cer- 
 tain rights that are guaranteed against invasion by the public. It has already 
 been determined that the Utilities Board is not bound by the municipal contracts 
 limiting rates of fare, and the Public Service Railway Company, therefore, 
 claims its legal right to insist that the contracts be disregarded and that rates be 
 established which will enable the company to earn a fair return upon the present 
 value of its property. Against the violation of this right by adverse action of 
 the Board, the company can appeal to the courts of New Jersey and ultimately 
 to the Supreme Court of the United States for protection. One would suppose 
 that under these circumstances, if Dean Cooley's theories of valuation are cor- 
 rect, the securities of the Public Service Corporation would even now reflect 
 the increased value of its holdings in the common stock of the Public Service 
 Railway Company. Yet, as a matter of fact, not only have the bonds and guar- 
 anteed stocks of the underlying companies depreciated in value since 1915, but 
 also the common stock of the Public Service Corporation has suffered a big 
 slump. It was quoted at 116 on December 31, 1915, the date of the original 
 Cooley appraisal; by May 1, 1919, it was down to 83, by December 15, 1919, 
 down to 65, and now (July, 1920) it is down to 55. Obviously, a fall from 116 
 in 100-cent dollars to 55 in 50-cent dollars in four and a half years does not 
 indicate the increase in the intrinsic value of the stock that ought to be reflected 
 in its market value if Dean Cooley's valuation theories were sound and if the 
 courts of the country were dependable as protectors of vested interests. 
 
 The fact is that, under the abnormal conditions of the present time, the use 
 of the reproduction-cost method on the basis of present prices as a means of 
 fixing value for rate purposes is absurd in theory and grotesque in results. 
 Dean Cooley's statement before the Utilities Board and also before the Federal 
 Electric Railways Commission that rejiroduction cost in normal times is taken 
 as the best possible substitute for historical cost, where the latter cannot be ac- 
 curately ascertained by recourse to the books of account, has merit. But his re- 
 jection of historical cost at the present time, and his contention that reproduc- 
 tion cost at war prices should be used as the basis for fixing value for rate pur- 
 poses, lead to results that are astonishingly unjust and, therefore, unsound. 
 Yet the Public Service Railway Company was able to produce in February, 
 1920, the other expert witnesses referred to. who not only valiantly supported 
 Dean Cooley but even went considerably beyond him in their valuation fallacies. 
 
 Old Property Worth as Much as New, According to Company's Experts 
 
 I have referred to the fact that Dean Cooley and his staff found upwards 
 of $8,000,000 of accrued depreciation in their survey of the Public Service Rail- 
 
698 Appendix A 
 
 way property in 1915. When Cooley came to testify in the rate proceeding he 
 was hard put to it to explain why he had found any depreciation at all. He 
 stoutly maintained that so far as the public was concerned there was no depre- 
 ciation; that the property was in a 100 per cent condition. Apparently his find- 
 ing of depreciation, or "deterioration," as he preferred to call it, was one proof 
 of the claim that neither he nor the company had any particular purpose in mind 
 when the valuation was made. Certainly, if he had supposed that it was to be 
 used for rate purposes, he would have protected himself from the "misrepresen- 
 tation" that appears to be natural where an appraiser sets down certain figures 
 which purport to represent a substantial difYerence between reproduction cost 
 new and reproduction cost new less depreciation, and then proceeds to deny the 
 existence of any such difference so far as the value of the property for public 
 use is concerned ! 
 
 All the experts produced by the Public Service Railway Company were em- 
 phatic in their declaration that a well-maintained street railway property should 
 be regarded as in a 100 per cent condition in a determination of value for rate 
 purposes. The Valuation Committee of the American Electric Railway Asso- 
 ciation, whose report was introduced in evidence by Mr. Schreiber, states that 
 it "wishes to emphasize its conclusions with respect to the subject of accrued 
 depreciation in the strongest manner possible, as follows: Where a property 
 has been maintained in good operating condition and an appraisal is being 
 made to determine investment value for rate-making or for sale to municipality, 
 state or government, no deduction should be made for accrued depreciation." 
 It thus appears that in spite of the emphatic rulings of the United States Supreme 
 Court in the Knoxville Water Case, the Miimesota Rate Cases, and other leading 
 cases, with respect to accrued depreciation, tiie Public Service Railway Com- 
 pany and its experts are still of the ojjinion that an old, jiartly worn-out and 
 partly obsolete street railway property is worth as much as a brand new one. 
 And this doctrine extends not merely to valuation for rate purposes, but to 
 valuation for sale to a municipality or state. It is hardly necessary to argue 
 the point except to call attention to the fact that the public utility companies 
 throughout the country for several years have been making a tremendous drive 
 upon commissions and courts in valuation proceedings to get recognition for 
 this fine fallacy that accrued depreciation is a myth. It is one of the big. vital 
 issues that Dean Cooley and the other Public Service Railway experts pushed 
 into the very forefront of their testimony in the rate proceedings. 
 
 Superseded Property Excluded From Inventory Reappears in the Intangibles 
 
 The physical property ct)vcred by a reproduction-cost ajipraisal obviously 
 must be limited to the property in existence at the time the appraisal is made. 
 Horses and mules that have been dead for the past thirty years, cars that have 
 been dismantled and burned, buildings that have been torn down, machinery 
 that has been sold for scrap, and all the other elements of physical property 
 once used and useful in the street railway business, but long since worn out, 
 abandoned or supcrsedeil because of their unfitness for contiimed service, form 
 no part of the inventory in a reproduction-cost appraisal. Yet the valuation 
 
Transportation Issues in New Jersey 699 
 
 experts for the companies hate to leave them out entirely. For appraisal pur- 
 poses, they conceive the fine idea that these ancient items of property, though 
 no longer discernible to any of the five senses of men, are still with us, having 
 attained a sort of spiritual immortality in the realm of the intangible, far beyond 
 the wear and tear and decay that are characteristic of earthly use. And so, 
 the reproduction-cost theorists include in their appraisals not merely the visible, 
 tangible, physical plant of the utility, but also its "business." They assume 
 that to reproduce the business, it would be necessary to invest in the mules, 
 the horse cars, the primitive motors, and all the other items of superseded prop- 
 erty which long years ago ceased to be useful in the operation of street railways. 
 
 Development Costs, Known and Unknown 
 
 Dean Cooley, possibly with an eye to the precedent established by the Utili- 
 ties Board in the Passaic Gas Case, reached the conclusion that 30 per cent was a 
 very fine, attractive, and, for that matter, conservative, percentage to add to the 
 reproduction cost new of the physical property of the Public Service Railway 
 — in which he included working capital, promoter's remuneration, cost of money, 
 and what not — in order to arrive at the full present cost of reproducing the 
 plant and business of the company. He felt pretty sure that it ought to be more 
 than 30 per cent, but was willing to let it go at that in order to prove how 
 moderate he was. The Public Service Railway Company handed him certain 
 figures purporting to show that, from 1903 on, deficiencies had been incurred 
 aggregating $16,247,369. These were arrived at by assuming that all the com- 
 pany's operating expenses and fixed charges, including the rentals on the in- 
 flated securities of the consolidation era, were necessary and proper, and that 
 the Public Service Corporation was entitled to receive 8 per cent per annum 
 on the money it invested in the Public Service Railway. Whenever the revenues 
 for any year were insufficient to satisfy these requirements, the deficiency was 
 to be capitalized and to form the basis for a return during succeeding years. 
 In this way, any deficiencies or alleged deficiencies below an 8 per cent return 
 were counted as cash investments, and were cumulated at 8 per cent compound 
 interest to furnish a measure of development cost. 
 
 By this process the company claimed that it had proven the figure $16,247,- 
 369, and so Cooley put this amount down in his valuation table as the "known 
 development costs 1903-1918." Dean Cooley testified that he did not know what 
 the development costs before 1903 were, but that in his judgment they must 
 have been even greater than subsequent to 1903. However, he took the 30 per 
 cent to cover development costs both before and after the Public Service Cor- 
 poration assumed control. Having accepted without question the company's 
 definite figure for development costs subsequent to 1903, he was compelled to 
 lump of? the balance of his 30 per cent as "additional development costs," or, 
 as he should have put it, "unknown development costs." 
 
 Dean Cooley's method of treatment produced most astonishing results. The 
 exhibit introduced by him setting up in three columns the reproduction cost 
 new of the property, first, on the basis of unit prices for 1911 to 191.S; second, 
 on the basis of unit prices for 1914 to 1918; and third, on the basis of unit 
 
700 Appendix A 
 
 prices for 1918 alone, shows the "known development costs 1903-1918" to be 
 precisely the same under each assumption, namely, $16,247,369. Inasmuch as 
 this figure purported to be an actual figure built up from the financial records, 
 it had to remain the same no matter on what basis the appraisal was figured. 
 However, the application of the flat 30 per cent, to the estimated reproduction 
 cost of the physical property to cover the entire development costs, "known" 
 and unknown, had the eflFect of producing a remarkable variation in the amount 
 of the development costs attributed to the period before 1903, while that subse- 
 quent to 1903 remained unchanged. Thus it appeared that when the repro- 
 duction cost was based upon 1911 to 1915 prices, the development costs prior 
 to 1903 amounted to only $9,945,970; but when reproduction cost was based 
 upon 1918 prices, the development costs prior to 1903 amounted to $21,517,717, 
 although in both cases the development costs subsequent to 1903, being "known," 
 were precisely $16,247,369, no more and no less. 
 
 "Heads We Win, Tails You Lose," the Company's Program 
 
 Nothing could show more clearly the absurdity of the method followed by 
 Dean Cooley and the other witnesses for the company in attempting to "lug"' 
 into a reproduction-cost appraisal the hypothetical historical cost of developing 
 the company's business. The whole theory of valuation for which they con- 
 tended is, in effect, that a public utility can never lose. They assume that if the 
 utility is to be regulated it will be guaranteed by its constitutional rights against 
 present or future losses. They also assume that if a utility is now being regu- 
 lated or is to be regulated in the future, the generous hand of the community 
 must necessarily make good to the present investors all of the actual or hypo- 
 thetical losses which they or their predecessors may have incurred back to the 
 Year One. They assume that any failure of the early investors to earn as high 
 a return upon their money as they hoped or expected to earn when they put 
 their money into the enterprise was an actual cash loss, which, cumulated at 
 compound interest from that time to this, is to be made good before the com- 
 munity's power of rate regulation can be made effective for the future. Even 
 though the utility may have operated for fifty years under limited rates of fare 
 fi.xed by voluntary contracts with the municipalities; even though during that 
 period the holders of these franchise contracts may have considered them almost 
 priceless; nevertheless, to whatever extent the investors at any time during 
 these past years may have been disappointed, these disappointments should now 
 \k retrieved by the present investors through a public guaranty. The fact that 
 in the old days investors and manipulators went into the street railway business 
 as a speculation; the fact that on realized or expected profits of the five-cent 
 fare they inflated the capitalization until, as Mr. Ralph S. Bauer would say, 
 the street railways should have been turned into steamboat companies to navi- 
 gate in their own water— these facts make no difference to Dean Cooley and 
 his fellow experts for the Public Service Railway Company. They would now 
 ask the public to confer upon the present stockholder— the Public Service Cor- 
 poration—the benefits necessary to make good an 8 per cent retuni upon the 
 entire investment of .nil the underlying and predecessor companies from the 
 
Transportation Issues in New Jersey 701 
 
 beginning of the street railway business until now. The Cooley theory in its 
 practical application means that a public service corporation, thanks to the 
 beneficent exercise of the police power under modern regulation, plays with the 
 public the game of "heads I win, tails you lose." It is a prominent part of the 
 theory of these experts that from the very beginning the street railways have 
 all of the time been losing heavily, but that as a condition of future public 
 control these losses, cumulated by compound interest at a speculative rate, must 
 be capitalized and added to the reproduction cost new of the physical property 
 as the so-called cost of reproducing the business, and thus become a part of the 
 rate base from now until the end of time. If this theory could be made good, 
 then, beyond a doubt, it would be greatly to the advantage of every street rail- 
 way company to keep on losing money year by year, and the more the merrier, 
 for where else could be found so profitable an investment as an investment in 
 street railway losses bound to accumulate at 8 per cent compound interest 
 forever ! 
 
 The Unearned Increment Plus 150 Per Cent on Rights of Way 
 
 Dean Cooley and the other witnesses for the Public Service Railway Com- 
 pany also stoutly maintain that a utility company is entitled to capitalize against 
 the public the natural increase in the value of the lands used for rights of way 
 and other street railway purposes. No matter whether these lands may have 
 been received as a gift or may have been acquired for a song, the growth of the 
 community, which the company and its predecessors were bound to serve, has 
 often resulted in an immense increment of land value. The private land owner 
 who improves land or holds it for a rise is compelled to pay the interest on 
 the original investment, whatever it may be ; the taxes and assessments, and 
 all other expenses of waiting for the increment to materialize. In the case of 
 the street railways, however, all of these expenses are met as a part of the cost 
 of operation, which is paid out of the revenues received from the riding public. 
 Thus, gains and losses, merited or unmerited, are all equally effective in pro- 
 ducing value against the public. 
 
 But the Public Service Railway Company now claims not merely the present 
 market value of the land, including all the increment, but in the case of rights 
 of way Dean Cooley 's appraisers would give to the company, to be capitalized 
 against the public, 150 per cent more than the market value to cover the assumed 
 costs of acquisition if it were necessary for the railway company now to acquire 
 new rights of way under present conditions. The "multiple" method of arriving 
 at the value of rights of way for railway purposes was flatly repudiated by the 
 United States Supreme Court in the Minnesota Rate Cases, where the opinion 
 was written by Justice Charles E. Hughes, but this counts for nothing in the 
 opinion of Dean Cooley and his associates. Neither does it count for anything 
 that the Supreme Court in these and other cases explicitly held that accrued 
 depreciation should be deducted in arriving at present value for rate purposes. 
 These rulings are regarded by the Public Service Railway Company's experts 
 as errors of the court. Dean Cooley was even willing to admit that the engi- 
 neering profession was in part to blame for the mistakes the court had made, 
 
702 .'VrpENDix A 
 
 because, forsooth, the engineers in their testimony in rate cases liad not with 
 sufticient unanimity and zeal piled up the companies' claims high enough, or 
 defended them with sufficient vigor. As Dean Cooley would say, the engineers 
 had failed to place ail of "the facts" before the court. He even told the Util- 
 ities Board that he had had in mind to call on ex-Justice Hlighes and point out 
 to him the mistakes he had made in the Minnesota Rate Cases, but, unfor- 
 tunately, it was now too late for it to do any good. .-Knd Mr. Almert. in his 
 testimony for the company, referred to the deduction of accrued depreciation 
 from reproduction cost new as "the one big fundamental error on the part of 
 the courts." 
 
 Watered Securities to the Tune of $73,000,000, Claimed as Franchise Value 
 
 Not satisfied with reproduction cost at war prices; not satisfied with claim- 
 ing that its old property is worth as much as if it were new; not satisfied with 
 the recognition of cumulated hypothetical deficiencies as additions to present 
 value; not satisfied with the unearned increment of land values, plus 150 per cent 
 on rights of way. the Public Service Railway Company, at the close of the last 
 hearing, came forward with the explicit claim that franchise values, equal to 
 all the watered securities piled up during the period of manipulation and con- 
 solidation, should be recognized as value upon which future car riders must 
 pay an S per cent return. The final decisions of the N'ew Jersey courts in the 
 Passaic Gas Case are now to be repudiated. The company, regarding the United 
 States Supreme Court as the final |)rotector of vested interests, still clings to 
 the forlorn hope that this ultimate tribunal will sanctify the results of the stock 
 and bond deals in the consolidations of 25 years ago. It does not matter that 
 these old consolidations still smell to heaven whenever an accountant succeeds in 
 prying open the closet doors that ordinarily conceal the Public Service Railway 
 Company's past. Naively, the company claims that the value of the franchises — 
 the five-cent franchises — under which so many millions of dollars of "losses" 
 were piled up, was accurately measured by the estimates of value placed upon 
 them by the hopeful manipulators who, according to Accountant Wolff, injected 
 some $7.^000.000 of water in the securities of the Public Service Railway system 
 back in the nineties. 
 
 Cooley's methods were controverted on practically every fundamental issue 
 by Dr. Milo R. M.iltbie. former public service commissioner in New York, and 
 by Professor Kdward W. Bemis, a distinguished valuation expert on the public 
 side, both of whom testified for the Municipalities. With respect to the repro- 
 duction-cost method, depreciation, land values, working capital, overhead and 
 development cost, they provetl that his theories were unsound and inconsistent 
 with the best precedents of valuation in rate proceedings. 
 
 Cooley's Appraisal Sampled 
 
 Thus far I have been indicating the lengths to which Dean Cooley and 
 the Public Service Railway experts generally had the hardihood to go in their 
 general theories and methods in the ascription of value to the company's |)rop- 
 
Transport ATiox Issues in New Jersey 703 
 
 erty on the basis of reproduction cost. As I have said, neither the UtiHties 
 Board nor the Municipalities undertook to make a new inventory or to establish 
 new unit prices as the basis for a reproduction-cost appraisal of this property. 
 Yet the experts for the Municipalities were able, within the limited time at 
 their disposal, to check some of Cooley's detailed work. For example, Mr. 
 Charles K. Mohler. the engineer, found that 46 passenger cars retired from 
 sen'ice as worn out or obsolete before May 31, 1919, had been entered in the 
 Cooley appraisal on December 31, 1915, as being on the average in a 61.1 per 
 cent condition, which indicated that they were good for 15 years more instead 
 of 3 years. Under Cooley's theory that in a valuation for rate purposes there 
 is no accrued depreciation, these cars went in at 100 per cent of their repro- 
 duction cost. Mr. Mohler found that 100 General Electric No. 57 motors were 
 retired in 1918, and $44,250 was withdrawn from the fixed capital account as 
 the company's estimate of actual cost. Cooley's appraisal figure without over- 
 heads for 100 similar motors was $76,357, and with overheads $103,225. Thus 
 with Cooley's appraisal of the company's property substituted for book cost, 
 the capital account would show $14,725 more after the motors had been scrapped 
 than the actual cost account showed when they were new. Mohler also found 
 that Cooley had allowed $10 apiece "base cost" for removing 25 hypothetical 
 willow trees, 12 feet high, assumed to have been found on the right of way 
 of the Hackensack line. With the overheads added, the cost of removal was 
 $14.67 apiece, which at the wages paid before the war would be "going some" 
 for a 12-foot willow. Mr. Mohler showed that the land and improvements at 
 Wood Lynne Park were appraised by Cooley at $57,608 including the over- 
 heads, but with accrued depreciation deducted ; while this same property, sold 
 two years later, brought a net price of $14,264. This property at the undepre- 
 ciated value claimed for rate purposes stood at $52,644 without the overheads, 
 and at $75,036 with them. A piece of property in Camden consisting of land 
 and two residence blocks stood in Cooley's appraisal for $21,256, including the 
 overheads, or, with depreciation deducted, at $18,617. This property brought 
 $7,000 when it was sold two years after the appraisal. 
 
 In making his reproduction-cost estimate Cooley assumed that the entire 
 property being appraised was non-existent except for inventory purposes, that 
 not a wheel would be turned until at the end of a three-year construction period, 
 preceded by another year for the acquisition of land ; yet in fixing his unit prices 
 for track work he allowed 10 cents per lineal foot for the removal of pre-existing 
 track, made another allowance for the cost of maintaining street railway traffic 
 while the theoretical reproduction of the property was going on, and even 
 assumed that the company would be carrying the laborers to and from their 
 work on the cars. One of the most extraordinary discrepancies brought to light 
 was with respect to the cost of grading job on the Turnpike line, which was 
 being done right at the time when Dean Cooley was making his inventory. 
 The reproduction-cost estimate that went into the appraisal on account of this 
 work was $65,968 without overheads, and $96,753 with them. The actual cost 
 as shown by the comjiany's construction records, was $30,178 without the over- 
 heads which, for the entire job including the grading, were only $3,283. 
 
704 Appendix A 
 
 Divergent Results: $59,000,000 by Subtraction: $180,000,000 by Addition 
 
 The reproduction-cost method, if carefully and sensibly applied, may un- 
 doubtedly be used to throw light upon the question of fair present value for 
 rate purposes, but the tremendous economic changes that have taken place as 
 a result of the war make it especially difficult at the present time to use this 
 method in such a way as to be helpful to a public authority bound to seek 
 a just result. Yet Cooley's original appraisal made in 1915, before these eco- 
 nomic changes took place, involved so many valuation vagaries that its use- 
 fulness as a measure of fair value for rate purposes needs to be heavily dis- 
 counted. Still, without admitting the correctness of the Cooley inventory in 
 all its details, or the correctness of the unit prices which Dean Cooley set up 
 as fair average prices for the five-year period ending with 1915, I thought it 
 possible, on the basis of this inventory and of these unit prices, by the elimina- 
 tion of unused property, by the deduction of accrued depreciation, by the read- 
 justment of the overhead allowances, and by certain other major corrections 
 of method, to save the result based on the reproduction-cost theory from being 
 so fantastic as to condemn itself. As a witness tor the Municipalities I prepared 
 an analysis of the Cooley apjjraisal along the lines indicated, having in mind 
 the sound principles of valualiun to which Dr. Maltbie and Professor Bemis had 
 already testified. .After making an allowance of 10 per cent for going value, 
 instead of the outrageous 30 per cent allowed by Dean Cooley and other com- 
 pany witnesses on the unproven hypothesis that this percentage would fairly and 
 conservatively represent actual development costs, I reached as my final figure 
 appro.ximately $59,000,000. This figure contrasts with the $180,000,000 arrived 
 at by Mr. William H. Blood, Jr., of Stone & Webster, and with the intervening 
 figures arrived at by Almert. Cooley, and other Public Service Railway witnesses. 
 
 Such an enormous variation in an estimate of value based on reproduction 
 cost, and starting from the same inventory and the .same unit prices, is calcu- 
 lated to evoke comment, to say the least. The differences are in part explained 
 by what I have already said about the principles laid down and the claims made 
 by the Public Service Railway Comjiany witnesses. 1 have only touched the 
 high spots in the analysis. It would be fruitless here to go into the fine details 
 to show further where Cooley's original valuation and the subsequent inferences 
 from it overshot the mark. It is worth while, however, to correct a coinnion 
 misapprehension with respect to the appraisal process. F.ven under the best of 
 conditions a reproduction-cost appraisal presents a comple.x and difficult problem, 
 but the iirulikni of determiiiing fair present value for rate purposes under the 
 rules laid down by the I'nited States Supreme Court is infinitively more complex 
 and difficult. People often assume that all you have to do to get the value of a 
 street railway is to hire an engineer to go out and look it over and then make a 
 few computations and tell you what it is worth. They assume that value for 
 rate purposes is a fact to be found by a technical expert, instead of a judgment 
 to be rendered by a governmental authority clothed with responsibility for the 
 application of sound public jiolicics to rate-making. .\s a matter of fact, as 
 
Transportation Issues in New Jersey 705 
 
 proven by the record in this very case, a street railway company can find cele- 
 brated engineers and experts to support any vakie that it may desire to estabHsh. 
 
 Why Engineering Valuations Differ 
 
 It is often said that reputable engineers making a valuation of the same 
 property, even though they represent different interests, will come within a very 
 small percentage of an identical result. This is true when all of the conditions 
 under which the appraisals are to be made are prescribed in great detail by 
 agreement or by a supervisory authority, but when such an appraisal is com- 
 pleted, it does not necessarily represent the value of the property, but merely a 
 result ascertained by the application of certain rules to certain detailed facts 
 about which there can be no dispute. Obviously, two competent engineers, 
 though acting independently, ought to be able to agree in the count of the cars 
 in service, in the measurement of the tracks in use, in the computation of the 
 amounts of paving of different kinds that are found in connection with the road- 
 bed, in the description of the size and type of car-barns and other buildings and 
 with respect to all those facts which are primarily matters of inventory — of 
 count, measurement and description. Furthermore, it is to be expected that 
 competent engineers, if they are working upon identical assumptions as to the 
 date of the appraisal and the conditions of the work, will not differ much with 
 respect to unit prices. 
 
 The application of the unit prices to the inventory produces a result that 
 engineers call "base cost." Even with respect to base cost there are likely to 
 be great differences in the results obtained, unless the assumptions and methods 
 upon which the appraisal is based are identical, and there is no likelihood that 
 they will be identical, unless steps are taken to make them so. Under these cir- 
 cumstances, a purely ex parte appraisal made by. or for the company that owns 
 the property, hardly rises to the dignity of evidence in a rate proceeding ; for 
 everything about it depends upon the assumptions made and the methods used, 
 and, as we have seen, the assumptions and methods of one appraiser are likely 
 to differ radically from those of another. But if, through cooperation, through 
 strict supervision or through accident, different appraisers do reach results that 
 come within a very small percentage of being identical so far as base cost is 
 concerned, then the real troubles begin. When appraisers representing one in- 
 terest get through with the processes of addition and multiplication, while those 
 representing another interest get through with the processes of subtraction and 
 division, the final results are likely to be as far apart as the east is from the 
 west. This point is well illustrated by the results in the Public Service Railway 
 Case as I have already outlined them. Here the Cooley appraisal was purely 
 ex parte. There was absolutely no agreement or attempt at agreement between 
 the company and the commission, or between the company and the municipalities, 
 with respect to the conditions under which the appraisal was to be made or the 
 rules to be applied. The appraisal was presented before the Utilities Board as 
 a completed thing. Without an entirely new appraisal, no substantial changes 
 in either the inventory or the unit prices could be made, but even on this basis 
 
706 Appendix A 
 
 the divergent results to which I have referred were reached through the processes 
 of analysis and readjustment. 
 
 An Illustration from Pittsburgh 
 
 Another illustration will show even more clearly the difficulties and uncer- 
 tainties of public utility appraisal work. The Public Service Commission of 
 Pennsylvania, in order to minimize the difYerences between the street railway 
 companies and the municipalities, has adopted a policy of cooperation through the 
 establishment in each case of a joint board of engineers composed of appraisers 
 representing the municipality and appraisers representing the company, with the 
 chief engineer of the commission as chairman. The most notable application of 
 this policy was in connection with the appraisal of the Pittsburgh Railways. 
 Here, an Engineers Valuation Board was organized March 15, 1918. It rendered 
 its report to the Public Service Commission in Augvist, 1919. It presented ap- 
 praisals on seven different bases. The results, without any deduction for depre- 
 ciation, ranged from $49,324,000 as the estimated cost of reproduction new of 
 the existing property at prices ruling when each part of the property w'as con- 
 structed and under the original conditions of construction, up to $102.S42.000 
 as the estimated cost of reproduction new at prices and under the conditions 
 prevailing on April 1, 1918. The Board of Engineers also indicated the amount 
 of superseded property included in its historical-cost estimate and the amount of 
 accrued depreciation in each of its reproduction-cost estimates. The deduction 
 of depreciation from the normal reproduction cost left $37, 2<S5.000 as a definite 
 minimum, as compared with the $102,842,000 maximum without depreciation 
 deducted, both of these figures being arrived at by the reproduction-cost method. 
 With respect to these figures the Board of Engineers was unanimous, but this 
 was not the whole story. The Board reported that it was unable to agree as to 
 "development value, going-concern value and other elements of value." 
 
 Thus, the Pennsylvania Commission, after making every etTort to promote 
 cooperation and agreement between the City of Pittsburgh and the Pittsburgh 
 Railways Company, found itself with sets of agreed-upon figures ranging all the 
 way from thirty-seven millions to one hundred and two millions, with no agree- 
 ment whatever upon intangibles. The commission ultimately adopted an arbi- 
 trary final figure of $r)2, 500,000, but this was fixed frankly as a basis for reorgan- 
 ization, on the theory that any smaller figure would result in the disintegration 
 of the property, which, in the eyes of the commission, would be a public calamity. 
 
 Historical-Cost Method Also Subject to Jugglery 
 
 It might be supposed that coming down out of the clouds of theory to the 
 hard basis of accounting facts we could depend upon the actual or historical-cost 
 method to give us something precise and definite in the valuation field. Unfor- 
 tunately, however, miiform and scientific systems of accounts do not reach back 
 very far in the hi.siory of the electric railway business, and in the case of a 
 great, composite system like the Public Service Railway, with a street car history 
 of sixty years behind it, and a turnpike history almost as long still further back, 
 we c.iniuit hope to get an indisputable figure representing original cost to date or 
 
Transportation Issues in New Jersey 707 
 
 any other precise investment concept. Historical cost can be juggled with almost 
 as freely as reproduction cost, if the experts have the will to juggle. As we 
 have seen, Accountant Mark Wolff arrived at $93,662,873, as the total actual cost 
 of the Public Service Railway property, based for the most part upon the con- 
 struction accounts. On cross-examination, in view of minor gaps in certain of 
 the records, and in order to be liberal to the company, Mr. Wolff said that he 
 would be willing to round off the actual cost figure to an even $95,000,000. As 
 counsel for the company, Senator Wakelee brought out the fact that certain in- 
 tangible items which the company claimed as elements of value were not included 
 in Wolff's actual cost figures, but for the most part these were hypothetical and 
 elusive items for which the company could supply no specific figures from its 
 records. On the other hand, it was pointed out on behalf of the municipalities 
 that Mr. Wolff's figures represented cost new of all the physical property that had 
 ever been acquired by the Public Service Railway Company or its predecessors, 
 less only such items as may have been written off from the capital account by the 
 companies themselves during the past sixty years. For example, the figures in- 
 cluded many millions for superseded horse-car and cable property and many addi- 
 tional millions for power stations subsequently alienated to the Public Service 
 Electric Company. The figures showed no deduction whatever from the cost 
 new of the existing property. 
 
 Barker and Almert, Experts in Addition 
 
 Nevertheless, Mr. W. S. Barker, comptroller of the Public Service Railway 
 Company, started out with Wolff's round figure of $95,000,000, and built up an 
 alleged historical cost to approximately $147,000,000. To accomplish this he 
 first added an item of $420,515 paid to one B. M. Shanley back in electrification 
 days, and charged to the "franchise and property account" of the Consolidated 
 Traction Company. Mr. Wolff had rejected this item. Then, Mr. Barker added 
 12% per cent for promoter's remuneration, cost of money, and organization and 
 development of the project, alleged elements of preliminary or overhead expense 
 not included in the construction costs as shown on the books. These estimated 
 items amounted to nearly $12,000,000. He then added two and a half million 
 dollars for working capital, and $6,000,000 for the unearned increment of land 
 value which, he assumed, had been taken into consideration and capitalized at 
 the time when the consolidations of the underlying companies were effected. 
 This gave him $115,848,079. To this he added $7,795,750 of development costs 
 for the period prior to 1903, and $23,841,764 for development costs subsequent 
 to that date. These estimates of development costs had been worked out from 
 the income accounts of the principal companies, and represented his estimate of 
 the aggregate deficiencies below an 8 per cent return upon construction cost. 
 This gave him a final figure of $147,485,593 as the approximate historical cost 
 of the property. 
 
 Mr. Harold Almert also took a fling on behalf of the company in the realm 
 of historical cost. He started with the $109,848,079 representing Mr. Barker's 
 historical cost before the addition of development costs, but instead of being 
 satisfied with the $31,637,514 of development costs worked out on the 8 per 
 
708 Appendix A 
 
 cent theory, he concluded that it would be proper to add enough for development 
 costs to bring his historical cost up to the $165,000,000 which he had already 
 fixed as the reproduction cost new of the property at war prices. This gave him 
 a little over S55.OOO.0OO for development costs, although he stated that if he 
 were of a mind to add all of the development costs, as would be entirely proper, 
 he would have to put them in at between 90 and 100 million dollars. 
 
 Actual Cost, Less Depreciation, of Existing Property 
 
 Starting from Mr. Wolff's actual construction cost figure of $93,662,873 
 and going in the opposite direction from that followed by Mr. Barker and Mr. 
 Almert I deducted the book cost of power plant and equipment alienated in 1910 
 to the Public Service Electric Company, the estimated cost of superseded prop- 
 erty dating back to the days of horse cars and cables, the cost of "rehabilitation"' 
 charged to construction in the early years of Public Service Corporation control 
 (a cost which appears to have been incurred in changing the gauges of various 
 street railway lines for the purpose of unified operation), the miscellaneous 
 properties used for ferry and other non-railway puqioses, and accrued deprecia- 
 tion of existing property figured on the same basis that I used in estimating re- 
 production cost. In this way I reached $56,077,366, as the final figure for esti- 
 mated actual cost, less depreciation, of the existing physical property of the 
 Public Service Railway Company as of March 31, 1919. 
 
 For the purpose of determining whether or not any allowance should be 
 made for development cost in this actual cost study, I assumed that the physical 
 property superseded at or before electrification could or should have been written 
 out of the capital account before the several dates, beginning May 31, 1903, when 
 the control of the various portions of what is now the Public Service Railway 
 system came into the hands of the Public Service Corporation. On the other 
 hand I assumed that no depreciation had been written of? with respect to the 
 property existing on those dates. Starting on this basis I found that the earn- 
 ings of the Public Service Railway system were sufficient to pay 6 per cent on 
 the actual construction cost of the existing property, pay the $4,160,000 of 
 rehabilitation as an operating expen.se. and pay the $14,510,000 of accrued depre- 
 ciation which I attributed to the existing property as of March 31. 1920, and still 
 leave a handsome surplus for contingencies. 1 could not see that it would be 
 just to make any allowance for development cost to be capitalized at this time 
 against the public. It seemed to me, particularly in view of the scandalous way 
 in which the five-cent fare franchises were capitalized in the stock and bond deals 
 during the period of electrification, that it would be preposterous to assume the 
 existence of develo])ment costs back of 1903, under the previous regimes, as an 
 element of "fair value" at the present day. However. Mr. Barker, a witness 
 for the company, came along, and from an examination of the incomplete rec- 
 ords of the predecessor companies, and, upon the assumption that these com- 
 panies were entitled at all times to an 8 per cent return with deficiencies cunni- 
 latcd at 8 per cent compound interest, figured out so-called development costs 
 of $7,795,750 for the period prior to 1903, without providing for the superseded 
 
Transportation Issues in New Jersey 709 
 
 property; and by the use of the 8 per cent return and certain other adjustments 
 he produced a cumulative deficiency of $23,841,764 for the period subsequent to 
 1903. The widely divergent results reached clearly illustrate the possibility of 
 creating the appearance of a loss merely by starting with an overloaded capital 
 account and by figuring the fair return at a higher rate than the actual cost of 
 money. 
 
 It will be remembered that 1916 was the banner year in the history of the 
 Public Service Railway Company. It was to the conditions of 1916 that the 
 company asked to be restored in the Emergency case, but Mr. Barker's compu- 
 tation of development cost shows a deficit of $1,566,000 for that banner year. It 
 is out of the deficits so computed that the company builds up development costs 
 by compound interest and pyramids so-called values as an impassable barrier to 
 rate regulation in the future. 
 
 What 8 Per Cent. Compounded Will Do for Cheerful Losers 
 
 The theory that a street railway company cannot under any circumstances 
 lose, and that any deficiencies, assumed or real, are to be immediately and perma- 
 nently capitalized and preserved in the form of development cost or going value, 
 is reduced to an absurdity when consideration is given to its ultimate effects. For 
 example, a single dollar of loss incurred in the year 1916 and cumulated, accord- 
 ing to the Public Service Railway Company's plan, at 8 per cent compound in- 
 terest, would, in 100 years, add the sum of $2,199.98 to the value of the plant 
 for rate purposes, and if the railway incurred an additional loss of one dollar 
 during each of the 100 years, the aggregate additions to capital at the end of that 
 time on account of this annual one dollar loss would be $27,484.79. If the com- 
 pany lost $1,566,048 in 1916, its banner year, as Mr. Barker figured that it did, lo, 
 what does the future hold for the people of New Jersey! This loss, even if not 
 repeated, would, in the course of 100 years accumulate the tidy sum of $3,400,- 
 000,000; and if the banner prosperity of 1916. when the company lost only 
 $1,566,000. were to be the lot of the Public Service Railway Company year after 
 year for the full period of a century, the accumulated losses would by that time 
 have added some $43,000,000,000 of wealth to the company. As the banished Duke 
 would say, "Sweet are the uses of adversity." Just think what would happen 
 to Mr. McCarter's half million dollars of common stock in the Public Service 
 Corporation of New Jersey if he could manage to stick it out for another 100 
 years. But as a century seems a long time to wait, we can still hold out a better 
 hope. Even the accursed zone system, jitney competition, the strikes and the 
 increased wages offer their balm to the stockholders of the Public Service Rail- 
 way Company, for, according to Mr. Barker's figures, the company's deficiency 
 for the first three months of 1919 was accumulating at the rate of nearly $5,000,000 
 a year, without counting the unearned return upon the deficiencies for the inter- 
 vening years. If things keep up at this rate Mr. McCarter will have to wait 
 much less than a hundred years to realize his billion dollar interest in the intan- 
 gible values of the Public Service Railway property. This analysis suggests an 
 easy way to provide for paying the cost of future world wars. 
 
710 Appendix A 
 
 What Adjusted Capitalization Shows 
 
 I should add just a word about the company's capitalization. Out of a par 
 value of $160,514,150, including real estate mortgages, advances from the Federal 
 Government, and investment by the Public Service Electric Company upon which 
 the Public Service Railway Company pays interest, Mr. Wolff found $72,934,221 
 of "water," or, as he called it out of deference to the sensibilities of Mr. McCarter 
 and the Utilities Board, "excess capitalization." This, according to Senator 
 Wakelee, represents the franchise values of the property as of the dates when 
 the water was injected into the capitalization. How much more the franchises 
 may now be worth in view of the abrogation of the five-cent fare limitation, and 
 the accumulation of invaluable deficits during the past 17 years, deponent, the 
 Public Service Railway, sayeth not. 
 
 From the other side it should be pointed out that the $87,000,000 of "honest" 
 capitalization, conceded by Mr. Wolff in a spirit of liberality, is not necessarily 
 represented to the full 100 per cent by the present value of existing property, 
 for the company's depreciation reserve is a mere nominal sum and, therefore, a 
 large percentage of the par value of these securities now represents superseded 
 property, the power plant disposed of to the Electric Company and accrued depre- 
 ciation of railway property still in use. With these three items deducted the in- 
 vestment, as figured on the basis of sound capitalization, would be brought down 
 well below $60,000,000. So again we get, from the point of view of capitaliza- 
 tion, a range of nearly one to three in the final results. 
 
 The Function of the Utilities Board 
 
 With these [jreposterous ditfcrcnccs between the witnesses representing the 
 opposing interests, whether they approach the problem from the point of view 
 of reproduction cost, from the point of view of actual cost, or from the point 
 of view of capitalization, the decision of the Public Service Railway Case on the 
 basis of the evidence presented would seem to be almost hopeless. With so much 
 at stake, both for the Public Service Railway Company and for the people of New 
 Jersey, it would seem that the Utilities Board might better have adopted a pro- 
 cedure designed to minimize the divergence in the testimony presented. The 
 inventory should have been made under public supervision or by cooperation 
 between the opiiosinjj parties in interest: the unit prices should have been figured 
 out in the same w.iy ; the conditions and methods governing the reproduction- 
 cost appraisal and the determination of depreciation should have been prescribed 
 by the Utilities Board; the canons of an actual or historical-cost study should 
 have been laid down. Under the ditVicult circumstances surrounding a valua- 
 tion of such a property, the Utilities Board should have gone to great lengths 
 to prevent the presentation of loose aiul disputed figures by either side. 
 
 But with all i)recautions taken there would still remain for the Utilities 
 Board itself a high and dilVicult governmental function. The determination of the 
 value of a public utility property for rate purj)oses is not an engineering dis- 
 covery. Under the valuation rules that are coming to be widely accepted by 
 
Transportation Issues in New Jersey 711 
 
 courts and commissions, the responsible authority is required to take into con- 
 sideration every pertinent fact — the original cost of the property and the subse- 
 quent additions thereto, its present condition, the estimated cost of replacement, 
 and everything else that may help in reaching a just decision. It is clear that 
 for the proper exercise of so difficult and responsible a function unusual intel- 
 ligence, wide experience, a broad-gauge attitude, a keen realization of the char- 
 acter of the public interest involved, and a virile will, are essential. 
 
 Under the terms of the public utility law, a utilities board, with the right 
 qualifications, has sufficient authority to enable it to reach a sound conclusion 
 in even so difficult a matter as this, but it cannot hope to do so unless it provides 
 itself with adequate facilities, independent of the contending parties, for the 
 proper testing of the evidence submitted by opposing witnesses, nor unless it 
 brings its power and its intelligence to bear upon the problem of reducing the 
 points of difference between them, so far as this can be done, by prescription of 
 rules and methods of procedure to give some reasonable uniformity to the results 
 of valuation studies which are based on the same general theory. In the con- 
 fusion that now exists in the Public Service Railway Case, the Utilities Board is 
 almost helpless. 
 
 Government by Contract — A Nev^r Way of Spending Public Money 
 
 At this point the legislature of 1920 steps in to relieve the Board of all 
 responsibility for the valuation. Proceeding upon the naive, but exploded theory 
 that a valuation is a mere engineering process. Chapter 351 of the Laws of 1920 
 instructs the Governor, the State Treasurer and the State Comptroller to act as a 
 commission to procure an appraisement of street railway property. The first 
 section of the bill constitutes the new commission "for the purpose of ascertain- 
 ing and determining the value of all the property, including every proper and 
 lawful element thereof, of any or all street railway and traction companies" in 
 the State of New Jersey. This sounds like discretion, responsibility, and power ! 
 But the act goes on to say that the commission's functions are to be performed 
 "in the following manner." The manner prescribed is by the immediate selection 
 of "a competent electrical or mechanical engineering concern, either firm or cor- 
 porate, of the highest established reputation, equipped and organized for and 
 experienced in the work of valuing street railway property," and of entering 
 into a contract with such conern "to make and complete" the proposed valuation. 
 Then the act proceeds to confer powers upon and give directions to the unknown 
 engineering concern that is to do the work. The sum of $100,000 is appropri- 
 ated for the purpose of carrying out the provisions of the act and the commis- 
 sion is empowered to agree with the engineering concern selected upon the com- 
 pensation to be paid for its services and expenses. Section 9 of this act is so 
 unique and extraordinary that I quote it in full, as follows: 
 
 "When the valuation of the property of any street railway or traction company is com- 
 pleted as herein directed, the engineering concern so selected to make such valuation shall 
 file with the commission herein constituted a complete and detailed report of such valuation 
 in form available for use for the purpose of fixing rates under e-xisting laws, which report, 
 together with all documents and maps, and other papers accompanying same shall be imme- 
 diately transmitted to and filed with the Board of Public Utility Commissioners of this 
 
712 Appendix A 
 
 State, and shall be a public record, open to the inspection of the public at all reasonable 
 times, and shall be admitted as evidence in the courts of this State and shall be evidence of 
 the facts therein contained to the same extent as though the same had been produced and 
 proved and the value of the property as set forth in said report shall be accepted by the 
 Board of Public Utility Commissioners of this State as the value of said property as of the 
 date specified in said report in any rate proceeding under any law of this State to the extent 
 that the value of said property is a factor in the fixing of a rate." * 
 
 Thus the established procedure for the valuation of public utility propeiiy 
 for rate purposes is swept aside and this all-important function of government 
 is farmed out to "an engineering conceni." When, before, was so complete an 
 abdication of governmental power proposed? Why did the legislature not enact 
 that the valuation of each street railway company's property should be made 
 by the company itself? Since the valuation is not to be proven by oath; is not 
 to be the subject of public hearings and cross-examination of witnesses ; is not 
 even to repo,«;e in the hands of the valuation comini.>5sioners long enough for 
 them to read it, but is to be immediately transmitted, with all the accoinpanying 
 maps and documents, to the Utilities Board and thereafter to be accepted by the 
 Board as fixing the value of the property for rate purposes, and is to be accepted 
 in all the courts of New Jersey as competent evidence, just as if it were really 
 so, why was it necessary to provide for the expenditure of $100,000 of the 
 State's money for doing work which the several street railway companies would 
 have been glad to do at their own expense, and which they would have done 
 with as great a degree of safety to the public interests? For, as Dean Cooley 
 said in his testimony before the Federal Electric Railways Commission, the 
 public is ignorant. But even the companies themselves are also ignorant. It 
 takes the acute minds of engineers, trained in the process of valuation, to dis- 
 cover elements of value which the companies themselves could not find if they 
 were left unprompted. 
 
 The valuation issues at stake in the Public Service Railway Rate Case are 
 of supreme importance. Is it not clear that the people of New Jersey are bung- 
 ling the problem, with possible future consequences that are appalling to con- 
 template? 
 
 IV. 
 A DEFINITE AND CONSTRUCTIVE STATE POLICY NEEDED 
 
 Thus far in this review 1 have dealt witli the effects of jitney competition, 
 with the vital importance of efTeclive public control as a condition precedent to 
 street railway monojn>ly, with the failure of the Public Service Company in the 
 past to earn by adequate service the right to public i)rotection as the exclusive 
 agency for local transportation, and with the extraordinary complexity and vital 
 importance of the undetermined issues coiniected with the valuation of the rail- 
 way projKTty for rate purposes. The New Jersey situation has so many angles 
 that the analysis and discussion of the issues involved could be prolonged indefin- 
 itely. The whole nation-wide jiroblem of street railway development and control 
 is here exemplified. I'verywhere the same question is pressing for an answer: 
 Shall the public arm be paralyzed in dealing with local transportation issues, be- 
 
Transportation Issues in New Jersey 713 
 
 cause, forsooth, the companies demand unhmited help to enable them to support 
 their tottering financial structures? Shall the urban communities of the state, 
 and even the state itself, for lack of initiative and a fixed public policy, lapse 
 into the pitiful condition where they recognize their absolute dependence upon 
 the street railways for essential transportation service, but are unable to help 
 themselves, and see no way but to "give in" and take whatever terms the com- 
 panies may feel like prescribing? Must the state and the municipalities accept 
 as inevitable a condition where every consideration of public policy and every 
 urban interest affected by transportation service will be absolutely subordinated 
 to the one compelling demand of the company for more revenues to produce 
 profits that will be sufficient to attract new capital into the business? 
 
 No one denies that capital is necessary for street railways, and that in one 
 way or another the full cost of capital, along with all the other necessary elements 
 in the cost of necessary service, must be paid by those who receive or are bene- 
 fited by the service. But the public is entitled to insist that the cost of service 
 shall be kept down to the lowest practicable minimum and that the service shall 
 be adequate without being wasteful. It is absolutely essential that the cost of 
 capital, the fixed charge, shall be held down. This involves not only a conserva- 
 tive valuation of existing property and reasonable conservatism in the invest- 
 ment of new money, but also a conservative rate of return. The Public Service 
 Railway Company claims eight per cent per annum reaching all the way back 
 through the dim and distant years to the origin of street railway transportation 
 in New Jersey. We have already seen in retrospect and in prospect the colossal 
 results of capitalizing and compounding the eight per cent hopes of a few gener- 
 ations of sanguine investors. 
 
 We have to ask this question : What is it that makes the cost of capital 
 high? The reply is clear: Too much of it in proportion to the earning power 
 of the enterprise, too much risk, and a money market where demand outstrips 
 supply. 
 
 Too Much Capital: Too Much Risk: Too High a Rate of Return 
 
 With the seven-cent fare, the Public Service Railway's revenues are about 
 525,000,000 per annum. On the basis of a $60,000,000 investment, this would 
 give a yearly revenue of 42 cents for each dollar of capital, a figure that is less 
 than the earnings of the Cleveland Railway in 1919 under a five-cent fare. On 
 the other hand, if we take for the Public Service Railway the valuation figure 
 offered by Mr. Blood, namely, $180,000,000, the company's gross revenue is re- 
 duced to 14 cents per dollar of investment. To pay an eight per cent return upon 
 a $60,000,000 valuation would take less than 20 per cent of the gross earnings, 
 but to pay 8 per cent upon a valuation of $180,000,000 would take more than 57 
 per cent of the earnings. The very claim of a high valuation or of a high rate 
 of return makes the investment speculative. The power to earn what the com- 
 pany demands as a right becomes more precarious. The greater risk calls for a 
 still higher rate of return, and the still higher rate of return further increases the 
 risk. Even the Cleveland Railway Company, with its service-at-cost franchise, 
 has recently demanded an increase in the rate of return from 6 per cent to 7 per 
 
714 Appendix A 
 
 cent. One of the leading witnesses for the American Electric Railway Associa- 
 tion went before the Federal Electric Railways Commission and claimed ten per 
 cent as a fair rate of return even with a service-at-cost guaranty. So also the 
 New York Electric Railways Association tried to put through the 1920 session 
 of the legislature a service-at-cost plan with a ten per cent return prescribed. 
 Thus we see the street railways being drawn by the lure of the pleasant circular 
 motion into the relentless power of the financial whirlpool. 
 
 Welfare of Capital Requires Safety and a Low Return 
 
 The high rates now being paid to induce new money to flow into public 
 utilities, particularly street railways, are the result of insecurity and of scarcity 
 of free capital. Many people seem to entertain the fallacy that the nominal 
 "wages of capital" are increased on account of the general increase in prices. As 
 a matter of fact, the depreciation in the currency has nothing to do directly with 
 high interest charges, since interest and principal are both figured in the same 
 kind of dollars. Six per cent applied to a million 50-cent dollars is obviously 
 as adequate a rate of return as six per cent applied to a million 100-cent dollars. 
 But when the supply of free capital is inadequate to meet the demand, or when 
 the risk of the prospective investment is increased, the rate of interest goes up. 
 During the war period many things have combined to accentuate the risk attach- 
 ing to street railway investments, but the most potent of all these influences is 
 the knowledge that the promoters who built up the pre-war financial structure 
 overplayed the game and left the companies topheavy with capital obligations. 
 There is no hope that rates of fare can be kept low enough to be attractive to 
 potential car riders unless the basic financial policies of the street railway in- 
 dustry are reversed. To claim a doubled valuation by reason of war conditions 
 increases the difficulty of earning a fair return. To claim a doubled rate of 
 return on account of the scarcity of capital and the increasing dangers of the 
 investment takes the companies a stage farther on the road to ruin. Safety lies 
 in security and a moderate or even a low rate of return. 
 
 A Challenge to Efficient Operation Necessary 
 
 Another thing that the public has a right to look out for is the operating 
 expenses. Protected monopoly has a tendency to deaden enterprise, particularly 
 if the idea gets abroad that unrestricted regulation or a service-at-cost contract 
 is nothing more than a cost-plus scheme, in the Public Service Railway Kate 
 Case, the municipalities did not provide the funds for making a transportation 
 survey for the ])urpose of laying bare wastes and extravagances in operation, 
 and the Utilities Uoard secTued to assume that it was unnecessary to ([uestion or 
 check up tiie company's expenses to any great extent. It is surmised that a 
 detailed survey of the Public Service Railway from the point of view of opera- 
 tion would reveal the |)ossil)ility of important economies, particularly in the speed- 
 ing up of service, in the adoption of one-man safety cars on many lines, and in 
 rerouting and in the improvement of schedules. At any rate, under a scheme of 
 state regulatii'ii, with no contractual maximum rate of fare, public control will 
 
Transportation Issues in New Jersey 715 
 
 surely prove a failure unless it provides an effective challenge to economy and 
 efficiency in operation. Without such a challenge, private management loses its 
 incentive under the condition of protected monopoly. 
 
 The Price of Public Cooperation 
 
 The street railways have come to a pass where public cooperation is more 
 than ever necessary, not m,erely for their prosperity but even for their survival 
 as public utilities. In his testimony before the Federal Electric Railways Com- 
 mission in October, 1919, Mr. John A. Beeler, the transportation engineer, laid 
 particular emphasis on this point. 
 
 "The electric railways," said he, "were for so many years unaccustomed to regulation 
 that they came to respect much too slowly the value of cooperation with state and municipal 
 regulatory bodies. Today, when the electric railway needs all the cooperation it can get, 
 it finds that it has been a demoralizer of public confidence in these very commissions and 
 local authorities whose help would now be so valuable." 
 
 If the companies would come down to earth, be moderate in their valuation 
 claims, be satisfied with a conservative rate of return, bestir themselves to effect 
 economies in operation, and subordinate profits to service as their controlling 
 motive, the public could well afford to extend to them the helping hand of co- 
 operation. When street railways feel themselves to be public servants and when 
 they are so regarded by the communities which they serve, then surely there is 
 every reason to give them protection against destructive competition, to relieve 
 them from excessive and discriminating tax burdens and other public charges, to 
 aid them in every way possible in giving convenient, rapid and uninterrupted 
 service, and to assure them adequate compensation for the work they do. But 
 public cooperation cannot properly be given to the companies in these or any 
 other ways unless they frankly and absolutely accept the role, not merely the 
 name of public servants. 
 
 A Fundamental Change in Public Relations Essential 
 
 The degree of public cooperation necessary to make street railways finan- 
 cially successful under existing conditions, without an unwarrantable curtail- 
 ment of the public service they render, is almost if not quite beyond the horizon 
 of hope under private ownership and operation. Without doubt, a fundamental 
 change in their public relations is essential, and also, without doubt, the com- 
 munity at large cannot escape the burden of a greater responsibility for self-help 
 than it has ever been willing, hitherto, to assume. The effective control of public 
 utility services, and more especially the guaranty that adequate local transporta- 
 tion service shall be available to the community at a reasonable cost, stand in the 
 very front rank of New Jersey's governmental problems. The state needs a 
 policy, a policy that goes far beyond the temporizing expedients of mere regu- 
 lation, a policy that looks into the future and paves the way for effective com- 
 munity action leading to the full acceptance of public responsibility for the per- 
 formance of public functions and to the final subordination of profits to service 
 as the controlling motive in the public utility field. Leading up to the fortuula- 
 
716 Appendix A 
 
 tion of such a policy, a searching survey of existing conditions is an essential first 
 step. Such a sur\ey could best be made by a commission acting under legisla- 
 tive authority. But such a commission, if appointed, ought to be free from the 
 curse of petty, partisan politics; else it would be a case of the blind leading the 
 blind, and both falling into the ditch. Such a commission would need intelli- 
 gence and courage, for the subject of its inquiry would be not only supremely 
 important but also highly controversial. It may take years for the state to form- 
 ulate and adopt an efTective public utility policy. That is all the more reason for 
 beginning to look into the matter now. Perhaps it is not absolutely essential 
 that at the start the inquiry be under the auspices of the state. The municipal- 
 ities might act together, or even a group of public-spirited citizens' organizations 
 might initiate the movement. But in one form or another concerted action ought 
 to be taken to lift the Public Service Railway problem out of chaos and get 
 public attention focussed on it under circumstances calculated to lead to the adop- 
 tion of a definite plan for its solution. 
 
 New Jersey Needs Light 
 
 The big things upon which definite light is needed at the present juncture 
 are: 
 
 1. The extent to which the jitneys are rendering a necessary public service, 
 the extent to which their o])erations need to be brought under a better system 
 of regulation for the protection of the public, and the etTect of their competition 
 upon trolley tratiic, trolley revenues and trolley fares. 
 
 2. The adequacy of the local transportation service now being rendered by 
 the street cars, the sufficiency of the Public Service Railway Company's facili- 
 ties to handle all of the traffic, the street railway extensions needed in the near 
 future, and the extent to which motor buses may be used advantageously as part 
 of a unified transportation system. 
 
 3. The fair value of the Public Service Railway Company's property de- 
 voted to public use and the relation which this value bears to the company's 
 capitalization and fixed charges. 
 
 4. The rate of return which the Public Service Railway Company must be 
 allowed to earn if it is to render the public service required of it ; this being 
 largely a question of the reasonableness of the company's present commitments 
 and of the security that can properly be given to its investment and its earning 
 power in the future. 
 
 5. The extent to which the cost of necessary street railway service can 
 properly be reduced by improved methods of operation. 
 
 6. The necessity of public cooperation and the extent to which it is pos- 
 sible in the production of adequate transportation service upon tenns conducive 
 
 -to the general welfare, including a consideration of policies relating to taxation, 
 paving obligations, the readjustment of street layouts, help in keeping the tracks 
 clear for the street cars, the status of the investment with respect to its fair 
 earning power and security, and the ultimate right of the state or the municipali- 
 ties to take over the transportation system when public policy makes it necessary. 
 
APPENDIX B 
 
 A REPORT 
 
 ON 
 
 CERTAIN ASPECTS OF THE 
 TRACTION PROBLEM OF THE 
 CITY OF DENVER, COLORADO 
 
 BY 
 
 DELOS F. WILCOX, Ph.D. 
 
 PREPARED FOR 
 
 THE DENVER COMMISSION OF RELIGIOUS FORCES 
 October, 1920 
 
Appendix B 
 
 A REPORT ON CERTAIN ASPECTS OF THE TRACTION PROBLEM 
 OF THE CITY OF DENVER, COLORADO 
 
 Elmhurst, N. Y., 
 Oct. 29, 1920. 
 Dr. John A. Lapp, Director, 
 22 East Ontario Street, 
 Chicago, Illinois. 
 
 Dear Doctor Lapp: 
 
 I refer to our conference in New York at the City Club on September 18, 
 1920, when you explained to me the street railway situation in Denver and stated 
 that an investigation of the labor relations of the Denver Tramway Company 
 was being undertaken on behalf of the Catholic, Protestant and Jewish churches. 
 At that time you said that you and your associates desired me to take part in the 
 investigation and to report to you on some of the collateral elements of the prob- 
 lem, particularly with respect to the Tramway Company's financial needs as a 
 factor in the determination of its relations with its employes. At a subsequent 
 conference at the City Club on October 10, 1920, I went over the matter again 
 with yourself and Rev. Dr. John A. Ryan and Dr. Edward T. Devine, your asso- 
 ciates in the conduct of the investigation, and after a discussion of the chief 
 factors in the general electric railway problem and of the conditions peculiar to 
 Denver, you requested me to cover four principal points in my report, as follows : 
 
 I. Fair play in the attitude of the public toward the public utilities, and the position 
 which the moral forces of the community should take with respect to the utilities' financial 
 needs. 
 
 II. The significance of valuation in the settlement of street railway problems, with a 
 brief analysis of the methods followed and the results reached in the valuation of the Denver 
 Tramway property by the Colorado Public Utilities Commission and by the experts retained 
 by the Tramway Adjustment Committee of Fifty-Five. 
 
 III. A brief analysis and evaluation of the "Service-at-Cost" ordinance drafted by the 
 Tramway Adjustment Committee and of the "Elastic 6c Fare'' ordinance, both of which 
 were submitted to popular vote at a special election October 22, 1919. 
 
 IV. \ discussion of the methods pursued by the Denver Tramway Company with 
 respect to maintenance, replacements and depreciation as revealed by the company's reports. 
 
 You advised ine that the primary purpose of the investigation undertaken 
 by you and your associates was to enable you to render an impartial report to the 
 people of Denver with respect to the Trainway Company's labor policy. You 
 explained that your interest in the financial problems of the company was inci- 
 dental to the efifect which the company's financial condition necessarily or actu- 
 ally has upon its labor relations. Therefore, for the purposes of this investiga- 
 tion, you did not deem it necessary that I should go to Denver and make a de- 
 
 719 
 
720 Appendix B 
 
 tailed study of the street railway problem on the ground. In lieu of that, you 
 asked me to examine a considerable mass of data submitted by you which in- 
 cluded : 
 
 (a) The two decisions of the Colorado Public Utilities Commission with respect to the 
 Tramway vahiation and fares; , r-r c 
 
 (b) The report and findings of the Tramway Adjustment Committee of bitty-hve; 
 
 (c) The two ordinances rejected by the voters at the October. 1919, election; 
 
 (d) A series of statements furnished by the Denver Tramway Company to the Tram- 
 way Adjustment Committee at various dates in the early months of 1919; 
 
 (e) The last three annual reports of the Denver Tramway Company, and 
 
 (f) The special edition of "Tram-O-Grams" published May 25, 1920. 
 
 While the time available for my part of the investigation has been limited, 
 and while the documents submitted to me do not cover all of the details which I 
 should need to look into if I were asked to render a complete and final report on 
 the company's financial needs, nevertheless, on the basis of the information at 
 hand and the time available for its examination, I am now prepared to discuss 
 in general terms the several points upon which you requested my advice. 
 
 Fair play in the attitude of the public toward the public utilities, and 
 the position which the moral forces of the community should take with 
 respect to the utilities' financial needs. 
 
 In the grave crisis through which the street railways of the country are now 
 passing, the problem of their public relations is absolutely fundamental. The 
 street railway problem at the present time involves a conflict between public and 
 private interests. The drift of population to the urban centres is still going 
 steadily on, and no community fuiictiuii that arises out of the conditions of city 
 life is more vital to the public welfare than the provision of local transportation 
 facilities. The magnitude of the interests in street railways, and their importance 
 in the social economy of cities may be seen from the fact that these local trans- 
 portation lines carry more than 10 times as many passengers as are carried by 
 the steam railroads of the country, and the investment in street railway facilities 
 is about twice as great, in the aggregate, as the entire funded debt of all the 
 municipalities in the country. The policy of American cities thus far, with few 
 exceptions, has been to depend upon private agencies to supply, under various 
 degrees of public control, the local transportation service that is essential to every 
 community. 
 
 At the present time every big city in the United States is faced with the 
 problem of detennining what its duty toward the street railway is. The last 
 thing that a community can atlord to be is unfair. The greatest need of every 
 modern urban community is the power of public initiative and civic cooperation 
 and nothing can be so destructive to this power as a spirit of injustice donjinating 
 community policy. Yet under many circumstances it is very hard to know what 
 justice is. 
 
 Beyond a doubt, the street railway companies as a class have, in the past, 
 
Denver Tramway Report 721 
 
 committed grave wrongs against the public conscience and the public welfare. 
 They have often been instrumental in the corruption of public servants; they 
 have seldom accepted intelligently and in good faith the full obligations resting 
 upon them as agencies for public service; they have too often looked upon their 
 business as a private business with the desire for profit as ks mainspring, and 
 have made the manipulation of stocks and bonds rather than the operation of 
 street railways their primary business. At the present time, when the street 
 railway companies are in financial straits, and the transportation service of urban 
 communities is being curtailed and is thought to be in danger of breaking down 
 completely, it is time to look the facts squarely in the face for the purpose of 
 determining what good morals and the public interest demand in the readjust- 
 ment of the relations between the communities and the companies. 
 
 It is the theory of the Federal Constitution and of American law in general 
 that contracts representing the voluntary engagements of the parties are sacred 
 and must be enforced unless both parties consent to have them changed. In the 
 past, when the cost of street railway service was low and the amount of street 
 railway traffic rapidly increasing, the companies have stoutly resisted the exercise 
 of the police power to reduce the fares below the rates stipulated in their fran- 
 chise contracts. But now the tables are turned ! The companies that once 
 looked upon the fixed 5-cent fare as the talisman of speculation and profit — as 
 the key that would unlock the vaults of private capital for the unlimited expan- 
 sion of a prosperous and powerful industry — have fallen upon evil times. They 
 miscalculated the cost of transportation service ; they did not foresee the poten- 
 tial competition of the trackless and trolleyless motor vehicle ; they neglected 
 depreciation and lived in a fool's paradise and, in common with the rest of us, 
 failed to take into account the possibility of such an economic revolution as was 
 brought on by the World War ; they pursued a reckless financial policy ; and they 
 cultivated the enmity of the people, who, they supposed, were dependent upon 
 them for transportation service. 
 
 They have had a rude awakening and now they come, hat in hand, pleading 
 that they be released from the obligations of the contracts which are no longer 
 profitable to them. Under the new conditions that have arisen a franchise con- 
 tract is regarded as a mere scrap of paper^the last thing in the world that should 
 be enforced. 
 
 In the midst of this confusion it is important to lay bare the essential factors 
 in the problem of urban transportation. 
 
 First. It has come to be recogiiized that public transportation facilities are 
 absolutely essential to the welfare of every large urban community and that for 
 the present, and perhaps for an indefinite time in the future, electric railways will 
 be the principal agency through which this service is rendered. Just now a 
 great deal is being thought and hoped and said about the possibilities of the 
 motor bus as a means of public transportation, but the one thing that has be- 
 come certain in this connection is that the unrestricted development of motor 
 bus transportation in competition with the street railways will certainly result in 
 the crippling, if not the complete destruction, of one or the other of these agencies, 
 and that thus far the electric street railway, conservatively financed and effi- 
 
722 Appendix B 
 
 ciently operated, has very great advantages over the motor bus as the sole or 
 principal means of transportation in a large city. 
 
 Second. Local transportation service is recognized to be so essential to the 
 general welfare of every urban community, and the conditions under which the 
 sen'ice must be rendered are so intimately related to community affairs, that the 
 community itself is bound to assume the final responsibility for the provision 
 of such service. It is too late in the day for American cities to shirk this respon- 
 sibility and allow the burden to fall upon private initiative and private enterprise 
 unassisted and uncontrolled. No community can afford to permit the motive of 
 private profit to be controlling in the determination of the extent and character 
 of the transportation facilities furnished. 
 
 Third. It follows that the community, in its organized capacity, either must 
 take the initiative and perform for itself the service which it recognizes to be in- 
 dispensable, or else it must permit the service to be performed by private agen- 
 cies on terms and conditions that will be persuasive to private enterprise to 
 undertake or to continue the performance of the function. What the community 
 does for itself need not be self-sustaining; what the community depends upon 
 private enterprise to do must be remunerative, or else private enterprise will 
 balk and refuse to do the work. 
 
 Fourth. Where a private company has entered into a franchise contract 
 by which it undertakes to render transportation service indefinitely or for a 
 given period of years at a fixed price, the community, undoubtedly, has the legal 
 right to enforce the terms of the contract and to require that the stipulated 
 service shall be rendered at the stipulated price. However, if the city is growing, 
 as most American cities are, it is necessary that street railway facilities be con- 
 tinually extended and improved. This requires the investment of new capital, 
 and as a practical matter a city has to consider the effect of the enforcement 
 of the franchise rates prescribed by the franchise upon the ability of the operat- 
 ing company to furnish or procure the additional capital required for the full 
 performance of its function as a public servant. Under some circumstances the 
 city's legal right to force the company to fulfill its contract as to rates of fare is 
 a barren one. Whether or not it should be exercised depends largely upon the 
 question whether at the particular time and under the particular circumstances 
 it is essential to the public welfare that additional street railway facilities be 
 provided to take care of increasing public needs. In an era of rising prices, 
 when new rails and new cars and all the other items entering into the construc- 
 tion and equipment of a street railway cost more than they did when the railway 
 was originally constructed and equipped, the capital account has to be gradually 
 readjusted to the higher price level through the process of replacement. This 
 process of replacement is going on continually and cannot be halted for any 
 length of time under any circumstances without resulting in the deterioration and 
 ultimate breakdown of the transportation agency. This means that when prices 
 are going up and for a number of years after they have reached a high level, 
 new capital will be rcijuircd from time to time even though the street railway 
 is not extended a single foot and even though its facilities for carrying passen- 
 gers are not increased in the slightest degree. If the revenues are limited by a 
 
Denver Tramway Report 723 
 
 fixed rate of fare, and if wages and the cost of materials used in maintenance 
 have greatly increased, it may be that the company's revenues will not be suffi- 
 cient to take care of replacements even though it foregoes entirely the return 
 upon the investment. So here again it becomes a question of sound public policy 
 based upon necessity. If transportation service is recognized as essential to the 
 community; if it is seen that the continuous expansion of transportation facilities 
 is also essential, and if the revenues provided under the rates of fare fixed by 
 the franchise contract are insufficient to provide an income by which additional 
 capital can be attracted into the service, the enforcement of the letter of the con- 
 tract may result in defeating the very purpose for which the franchise was 
 granted. Here again we see that the community must either be prepared to serve 
 itself in the matter of transportation or else to permit private agencies to serve 
 it on terms and conditions that will enable them to render the service, and particu- 
 larly that will be persuasive to additional capital to come into the service as 
 needed. 
 
 Fifth. In certain cases the revenues of the enterprise may be so limited as 
 compared with the increasing cost of the service as to make it impossible for the 
 company to continue the operation of the cars irrespective of any provision for 
 new capital already invested. If the fair and necessary cost of labor and ma- 
 terials necessarily entering into the essential service, with all practicable econ- 
 omies efifected, is still greater than the revenues derived from the traffic at the 
 rates prescribed by the franchise, it is obvious that the service will have to stop. 
 If the service is to be continued upon terms advantageous to the public and 
 just to the employes, the revenues derived from the rates must be at the very 
 least sufficient to pay all of the costs of operation, including the depreciation that 
 is accruing as time goes by; for unless depreciation is taken care of out of 
 revenues the street railway will ultimately break down through lack of provision 
 for essential replacements. 
 
 Sixth. Every community, therefore, in times like these, is confronted with 
 the question as to what it can do, consistent with preserving street railway^ service. 
 Cities are confronted with a condition, not a theory. "You cannot get blood out 
 of a turnip." The enforcement of a contract with a street railway company, 
 though legally possible, may, under certain circumstances, be impracticable for 
 the reason that the enforcement of the contract under those circumstances would 
 destroy entirely the company's ability to serve. Unless the city is prepared to 
 undertake the service itself or can find somebody else willing and able to render 
 the service on better terms, it can have no object in driving the existing agency 
 entirely out of the field. In every proceeding for the fixing of rates, and in every 
 negotiation for a resettlement of the relations between a city and the owners of 
 a public utility, it is essential at the outset to look the facts in the face. The 
 street railway interests are prone to confuse the preservation of the present man- 
 agements with the preservation of the industry itself, but the public ought not to 
 confound the two. In many cases where the financial foundation of the exist- 
 ing street railway system is rotten there may be no remedy for the poverty and 
 impotence of the present time except through a radical reorganization of the 
 company and a scaling down of its excessive obligations. If such action is neces- 
 
724 Appendix B 
 
 sary to the devclopiueiit of a sound future policy, the community ought not to 
 flinch from enforcing it. Bankruptcy, receiverships and reorganization do not 
 necessarily mean the crippling of street railway service. Under certain circum- 
 stances they may be absolutely essential conditions precedent to stable and effi- 
 cient performance in the future. 
 
 Seventh. This brings us to the crux of the ethical problem involved. At 
 the present time, when prices have reached an abnormally high level through the 
 exigencies of the World War. the companies are seeking to take advantage of 
 the rules of rate regulation to get the public to recognize and guarantee a valua- 
 tion based on present prices that will absolutely cover the improvident expendi- 
 tures, the neglected depreciation and the inflated capitalization of the past, and 
 not only leave the present managements in control but so increase their equities 
 in the property as to make them safe for all time to come from the fear of the 
 bondholder. 1 have no hesitation in taking the position that the sense of justice 
 and equity does not require the public to agree to an adjustment that would bring 
 such a result. It follows that an increase of fares, if it is to be granted, should 
 be based upon a valuation at normal prices and not at the swollen reproduction 
 cost prices of the present day. In this era of abnormally high prices the cost 
 of street railway service in terms of dollars and cents has greatly increased. 
 On the other hand, the development of the automobile and the motor bus has 
 tended to place an automatic limit upon the value of the service. Every con- 
 sideration of public welfare demands that street railway rates shall be kept as 
 low as possible without an essential impairment of the service rendered. It may 
 even be that in certain communities, under certain conditions, good public policy 
 will require that a substantial portion of the cost of transportation ser\'ice be 
 paid out of taxes, but there can be no dispute of the statement that high street 
 railway rates are inimical to the ])ublic welfare and to the proper development of 
 urban communities. Therefore, it is essential that the representatives of the 
 public in making adjustments with street railway com])anies shall insist upon a 
 conservative valuation and a conservative rate of return, as well as upon economy 
 and ctVicicncy in management . in order that rates may be ke])t down. It is infin- 
 itely better to have a low valuation of well-maintained property and a low rate 
 of return with security that the return will be earned and paid, than to yield to 
 the policies for which the street railway industry is now contending which lead 
 to intlaled valuations, to increased risk, to higher rates of return, to higher fares. 
 to increased competition, to decreased traffic and lo the ultimate breakdown and 
 possible elimination of the street railway as a public utility. 
 
 Eiilhth. A sense of justice does not require, and a soft spot in the heart 
 for the "widows and orphans" docs not warrant, the adoption of a jmlicy based 
 on the theory that no matter how the street railway magnates mav have gambled 
 and lost in the i)ast their losses are now to be made good and given a public 
 guaranty for all time to come, i^quity is not forever yielding the rights of the 
 general public for the sake of preserving the gains or making good the losses of 
 particular individual> who happen to have been engaged in the street railway 
 business at the time when it was looked upon as a speculative industry. 
 
 Xiiitli. in my view, therefore, the policy which the moral forces of America 
 
Denver Tramway Report 725 
 
 should adopt with respect to the street railway companies includes a refusal to 
 make good the ancient losses that have been sustained under the terms of fran- 
 chise contracts, unless it be in those exceptional cases where the losses resulted 
 directly or indirectly from public action taken subsequent to the negotiation of 
 the contracts, and action which could not reasonably have been anticipated by 
 the grantees of the franchise. If, upon a conservative valuation with a conserva- 
 tive but secured rate of return, and with the adoption of all economies in opera- 
 tion consistent with the payment of just wages to the employes and with the 
 rendering of adequate and efficient service to the public, the revenues derived 
 from the contract rates are insufficient to pay the full cost of service, and if the 
 companies have not earned excessive returns under their franchises in the past, 
 then, notwithstanding the requirements of the franchise contracts, the community, 
 in justice, ought to do one of three things — (1) permit an increase in rates suf- 
 ficient to cover the full cost of the service; or (2) relieve the companies from 
 taxes and public burdens, and if necessary make contributions out of the public 
 treasury to decrease their expenses or to increase their revenues, one or both, to 
 the point where they can make the two ends meet; or (3) take over the properties 
 for public ownership and operation. Whether fares shall be increased should 
 be determined primarily upon the basis of the public welfare. Fares should 
 never be increased to a point where they result in a substantial curtailment of the 
 usefulness of the transportation service. 
 
 My answer to the question of ethics is that as a matter of practical neces- 
 sity the community must either be ready to serve itself in the performance of this 
 essential public function, or else must be prepared to concede the terms and con- 
 ditions which, under all the circumstances, will induce private enterprise to per- 
 form the function. Beyond this, the community is not required to go unless the 
 company comes with clean hands and a humble spirit. 
 
 II. 
 
 The significance of valuation in the settlement of street railway prob- 
 lems, with a brief analysis of the methods followed and the results reached 
 in the valuation of the Denver Tramway property by the Colorado Public 
 Utilities Commission and by the experts retained by the Tramway Adjust- 
 ment Committee of Fifty-Five. 
 
 The initial step in the preparation for rendering street railway service is the 
 investment of capital. So long as the community has been or is unable or un- 
 willing to make use of public funds or public credit for this purpose the burden 
 of supplying the necessary capital falls upon private enterprise. It has long 
 been recognized in American jurisprudence that public utility property, though 
 privately owned and operated, is property affected with a public interest and 
 subject to various limitations and disabilities that do not attach to private prop- 
 erty devoted to private use. As a necessary result of these conditions, the amount 
 of the investment to be recognized, used and protected must be determined at 
 
726 Appendix B 
 
 the very threshold of any intelligent policy of public control or public ownership 
 of a street railway or other public utility. The hostility that has grown up 
 against public utilities, the failures of public regulation, and the slowness and 
 painfulness of the development of public ownership as a policy are all due pri- 
 marily to uncertainty upon this one point : What is the amount of the capital 
 necessarily invested in the production of the service, and upon which those who 
 render the service are entitled to a fair return? 
 
 It is of primary importance that a figure be fixed as the definite capital 
 value upon which as a basis the whole structure of the public relations of the 
 utility can be erected. Within certain limits, it might even be urged that it is 
 more important both to the public and to the utility to get the capital value fi.ved, 
 than it is to have it fixed at the right amount. Nevertheless, fair play to the 
 investors, justice to the public, and the practical requirements of a conservative 
 financial program make it exceedingly important that the capital value as fixed 
 should be somewhere near right. One not familiar with the conditions under 
 which street railways have been constructed and operated would naturally assume 
 that the determination of the amount of investment properly to be recognized as 
 an essential factor in the cost of service would be a comparatively simple and 
 easy matter. A great many intelligent people assume that the "value" of a 
 street railway property is a fact which can be readily ascertained by any com- 
 petent valuation engineer. But this is far from being so. .K street railway is 
 not a commodity that has a freely determined market value, and what its "fair 
 value" may be for the purposes of public control is determined by the application 
 of a great number of assumptions and theories with respect to which engineers, 
 lawyers, economists, business men and plain citizens have entertained wide dif- 
 ferences of opinion. Valuation theorj- and valuation practice are now in a 
 chaotic condition in this country. Premature or imprudent investments, the 
 manipulation of securities, the neglect of depreciation, the coming of the auto- 
 mobile as a competitor, the appreciation of land values, the violent economic 
 changes that have grown out of the war, and the tightening reins of public regu- 
 lation all combine to make "actual value." "fair value," or any other measure 
 of the amount of the investment entitled to recognition an elusive concept. 
 
 In the midst of this confusion it is hard to get away from the inherent justice 
 of the rule adopted by the regulatory authorities of the State of Massachusetts 
 to the effect that the capital value upon which the owners of a public utility 
 property are entitled to earn a fair return, so long as as the jiropertv is devoted to 
 public service, is the amount of capital honestly and prudently invested in the 
 enterprise. Even in the application of this apparently simple rule we encounter 
 many difficulties. The records of investment m.\v be incomplete or inaccurate. 
 In the matter of imprudence, hindsight is better than foresight. Even with re- 
 spect to honesty, something depends upon the ethical standards of the time. 
 No formula can be devised that will invariably bring a just result unless it be 
 applied by an iiUelligent, informed and fair-minded tribunal. Just now, how- 
 ever, we arc not so much concerned with the niceties of even-handed justice in 
 valuation matters as we are in avoiding the enormities that arc being proposed by 
 interested parties in tin- n.inu- nf valuation. If free rein is given to the imagina- 
 
Denver Tramway Report 727 
 
 tion of the appraisers, it makes little ditTerence whether the rule adopted is "his- 
 torical cost" or "reproduction cost"; with a given amount of securities outstand- 
 ing to be protected, they can be safely covered by either method of appraisal. 
 
 The Colorado Public Utilities Commission in its Decision No. 223, found 
 that "the present fair value" of the company's property "devoted to public use" 
 as of December 31, 1917, "including a reasonable allowance for working capital," 
 was the sum of $23,674,100, of which $20,867,750 was the value of the "city 
 lines." The length of track included in the city lines on December 31, 1917, as 
 shown by the company's annual report for that year, was 203.83 miles, which 
 gives a valuation of $102,378 per mile of single track. The figure given by the 
 company in the special edition of "Tram-O-Grams" for May 25, 1920, is $102,796 
 per mile, but the difference is immaterial. The Public Utilities Commission, 
 dealing with the property as a whole — including the 47.97 miles of interurban 
 lines — found the value to be a little less than $94,000 per mile of single track. 
 As tending to show that its valuation was conservative, the Commission said in 
 its decision of December 17, 1918 (page 34) : 
 
 "From the testimony in this case it appears that in similar proceedings, involving street 
 railroad properties of the same general character, the following valuations for rate-making 
 purposes have been determined and have been sustained : 
 
 Total appraised value 
 Year Location per mile of single track 
 
 1913 Toronto $167,000.00 
 
 1913 Kansas City, Mo 134,600.00 
 
 1915 Detroit 134,300.00 
 
 1917 Portland, Ore 117.000,00 
 
 1917 Chicago surface lines 143,400.00" 
 
 While it is impossible to establish with any degree of finality the fairness of 
 a street railway valuation by a comparison of the result — reduced to a track 
 mileage basis — with the results reached in other jurisdictions with respect to 
 other street railway properties, track mileage figures, if carefully used, may throw 
 light upon the subject. However, it is a matter of great surprise to me that the 
 Colorado Public Utilities Commission should have been led — no doubt by the 
 imperfect evidence before it — to make such an astonishingly incorrect statement 
 as that which I have just quoted. Of the five appraisals referred to only one — 
 namely, that of the Portland, Oregon lines — was determined "in similar pro- 
 ceedings," and my figures show that the valuation placed by the Oregon Public 
 Service Commission upon the city lines of the Portland street railway was $98,879 
 per mile of single track, and upon the entire Portland system — including the 
 interurban lines — $87,328 per mile of single track. The same figure quoted by 
 the Commission— namely, $117,000 per mile of track — is cited again by the 
 Denver Tramway Company in "Tram-O-Grams" of May 25, 1920. I cannot 
 identify this figure at all. 
 
 The Toronto 1913 valuation was an appraisal made for the purpose of fixing 
 a price at which the city could take over the property eight years in advance of 
 the expiration of the franchise, which was then supposed to be a very advan- 
 tageous one for the company. The physical property of the Toronto railway, 
 consisting of 120 miles of single track, was valued at $9,894,483 and the fran- 
 
728 Appendix B 
 
 chise at $10,713,553. The mileage figure cited by llie Colorado coniniissioii in- 
 cludes this franchise value. 
 
 The Kansas City appraisal of 1913 was made as a basis for the negotiation 
 of a new franchise between the two Kansas Cities and the company. The 
 "value" attributed to the unexpired life of the old franchise represented about 
 25 per cent of the total valuation agreed upon, and even at that the value of the 
 property per mile of single track was only $110,000 instead of the $134,000 quoted 
 by the Colorado commission. 
 
 The 1915 Detroit appraisal was not made in a rate proceeding and was not 
 "sustained"' so far as I know by any public authority. In fact, the Detroit 
 United Railway in 1919 offered to sell its city lines consisting of 302 miles of 
 track to the City of Detroit for the sum of $31,500,000, and the offer was re- 
 jected by the people on the theory that the price was too high. 
 
 The valuation of the Chicago surface lines referred to in the table was the 
 result of an agreed-upon valuation in 1907. plus additions to capital account 
 under the terms of the Chicago Settlement Ordinances, which have notoriously 
 resulted in the inflation of the capital value. When the Chicago Surface Lines 
 went before the Illinois Public Utilities Commission early in 1919 for emergency 
 relief, the Commission looked over their capital account and struck out of the 
 $157,000,000 total items aggregating $44,000,000, on the ground that these items 
 were of such a character that they could not be accepted as part of a valuation 
 for rate fixing.* 
 
 It thus appears that the valuation-per-track-mile comparison drawn bv the 
 Colorado commission in its decision of December 17, 1918. is based upon mis- 
 information and is wholly unreliable and misleading. If the conclusions of the 
 commission are correct, they certainly are not proven by the com])arison upon 
 which the commission relied to prove them. 
 
 It is a well-known fact that variations in the character and extent of street 
 railway properties in different communities are so great that comparisons of 
 cost or value per mile of single track are apt to be misleading unless all the con- 
 ditions are carefully scrutinized ; yet. if comparisons on this basis were desired, 
 we might turn to the valuation of the local lines of the Los Angeles Railway Cor- 
 poration made for the Board of Public Utilities of the City of Los Angeles in 
 1913. In that case a local car system of 351 miles, principallv narrow gauge like 
 the car lines of Denver, was appraised at approximately $i9.S00,000 exclusive 
 of working capital, and later on, when the California Railroad Commission re- 
 viewed this appraisal in a case where the company was seeking to issue addi- 
 tional securities the commission did not establish a final value but dismissed the 
 ai)plication, as it was unable to see how the value of the property could be 
 brought up to the face value of tiic bonds outstanding against it. which at that ■ 
 time amounted to $23,544,000. or approximately $(>7.000 per mile of track. I 
 
 In 1016 the Massacluisctis Public Ser\ice Commission made a valuation of I 
 the liay Slate lines serving Fall River. Lowell, Lynn, Lawrence. Brockton and " 
 
 \ovcn,hrl% l«"n*^S,l','lJ'i'' '';"";""?" P< '••" rn'orl Ihc Illinois Public Utilili« fommission. on 
 fonncr«.r:i f/.r; irihi.iTl, ^"••' ""'V '" ""• "'?'.'" "f '»><■ appKcalion of thr ChicaRo Surface Lines 
 «^ "irr,..." . V.) Ill iT.! Ia thr vnlnation for ratc-makmR |.„r,.o.rs. as of .\|,ril Jn. VUO w.is cst.,l.lishr<l 
 
 relerrrd m in the I olotado ( onmnssion » decision of nccetnlier 17, 191S.~I). F. W. 
 
Denver Tramway Report 729 
 
 other industrial cities and towns in eastern Massachusetts. This system as 
 valued comprised 870 miles of single track, and the value for rate purposes was 
 fixed at $39,104,370, or $45,000 per mile. 
 
 The City of Seattle on April 1, 1919, acquired by purchase the city lines of 
 the Puget Sound Traction, Light & Power Company, comprising approximately 
 206 miles of single track, for the sum of $15,000,000, or a little less than $73,000 
 per mile. It should be said, however, that no power plant was included in the 
 Seattle purchase, but it should also be said that the consummation of the pur- 
 chase at the time was strongly opposed by some of the most intelligent friends 
 of municipal ownership on the ground that the price was grossly excessive, and 
 this opinion is strongly held in Seattle at the present time. 
 
 It is well known to all those who have made a study of street railway traffic 
 that the number of rides per capita tends to increase with the size of the com- 
 munity, and so distinguished a transportation engineer as Mr. Bion J. Arnold 
 of Chicago has figured out that the necessary investment in local transportation 
 facilities increases somewhat as the square of the population of the urban com- 
 munity concerned. A comparison of street railway valuations on the basis of 
 the amount of the recognized investment per capita would be likely to show, 
 under conditions otherwise comparable, a larger per capita investment for a big 
 city than for a small one. Such a comparison is of course subject to many quali- 
 fications just as in the case of track mileage comparison. The topography of 
 cities is diiTerent ; the cost of materials and labor is dilTerent ; the amount of 
 paving is different ; the density of population is different, and many other factors 
 require that the results of any comparison be carefully checked before they are 
 accepted as having definite and conclusive significance. However, for the pur- 
 pose of showing how Denver would stand in the matter of street railway valua- 
 tion per capita, I have assembled the figures showing the population in 1920, 
 the total valuation of the city lines of the street railway system at certain given 
 dates, the valuation per capita of population in 1920, and the mileage of single 
 track, in 10 different communities ranging in population from Toledo, which is 
 slightly smaller than Denver, to Detroit, which is four times as large. These 
 figures show Denver with a street railway investment of $81 per capita based on 
 the valuation of the city lines made by the Public Utilities Commission and ac- 
 cepted by the Tramway Adjustment Committee of Fifty-Five for incorporation 
 in the "Service-at-Cost" ordinance last year. Toledo is now voting on a service- 
 at-cost franchise in which the capital value of the property is fixed at $8,000,000, 
 or the equivalent of $33 per capita. This does not include power plant, which 
 usually amounts to 10 or 15 per cent in value of the total street railway property. 
 It is noteworthy that Cleveland, which has been operating for the past 10 years 
 under the original service-at-cost plan, and which is known to have one of the 
 best street railway systems in the country, has a recognized investment of only 
 $40 per capita, and Detroit, on the basis of the purchase price rejected in 1919 
 because it was too high, has an investment of only $29 per capita. The case of 
 Milwaukee is one of the most significant among those shown in the table below; 
 for it was in Milwaukee that the policy of valuation of street railway properties 
 by state authority for rate-making purposes first became effective. It will be 
 
730 Appendix B 
 
 seen that in 1920 the amount of the recognized investment per capita in the city 
 lines of Milwaukee is only $35, which does not include any power plant. 
 The table is as follows: 
 
 STREET RAILWAY \ALUATION— CITY LINES 
 
 Per Capita Miles of 
 
 Population of iQio Single 
 
 Cit\ 19^0 Year Total Population Track 
 
 Toledo 243.109 1920 S8.000.000 $33 118.00 
 
 Denver 2.S6.369 1918 20.867.750 81 203.83 
 
 Portland, Ore 258.288 1917 18.233.371 71 184.36 
 
 Indianapolis 314.194 1918 15.0(W.000 48 161.12 
 
 Seattle 315.652 1919 16.154.950 51 228.13 
 
 The Kansas Cities 425.587 1920 36.763.954 87 315.73 
 
 Washington 437.571 1919 30,376.863 69 192.47 
 
 Milwaukee 457,147 1920 16,020.057 35 180.4 
 
 Cleveland (including East Cleveland 
 
 and Lakcwood) 865.860 1919 34.218.000 40 364.56 
 
 Detroit (including Hamtramck and 
 
 Highland Park) 1,088.853 1919 31,500,000 29 302.04 
 
 There is practically no limit to the values claimed by the street railway 
 companies under the chaotic conditions of the present time. With their secur- 
 ities greatly depreciated in value, with operating expenses so high as to make it 
 doubtful in many cases whether their enterprises can be made fully self-sustaining 
 even with all fare restrictions removed, with the confession upon their lips that 
 the fulfillment of their contracts spells inevitable bankruptcy, the companies still 
 greedily display their ancient losses and disappointments, transmuted by the 
 alchemy of appraisal into "going value," and appeal to the very prices that make 
 profitable operation impossible to prove an enormous increase in the amount of 
 their investment. I am satisfied that the financial structure of the street rail- 
 way companies in this country has been largely built upon the hope of profiteer- 
 ing, and that the disappointment of this hope during the war period, when so 
 many other lines of business were in fact reaping rich rewards, has made many 
 traction men feel that the electric railways have been the victims of unjust dis- 
 crimination at the hands of fortune. There can be no doubt whatever that the 
 valuation claims generally put forward by the companies at the present time, if 
 allowed and made good through public guaranties, would put the stockholders in 
 the way of profiteering on an even larger scale than was indulged in by street 
 railway promoters in the early days of electric traction. 
 
 Under these conditions what shall we adopt as the correct method of reach- 
 ing a fair result in the appraisal of street railway property as a basis for public 
 control or public purchase? I believe that the basic figure to be used is the 
 actual capital cost of the property now in existence devoted to public use, with 
 such deduction for depreciation as will measure the extent to which the original 
 investment has been impaired by wear and tear or by the passage of time. If 
 complete records are not available, then the so-called "normal" reproduction cost, 
 based u[)on a careful estimate of what the existing items of property should have 
 cost at the time when they were installed, supplies, in my opinion, the foundation 
 for a just appraisal. It is neither financially provident nor ethically necessary 
 for the community to perpetuate the false hopes, the blunders, or the negligence 
 
Denver Tramway Report 731 
 
 of a past generation of street railway owners and operators. A property that 
 is subject to increasing competition, that never in the world would be reproduced 
 in its present form and extent, and that can hardly see its way out of the woods 
 under any possible scale of rates, cannot properly be said to have an immense 
 "going value" over and above the depreciated cost of its physical plant. If the 
 street railways are to be put upon their feet financially and if their credit is to be 
 restored without the destruction of their primary function as a means of render- 
 ing cheap transportation service to the multitudes who dwell in cities, the valua- 
 tion of their property, established as a basis for rate making, with public guaran- 
 ties, must be conservative. Losses that have been liquidated years ago cannot 
 now be revived and capitalized, and losses that have occurred in more recent 
 years must in the main be finally liquidated before the street railways can be put 
 upon a sound financial footing. 
 
 In this era of war prices the companies beg us to forget all about capitaliza- 
 tion, knowing full well that a physical appraisal based upon present prices, with- 
 out any deduction for depreciation, will in most cases make good all of the 
 securities outstanding, no matter how much they have been inflated, and further 
 knowing that if under pressure of the demand that the investment shall be made 
 attractive to new capital the rate of return upon the appraised value is forced up 
 several points beyond the normal rate of interest on borrowed money, the stock- 
 holders can profiteer in the margin between what they receive as a fair rate of 
 return and the actual rate of interest paid on the bonds. For illustration, let us 
 take the case of the Denver Tramway Company, whose outstanding securities, 
 on December 31, 1917, amounted to $24,872,100, of which $18,715,800 was bonds 
 and $6,156,300 stock, as compared with the valuation of $23,674,100 fixed by the 
 Colorado Public Utilities Commission as of that date. The interest actually 
 paid at the present time on the company's funded debt appears to be $1,005,790 
 per annum, or an average of approximately 5.4 per cent. The commission re- 
 commended that the company be allowed a return of 8 per cent upon its entire 
 capital value as fixed. This would mean an annual return of $1,893,928, or 
 $888,138 in excess of the bond interest. Assuming that all of this excess return 
 were paid out to the stockholders, the company could pay an annual dividend of 
 14.4 per cent upon the capital stock. Even if the rate of return is figured at 7 
 per cent, as recommended by the Tramway Adjustment Committee, the excess of 
 the return over and above the bond interest is sufficient to yield a dividend of 10.5 
 per cent upon the capital stock. My point is that even if the value of the prop- 
 erty were no greater than the par value of the bonds outstanding, a rate of return 
 two points higher than the average rate of interest paid on the bonds would 
 yield in this case a dividend of 6 per cent on the stock, and the value of the stock 
 in the market might be established at par, even though it did not represent a 
 dollar of investment. 
 
 Thus the companies by their present claims, and in the face of the most un- 
 toward conditions, are striving in two ways to put themselves beyond the pale of 
 regulation so far as rates are concerned. If they can get war prices adopted as 
 the basis of valuation, they can snap their fingers at the public so far as over- 
 capitalization is concerned. Then, again, if they can get the rate of return on 
 
732 Appendix B 
 
 the entire investment high enough to make street railway securities under present 
 conditions attractive to the possessors of free capital, that in itself will cover the 
 existing capitalization, even with a conservative valuation, and will make the 
 capitalization itself conservative if the valuation is based upon present prices or 
 is brought up to the level of present reproduction cost by the capitalization of 
 imagined intangibles. 
 
 In the light of these conditions, and tested by the standards of sound public 
 policy, what can we say as to the valuation of the Denver Tramway property 
 fixed by the Public Utilities Commission of Colorado and accepted by the Tram- 
 way Adjustment Committee of Fifty-Five? The first thing that strikes one 
 in an analysis of the methods followed by the commission is its brave words 
 used in denouncing reproduction cost at war prices, where it says: "The Com- 
 mission is of the opinion that the cost of reproduction of this property, as sub- 
 mitted by the Tramway Company, based on market prices and conditions pre- 
 vailing as of January 1, 191S, * * * * should not be given any considera- 
 tion in arriving at the value of the property in a procedure of this nature." 
 The valuation of the property by the commission's engineers is labeled "Normal 
 Reproduction Cost," and so far as the commission's decision reveals the de- 
 tailed methods used by the engineers it appears that the unit prices were estab- 
 lished partly on the basis of actual cost, and partly on the basis of average market 
 prices prevailing in 1915 or during a ten-year period preceding 1915. Evidently 
 the engineers applied no specific fornnila strictly but assembled such data as they 
 could for the establishment of unit prices on a pre-war basis. While, of course, 
 I have been unable to check from the data submitted either the inventory itself 
 or the unit prices applied to it. I assume that the inventory is approximately cor- 
 rect and that the unit prices were fairly established on the bases outlined. The 
 value found by the commission illustrates very well the relative unimportance 
 of the base cost of the physical property as arrived at in engineering appraisals. 
 The final result may be so different as to make the basic figure unrecognizable. 
 That depends primarily upon what is done with the three factors of overhead 
 expenses, accrued depreciation and intangible values. 
 
 It is noteworthy that in this particular case the normal reproduction cost new 
 of the entire physical pro])erty. exclusive of general overheads and working cap- 
 ital, was found to be $15,257,944, while the final figure reached by the commis- 
 sion as the fair value of the property for rate-making purposes was $23,674,100, 
 an increase of 55 per cent. This increase, without any offset for accrued depre- 
 ciation, is apparently made up of the following items: 
 
 1. General overhead cxik-ii>cs allowed In- tlic engineers $.i.()87.430 
 
 2. "WorkinR Capital" allows! In- the enRiiieers .^i.^O.OOO 
 
 3. "Going \alue" or other intaiiKihlcs. allnwed In- the Commissinii 4.178.726 
 
 $«.416,156 
 
 nic general overheads allowed by the engineers are, in my opinion, exces- 
 sive. They amount to 24 per cent on the base cost of the property. While this 
 is a iinich lower percentage than is sometimes claimed by engineering experts 
 cniplovfd l)v the coinp.Miii-s. ii is noteworthy that it is high in comparison with 
 
Denver Tramway Report 733 
 
 the allowances made by tlie Wisconsin Railroad Commission, the Massachusetts 
 Public Service Commission, and the Interstate Commerce Commission in valua- 
 tion work. As is well known, the Wisconsin commission was a pioneer in the 
 valuation of street railways and other utilities. In its first appraisals it allowed 
 10 per cent for overheads, but as its work proceeded it found that this percent- 
 age was too low, and increased it first to 12 per cent, and finally, after verv care- 
 ful checking, to 15 per cent. The latter is the percentage used in the valuation 
 of the ^Milwaukee Street Railway property. The Massachusetts Public Service 
 Commission, in the now celebrated Bay State Street Railway Case, where the 
 basis used was the estimated amount of capital honestly and prudently invested 
 in the property, allowed 8 per cent for general overheads. 
 
 In 1919, at the solicitation of the electric railway interests, the Federal Elec- 
 tric Railways Commission was appointed by the President for the purpose of in- 
 vestigating the condition of the industry and making recommendations for the 
 solution of the electric railway problem, which was recognized to be acute. This 
 Commission did not attempt to make specific findings as to the proper basis for 
 the valuation of street railway properties, but said : 
 
 "No permanent solution of the electric railway question can be found in the absence 
 of a finding of value for rate-making purposes. This applies to commission form of regu- 
 lation, cost of service contracts, or public ownership and operation. The public should know 
 what it is paying for, and this question cannot be settled without knowing what the property 
 is worth." 
 
 At its hearings the Commission had discouraged the introduction of testimony 
 on the subject of valuation, but in its report it referred to the work of valuation 
 of the steam railroads of the United States, and said that in its opinion "the 
 decisions of the Interstate Commerce Commission, based upon long experience 
 and investigation, will in large measure settle the standard of valuation." For 
 this reason it suggested that municipalities and states when engaged in fixing the 
 values of electric railways should familiarize themselves with the practice, experi- 
 ence and decisions of the I. C. C. in these valuation cases. The fact must not 
 be lost sight of that the Federal Electric Railways Commission report was signed 
 by a representative of the electric railways and by a representative of the invest- 
 ment bankers. Particular reference was made to the Interstate Commerce Com- 
 missions's report in the Texas Midland Railroad valuation, and it is a matter of 
 great significance that in the Texas Midland Case the overheads allowed aggre- 
 gated less than 8 per cent on the base cost of the property. Furthermore, it 
 is significant that in the Des Moines Gas Case, where the United States Supreme 
 Court said that the master had given sufficient consideration to going value with- 
 out the allowance of a separate amount for that item, the court's conclusion was 
 based in part upon the fact that the master had allowed overheads aggregating 
 15 per cent and covering the usual items which, in the court's opinion, were in 
 large part identical with the elements ordinarily considered in the determination 
 of going value. Moreover, in the appraisal of the property of the Denver Union 
 Water Company, May 1, 1914, by Special Master William J. Chinn, appointed 
 by the United States District Court, the amount allowed for overhead expenses 
 was only 15.21 per cent of the base cost new. Mr. Cliinn's appraisal was sub- 
 sequently approved by the United States Supreme Court. 
 
734 Appendix B 
 
 In view of the foregoing, I think that the overhead allowances made by the 
 commission's engineers in the Denver Tramway appraisal are about $1,500,000 
 too high. It will be observed that the allowance for interest during construction 
 alone is $1,783,499, or more than 10 per cent on the total reproduction cost of 
 the property, exclusive of interest during construction and working capital. 
 The amount to be allowed for this item, as for other items of overhead expenses, 
 is largely hypothetical, and depends upon the assumptions made by the appraisers 
 with respect to the length of the construction period, the financial arrangements 
 entered into and the rate of interest paid upon money used for construction pur- 
 poses, but in my opinion the allowance made is nearly double what it should be. 
 
 With respect to the item of $550,000 for working capital, I assume that this 
 includes both "material and supplies" on hand and "cash working capital." 
 Indeed I find from the Denver Tramway Company's annual report for the fiscal 
 year ended December 31, 1917, that the company on that date had among its 
 assets material and supplies with a book value of $219,051. It would appear, 
 therefore, that about $330,000 of the amount allowed by the commission's en- 
 gineers was for "cash working capital." The matter of working capital in a 
 street railway valuation has been the subject of a good deal of controversy in 
 rate cases. A street railway collects its revenues at the time when the service 
 is rendered, or even in advance of that time to the extent that tickets are sold. 
 A street railway company gets from day to day substantially all of the revenues 
 that it will ever get to cover the full cost of the service as it is rendered. If 
 working capital is to be allowed in a public utility valuation, it can only be on 
 account of moneys necessarily supplied by the investors to cover the company's 
 cash expenditures on account of the cost of service in advance of the time when 
 the revenues applicable to the cost of service are collected. It is hardly necessary 
 to examine the actual financial transactions of a street railway company to see 
 that expenditures on account of the cost of service are for the most part paid 
 after the revenues have been collected. On this point the Federal Electric Rail- 
 ways Commission in its report to tiie President makes the following statement : 
 
 "They (the electric railways) liavc a continnons and immediate market for tlieir 'juxls ' 
 They sell transportation as it is produced. While electric railway traffic fluctuates somewhat 
 from year to year, accordinR to the numlwr of passengers and the prosperity that prevails, 
 and fluctuates somewhat from season to season, from week to week, and from day to day, 
 these fluctuations arc relatively unimportant. The husiness of transportation goes on every 
 day in the year. I'ndcr n<irmal conditions the credit of the electric railway husine'^s is it- 
 relatively small need for 'fluid' or workiuR capital. In this respect it occupies a position 
 more independent than that of any other utility or any other pri\-ate industry. It docs a cash 
 husiness. .Mmost UK) per ceiit of its revenues are collected in advance, through the sale of 
 tickets or at the time the service is rendcreil. from the collection of fares in the cars. Money 
 flows into its coffers day liy day in a relatively even stream. Before it pays the wages of 
 its employes, the salaries of its officers, the claims resulting from injuries and damages, the 
 rentals for the use of property, the interest and dividends on its investment, or its taxes, 
 it has already collected from its patrons in cash full compensation for the .service rendered. 
 It does not send out hills." 
 
 The Wisconsin Kailroad Commission, as a result of its many years of ex- 
 perience in dealing with street railway valuations in rate proceedings, no longe. 
 makes any allowance whatever for cash working capital. My own analyses of 
 the cash receipts and expenditures of the Public Service Railway Company of 
 New Jersey and of the detailed balance sheets of the Cleveland Railway Com- 
 
 r 
 
Denver Tramway Report 735 
 
 pany have thoroughly convinced me that even as to the item of material and 
 supplies the cash required to pay for them in advance of the time when they are 
 used is much more than offset by a company's deferred payments for salaries, 
 wages, taxes, interest, etc. In my opinion, therefore, neither the book item 
 "material and supplies" nor "cash working capital" has any place in the per- 
 manent valuation of a street railway property for rate purposes. 
 
 The Colorado commission discusses going value at considerable length, but 
 does not clearly indicate the amount actually allowed for this item. Prof. Milo 
 S. Ketchum, in his report to the Tramway .\djustment Committee, reached the 
 conclusion that the commission had allowed about $2,500,000 for the going value 
 of the city lines. The exact amount cannot be deduced from the commission's 
 decision, for the commission does not give details in support of its final figure, 
 but says : "The amount arrived at represents, in other words, the present fair 
 value of the property based upon its cost of reproduction under average or nor- 
 mal conditions, its present service condition and efficiency, and all other relevant 
 facts." As we have seen, the diiTerence between the reproduction cost new plus 
 working capital and the final valuation figure for the entire property is $4,178,726. 
 If the commission, in fact, in arriving at its final figure, made any allowances for 
 accrued depreciation, then its allowance for going value or other intangible ele- 
 ments must have been even greater than $4,178,726. For this reason I shall 
 assume that no deduction was made for depreciation, and that the figure just 
 given represents the commission's estimate of going value of the property. If 
 that be so, it will be seen that going value amounts to 22 per cent of the repro- 
 duction cost new of the physical property, including the overheads, but excluding 
 working capital, or 27 per cent of the base cost of the physical property. 
 
 There is still great uncertainty as to what going value in the street railway 
 business is. The United States Supreme Court has discussed this element of 
 value with respect to other utilities, such as gas and water supply, where a, 
 going concern is enabled to do business and to earn a revenue by reason of the 
 fact of its having established physical connections between its distribution system 
 and the buildings in which its consumers live or do business. In street railway 
 operation I know of nothing closely analogous to the value of these connections. 
 Even at that the United States Supreme Court, as I have already indicated, ap- 
 proved the valuation of the Des Moines Gas property without any separate allow- 
 ance for going value. In the Denver Union Water Case it approved the master's 
 finding with a separate allowance of $800,000, or the equivalent of 6.35 per cent 
 of the total value of the property with this element excluded. In the water 
 case, however, the master expressly stated that in arriving at the value of the 
 physical property he had made "no addition whatsoever because such property 
 constitutes part of a long established plant doing a business which yields an 
 income." Personally I have no doubt at all that the valuation of the physical 
 property made by the master in the Denver Water Case and the valuation of the 
 physical property made by the master in the Des Moines Gas Case were as nearly 
 alike with respect to the consideration of the value of the property as a going 
 concern as two appraisals could well be. but in one case the master said that he 
 had valued the company's property on the basis that it was in successful opera- 
 
736 Appendix B 
 
 tion, while in the other case the master expressly stated that nothing was included 
 in the physical appraisal on this account, and so made a separate allowance. 
 The Supreme Court approved the results in both cases. It is perfectly clear that 
 a value reached by a reproduction cost appraisal of the physical property is based 
 upon the assumption tliat the property is alive and not dead, for if it were not 
 "going" or at least if it did not have the right to go. and the opportunity to earn 
 money by going, it would be worth less than its reproduction cost. Indeed, it 
 might have very little value e.xcept as junk. 
 
 The Wisconsin Railroad Commission in its decision of June 24, 1920. with 
 respect to the fares to be charged by the Milwaukee Electric Railway and Light 
 Company, complying with the mandate of the Dane County Circuit Court, de- 
 ducted accrued depreciation from the cost new of the physical property, and set 
 up a separate allowance for going value. It fixed the sum of $500,000 as the 
 going value of a property otherwise appraised at $15,500,000. This makes the 
 going value allowance between 3 per cent and 4 per cent of the value of the 
 physical property. 
 
 Taking all these things intu consideration. 1 cannot escape the conclusion 
 that the allowance for going value made by the Colorado commission in the 
 case of the Denver Tramway Company, and approved by Prof. Ketchum. was 
 grossly excessive. I doubt if any separate allowance whatever for going value, 
 under the circumstances of the Denver Tramway Company, is required under the 
 rulings of the United States Supreme Court, but in any case I am sure that it 
 would be difficult to justify an allowance of more than 5 per cent of the cost 
 new of the physical property. 
 
 We now come to the question of depreciation. The figures thus far dis- 
 cussed assume that the property is brand new. The treatment of depreciation 
 is a subject of violent controversy in valuation circles. The United States 
 Supreme Court has repeatedly held that accnied depreciation must be deducted 
 from cost new when the re])ro(luction method is used as a basis for arriving at 
 fair value for rate purposes. Whether accrued depreciation should be deducted 
 where the "actual cost" or the "capital honestly and prudently invested" is the 
 basis used has not been made quite so clear. It is now fully recognized that 
 depreciation is an operating expense. From this it follows that if depreciation 
 has been neglected a portion of the operating expenses has been deferred, and if 
 the property is retained in the capital account at its cost new, the result in effect 
 is the capitalization of unpaid operating expenses. Such a policy, if permanently 
 followed, cannot he justified on any theory of sound finance. If a street railway 
 company operating under a franchise contract containing specific limitations upon 
 the rates of fare has failed to make i>rovision for depreciation as it accrued, 
 whether the failure was due to insutVicient earnings or to a propensity lor paying 
 dividends on stock not representing cash investment, it cannot be justly claimed 
 that the public when it makes a new deal with the company at the latter's solicita- 
 tion should make goo<l all of the comjiany's past losses, as well as guarantee it 
 against losses in the future. 
 
 Ill its decision of December 17, lOl.S. the Colorado commission fixed 
 $500,000 as the amount of antnial depreciation .tccruing on the entire property in 
 
Denver Tramway Report 7},7 
 
 excess of current maintenance. It found that during the year 1917 the company 
 had in fact included in its maintenance accounts the sum of $150,000 for replace- 
 ments properly chargeable to a depreciation reserve. It appears, therefore, that 
 in the commission's opinion the value of the physical property at the end of 1917 
 must have been $350,000 less than it was at the beginning of the year as a result 
 of the uncared for accruing depreciation. The commission did not state the 
 amounts of money included in the maintenance accounts for years prior to 1917 
 which were properly attributable to replacements, but if we assume that on the 
 average during the preceding period of ten years the dififefence between the 
 amount actually spent for replacements and the amount of the accruing depre- 
 ciation as fixea by the commission was the same as it was in the year 1917, we 
 should have to conclude that, disregarding additions, extensions and betterments, 
 the physical property on December 31, 1917, must have been worth $3,500,000 
 less than it was ten years before. I make this computation merely to show how 
 the Colorado commission, by its treatment of annual depreciation, proves that 
 the physical property in its present condition must be worth very much less than 
 cost new. It is said that the Denver Tramway property has been well managed 
 and maintained, and is in good operating condition ; but it has been well estab- 
 lished in the case of the Cleveland Railway Company that a standard of 70 per 
 cent condition of cost new is a very high standard and one that cannot easily be 
 maintained. True, many engineers who ignore the depreciation that cannot be 
 seen and measured appraise street railway properties and report them to be in 
 a condition as high as 85 or 90 per cent of cost new. Here again the conclusion 
 reached depends upon the assumptions made and the methods used, but I have 
 very little doubt that a consistent application of the commission's findings with 
 respect to annual depreciation would reveal an accrued depreciation of at least 
 $5,000,000 in the Denver Tramway property on the basis of the reproduction cost 
 estimate submitted by the commission's engineers. 
 
 Taking into consideration the several matters to which I have called atten- 
 tion, I think that a fair valuation of the entire Tramway property, with deduc- 
 tion for accrued depreciation, would be not more than $14,000,000 or $15,000,000. 
 It all depends upon the assumptions made, the valuation rules followed, and the 
 practical interpretation of the word "fair" in a readjustment of the public rela- 
 tions between the city and the company, but so far as I have been able to deter- 
 mine from the data submitted to me, I should expect that the result indicated 
 would be reached by the application of correct rules of valuation and a proper 
 consideration of the relative claims of the company and the public. 
 
 So far as I can see, the only escape from this conclusion would lie in the 
 acceptance of the claim that war prices should be used as the basis for a present- 
 day valuation on the theory- that the purchasing power of money has been cut in 
 two through economic changes over which neither the City of Denver nor the 
 Tramway Company had any control, and that, therefore, a valuation of $30,000,000 
 in the money of today represents no greater purchasing power than a valuation 
 of $15,000,000 in the money of 1914. In certain respects this theory is plausible, 
 but as applied to a public utility property mortgaged to the full extent of its 
 original cost the application of the theory works out a monstrous injustice. No 
 
738 Appendix B 
 
 street railway company considers for a moment the necessity of voluntarily going 
 to its bondholders and doubling the rate of interest on the bonds outstanding in 
 order that the owners of these securities may receive the same amount of income, 
 measured by purchasing power, that they received when the bonds were first 
 issued. The result is that if street railway valuations are now fixed on the basis 
 of war prices for the purpose of making good to the owners the decrease in the 
 purchasing power of money, the losses which the bondholders have already in- 
 curred through the depreciation of the dollar will not be made up to them, but 
 these losses will be transformed into profits conferred upon the stockholders, 
 whose real financial interest in the property may be little or nothing. From the 
 practical point of view, it would mean that every tribunal charged with the regu- 
 lation of the rates of public utilities would be setting up in the business of guar- 
 anteeing the purchasing power of the dollar so far as the utilities under its control 
 were concerned, and thus we should have a motley group of regulatory author- 
 ities assuming jurisdiction over the money of the country and conferring special 
 favors upon the particular groups of property owners who happened to have in- 
 vested in public utilities. It is not yet certain how the highest courts will finally 
 decide with respect to the use of war prices in the valuation of public utility 
 property for rate purposes, but thus far the weight of judicial opinion and 
 sound reason is. I believe, in support of the position taken by the Colorado com- 
 mission, when it flatly refused, in this case, to consider war prices as a basis for 
 fair valuation. 
 
 III. 
 
 A brief analysis and evaluation of the "Service-at-Cost" ordinance drafted 
 by the Tramway Adjustment Committee and of the "Elastic 6c Fare" ordi- 
 nance, both of which were submitted to popular vote at a special election 
 October 22, 1919. 
 
 The service-at-cost plan is now being advocated by the electric railway com- 
 panies throughout the country, and this plan has recently been recommended by 
 the Federal Electric Railways Commission in its report. The plan was origin- 
 ated in Cleveland ten years ago as a means of bringing to a conclusion a long and 
 bitter controversy between the city and the street railway company. It has since 
 been adopted in a number nf other American cities, but in no other instance that 
 I know of have its fundamental conditions been so favorable to the public as in 
 the case of Cleveland. The testimony given before the Federal Electric Rail- 
 ways Commission at its hearings in Washington last year and the general con- 
 sensus of opinion of those familiar with street railway conditions in different 
 cities of the country indicate that service at cost, as worked out in Cleveland, has 
 proved to be the most satisfactory plan of street railw.iy operation yet devised 
 under private management. But even in Cleveland, where the spirit of coopera- 
 tion between the city and the company in the administration of the plan has been 
 quite remarkable, certain weaknesses have developed which show that it is far 
 from perfect and that it can hardly be regarded as a permanent and final solution 
 
Denver Tramway Report 739 
 
 of the public relations of the street railways. As worked out in other cities, 
 service at cost has been modified so as to be in many respects more favorable to 
 the companies, although even in Cleveland the company went through the war 
 with flying colors and maintained its credit during the period when most other 
 street railways of the country were bankrupt or on the verge of bankruptcy. 
 
 A flexible fare is one of the most characteristic features of a service-at-cost 
 plan, but in the Cleveland franchise an upper limit is established beyond which 
 the fares may not go ; while in the plan as advocated by the electric railway com- 
 panies and as recommended by the Federal Commission, no such upper limit 
 is established. In the light of recent fare tendencies it requires very little con- 
 sideration to show that the dift'erence between an upper limit and no upper limit 
 in a service-at-cost plan is a radical and fundamental difference. Under the 
 theory of regulation by state commissions or by other public avithorities exercis- 
 ing the police power, it is well established that the rates charged by a public utility 
 may not be higher than the service is reasonably worth. In the past the neces- 
 sary cost of the service has been regarded as the low limit and the reasonable 
 value of the service as the high limit of rates, and so long as the cost under 
 normal conditions was uniformly less than the value there was no conflict in the 
 practical application of the two rules. But since the advent of automobile com- 
 petition, and particularly since the vast increase in the cost of service under the 
 influence of the war, it is becoming apparent that in many cases the full cost of 
 local transportation service, with a liberal return on past investments figured in, 
 is likely to be greater than the true value of the service rendered to the car riders. 
 The adoption of the service-at-cost plan without any upper limit on street rail- 
 way fares exempts the companies from the effect of the old limitation inherent 
 in the police power and permits them to charge under public guaranties any rates 
 — no matter how high — up to the point where they yield sufificient revenue to 
 cover the entire cost of service, including the established rate of return upon the 
 capital value. In theory, this change is one of vast moment. It means that here- 
 after — if the service-at-cost plan as outlined is adopted — the rates of fare on 
 urban street railways will be fixed wholly on the basis of the financial needs of 
 the enterprise, and to no extent whatever will be controlled or limited by social 
 requirements. In other words, street railway fares, for all practical purposes, 
 will be removed from public control and the character of the street railway as a 
 public utility will be impaired and, perhaps, in some cases destroyed. 
 
 In addition to the flexible fare, the establishment of a fixed capital value 
 is an important characteristic of the service-at-cost plan. Here again, the pub- 
 lic interest was better protected in the original Cleveland ordinance than in most, 
 if not all, of the service-at-cost plans subsequently adopted. The fixed capital 
 value serves not only as the open door to public ownership in case the experiment 
 of service at cost under private management should fail, but also as one of the 
 chief determining factors in the cost of service and, therefore, in the control of 
 the rates to be charged. It is not too much to say that a service-at-cost plan 
 might be excellent in every other respect, and yet have its efTectiveness entirely 
 destroyed by too high a valuation. 
 
 A third element of great importance is the rate of return to be paid on the 
 
740 Appendix B 
 
 capital. From the point of view of its effect upon fares, this may be quite as 
 important as the valuation itself. In this respect, also, the original Cleveland plan 
 was reasonably conservative, as the return to capital represented by stock issued 
 at par was fixed at 6 per cent, and the return to capital represented by bonds was 
 fixed at the actual interest paid on the money, not exceeding 6 per cent. 
 
 It can readily be seen that a service-at-cost plan with no upper limit as to 
 fares, with an excessive valuation, and with a "liberal" rate of return will be so 
 different from the Cleveland plan in its relative effects upon the public and the 
 private interests concerned as to fall into an entirely different category. 
 
 The points I have mentioned affect the price that is to be paid for the 
 service rendered, but under service at cost it is also necessary that some provision 
 be made by which the public will be enabled to see that it gets the worth of its 
 money. In other words, it is recognized as an essential characteristic of service 
 at cost that the control of the service shall be wholly or predominantly in the 
 hands of officials representing the community. 
 
 Turning to the Denver service-at-cost ordinance prepared by the Tramway 
 Adjustment Committee of Fifty-F'ive, and submitted to the electors last year, it 
 will be noticed that it contained no upper limit whatever upon the fares to be 
 charged except the cost of the service. On the other hand, it did prescribe a 
 definite though low minimum below which the fares could not go, no matter how 
 little the cost of service under future conditions might become. This ordinance, 
 therefore, is subject to the general objection that it would relieve the company 
 of the obligation to charge rates not in excess of the reasonable value of the 
 service rendered except as that value is measured by cost, including a full return 
 upon capital. In this respect the ordinance was theoretically nuich more advan- 
 tageous to the company and much less advantageous to the city than the Cleve- 
 land service-at-cost model. 
 
 In the second place, the recognized capital value in the Denver ordinance 
 was $20,867,750. or $81 per capita on the basis of the 1920 population as com- 
 pared with a capital value of $34,218,000 on December 31, 1919 in Cleveland, or 
 the equivalent of $40 per capita of the 1920 population. If my analysis of the 
 valuation fixed by the Colorado Public Utilities Commission is anywhere nearly 
 correct, then it shows that the capital value recognized in the Tramway Adjust- 
 ment Committee's ordinance was excessive. Indeed, the importance of conserva- 
 tism in laying the foundation for the financial rehabilitation of a street railway 
 system at the present time is so great that the valuation accepted in the Denver 
 ordinance might have proven fatal to its success, regardless of anv consideration 
 of the public rights in the matter. 
 
 It will be noted, also, that the rate of return fixed in the Denver plan was 7 
 per cent upon the entire capital value of the city lines. This would amount 
 to $1,4'''0,742. If the s.ime rates of return est.ablishcd by the Cleveland plan 
 had been fixed in the Denver ordinance, the total annual return paid to capital 
 on the basis of the initial investment and the amount of bonds now outstanding 
 would have been approximately $350,000 less. 
 
 It will be seen, therefore, that from the point of view of what the car riders' 
 would have to pay for the service rendered, the Tramway Adjustment Commit- 
 
Denver Tramway Report 741 
 
 tee's plan was much less favorable to the public and much more favorable to the 
 company than the Cleveland plan. 
 
 If we turn to the matter of the extent and quality of the service rendered, 
 we find that in the Tramway Adjustment Committee's plan the city reserved no 
 affirmative control whatever over extensions, additions and improvements ; while 
 its supervision over schedules, routes and transfer regulations was to be exercised 
 through the Board of Tramway Control consisting of three members — one to 
 be appointed by the Mayor, one by the City Council, and one by the Denver 
 Tramway Company. At first blush it would appear that the city, with a two- 
 thirds representation on the board, could have everything its own way. Upon 
 further examination, however, we see that the company's representative is to be 
 removable at any time at the pleasure of the company. There would be no ques- 
 tion whatever about his being continuously and completely responsible to the 
 company's point of view as to its own interests. On the other hand, the Mayor's 
 representative was to hold office during the term of the Mayor that appointed 
 him. and was not subject to removal by the appointing power or by anybody else. 
 Similarly, the member appointed by resolution by the majority of the City Council 
 was to hold office for five years with no provision whatever for his removal prior 
 to the expiration of his fixed term. It can readily be seen that with complete 
 responsibility on the part of the company's representative to the interests which 
 he was appointed to serve, and with the two city representatives appointed by 
 different political authorities, and in neither case responsible to the appointing 
 power or to the jieople of the City of Denver for the way they protected the public 
 interests, the control of service reserved to the city would in all likelihood prove 
 to be nominal rather than real. The Tramway Company would have a supreme 
 interest in controlling either the Mayor or the Council when the original appoint- 
 ments were made, or else in getting control of one or the other of the city repre- 
 sentatives after they had been appointed. I cannot think that such a plan of 
 control could possibly work out for the public interest. 
 
 One of the most obvious and fundamental theoretical defects of the Cleve- 
 land plan is the fact that the return to the investors is a fixed, inflexible amount 
 which under all ordinary circumstances, within the limitations of the earning 
 power of the enterprise under the maximum rate of fare, will be paid; whereas, 
 no amount of effort on the part of the management — no matter how commendable 
 — will result in yielding any additional reward to the investors who are supposed 
 to appoint and control the management. This is recognized to be one of the 
 fundamental weaknesses of the whole service-at-cost scheme. It inheres even 
 in the scheme of continuous state regulation whenever the rules restricting the 
 :ompanies to a fair return are consistently applied. An effort to get away from 
 :his difficulty by providing some incentive for economical and efficient manage- 
 Tient through the use of a sliding scale schedule applicable to the return upon 
 :apital and dependent upon the rate of fare charged was made in the Dallas and 
 Cincinnati service-at-cost ordinances, but in neither case thus far has the sliding 
 scale come into play, and for that reason no positive experience with the effect 
 jf the sliding-scale plan in the control of street railway fares is yet available. 
 The scheme is adapted from the so-called Boston sliding scale which was applied 
 
742 Appendix B 
 
 some years ago in the case of the Boston Consolidated Gas Company. In fact, 
 the plan was originally imported froni England where also it has been applied 
 to gas companies. The Denver "Service-at-Cost" ordinance, as drafted by the 
 Tramway Adjustment Committee, incorporated the sliding scale feature. This 
 was based upon the assumption that the service-at-cost experiment would be 
 started off at a 6-cent fare. The company would be entitled to an additional 
 Yi of 1 per cent on the capital value so long as it was able to maintain this initial 
 rate of fare, and if it succeeded in reducing the adult fare to 5'/^ cents by ticket, 
 it would be entitled to take as a part of the return upon capital another Vi of 
 1 per cent, thus raising the ultimate return to 7'/^ per cent. In like manner, if 
 the company succeeded in reducing the fare to 5 cents its ultimate rate of return 
 would be 7% per cent, and if it reduced the fare below 5 cents, the ultimate 
 return upon the investment would be a full 8 per cent. 
 
 While I recognize the need for some sort of an incentive to induce the 
 management to provide efficient and economical operation under a service-at-cost 
 plan, I have not had any confidence that the sliding-scale schenie, with its auto- 
 matic adjustment of the rate of return to the rate of fare, can work out bene- 
 ficially to the public in the case of a street railway. Any automatic plan that 
 furnishes a direct incentive to economy is likely to result in a scamping of service, 
 greatly to the detriment of the traveling public. It may be that in the case of 
 gas companies, where the standards of service are relatively simple, this diffi- 
 culty can be overcome by diligent public control, but in the case of local transpor- 
 tation the elements entering into good service are numerous and complex, and it 
 seems to me that any scheme of public control of serv-ice is likely to be thwarted 
 if at the same time a definite reward is offered to the management for making 
 the service poor. If low fares mean high dividends, the management of a street 
 railway resi)onsible to the stockholders will be pretty sure to sec that the number 
 of straphangers is not unduly diminished, and that all of the elements of service 
 which cost money are restricted as far as practicable. 
 
 It is one of the merits of the service-at-cost idea that the control of the 
 service to be rendered is to be vested in the hands of the public, and that the 
 public can have any kind of service it wants if only it is willing to pay for it. 
 This idea negatives any scheme of control throusjh an automatic device for the 
 manipulation of financial inotives. I am satisfied that under any service-at-cost 
 plan the control of the cost of service, as well as the control of the quality of 
 service, must be effected through the exercise of continuous detailed attention 
 and pressure on the part of those representing the public interest. For this 
 reason I do not believe in the automatic slitling scale method as a substitute for 
 vigilant regulation and the frequently repealed exercise of responsible and intel- 
 ligent judgment. 
 
 From what I have already said it will be clear that in my judgment the 
 Tramway .\djuslmcnt Committee's service-at-cost plan was seriously defective. 
 The limits of this re|>ort do not permit nie to go into a complete analysis of all 
 the features of the ordinance, but without going any further in details I may say 
 that in my opinion the purchase clause, the arbitration clause, and the provisions 
 for the fare control fund and for the renewals and depreciation reserve fund are 
 
Denver Tramway Report 743 
 
 all open to criticism. On the whole, I should say that the ordinance was by no 
 means as carefully worked out or as well calculated to protect the public interests 
 as the Cleveland plan. Moreover, it strikes me that if the service-at-cost idea is 
 to be weakened the farther it gets away from its point of origin and the more 
 light we have upon its merits and defects, then instead of being a panacea for 
 the ills of the street railway business, as many enthusiasts would now regard it, it 
 will prove to be a scheme fraught with danger, and may even have the efi'ect of 
 making the ultimate solution of the transit problem more difficult instead of 
 easier. Surely, no city can afford to adopt the service-at-cost plan except after 
 the most careful deliberation, and with the most complete safeguarding of the 
 public interest. 
 
 With respect to the "Elastic 6c Fare" ordinance, not much need be said. 
 Its sole purpose was to provide machinery for moving fares up and down to 
 meet changes in wage schedules of the Tramway employes. It appears that the 
 efifect of this ordinance would have been to establish a tendency toward the 
 stabilization of wages at the point where they were at the time when it was voted 
 upon. While the increase of fares to cover an increase in wages, or the decrease 
 of fares to take up the slack brought about by a decrease in wages, was not to be 
 mandatory upon the board of control but merely permissive, the action of the 
 board in case it decided to change the fares was closely circumscribed. Where 
 wages had been increased the fares could not be increased more than sufficient 
 to take care of the wage increase : and where wages had been decreased the fares, 
 if lowered, could not be decreased less than sufficient to cover the amount of the 
 decrease in wages. The best that can be said for such a plan is that nobody can 
 tell for certain how it would work out. Its apparent purpose was to make the 
 rate of fare flexible only with respect to changes in the rates of wages. It did 
 not contemplate a fluctuation in rates of fare as a result of general causes, such, 
 for example, as the introduction of one-man car operation, or changes in the cost 
 of power or materials entering into street railway service. Apparently, it did 
 not contemplate the possibility that the increase in traffic might under certain con- 
 ditions absorb wage increases, though it is quite possible that under the terms of 
 the ordinance this could have been taken into consideration by the board of con- 
 trol. One provision of the ordinance which 1 never like to see in such a measure 
 was to the effect that fares could not be increased to take care of a wage increase 
 based upon an hourly schedule above the average paid to street railway employes 
 at the time in five other cities. The ordinance did not even define this standard 
 as being applicable to motormen and conductors, and under its terms the board 
 of control would have been compelled to figure out in the best way it could the 
 average wage schedule paid to the "employes" in the five cities mentioned. In 
 any case, the adoption of such a standard is a mere lazy man's way of avoiding 
 responsibility. Such a plan would throw upon the employes of the other cities 
 the primary burden of securing wage increases which the Denver employes would 
 then — with little effort of their own — proceed to enjoy. However, if the em- 
 ployes of the other cities or some of them were unsuccessful in their efforts to 
 secure higher wages, the Denver employes would have to "tag along." For these 
 

 744 Appendix B 
 
 reasons I do not think that the "Elastic 6c Fare" ordinance was a measure 
 designed with sufficient care and skill to be used as a means of settling either the 
 financial or the labor problems of the Denver Tramway Company. 
 
 IV. 
 
 A discussion of the methods pursued by the Denver Tramway Company 
 with respect to maintenance, replacements and depreciation, as revealed by 
 the company's reports. 
 
 It appears from the annual reports of the Denver Tramway Company to its 
 stockholders, and from the statements submitted by the company to the Tramway 
 Adjustment Committee, that prior to the company's appeal to the Colorado Public 
 Utilities Commission for permission to charge an increased fare little or no pro- 
 vision had been made for accruing depreciation other than the current expendi- 
 tures for mantenance. In its appeal to the Utilities Commission the company 
 submitted an estimate intended to show that for the year 1917 "the annual 
 accrual for depreciation, renewals and obsolescence" was approximately $892,140. 
 In Tramway Letter No. 6, submitted to the Tramway Adjustment Committee 
 under date of February 8, 1919, the company explained the basis for this estimate. 
 The amount charged to maintenance and renewals in 1916 and 1917 by the San 
 Francisco Municipal Railway was figured out at $7,434 per mile; the amount 
 charged in Cleveland, at $5,7SO per mile, and the amount charged by the Chicago 
 .'Surface Lines at $5,310 per mile, showing an average of $6,174 per mile for these 
 three systems. The Tramway Company then assumed that $5,000 per mile on 
 the city lines and $4,000 per mile on the interurban lines would be a proper figure 
 for Denver, and from the $1,215,000 i)cr annum thus arrived at, it deducted the 
 $320,860 actually s])ent in current maintenance in 1917, and thus reached the 
 figure $892,140 claimed by it as the necessary allowance to cover depreciation 
 accnied during that year and not cared for by maintenance. 
 
 The Colorado commission found that during 1917 $150,000 of the amount 
 expended for maintenance was for replacements properly chargeable to deprecia- 
 tion reserve. Its engineers estimated the annual depreciation requirements of 
 the entire system of the Denver Tramway Company at $()77,644 on the straight 
 line basis, and at $435,275 on a 4 jkt cent sinking fund basis. Without stating 
 the basis for its final decision and without prescribing the method to be used by 
 the company in handling the de])reciation reserve, the commission fixed the 
 annual depreciation requirements at $500,000, of which 90 per cent was attributed 
 to the city lines. 
 
 Sul)se(iuent to the commission's decision, the Board of Directors of the 
 Denver Tramway Company, in July, 1918, decided that $300,000 per annum 
 should be "the minimum annual accrual to cover depreciation and renewals." 
 an<l this decision was made retroactive to cover the year 1917. The company's 
 annual report for the year 1918 shows that the .sum of $218,448.21 was charged 
 to profit and loss on account of "additional depreciation accrual" over and above 
 
Denver Tramway Report 745 
 
 the amount actually expended for renewals in 1917. In an exhibit attached to 
 Tramway Letter No. 5, addressed to the Tramway Adjustment Committee under 
 date of February 8, 1919, it is shown that the amount actually expended for re- 
 placements and charged to maintenance during the year 1918 was $350,000 as 
 compared with the sum of $150,000 so spent and charged during the preceding 
 year, and $150,000 estimated to be so spent and charged during the year 1919. 
 The real questions to be determined are (1) the amount of depreciation actually 
 accruing from year to year, and (2) the extent to which this depreciation is being 
 offset by expenditures charged to maintenance. 
 
 This involves a discussion of the fundamental theory of depreciation and 
 the relation between annual depreciation allowances, the depreciation reserve and 
 the accrued depreciation to be taken into account in the determination of the 
 present fair value of the property for rate purposes. It is generally recognized 
 by regulatory authorities and students of public utility finance that one of the 
 primary causes of the financial breakdown of the electric railways has been their 
 neglect of accruing depreciation. The present managements of the companies 
 say that not only did their predecessors, in their optimism with respect to the 
 future earning power of the electric railways, fail to see the need of a deprecia- 
 tion reserve, but that their earnings were in fact too small to permit of their 
 setting such a reserve aside if they had recognized the need of it. The situa- 
 tion seems to be this : when a street railway is new, the necessary expendi- 
 tures for maintenance are very small, but as the system grows older the cost of 
 maintenance and replacements gradually increases until, as the experts say, the 
 system has gone through a complete cycle of renewals and has settled down to the 
 normal condition of an old property. While there may be considerable difference 
 of opinion as to what that normal condition is, measured in a percentage of cost 
 new, it is admitted that this difference represents capita! that has been used up 
 in the rendering of service. It is what might be termed an invisible operating 
 expense. However, it is further admitted that in the ordinary course of develop- 
 ment of a going street railway property it will never be possible by a wise expen- 
 diture of money to restore the capital so used up. It is not correct to assume that 
 the entire property is going to depreciate down to zero and then have to be re- 
 placed all at once. On the contrary, the particular items of property have dif- 
 ferent useful lives, and are renewed from time to time as occasion requires. 
 After the property has once settled down to a normally depreciated condition, 
 the renewals come along from year to year in a comparatively steady stream, 
 and a sum equivalent to the full amount of accruing depreciation, on the average, 
 will have to be spent each year for replacements. If during the early life of the 
 plant the full amount of accruing depreciation has been set aside out of earnings 
 and not paid back to the investors, a reserve will have been accumulated far in 
 excess of any actual need for replacements. Theoretically this reserve represents 
 the permanent depreciation of the property. As it cannot be used in the main- 
 tenance of the property, it should have been returned to the investors, and a 
 corresponding reduction in the capital account made, or else it should have been 
 invested in additions and betterments without any increase in the capital accoimt. 
 In the one case the capital account upon which the investors are entitled to earn 
 
746 Appendix B 
 
 a fair return under the established rules of rate regulation will have been reduced 
 from the original cost of the property to the original cost less permanent accrued 
 depreciation. In the other case, the property will have been enlarged from time 
 to time so that the original cost of the property, including the cost of additions 
 and betterments, less the amount of the accrued depreciation, will at all times 
 be equal to the construction cost of the initial plant, and thus the integrity of 
 the company's investment will be protected. 
 
 It may be said that the whole issue in the matter of depreciation is bound 
 up with the confusion in regard to what the present treatment of past history 
 should be. In the Kno.xville Water Case the United States Supreme Court clearly 
 held that in a rate proceeding accrued depreciation should be deducted from the 
 cost new of the property, and that, if the company had failed in the past to charge 
 rates sufficient to take care of depreciation as it accrued, or having collected suf- 
 ficient revenues for the purpose had dissipated them in the payment of dividends 
 or otherwise, the public could not now be made, through a higher schedule of 
 rates, to make good the company's past negligence. Under this rule it seems to 
 be clear that when the rates of a street railway are first fixed on the service-at- 
 cost principle, whether through the exercise of the police power or by means of a 
 negotiated contract, the full amount of the accrued depreciation of the property 
 up to that time should be deducted from cost new in arriving at the rate base. 
 Therefore, assuming that the property has reached a normally depreciated con- 
 dition, the entire amount of accruing depreciation will be oflFset on the average 
 from year to year by expenditures for replacements, and under these circum- 
 stances there is sound reason for the practice of combining maintenance, depre- 
 ciation and renewals in a blanket allowance which, in general, will correspond 
 with the amount of money actually put into the property from year to year as a 
 part of the cost of operation. True, prudence and the fact that even in an old 
 property replacements do not come in an ab.solutely even stream, dictate that the 
 amount set aside out of earnings should be sufficient to accumulate a moderate 
 reserve to cover the unevenness in the actual requirements for replacement ex- 
 penditures. 
 
 The San Francisco Municipal Railway, starting out as a new enterprise, 
 adopted the policy of setting aside a fixed percentage of the gross revenues for 
 depreciation, and this reserve, during the first seven years of operation, accumu- 
 lated to the extent of $15,000 per mile of track in service at the end of the period. 
 I do not know just how this San Francisco depreciation reserve is being used, 
 but to the extent that the bonds issued against the jiroperty are being paid off 
 and to the extent tiiat additions and betterments are being made, this fund could 
 properly be used for one or both of those purposes. In either case the result 
 would be in effect the decapitalization of the property to the extent of the per- 
 manent accrued depreciation provided for. 
 
 In Cleveland, under the service-at-cost plan, no separate depreciation reserve 
 has been established, but a certain amount per car mile is taken out of current 
 revenues and expended for maintenance and renewals, which arc treated as a 
 part of operating expenses. Moreover, one of the chief reasons why the current 
 expenditures for maintenance and renewals on the Cleveland Railway system 
 
Denver Tramway Report 747 
 
 are so liberal is that, under the terms of the service-at-cost ordinance, the entire 
 cost of replacements is charged to operating expenses, even though the new item 
 of property may cost twice as much as the original cost of the identical item 
 replaced. In other words, under the Cleveland plan the replacement of identical 
 jtenis of property is treated as an operating expense, regardless of fluctuation in 
 costs, whereas under the ordinary accounting rules prescribed by the Interstate 
 Commerce Commission and by the state utility commissions generally, it is not 
 the property itself but the original cost of it that is replaced and charged to oper- 
 ating expenses. In a period of rising prices and for quite a number of years 
 after prices have reached a high level, the Cleveland policy results in a much 
 swollen maintenance account, for the reason that the street railway system is 
 being rebuilt on the basis of a higher price level, without any corresponding ad- 
 justment and increase in the capital account. 
 
 Attention should be called in this connection to the confusion resulting from 
 the unwarranted claims advanced by the Denver Tramway Company in its state- 
 ments to the Tramway Adjustment Committee, and in fact frequently advanced 
 by street railway companies in rate proceedings during the present abnormal 
 times, to the effect that on account of the great increase in the cost of labor and 
 materials allowance for accruing depreciation to cover the cost of replacements 
 ought to be greatly increased, when the fact is that under the systems of account- 
 ing prescribed by the commissions the portion of the cost of replacements repre- 
 senting an increase over the original cost of the articles replaced is not to be 
 charged to operating expenses at all, but to new capital. 
 
 An allowance for depreciation, in addition to the expenditures for current 
 maintenance as reflected in the companies' statements of operating expenses, is 
 frequently made by commissions in establishing rates, but it is impossible to say 
 in any given case whether or not the allowance is correct or excessive, except 
 upon the basis of an actual detailed examination of the company's operating 
 expenses and of the condition in which the property, as a matter of fact, is being 
 maintained. True, the lesson of neglected depreciation ought to be well enough 
 learned so that in the future the regulating authorities will lean toward liberality 
 in the amounts allowed for depreciation, but will accompany this liberality with 
 the enforcement of strict rules respecting the use of the moneys so allowed. 
 Financial conservatism requires that depreciation shall be taken care of as it 
 accrues, but this does not mean that the public shall give up its rights under the 
 Knoxville Water Case rule, and. in the guise of an allowance for accruing depre- 
 ciation, enable the company in the future to build up a reserve to make good all 
 of the depreciation that has already accrued. The Denver Tramway Company 
 states that in 1918 it spent $350,000 for renewals. If, as a matter of fact, the 
 property was in as good a condition at the end of the year as it was at the begin- 
 ning of the year, this would indicate that the entire amount of accruing depre- 
 ciation had been taken care of through maintenance, and if, in point of fact, the 
 condition of the property was improved during the year, this would indicate that 
 not only all of the accruing depreciation had been taken care of. but that some of 
 the depreciation accrued in previous years had been made up. 
 
 Upon the data submitted I cannot determine closely the amount which the 
 
748 Appendix B 
 
 Denver Tramway Company ought to spend from year to year in maintenance 
 and renewals in order to keep its physical property up to its present condition. 
 However, it is clear that track mileage is a very imperfect basis for the determin- 
 ation of what such an allowance should be. Under the Cleveland plan the 
 allowance is based on the number of car miles run, which, in my opinion, is a 
 better, though by no means a perfect basis, for the determination of reasonable 
 requirements. The Denver Tramway Company's annual report shows that in 
 the year 1917 the number of passenger car miles run on its entire system was 
 12,077,487. At the average rate allowed under the Cleveland ordinance during 
 the year 1917, namely 4.9 cents per car mile, the total expenditures of the Denver 
 Tramway Company for that year should have been approximately $600,000, as 
 compared with the $322,860 reported by the company as its actual expenditures 
 for current maintenance. The Cleveland allowance has since been practically 
 doubled, but the necessity for the increase was in large part due to the fact which 
 I have already explained, namely, that the full cost of replacements is charged to 
 oi)crating expenses under the Cleveland contract, even though at prices now 
 prevailing this cost is very much greater than the original cost of the articles 
 replaced. 
 
 Whatever policy is followed with respect to accruing depreciation, it should 
 be made to "tie in" with the treatment of accrued depreciation in the valuation. 
 The company cannot be permitted in one breath to assert that its property for ■ 
 valuation purposes has not depreciated a dollar, while in the next it stoutly main- 
 tains that for revenue purposes the property is going to the scrap heap on the 
 straight line basis to the tune of several hundred thousand dollars a year. 
 
 Respectfully submitted, 
 
 Delos F. Wilcox 
 
 I 
 
NOTES AND REFERENCES 
 
 TO 
 
 ANALYSIS OF THE ELECTRIC RAILWAY PROBLEM 
 
 Chapter I 
 
 Note i (Page 3). The New York City traffic figures for the year ended June 30, 
 1920, are as follows : Total Revenue Passengers, 2,364,775,067. Revenue Rides Per 
 Capita, 421. 
 
 Chapter II 
 
 Note i (Page 6). On May i, 1920, the wages of motormen and conductors in 
 Cleveland were advanced to the following scale: 70 cents per hour for the first three 
 months, 7^ cents for the next nine months and 75 cents thereafter. The same scale was 
 put into efifect in Detroit on May 16, 1920. In Chicago a still higher scale was adopted 
 as of June I, 1920, the rate on the surface lines being 75 cents for the first three months, 
 78 cents for the next nine months and 80 cents after the first year, with 82 cents for 
 night operation. In Philadelphia the trainmen are not members of the Amalgamated 
 Association of Street and Electric Railway Employes, but their wages are adjusted from 
 time to time to the average wages paid to trainmen in the four cities, Chicago, Cleve- 
 land, Detroit and Bufifalo. On this basis the Philadelphia wage rate should have been 
 increased to 72^/2 cents on June i, 1920. The increase could not be paid at the time 
 because of insufficient revenues under the five-cent fare. Subsequently, when the seven- 
 cent fare became effective in Philadelphia, November i, 1920, the 72^-2 cent wage scale 
 was put into effect. 
 
 The peak of motormen's and conductors' wages was reached in the increases in 
 Chicago, Cleveland, Detroit and Philadelphia in 1920. The cost of living reached its 
 maximum in the summer of 1920. By May l, 1921, as measured by the index compiled 
 by the National Industrial Conference Board, it had fallen 19 per cent from the maxi- 
 mum and stood at 166, as compared with 100 representing the cost of living in 1914. 
 Under the influence of the general downward trend of prices and the decrease in 
 revenues resulting from the business depression coupled with high rates, street railway 
 trainmen's wages have been coming down in connection with the readjustment of con- 
 tracts in 1921. On April 15, 1921, the Cleveland trainmen's union voted 2,158 to 348 
 to accept a 20 per cent reduction in wages beginning May I. The new Cleveland scale 
 is 55 cents for the first three months of service, 58 cents for the next nine months and 
 60 cents after the first year. The men voted in favor of the wage cut. rather than go 
 to arbitration with the issue of the "open shop" to be included as a question to be passed 
 upon by the arbitrators, as proposed by the company. Later on, the same scale was also 
 accepted by the employes of the Dietroit United Railway effective as of May I, 1921. 
 
 749 
 
750 Electric Railway Problem 
 
 Another illustration of the recent wage changes is that of the motormen and con- 
 ductors on the city lines of the Michigan United Railways Company, operating in 
 Jackson, Kalamazoo, Lansing and Battle Creek. As a result of arbitration the wage 
 scale was increased June I, 1920, from 40 cents for the first year and 42 cents there- 
 after to 60 cents and 62 cents. When the year's contract expired in 1921 the men 
 accepted a cut to 44 cents and 46 cents, with 5 cents additional for operators of one-man 
 safety cars. 
 
 On May I, 1921, the Philadelphia scale was reduced 7V2 cents per hour as a result 
 of decreases in Detroit and Cleveland. The Philadelphia scale for surface motormen 
 and conductors is now 60 cents for the first three months. 63 cents for the next nine 
 months and 65 cents thereafter. Beginning August i. 1921, the wages of trainmen on 
 the Public Service Railway lines in New Jersey will be 46 cents for the first three 
 months, 48 cents for the next nine months, and 60 cents after the first year, with 5 
 cents per hour extra for operators of one-man cars. 
 
 Note 2 (Page 6). The "Proceedings" referred to here and elsewhere in the "Analy- 
 sis" are the "Proceedings of the Federal Electric Railways Commission, held in Wash- 
 ington, D. C, during the months of July, August, September and October, 1919. together 
 with Final Report of the Commission to the President," published in three volumes. The 
 distribution of the "Proceedings" was undertaken by the American Electric Railway 
 Association, 8 West 40lh Street. New York City. The following announcement appeared 
 in the Electric Railway Journal of April 23, 1921 : 
 
 "Acting Secretary J. W. WVlsli of the .■\merican .Association has notified nicmlwr com- 
 panies that a limited supply of the complete proceedings of the Federal Electric Railways 
 Coinmission report, bound in buckram, arc available. As far as the supply will permit, the 
 association will furnish without charge a complete set of the volumes to any city or college 
 librar>'. or to any city official designated by a member company. .As the requests must come 
 through the member companies and as the librarians may not know about the report, it 
 devolves upon electric railway officials to take the initiative in seeing that their local college 
 and public libraries are given an opportunity to secure these volumes." 
 
 In addition to the copies of the Proceedings purchased and distributed by the American 
 Electric Railway Association, 500 copies were run off for the Government Printer and 
 copies may be purchased from him. 
 
 Chapter III 
 
 Note I (Page u). This is the printed "Argument and Brief," submitted on behalf 
 of the Amalgamated A.ssociation of Street and Electric RaiUvay Employes of America 
 by W. Jctt Lauck. For copies address Mr. Lauck, 712 Southern Building, Washington, 
 D. C, or W. D. Mahon. International President of the Amalgamated Association, Detroit, 
 Mich. 
 
 Chapter VI 
 
 Note i (Page 2q). This report of the Committee on Public Service Securities was 
 published in the I. B. A. of A. Bulletin of December 3. 1919. issued from the office of 
 the Secretary of the Investment Bankers Association of America. 11 West Monroe 
 Street, Chicago. 111. On May i, 1921, the Association had a membership of 541 main 
 offices and 250 branch offices. 
 
 Chapter VII 
 
 Note I (/'(j(7f .?-'). Public Utilities Reports. 1918E. page 910; Reports of the 
 Board of Public Utility Commissioners of the State of New Jersey, Vol. VI, page 269. 
 
Notes and References 751 
 
 Chapter IX 
 
 Note i (Page 42)- After being still further revised, this exhibit was filed a third 
 time with the Commission under date of December 3, 191 9. 
 
 Chapter X 
 
 Note i {Page 45). See "Award and Findings of A. A. Stearns, J. R. Nutt, and 
 W. E. Davis, Arbitrators, between the City of Cleveland and the Cleveland Railway 
 Company on the question of increase in interest rate upon the capital stock of the 
 company; together with brief in behalf of the company and ordinance of the city amend- 
 ing Ordinance No. 48845-A, as directed by award." December, 1919. 
 
 Chapter XI 
 
 Note i {Page 55). The report of Committee on Valuation of the American Elec- 
 tric Railway Association was approved by the Executive Committee of the Association, 
 June, 1919, and ordered published. A full abstract of this report appeared in the Elec- 
 tric Railway Journal of August 2, 1919, Vol. 54, page 222. The report was presented 
 at the Atlantic City convention of the Association, October 8, 1919. It was issued in 
 pamphlet form from the office of the Secretary of the Association, 8 West 40th Street, 
 New York City. 
 
 Note 2 {Page ^4). In an article published in the Electric Railway Journal of 
 May 7. 1921 (page 873), entitled "Depreciation in San Francisco," a table is given 
 showing that the total amount of funds voted by the City of San Francisco for its 
 municipal railways up to December 31, 1920, amounted to $5,826,552.47. During the 
 eight years of operation the municipal railway had received a total revenue (with the 
 fare at 5 cents) of $15,078,490.49. The operating expenditures during the same period 
 had been $9,561,758.63, and net earnings before deduction of taxes and depreciation. 
 $5,516,731.86. The net earnings had been distributed as follows: 
 
 Interest on outstanding bonds $1,642,322.03 
 
 Redemption of maturing bonds 899,300.00 
 
 Extensions and betterments 1,188,150.20 
 
 Depreciation 1,266,832,01 
 
 Compensation insurance 156,628.69 
 
 Materials and supplies 150,57872 
 
 Advanced to Twin Peaks Tunnel 82.152.52 
 
 Accidents, damages, etc 130,767.68 
 
 $5,516,731.86 
 
 Another indication of what the electric railways could have done under the five- 
 cent fare in pre-war times by w-ay of accumulating depreciation and amortization 
 funds, if the interests in control had been bent upon pursuing a conservative finan- 
 cial policy, is found in the experience of Cleveland under the Tayler service-at-cost 
 ordinance during the eight years from 1910 to 1918. As a result of the adoption 
 of the Tayler plan, street railway fares in Cleveland were reduced from 5 cents to 
 3 cents. The 3-cent fare, with some variations in transfer charges, continued in effect 
 until December 26, 1917, and it was not until August 4, 191 8, under war conditions, that 
 the fare got back to 5 cents. In an address before the National Municipal League at its 
 Indianapolis Convention in November, 1920, Judge Fielder Sanders, City Street Rail- 
 road Commissioner of Cleveland, said : "'One tremendous result of this low fare in 
 Cleveland not to be forgotten is the fact that its car riders in eight years between 1910 
 
752 Electric Railway Problem 
 
 and 1918 have saved more than thirty million dollars, over and above what they would 
 have paid if the fare had continued at 5 cents under the pre-existing private manage- 
 ment as in other cities ; or, in other words, they have saved for their own use an amount 
 which, if it had been put in a sinking fund, would have purchased all of the railway 
 company's property in September, 1918." (See National Municipal Review for Febru- 
 ary, 1921, special supplement on "Service at Cost.") 
 
 Chapter XII 
 Note i (Page 59). See Note i. Chapter V'll. 
 
 Chapter XIII 
 
 Note i (Page 62). On November 14, 1920 — two years after the signing of the 
 Armistice and more than one year after the close of the hearings of the Federal Electric 
 Railways Commission — the Cleveland fare at last was forced up to the maximum per- 
 mitted under the amended Tayler service-at-cost ordinance, viz. : 6 cents cash fare, 9 
 tickets for 50 cents, and i cent for transfer, with no rebate. See also Note 3. Chapter 
 XXVII. 
 
 Note 2 (Page 64). Published as a document of the Commonwealth of Massachu- 
 setts. For copies address Commission of the Department of Public Utilities, 15 Ash- 
 burton Place, Boston, Mass. 
 
 Note 3 (Page 66). The members of the Committee on One-Man Car Operation 
 were : C. W. Kellogg, of Stone & Webster, chairman ; S. W. Greenland, of Fort Wayne 
 and Northern Indiana Traction Company ; J. K. Punderford, of the Connecticut Com- 
 pany; J. C. Thirlwall, of the General Electric Company; C. H. Beck, of the Westing- 
 house Traction Brake Company, and Clarence Renshaw, of the Westinghouse Electric 
 and Manufacturing Company. The Committee's report was published in pamphlet form 
 by the American Electric Railway Association, 8 West 40th Street, New York City. 
 
 Note 4 (Page 66). Henry Ford's promised gasoline street car has not yet material- 
 ized (June, 1921). The City of Detroit in constructing its municipal railway lines for 
 electrical operation, however, has adopted a new type of track construction which is 
 said to be much less expensive than the old type. It has had 25 safety cars in operation 
 since February i, 1921, and according to a statement issued by the Street Railway Com- 
 mission, May 7, 1921, it has ordered 125 additional safety cars, to be delivered from 
 June 20 to September 15 of the current year. It was also announced that cars of the 
 Peter Witt type would be ordered for use on the heavy traffic lines. 
 
 Chapter XIV 
 
 Note i (Page 6q). The members of this committee were P. H. Gadsden, E. K. 
 Hall, and H. H. Crowcll, representing the American Electric Railway Association, the 
 National I\lectric Light Association, and the National Commercial Gas Association. 
 
 Note 2 (Page jo). Published by the author, Morris L. Cooke, 401 West Walnu 
 Lane, Gcrmantown. Philadelphia, Pa. 
 
 Chapter XV 
 
 Note i (Page Jj). For changes in the Cleveland situation, see Note I, Chapter 
 XIII. At the present writing (June, 1921), the Intcrborough Rapid Transit Company 
 is still on a 5-cent fare basis, and has thus far escaped a receivership. The Philadelphia 
 Rapid Transit Company has been forced by the Pennsylvania Public Service Commis- 
 
Notes and References 753 
 
 sion to abandon the 5-cent fare and charge 7 cents cash, with four tickets for 25 cents, 
 in lieu of the abolition of transfers, which the company proposed. The Chicago Surface 
 Lines have raised their fare to 8 cents upon authority of the Illinois Public Utilities 
 Commission. The Capital Traction Company has also been put up to 8 cents cash fare, 
 with four tickets for 30 cents, because the Public Utilities Commission of the District 
 of Columbia decided that the less-profitable competing car line (the Washington Railway 
 and Electric Company) needed this rate. The Union Street Railway Company of New 
 Bedford has retained the 5-cent basic fare, and earned nearly 12 per cent on its capital 
 stock in 1920. See Electric Railway Journal, June 11, 1921, page 1098. The fare on 
 the Detroit United Railway city lines went up to 6 cents in 1920, but was reduced on 
 June 19, 1921, to 5 cents cash, with a i-cent transfer charge. Even in Indianapolis the 
 6-cent cash fare, with 20 tickets for $1 and a i-cent transfer charge, was put into effect 
 beginning April 18, 1921. A few weeks later, in June, 1921, the 5-cent cash fare was 
 restored, with a 2-cent transfer charge. In San Francisco both the private and the 
 municipal lines have kept the 5-cent fare, but in Seattle under municipal operation the 
 cash fare has gone up to 10 cents and the ticket fare to &,i cents. The result in Seattle 
 is partly due to the fact that the city bought the Stone & Webster properties at a high 
 valuation, and undertook to pay for them out of the earnings within 20 years, besides 
 meeting all the costs of operation, maintenance and depreciation. (See also Note 4, 
 Chapter XLII). With the falling off of traffic, and a substantial drop in wages and 
 material prices, the increase in street railway fares at the present time (June, 1921) 
 seems to have been checked, and a tendency downward is now- apparent. 
 
 Chapter XVI 
 
 XoTE I (Page ^q). The entire series of tables and charts prepared by Mr. Welsh, 
 including Chart C-122, leferred to at this point in the text, have been reproduced in the 
 Proceedings, Volume III, pages 2221 to 2252. 
 
 XoTE 2 (Page 85). The number of operating street railways in New York City 
 listed by the Public Service Commission in its statistical reports for the fiscal year ended 
 June 30, 1920, was 36. This included several lines operate;d by receivers and several 
 lines which had only recently resumed independent operation as a result of cancellation 
 of leases. The operation of one company's lines has since been undertaken by the city. 
 The aggregate operating revenue of all the companies for the year was $127,880,166.06. 
 Taxes amounted to $7,353,877.53, or 5.75 per cent of revenue. 
 
 Chapter XVII 
 
 XoTE I (Page gi). "Studies in the Cost of Urban Transportation Service," by 
 F. \\'. Doolittle, Director, Bureau of Fare Research, American Electric Railway Asso- 
 ciation. Published by the Association, 8 West 40th Street, New York City. 
 
 Chapter XX 
 
 Note i (Page 100). The Special Street Railway Investigation Commission's work 
 and report form one of the several interesting contributions of Massachusetts to the 
 study of the street railway problem. The commission, created by the Massachusetts 
 legislature, was composed of the following members : State Senators Joseph W. Martin, 
 Jr., Charles W. Eldridge, and James L. Harrop; Representatives John M. Gibbs, George 
 M. Worrall, George Bunting, Martin Hays, John L. Donovan, Michael J. Fitzgerald; 
 and, as appointees of the Governor, W. Cameron Forbes and Gurdon W. Gordon. 
 Among other things, the commission recommended the adoption of a service-at-cost plan 
 
754 Electric Railway Problem 
 
 applicable to the street railways of the state. Two members of the commission — Messrs. 
 Worrall and Bunting — presented dissenting reports in favor of jnililic ownership, while 
 Mr. Donovan in another dissenting report expressed himself in favor of the resumption 
 by the legislature of the powers of control which had been delegated to the Public Service 
 Commission. A general act carrying out the commission's recommendations with respect 
 to service at cost was subsequently passed by the legislature in 1918: also special acts 
 under which the Boston Elevated Railway and the Eastern Massachusetts Street Rail- 
 way (the Bay State System) were taken over by the state for operation by boards of 
 public trustees, on a service-at-cost basis. The Street Railway Investigating Commis- 
 sion's report was published as Mas.sachusetts Senate Document 300, February i, 1918. 
 
 Note 2 (Page 102). The City of Bridgeport endeavored by ordinance in 1920 to 
 drive the jitneys out of the streets entirely. This measure, however, was declared invalid 
 by the courts on July 22 of that year, and on August 2 the Connecticut Company ceased 
 operation in Bridgeport, contending that it could not operate with the jitneys competing 
 and uncontrolled. On September 7, the City Council pas.sed a new ordinance outlining 
 certain traffic routes to which the jitneys were restricted. The effect was to bar the 
 jitneys entirely from the center of the city, leaving them the right to operate in the 
 outlying sections only. As a result, the Connecticut Company, on September 20. 1920, 
 resumed operations in Bridgeport. 
 
 By an act effective April 15, 1921, the State of Connecticut placed regulation of 
 the jitneys in the hands of the State Public Utilities Commission. After July 15. 1921, 
 any person desiring to operate a jitney must apply to the commission for a certificate 
 and must .satisfy the detailed requirements of the law. An applicant for a certificate 
 must indicate the route over which he intends to operate and must show the necessity 
 for operation over such route. The commission has power to establish such rules as it 
 sees fit for the further regulation of the jitneys. 
 
 Note 3 (Page 106). Public Utilities Reports. ig2oB. page 86. 
 
 Note 4 (Page 106). "Report of the Special Commission for the Investigation of 
 the Affairs of the Rhode Island Company, made to the General Assembly of the State 
 of Rhode Island, March, 191 8." 
 
 Chapter XXI 
 
 Note i (Page //.?). See Note i. Chapter II, and Note i, Chapter XLIII. Appar- 
 ently street railway wages reached their peak in 1920. Since the beginning of 1921 
 marked reductions have taken place. 
 
 Chapter XXII 
 
 Note I (Page 127). "Street Railway Fares: Their Relation to Length of Haul 
 and Cost of Service," by Dugald C. Jackson and David J. McGrath, McGraw-Hill Book 
 Company, 239 West 39th Street, .New York City. First edition, 1917. 
 
 ClIAITER XXIII 
 
 Note I (Page /^?5). The New York Evening Post (June 18, 1921) quotes New 
 York City 3V2 per cent bonds, due in 1954, at 70; 4 per cent bonds, due in 1959. at 80; 
 4V4 per cent bonds, due in igfw, at 82% : 4I o per cent bonds, due in 1957, at 88 and S-^V^. 
 
 Note 2 (Page ijio). I'pon cross-csamination by Commissioner Sweet, Mr. Bertron 
 further elaborated his ideas about municipal ownership. This additional testimony, not 
 cited in the te.\t of this report, is found at pages 549 to 552 of the Proceedings, as follows: 
 
 "Commissioner Sweet: You exprcs.scd a fairly favorable opinion of municipal ownership? 
 "Mr. BertPon: I personally think it will come to that in time. 
 
Notes and References 755 
 
 "Commissioner Sweet: You think it will come to that? 
 
 "Mr. Bertron : Yes; that is only a personal opinion. 
 
 "Commissioner Sweet : Do you base that on your idea of the situation as it is, especially 
 with regard to public sentiment, etc., or upon what you regard as really the best for the 
 public? 
 
 "Mr. Bertron : Well, there is a general disposition on the part of any municipality to 
 run thtir own property. They dislike having it owned and operated from a distance. 
 
 "Commissioner Sweet : Yes. 
 
 "Mr. Bertron : They would like to have it operated at home, very naturally. Well, it 
 is not a far step from that, if you are going to operate at home, to work out a business plan 
 for operating it. and they will not concede that someone else, living at a distance, has any 
 better business judgment than they have for operating the company, and they know that 
 they will be able to get the money cheaper, and hence should get the service cheaper. There- 
 fore, the logic of the situation is, isn't it, that it should come to that in these distinctly local 
 affairs ? 
 
 "Commissioner Sweet: Do you know of any objection on the part of chambers of 
 commerce or of the communities generally to having foreign capital come in and invest in 
 industries of other kinds — manufacturing, for instance? 
 
 "Mr. Bertron: No; not so much that, but there is a distinct feeling in most munici- 
 palities that they would like to be their own doctors on their own municipal problems. 
 
 "Commissioner Sweet : Don't you think there is. and ought to be, a distinction between 
 water supplies and street railways in regard to ownership by the city? 
 
 "Mr. Bertron : Somewhat. 
 
 "Mr. Warren: What is your answer, Mr. Bertron? 
 
 "Commissioner Sweet : Somewhat. 
 
 "Mr. Bertron : Somewhat. 
 
 "Mr. Warren: Somewhat? 
 
 "Mr. Bertron: There is not much danger of the water company being utilized politically, 
 less than with the street railway, on account of the number of employes, and all that 
 
 "Commissioner Sweet : The water supply is somewhat of a natural monopoly, is it not ? 
 
 "Mr. Bertron : Yes. 
 
 "Commissioner Sweet : There is a disadvantage to the municipality in having more 
 than one water supply, ordinarily ? 
 
 "Mr. Bertron : The same is true with the street railway. It is a natural monopoly. 
 
 "Commissioner Sweet: A natural monopoly? 
 
 "Mr. Bertron : Yes ; and recognized as such. 
 
 "Commissioner Sweet: Is not the same thing true of telephone companies? 
 
 "Mr. Bertron : Well, that is not local so much. You have telephone .systems that are 
 a part of great trunk lines rutuiing all over the country-. 
 
 "Commissioner Sweet: Don't you think it is a nuisance in a community to have more 
 than one company operatin.g there? 
 
 "Mr. Bertron : Oh, unquestionably. 
 
 "Conimis'iioner Sweet: If the street railway company is a natural mnnopolv in the 
 same sense that the water supply is a natural monopoly, why did you make a distinction 
 between the two with regard to municipal ownership? 
 
 "Mr. Bertron : The point I made was that there would be more objection, probably, on 
 the part of citizens to a municipally owned street raihvay than to a water company, fearing 
 lest they might not have as good business management. It is a little more complicated 
 problem. They have engineers on the outside and various other things. They have to keep 
 in touch with operations in other cities and other developments that take place. 
 
 "Commissioner Sweet : Yes. 
 
 "Mr. Bertron : .And then, too, a great many people think it would be a mistake to have 
 such a large body of men who are employed upon street railways subject to political influence 
 of various parties. 
 
 "Commissioner .Sweet: Don't you think that would he a serious objection? 
 
 "Mr. Bertron : I think it can be overcome. I think the street railways can be taken 
 out of politics, just as much as the water companies, and made an economic business propo- 
 sition in the municipality. I think it quite possible to do it. 
 
 "Commissioner Sweet : You arc rather optimistic with regard to city government, are 
 you not. then ? 
 
 "Mr. Bertron : Well. T think we are on the up-grade. I am a great believer in the 
 honestv of the .■American people, when they know the facts. 
 
 "Commissioner Sweet : Do you think the introduction of the commission form of city 
 government has helped materially in the (pialitv and character of those governments? 
 
 "Mr. Bertron : That depends unon the localitv. It has in some, and it has not in others. 
 
 "Commissioner Sweet : Do you think at the present time there is a greater freedom 
 from hriberv and dishonestv than there was 2S vears ago? 
 
 "Mr. Bertron : I do, very much, and I think that when this great body of young men 
 
756 Electric Railway Problem 
 
 that we are dcmol)ili2ing from the military service, are disseminated throughout the country, 
 men who have had discipline, who have had patriotism, and who have had experience, I think 
 they are going to be more public spirited, and 1 look for a distinct improvement in our 
 whole civic morale as a result of what these young men have gone through. 
 
 '"Commissioner Sweet : Do you think the management under municipal ownership and 
 operation would Ix; as efficient as under private ownership? 
 
 "Mr. Bertron : It can be made so. 
 
 "Commissioner Sweet: Would it Ije likely to be? 
 
 "Mr. Bertron : W ell, it can be made so. Now. whether it would, would depend entirely 
 on how it is handled. There are cities in which they could provide in the arrangement that 
 you have, say, two memlx^rs of the chambers of commerce on the board, a memlier of the 
 merchants' association, and two men representing labor, etc., and take it out of politics, and 
 run it as a business enterprise, it can be done, and I think the people will welcome it. 
 
 "Commissioner Sweet : Do you think they would have the feeling that it was their 
 own business? 
 
 "Mr. Bertron: .\nd they would take a pride in it. 
 
 "Commissioner Sweet : .\nd you think it would so develop that they would acquiesce in 
 changes of fares with less skepticism? 
 
 "Mr. Bertron: Oh, infinitely less. 
 
 "Commissioner Sweet : .\l the same time, Mr. Bertron, don't you know that up to date. 
 where municipal ownership has been tried, it has not been as efficient as private ownership ' 
 
 "Mr. Bertron : Rarely. 
 
 "Commissioner Sweet: What? 
 
 "Mr. Bertron: \'ery rarely. 
 
 "Commissioner Sweet: Well, as a rule, it has not been? 
 
 "Mr. Bertron: Yes; as a rule it has not been. 
 
 "Commissioner Sweet: Iton't you think your discounting the future on th.it line is 
 conservative for a banker, in assuming the conditions are going to be better in the hereafter 
 than they have been in the past — materially l)ctter in that regard? 
 
 "Mr. Bertron : I think it will come. 
 
 "Commissioner Sweet: I'ormer President Taft, when he appeared before us. expressed 
 the opinion that, under the i)resent situation of the street railway companies, they would 
 come to municipal ownership. ■ 
 
 "Mr Bertron: Not necessarily. I 
 
 "Commissioner Sweet: If relief were not given to the companies in some wav. " 
 
 "Mr, Bertron : Oh. well. 
 
 "Commis.sioner Sweet : He said he thought it would be an unfortunate thing to have 
 to adopt municipal ownership. 
 
 "Mr. Bertron: I'nlcss it was properly safeguarded and removed from politics, yes. 
 
 "Commissioner Sweet : Well, that is the problem, hut you can't remove anything that 
 is under the control of elected officials from politics. .\ man who is elected to office, the 
 mayor of a city or an alderman, or whatever the office may be. if he wants re-election, as most 
 officials do, is bound to consider the methods by which that may Ix- attained, if he is an 
 ordinary, everyday human Ix-ing. 
 
 "Mr. Bertron : He thinks so, but he makes a big mistake. T think the people would ' 
 much rather vote for a man who was brave enough to stand up for something — I 
 
 "Commissioner Sweet : That is very true i 
 
 "Mr. Bertron: (continuing^— than a man who would attempt to adjust hira.scif to what 
 he thnucht were their wi.-^hes 
 
 "Comtpissioncr Sweet : Rut those arc his purposes, and tho.se arc his morals. Tb.it 
 is almost inrariably the case He wants at least one re-election as a sort of endorseme"' 
 Now, aceorcling to Im breadth, according to his vision, will be the course that be will t.i' 
 and 1 think von will agree with me that a very large proportion of officials are ratlur 
 narrow, not altniiether wise, and instead of taking a broader view and doin-j what is ricbt 
 and depending uiMin that for public endorsement in re-election, thev indulge in what w ■ 
 call ix-ttv politics and seek to get vote.s here and there by cultivating the good will of t' 
 one or the other; is not that true? 
 
 "Mr Bertron: \'er\- frcfuientlv. 
 
 "CiMumissionrr S\<eet: .\\ Ica^t it has Ix-en true in the past? 
 
 "Mr. Bertron: \'crv freiiuently. 
 
 "Commissioner Sweet : And vou are looking now for a broader knowledge and a bigger 
 lot of "ublic officials, tb.isc who will not ho controlled bv such narrow methods' 
 
 "Mr. Bertron: In the c.rganization, the remo\-al of the staff from political atmospli' 
 ontirrb- I think that can Ik* Hone. 
 
 "Commissioner Swre' : One nuesiir.n more on this noint : Do vou think the saine 
 man servine as !>n elected official or serving at the head of a street raijwav comnanv as an 
 appointee of an e'ertefl official, would do as good work, would Ix- as efficient as he would if 
 he were employed by a pri^'ale corporation? 
 
Notes and References 757 
 
 "Mr. Bertron: He should be. 
 
 "Commissioner Sweet: I am not asking what he should be, but do you think he would be? 
 
 "Mr. Bertron : Well, I think he would have as much or even more civic pride in doing 
 well for his community than he would for a corporation. It would depend on the man, 
 largely. 
 
 Please don't misunderstand me about advocating municipal ownership of these properties. 
 I think it is better not at this time. I think we can work out a plan, as I said, an automatic 
 adjustment on a fair valuation, to give a fair return, and that is the way it should be handled; 
 but I said, ultimately. I think it will come to the other thing, because it is the rational thing, 
 and the cheaper thing. 
 
 "Commissioner Sweet : When you say 'rational,' you mean in theory it should be a 
 better thing? 
 
 "Mr. Bertron : Yes. 
 
 "Commissioner Sweet : But, in practice, I do not understand you to say that now, at 
 the present time, you consider that it is the better thing? 
 
 "Mr. Bertron : I prefer to see the other adopted first." 
 
 Chapter XXV 
 
 Note i {Page 130). The Annals of the American Academy of Political and Social 
 Science, January, 1915, Volume LVII, Whole No. 146, "Public Policies as to Municipal 
 Utilities." The article referred to in the text is entitled "Fundamental Planks in a 
 Public Utility Program," and appears at page 8 of the volume. 
 
 Chapter XXVII 
 
 Note I (Page 160). See Note i, Chapter XV. Since February, 1920, many of 
 the important cities which then retained the five-cent fare have had fare increases, 
 including Philadelphia, Cleveland, Buffalo, Los Angeles, Minneapolis, St. Paul, Roches- 
 ter, Louisville, and others. However, the tide seems to be turning, and the movement 
 looking to the restoration of the S-cent fare is noticeable in certain places. 
 
 Note 2 (Page 161). Since the text was written, some readjustment of fares, up or 
 down, has taken place in a number of these cities. The Public Trustees of the Boston 
 Elevated Railway have experimented with a 5-cent fare on certain lines. In their report 
 to the Massachusetts legislature in April, 1921, they stated that eight of such lines had 
 been established, with the 5-cent fare restricted to certain hours and to days other than 
 holidays and Sundays. Five proved failures and had been discontinued, but three were 
 still in operation at that time. 
 
 It is also noteworthy that, following a 12V2 per cent reduction in wages on the lines 
 of the Eastern Massachusetts Street Railway Company, as a result of arbitration, the 
 Board of Public Trustees on May 23, 1921, put into effect a series of fare reductions in 
 the form of reduced ticket rates. These reductions affected the street railway lines in 
 Lowell, Lawrence, Lynn, Haverhill, Brockton, and other cities of eastern Massachusetts. 
 
 In New Jersey the Public Service Railway Company endeavored to put into effect 
 the lo-cent fare at the beginning of 1921, but the new rate was suspended by the Board 
 of Public Utility Commissioners. Later on, in May, 1921, after public hearings, the 
 company's application for the lo-cent fare was denied by the hoard, and in July the 
 permanent fare was fixed at 7 cents with a 2-cent charge for transfers. 
 
 Note 3 (Page 164). Following the wage increase of May i, 1920, the Cleveland 
 "interest fund" was gradually depleted until on November 14, 1920, it was found neces- 
 sary to put the fare up to the maximum allowed under the Tayler franchise, viz., 6 
 cents cash and 9 tickets for 50 cents, with a penny for a transfer. On account of a 
 considerable decrease in traffic, due in part to the industrial depression in Cleveland, the 
 maximum fare proved insufficient to cover the entire cost of service, and at the end of 
 February, 1921, the "interest fund," originally established at $500,000, was entirely wiped 
 out and replaced by a deficit of $53,425. Under normal conditions this fund acts as a 
 
758 Electric Railway Problem 
 
 fare barometer. Whon it rises to $700,000, the fare goes down. When it sinks to 
 $300,000, the fare goes up. Jn this case, the maximum fare allowed under the franchise 
 having failed to provide the full cost of service, the Tayler plan appeared to be on the 
 verge of breaking down. Neither the city nor the company desired the fare to go above 
 six cents. The only other solution apparent lay in a reduction of operating expenses. 
 The decrease in traffic permitted some decrease in the amount of service given, and a 
 cut in salaries and wages other than those of the platform employes had the effect of 
 improving the company's condition. The month of March showed a reduction in the 
 deficit in the interest fund from $53,425 to $12,090. It is expected that the 20 per cent 
 reduction in trainmen's wages, effective May i, 1921, by saving the company about 
 $100,000 a month, will restore the interest fund and ultimately make a reduction in 
 fares again possible. 
 
 The maximum fare permitted under the Dallas franchise of 191 7 was 5 cents. But 
 in June, 1920, permission was given the company to increase the fare to 6 cents for 
 the period of one year. Later on, the company asked for an increase to 7 cents, but 
 got the 6-cent fare for another year. In Voungstown the fare went up to 9 cen;> 
 before the end of 1920, and in Cincinnati to 9 cents cash, with 2 tickets for 17 cents. 
 
 Chai'TEr XW'III 
 
 Note i (Page 17S). See pages 1504 and 2200 of the Proceedings; also page no 
 of "Argument and Brief" submitted to the Commission on behalf of the Committee of 
 One Hundred acting for the American Electric Railway Association, November 22, 1919. 
 
 Note 2 {Page 195). On April 5. 1920, the electors of Detroit authorized a $15,000,- 
 000 bond issue for the construction of an independent municipal street railway system. 
 Immediately thereafter, construction of the new lines was undertaken by the Detroit 
 Street Railway Commission, and on February I, 1921. the first section of the system w,^^ 
 placed in operation. 
 
 Note 3 {Page 196). During the calendar year 1919 the Boston Elevated Railway 
 deficit under the service-at-cost plan was $2,366,495 with the lo-cent fare in effect after 
 July 10. During the year 1920 the deficit was only $346,952. 
 
 Note 4 {Page 216). After an increase m trainmen's wages, the fares of the Mon- 
 treal Tramways Company were increased September i, 1920, to the following schedule: 
 Cash fare 7 cents, with four tickets for 25 cents or fifty tickets for $3. During the 
 period from February 10, 1918, when the service-at-cost contract went into effect, until 
 June 30, 1920, a deficit of $1,728,811.94 was accumulated, of whicli $364,700.20 was 
 attributable to the 12 months ended June 30, 1920. See "Second Annual Report of the 
 Montreal Tramways Commission to the City of Montreal, 1919-1920." On account of 
 this deficit, the company had been unable to pay to the City of Montreal the sum of 
 $500,000 per annum as rental for the use of the streets. 
 
 Note 5 {Page 217). At the present writing (June. 1921 ) negotiations are under 
 way for the purchase of the Toronto Railway Company's lines by the City of Toronto 
 on September I, 1921. This purchase will result in the consolidation of the local street 
 railway lines of Toronto under municipal ownership and ojieration. The price to be 
 paid for the private company's lines will l)e fixed by a Board of .Arbitrators, consisting 
 of Sir .Adam Beck for tlu- city. Sir Thomas White for the company, with the chairman 
 still to be selected. 
 
 CnAiTER XXIX 
 
 Note i {Page -v?). The Milwaukee fare schedule was again modified on June 
 24, 1920, by an order of the Wisconsin Railroad Commission which is still in etTcct 
 
Notes and References 759 
 
 (June, 1921). Under this order the 7-cent cash fare in the single-fare area was con- 
 tinued, but the ticket rate was increased to 8 tickets for 50 cents. In the suburban area 
 the rate of 3 cents cash per zone, with 25 tickets for 50 cents, was continued. 
 
 Note 2 (Page 224). The average length of the Providence zones as stated in the 
 text is air line measurement. The average track mileage in the central 2-mile zone is 
 about 2.4 miles; in the 1.75 mile zone, about 2 miles, and in the succeeding 1.5 mile zones 
 about 1.7 miles. This zone plan, with the fares established in September, 1919, is still 
 in effect (June, 1921). Operating statistics of the last two months of 1919 show an 
 increase of 5.65 per cent in the number of revenue passengers carried and an increase 
 of 24.55 psr cent in the passenger revenue as compared with the corresponding period of 
 the preceding year. For the full year 1920 the increase in the number of revenue passen- 
 gers was 4.91 per cent and in passenger revenue 20.42 per cent. The first four months 
 of 1921 showed a decrease of i per cent in the number of revenue passengers carried, 
 and of 0.91 per cent in the passenger revenue. These figures were furnished by A. E. 
 Potter, General Manager, in a letter dated May 24, 1921. Their chief significance is 
 in the fact that the zone fares produced a substantial increase in passenger revenue and 
 that the system is still in effect (June, 1921). The increases for revenue passengers are 
 not entirely reliable for comparative purposes, since the method of counting the passen- 
 gers changed more than once with the changes in the fare system prior to September 
 28, 1919. 
 
 Note 3 {Page 226). A brief description of the ticket rates put in force on May 
 23, 1921, by the Board of Public Trustees of the Eastern Massachusetts Street Railway 
 will be found in the Electric Railway Journal of June 4, 1921, at page 1057. 
 
 Note 4 {Page 227). The zone system and rates described in the text are still in 
 effect in Springfield, Mass. (June, 1921). Under this plan the Springfield Street Rail- 
 way Company has enjoyed a substantial increase in operating revenue, as will be seen 
 from the fact that for the calendar year 1920 its revenue was 13,805,563.94. as compared 
 with $2,495,234.98 for the calendar year 1917. 
 
 XoTE 5 {Page 229). On August I, 1920, the rates in Portland, Me., were further 
 increased to 10 cents cash and 8 cents ticket fare. 
 
 Note 6 {Page 234). On August 8, 1920, a new rate schedule was put in effect in 
 Connecticut with 7 cents cash fare for the initial zone. An outer zone about 2 miles 
 long was created, in which the fare was 6 cents. The suburban fare became 6 cents for 
 2-mile zones. 
 
 "This presented difficulties in two ways," writes President Storrs of the Connecticut 
 Company in the Electric Railway Journal of January i, 1921 ; "it neither provided the 
 necessary revenue nor was satisfactory to the public." He then continues: "Finally, on 
 November i, 1920, a return was made to the old 5-cent areas, with a lo-cent fare and 
 commutation ticket under same conditions as before at 2I2 cents per mile. Its effect 
 cannot yet be correctly analyzed, for it has been in effect but two months, months that 
 have suffered from the general industrial depression. It is only fair to state, however, 
 that from the standpoint of company revenue this system seems to be proving satisfac- 
 tory. As compared with corresponding periods of previous years, the increase in fare 
 has not proved so objectionable to the public as might have been anticipated, for the 
 number of passengers carried has decreased but slightly. Estimates in Connecticut are 
 complicated by the jitney problem." 
 
 Chapter XXXI 
 
 Note i {Page 272). See Note 3, Chapter XI 11. \ 
 
750 Electric Railway Problem 
 
 Chapter XXXIV 
 
 Note i {Page 311). Operation of the first section of the Detroit independent muni- 
 cipal railway lines commenced February I, 1921. The operating deficit for the month 
 of February was $2,928.78. and for the month of March. $3,829.78. A portion of this 
 deficit was accounted for by the fact that the Municipal Railway Department was charged 
 $2,250 per month by the Detroit Edison Company for the reservation of machines in 
 one of the Detroit Edison Company's substations. The municipal lines used only a 
 small percentage of the maximum power output of the machines reserved. It is expected 
 that the ratio of operating expenses to operating revenue will decrease as the service is 
 extended. Under the Detroit charter the Street Railway Commission is obliged to make 
 the municipal street railway system a self-sustaining one as soon as practicable. .\t the 
 election held April 4, 1921, the voters of Detroit approved the extension of the Municipal 
 Railway by the purchase of portions of the Detroit United Railway lines built under 
 day-to-day agreements, by a vote of 96.308 to 47,717. and at the same time rejected a 
 30-year service-at-cost franchise proposed by the company, by a vote of 91.490 to 53.302. 
 
 Note 2 (Page 311). "Report of Street Railway Commission appointed under Chap- 
 ter 359 of the General Acts of 1919 to make an Investigation and Study of the Street 
 Railways of the Commonwealth." The members of the commission were : From the 
 Senate: James F. Cavanagh, Leonard F. Hardy. John J. Walsh. From the House: 
 Wm. A. Kneeland, Benjamin Loring Young, Frank G. Allen, David J. Maloney, Wm. 
 H. McDonnell. Appointed by the Governor: Chas. G. Washburn, Roland W. Boyden, 
 David A. Belden, Charles S. Ashley, Charles Giddings. 
 
 Note 3 (Page 314). The subsidy policy as applied to street railways seems not to 
 have made much progress in Massachusetts since 1919. In New York, the 1921 legis- 
 lature, acting upon Governor Miller's recommendation, passed an act establishing a state- 
 appointed transit commission for New York City. (Chapter 134. Laws of 1921.) One 
 of the declared purposes of this act is the adoption of a plan of readjustment for the 
 relief of the transit emergency declared to exist, which shall contain provisions to bring 
 about "the receipt by the city of sufficient returns from the operation of the railroads so 
 that the corporate stock or bonds issued by the city for the construction of rapid transit 
 railroads may be exempted in computing the debt-incurring power of the city under the 
 constitution of the state." The obvious meaning of this declaration is that the rapid 
 transit subways must be made self-sustaining, and this policy is to be given effect even 
 if it requires the abandonment of the 5-cent fare, which has hitherto been heavily subsi- 
 dized by the City of New York under the "dual" subway contracts of 1913. 
 
 It is noteworthy also that the general municipal ownership law of Illinois, enacted 
 in 1913. expressly provides that the charges fixed by a municipality for any public utility 
 service which it may render "shall be high enough to produce a revenue suflicient to 
 bear all cost of maintenance and operation and to meet interest charges on bonds and 
 certificates issued on account thereof and to permit the accumulation of a surplus or 
 sinking fund that shall be sufficient to meet all the outstanding bonds or certificates at 
 maturity." 
 
 Note 4 (Page 3^0). The bill referred to in the text was known as the "Jcnks" bill. 
 It was defeated in the legislature at the 1920 session, but a year later, under Governor 
 Miller's leadership, the legislation mentioned in the preceding note was enacted. See 
 also Note 3, Chapter XL, and text pages 463 and 464. 
 
 Chapter XXXVI 
 
 Note I (Page 327). According to a report compiled by the American Electric 
 Railway Association, sixteen additional companies went into receivers' hands during 
 
Notes and References 761 
 
 the calendar year 1920, as compared with forty-eight during the preceding year. The 
 most important companies in the 1920 list were the Denver Tramways Company and the 
 Kansas City (Mo.) Railways. 
 
 Note 2 {Page 334). Public Utilities Reports, 191 9B, page 152; also pamphlet pub- 
 lished by the Public Service Commission of Indiana, Case No. 3505: "In Re Petition of 
 Indianapolis Traction and Terminal Company for Authority to Make Changes in Fares 
 to be Charged on the Street Railways in the City of Indianapolis." 
 
 Chapter XXXVIII 
 
 Note i (Page 348). Under state commission control, valuation is used chiefly as 
 a basis for rate-making; but in connection with service-at-cost plans, the capital value 
 established by agreement is generally used as a basis not only for rate adjustments but 
 also for possible future purchase by the municipality. 
 
 Note 2 (Page 371). Public Utilities Reports, 1920C, page 458. 
 
 Note 3 (Page 373). "Second Annual Report of the Public Service Commission," 
 Massachusetts, 1914, Vol. I, page 99. 
 
 Note 4 (Page 374). Bay State Rate Case: "Fourth Annual Report of the Public 
 Service Commission," Massachusetts, 1916, part i, page i ; Public Utilities Reports, 
 1916F, page 221. 
 
 Note 5 (Page 376). "An Act to amend an Act entitled 'An Act to regulate car- 
 riers,' approved February 4, 1887, and all acts amendatory thereof by providing for 
 physical valuation of the property of the carriers subject thereto and securing informa- 
 tion concerning their stocks and bonds and boards of directors," March i, 1913, Section 
 19a of the Interstate Commerce Commission law. 
 
 Note 6 (Page 376). Valuation Reports of the Interstate Commerce Commission, 
 Valuation Docket No. 2, Texas Midland Railroad. 
 
 Note 7 (Page 380). Smyth vs. x\mes, 169 U. S. 466 (March 7, 1898). 
 
 Note 8 (Page 382). Nebraska Rate Case: Smyth vs. Ames. 
 
 Note 9 (Page 382). Minnesota Rate Cases: Simpson vs. Shepard, 230 U. S. 352 
 (June 9, 1913). 
 
 Note 10 (Page 382). Kings County Lighting Co. vs. Willcox, 156 App. Div. 603; 
 210 N. Y. 479. Des Moines Gas Co. vs. City of Des Moines, 238 U. S. 113. 
 
 Chapter XXXIX 
 
 Note i (Page 386). Lincoln Gas and Electric Co. vs. City of Lincoln, 250 U. S. 
 255 (June 2, 1919). 
 
 Note 2 (Page 387). Passaic Gas Case: Public Service Gas Co. vs. Board of Public 
 Utility Commissioners (N. J.), 85 N. J. 63 (July 7, 1913). 
 
 Note 3 (Page 392). Pursuant to the recommendation of the Board of Arbitration, 
 the City Council of Cleveland passed an ordinance amending the Tayler franchise by 
 increasing the rate of interest on the Cleveland Railway Company's stock from 6 per 
 cent to 7 per cent. On April i, 1920, the company paid one quarterly dividend at the 7 
 per cent rate. Thereafter, on August 10, 1920, the ordinance amending the franchise, 
 upon referendum, was defeated and the company was compelled to go back to 6 per cent 
 dividends. See also Note 2, Chapter XLL 
 
 Note 4 (Page 395). City of Milwaukee vs. Milwaukee Electric Railway and Light 
 Co., Wisconsin Railroad Commission Reports, Vol. 10, page i. 
 
762 Electric Railway Problem 
 
 Chapter XL 
 
 Note i (Page 413)- By Chapter 278 of the Laws of 1921, in effect April 14, 1921, 
 entitled "An Act relating to Street Railways," the Minnesota legislature conferred upon 
 the Railroad and Warehouse Commission (a state body) exclusive initial jurisdiction 
 over street railway rates. By this act. cities were given the authority to acquire 
 street railway properties by eminent domain, by purchase through agreement or by pur- 
 chase at the fair value to be determined by the commission. Cities were also given 
 authority to operate street railways owned by them or to lease or resell them. Exclusive 
 authority for granting franchises was vested in the city government, with the proviso 
 that no lease, permit or franchise to operate a street railway in any city where a street 
 railway is already operating may be granted by the city council unless a certificate of 
 convenience and necessity is first obtained from the state commission. Every street 
 railway franchise becomes an indeterminate permit at the option of the company under 
 this act. 
 
 Note 2 {Page 413). The State Public Utilities Commission law of Illinois went 
 into effect January i, 1914. Ever since then a struggle has been going on to get the 
 act repealed or amended in the interest of municipal home rule. After the commission 
 had revoked the 5-cent fare provisions of the Chicago street railway settlement ordi- 
 nances, the question of the form of utility regulation became a state-wide political issue, 
 and in 1920 a Governor was elected, with the support of Mayor Thompson of Chicago, 
 pledged to reorganize the commission and to change the law so as to restore municipal 
 control of local utilities. The old commission was duly thrown out of office, and the 
 legislature at its 192 1 session passed a new utilities law containing partial provision for 
 home rule. 
 
 Note 3 (Page 413). See Note 3, Chapter XXIV. The New York legislature, by 
 Chapter 134 of the Laws of 1921, not only established a special Transit Commission 
 for New York City, but revised generally the public service commission law and imposed 
 upon the new Public Service Commission and the Transit Commission the duty of deter- 
 mining and fixing "just and reasonable rates, fares and charges" as the maximum to be 
 charged for the service performed, "notwithstanding that a higher or lower rate, fare or 
 charge has been heretofore prescribed by general or special statute, contract, grant, 
 franchise condition, consent or other agreement." Thus it appears that the state legis- 
 lature has gone as far as it can to confer upon the commissions authority to increase 
 street railway fares in New York City and other cities of the state, regardless of local 
 franchise conditions. 
 
 Note 4 (Page 417). In 1919 the original Public Service Commission for the First 
 District (New York City), composed of five members, was replaced by a single Com- 
 missioner with three deputies. By Chapter 134 of the Laws of 1921 the five-headed 
 up-state commission and the single-headed first district commission were abolished, and 
 in (heir place a single Public Service Commission of five members was established, with 
 state-wide jurisdiction over regulated utilities other than the transit lines of New York 
 City. This act also established a Transit Commission of three members for New York 
 City. The members of both commissions receive salaries of $15,000 per annum. The 
 term of oflicc of the public service commissioners is fixed at 10 years, the term of one 
 member expiring every second year. Members of this commission may be removed only 
 by re.solution concurred in by two-thirds of the members elected to each house of the 
 legislature. The members of the Transit Commission arc appointed by the Ciovernor for 
 a term of five years and may be removed by him upon charges of inefficiency, neglect 
 of duty or misconduct in office. 
 
Notes and References 763 
 
 Note 5 (Page 4^1). At the present writing (June. 1921) San Francisco still retains 
 a 5-cent cash fare on both the municipal and the privately owned lines. In Los Angeles 
 a 6-cent cash fare has just been established, but the 5-cent rate is preserved through the 
 sale of ten tickets for 50 cents. San Diego is now divided into two 5-cent fare zones. 
 Oakland and other East Bay cities went to the 6-cent fare in 1918. 
 
 Note 6 {Page 426). Toledo joined the ranks of the service-at-cost cities by vote 
 of the electors on November 2, 1920. The so-called Milner service-at-cost plan was 
 approved by a vote of 45.990 to 18,029, while at the same time two municipal ownership 
 proposals were defeated — one by a vote of 16.469 in favor and 46.369 against and the 
 other by a vote of 17,770 in favor and 43,125 against. The Toledo service-at-cost plan 
 provides for the automatic achievement of ultimate municipal ownership through the 
 gradual amortization of the capital value, which was fixed in the Milner ordinance at 
 $8,000,000. The new ordinance went into effect February i, 1921, after the transfer 
 of the properties of the Toledo Railways and Light Company to the Community Trac- 
 tion Company, which had been organized by the owners of the property to receive the 
 new franchise and operate under the new plan. For some time previous to this date the 
 Toledo fare had been 7 cents viith a 2-cent transfer charge. When the service-at-cost 
 plan went into effect the initial rate provided for in section 27 of the Milner ordinance, 
 viz., 6 cents cash fare with 5 tickets for 30 cents and i cent transfer charge, was estab- 
 lished. L'nder the ordinance this fare schedule must continue in force six months. There- 
 after, the fare is to be increased or decreased according to the condition of the "stabiliz- 
 ing fund." After four months' operation, at the end of May, a deficit of $260,672 had 
 accrued and it was expected that the fare would have to be increased to 7 cents in 
 August. However, attention is called to the fact that the trainmen in June, 1921, accepted 
 a v\-age agreement providing for a reduction of 10 cents per hour as compared with last 
 year's wage scale. Street Railway Commissioner Wilfred E. Cann is reported as stating 
 that in his opinion the reduced cost of labor and expected operating economies will bring 
 back a 5-cent fare in Toledo within a year. 
 
 Ch.\pter XLI 
 
 Note i {Page 433). Recent additions to the list of service-at-cost cities are Mem- 
 phis. Rochester and Toledo. The Memphis plan was put into effect April I, 1920, by the 
 Tennessee Railroad and Public Utilities Commission as a part of its scheme of state 
 regulation. In Rochester a service-at-cost agreement, effective August i, 1920, was 
 entered into by the city and the New York State Railways for a period of 10 years. 
 As stated in Note 6, Chapter XL. the Milner service-at-cost plan became effective in 
 Toledo February I. 1921. Since the report of the Federal Electric Railways Commission 
 was issued, in August, 1920, service at cost has been under consideration in a great 
 many places, but the number of cities actually adopting it continues to be small. 
 
 Note 2 {Page 441). At the referendum election, August 10, 1920, the ordinance 
 increasing the rate of return on the Cleveland Railway stock from 6 per cent to 7 per 
 cent, as recommended by the majority of the board of arbitrators, was defeated by a 
 vote of 10,660 in favor to 35,964 against. See also Note 3. Chapter XXXIX. 
 
 Note 3 {Page 445). On November 14, 1920, the Cleveland fare went up to 6 
 cents cash with 9 tickets for 50 cents and i cent for a transfer, the maximum permitted 
 under the Tayler service-at-cost ordinance as amended. See also Note i. Chapter Xllt. 
 and Note 3. Chapter XXVII. 
 
 Note 4 {Page 476). "An act to provide for service at cost by street railway com- 
 panies." Chapter 280 of the Laws of 1918 (Massachusetts), approved May 31. 1918. 
 
 Note 5 {Page 487). The Cincinnati service-at-cost plan has not been working 
 
764 Electric R^mlway Problem 
 
 smoothly. Both the city and the company appear to have realized that the fares have 
 gone too high. In June, 1921, an amending ordinance was passed to provide for a 
 reduction in the cost of passenger service by the suspension of certain payments and 
 accruals specified in the original ordinance. It was announced that a reduction in fares 
 might be expected .Xugust i, 1921, and a further reduction on November i. 1921. but 
 later on this ordinance was suspended by referendum petitions. On May i, 1921. William 
 C. Culkins, the first Director of Street Railways under the Cincinnati ordinance, retired 
 to become Secretary of the local Chamber of Commerce. 
 
 Note 6 {Page 490). The corporation counsel of Indianapolis, the attorney for the 
 local street railway company and the chairman of the Indiana Public Service Commis- 
 sion made a joint investigation of service at cost and were unable to learn that the 
 problem of incentive has anywhere been solved satisfactorily under this plan. As a 
 result of this investigation, the plan originally suggested by the city of Indianapolis in 
 May, 1920, was withdrawn several months later with the permission of the Public 
 Service Commission. For a discussion of the matter, see paper entitled "Service at 
 Cost — Panacea or Nostrum," by E. I. Lewis, read before the Indianapolis conference 
 of the National Municipal League in November, 1920, and published in the "Service at 
 Cost" sui^plement of the National Municipal Review for February, 1921. At the time, 
 Mr. Lewis was chairman of the Indiana Public Service Commission. He has since been 
 appointed to the Interstate Commerce Commission. 
 
 Note 7 {Page 401). "The Cost of Urban Transportation Service," by F. W. 
 Doolittle, Chapters XXII to XXVL 
 
 Note 8 {Page 504). Since the text was written, the City of Detroit on April 4. 
 1921, directly rejected service at cost by a decisive vote. See Note i. Chapter XXXIV. 
 
 Chapter XLII 
 
 Note i {Page 306). The American Electric Railway Association brief is printed 
 at pages 2149 to 2215 of the Proceedings. 
 
 Note 2 {Page 316). See Remington and Ballinger's Code, State of Washing^ton, 
 Sections 8005, 8006, 8007, and 8008. This law originated in Chapter 150 of the Laws 
 of Washington, 1909, page 605, entitled "An Act authorizing cities and towns to con- 
 struct, condemn and purcha.'^e, purchase, acquire, add to, maintain, conduct and operate 
 certain public utilities, providing for modes of payment therefor, repealing all acts in 
 conflict herewith, and declaring an emergency." 
 
 Note 3 {Page 310). Twichell vs. City of Seattle and Puget Sound Traction, Light 
 and Power Co., 106 Wash. 32. 
 
 Note 4 {Page .S-?/). In 1920 Seattle found it necessary to abandon the 5-cent fare 
 in order to make provision for a depreciation reserve, and for the amortization of the 
 purchase price of the property, as required under the state laws and the city's contract 
 ordinances. In the summer of 1920 the fare was put up to 10 cents cash, with a ticket 
 rate of 6% cents. Later on, the ticket rate was further increased to 8''^ cents. Mean- 
 while, Councilman Oliver T. Hrickson. for many years the leading official advocate of 
 municipal ownership and operation in Seattle, has started a movement for an amendment 
 to the city charter to reduce the car fare to 3 cents and make up any resulting deficiency 
 out of the general fund. Mr. Erickson, in a public statement issued in November, 1920, 
 said: 
 
 "Cheap transportation is the lifc-hlood of the city. Incrcasini; carfares is injurimis to 
 all who have any useful occupation. I l>elicvc in rcducinR and ultimately abolishing them." 
 
 Mr. Hrickson strongly opposed the purcha.se of the Puget Sound Traction lines by 
 the city in 1919 for $15,000,000, believing that the purchase price was grossly excessive. 
 
Notes and References 765 
 
 The deal was put through, however, by Mayor Ole Hanson and the majority of the 
 City Council. As an aftermath to the discovery that fares would have to be increased 
 radically to enable the municipal street railway system to meet its obligations, the City 
 Council, on June 7, 1920, authorized the mayor to make a special investigation of the 
 facts relating to the purchasing of the Puget Sound lines from Stone & Webster. Pur- 
 suant to this authority. Mayor Caldwell, in August, 1920, selected William Tucker, Esq., 
 to conduct the investigation, and six months later received his report. Mr. Tucker had 
 secured the services of an experienced appraisal engineer, Mr. Cyrus A. Whipple, who 
 reached the conclusion that the value of the property at the date of purchase did not 
 exceed $7,843,000, instead of the $15,000,000 paid to Stone & Webster. 
 
 This Seattle experience illustrates the danger to municipal ownership in the purchase 
 of old properties at the valuation claimed for them by their owners. 
 
 The Seattle street railway situation was discussed in an illuminating way by Pro- 
 fessor Paul H. Douglas, of the University of Chicago, formerly of Seattle, in an address 
 before the City Club of Chicago, April 28, 1921, entitled "An Experiment in Municipally 
 Owned Traction : Seattle." Professor Douglas' address appears in the June issue of the 
 Journal of Political Economy, published at the University of Chicago. 
 
 Chapter XLIII 
 
 XoTE I {Page SS^)- The tabulation given on pages 766 and 767 shows the con- 
 ductors' wage scale in each city and local as of January i, 1921, for comparison with 
 the tabulation given in the text. 
 
 Note 2 {Page 5,?-/). The labor disturbances in the electric railway field during 1920 
 and the first half of 1921 were fewer than might have been expected. Disastrous strikes. 
 involving violence, occurred on the Denver Tramway lines, the Brooklyn Rapid Transit 
 lines and the United Traction lines in Albany, Troy and the neighboring towns. During 
 1920 the companies generally yielded to the demands of the employes for higher wages, 
 while on the other hand, during the first half of 1921. with the cost of living on the 
 down-grade and the labor supply plentiful, the men have in numerous cases accepted 
 considerable decreases in wages. 
 
 XoTE 3 {Page 534). The wage booklet of the Amalgamated Association issued 
 January I, 1921, shows a further increase of 47 in the number of locals, the total on 
 that date being 375. While this would seem to indicate a continued growth in the influ- 
 ence of the Amalgamated, it is not certain what the effect will be of the present indus- 
 trial depression and the general "open shop" campaign now being carried on. In Albany 
 and Troy, for example, local divisions 148 and 132 have been fighting for their lives 
 during the entire first half of 1921. 
 
 Chapter XLVI 
 
 Note i {Page 579). B. Seebohm Rountree. "The Human Needs of Labour," Lon- 
 don, 1918. 
 
 Note 2 {Page 570). "The Monthly Review of Credit and Business Conditions in 
 the Second Federal Reserve District" (published by the Federal Reserve agent, the 
 Federal Reserve Bank of New York), issue of July i, 1921. shows that the cost-of- 
 living index for the United States, compiled by the National Industrial Conference 
 Board, stood on June i. 1921. at 161.9, as compared with 100 for the pre-war level. This 
 showed a decline of only 20.8 per cent from the maximum. Wholesale prices, as meas- 
 ured by the United States Department of Labor index, stood at 151 for May, showing 
 a decline of 44 per cent from the high point. 
 
766 
 
 Electric Railway Problem 
 
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Notes and References 
 
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768 Electric Railway Problem 
 
 Note 3 (Page 501). Chart C-5, referred to in the text, and other charts dealing 
 with trainmen's wages, trainmen's efficiency and the cost of living appeared in the printed 
 "Argument and Brief." submitted on behalf of the Amalgamated Association by W. Jett 
 Lauck, Southern Building, Washington, D. C. 
 
 Note 4 (Page 592). This exhibit, comprising 179 typewritten pages, is an impor- 
 tant source-document of information in the history of street railway overcapitalization. 
 It was submitted in typewritten form, and, unfortunately, was not included in the pub- 
 lished Proceedings of the Commission. 
 
 Chapter XLVII 
 
 Note i {Page 3q8). The situation revealed by the Amalgamated's wage booklet 
 of January I, 1921, is about the same as it was a year earlier with respect to the matter 
 mentioned in the text, except that a local has been organized at AUentown on the Lehigh 
 Valley Transit system, and the local on the Louisville Railway lines has been dropped out. 
 
 Summary 
 
 Note i (Page 64./) . This summary is included in the Proceedings, Volume III, 
 pages 2135 to 2148. 
 
 Note 2 (Page 65^). The increase in the rate of return from 6 per cent to 7 per 
 cent on the Cleveland Railway stock was defeated by popular vote after having been 
 recommended by a board of arbitration. See Note 3. Chapter XXXIX. and Note 2. 
 Chapter XLI. 
 
 Appendix A 
 
 Note i (Page 66j). Ford, Bacon & Davis were selected to do this work, and 
 Colonel Chas. N. Black, a member of the firm, had direct charge of the appraisal. Colo- 
 nel Black had already appeared (.-Xpril 17. 1919) before the New Jersey Board of 
 Public Utility Commissioners as an expert witness for the Public Service Railway Com- 
 pany in the very valuation proceeding for which the new valuation was to be substituted. 
 It is noteworthy, also, that Ford. Bacon & Davis financed the New Jersey & Hudson 
 River Railway & Ferry Company, reconstructed some of its lines and then disposed of 
 it to the Public Service Railway in 1910. 
 
 Note 2 (Page 66^). By Chapter 331. of the Laws of 1921, approved April 13. 
 1921, one day before the Ford, Bacon & Davis report was filed, the valuation act of 
 1920 was an ended so as to take away from the engineering concern's vahiatimi tlu- 
 finality which tlie original act attempted to give it. Section 9 of this unique valuation 
 act. with amendments made in 1921 shown in italics, is as follows: 
 
 "When the vahiatinii of thi' property of any street railway or traction company is com- 
 pleted as herein directed, the ciiRlnceriiiK concern so selected to make siicli valuation shall 
 file with the commission herein constituted a complete and detailed report of such valuation 
 in form availalilo for use for the pur|)osc of fixing rates under existini; laws, which report, 
 toscllicr with all docnmonts and maps, and other papers acrompanyint; same shall be imme- 
 diatclv Iransnnttod to and fdod with the Hoard of Public Utilitv Commissioners of this Statt- 
 and shall U- a pnlilic recunl. o|vn to the inspection of the puMic at all reasonable times, aii'l 
 shall be admitted as evidence in the conrts of this State and shall be evidence of the facl> 
 thrrein contained to the same extent as thouRh the same h.id been prtKlnced and i>roved an ' 
 the \-alne of the property as set forth in said report shall be accepted by the Board of Piihl' 
 Utility Commissioners of this State as f<r,\<:umt'li:r rT'i'i/riiri- o/ the value of said propert' 
 as of the date siH-cified in said report in anv rate proccedinij under any law of this .'^tate t 
 the exirnt that tlie vn]\\c of said pronerly is a factor in the fixinif of a rale; prov'dcii. th 
 Ihf roiiii.ti-/ nf (jiiy .tiii/i slrcrl roihcay or tniclinii cnm'<ii'iy, or nf any itiunicif<nlily >" 
 >iiuiiiiif>nlili,\< nfffclfd by .ft(</i rait- or cluiriir, or of Ihr Board of Pu'dlf I'lilily Commis- 
 .riVidiTf. iiMv rr,ict-<Ti7iirini' Ihf pi-ruin or ^.Tciiic prcpaniiii such rcjiort uf'nn any fads. 
 
 I 
 
Notes and References 769 
 
 statements or figures therein; provided, further , that the Board of Puhlie Utility Commis- 
 sioners, at any hearing or hearings for the purpose of fixing rales or charges of such street 
 railway iir traction company, may request such street railway or traction company, or any) 
 municipality or municipalities affected by such rates or charges, to submit other evidence of 
 the value of the property of sucli street raihcay or traction company, subject to cross- 
 examination by any interested party; provided, further, that the .mid Board of Public Utility 
 Commissioners may also, on its otcn initiative, submit such other evidence, subject to cross- 
 e.ramination by an interested party: and may also consider the evidence heretofore duly 
 submitter! to it in any hearing or investigation before said board involving the reasonableness 
 of the rates or charges of such street raihvay or traction company, in so far as such evidence 
 relates to the z'ahie of the property of any such street raihway or traction company; and 
 provided, further, that any hearing or hearings for the purpose of fixing rates or charges 
 of such street railway or traction company shall be preferred over all other hearings before 
 said Board of Public Utility Commissioners, and shall be determined and decided n'ithin three 
 months from the date of the filing of the said re:port of the valuation of such street railway 
 or traction company." 
 
 XoTE 3 (Page 66^). Under date of June 5, 192c, in response to this letter, State 
 Comptroller Bugbee made the following statement of his position: "The Legislature 
 having instructed the State House Commission to perform a certain task in connection 
 with the valuation of the Utilities of the State of New Jersey, there is nothing for me, 
 as an Officer of the State, to do except to go ahead, and perform that task which I 
 expect to do, as soon as possible." The Governor, the State Treasurer and the State 
 Comptroller in Xew Jersey constitute the State House Commission. These same officials 
 were constituted the Street Railway Valuation Commission by the act referred to in 
 the text, which was passed over the Governor's veto. Governor Edwards refused to act 
 with his colleagues, Messrs. Read and Bugbee. but these two officials, nothing daunted, 
 entered into a contract with Ford, Bacon & Davis under date of August 30, 1920, for 
 the valuation of the Public Service Railway property for approximately $100,000. The 
 appraisal report was filed in April, 1921. 
 
 Note 4 (Page 666). The Public Service Raihvay was un'successful in its injunc- 
 tion suits against the jitneys, but it did succeed finally in getting a bill through the legis- 
 lature of 1921 looking toward the restriction of jitney competition. Under this new law, 
 jitneys in operation on March 15. 1921, continue to be free from regulation by the utili- 
 ties commission, but any new jitney desiring to start operation on a street occupied by 
 a street railway must not only get the usual city license, but must also (procure a certifi- 
 cate of public convenience and necessity from the state commission. 
 
 Note 5 (Page 667). For the twelve months from June. 1920, to May, 1921, inclu- 
 sive, the total number of jitney passengers in Newark was 45.526,077, or an average of 
 124.729 per day. This shows an increase of 14I2 per cent over the preceding twelve 
 months' period. The jitney traffic reached a new monthly maximum in March, 1921, 
 when there were 4,392.950 passengers, or 141,708 per day. In May, 1921, the total num- 
 ber of passengers and the daily average were slightly less — 4,232,517 and 136,533, respec- 
 tively. 
 
 Note 6 (Page 670). On June 22, 1921, the Public Service Railway Company made 
 a new wage agreement with its motormen and conductors covering a two-year period 
 from August i. 1921, by which the hourly wage rates were reduced about ten per cent 
 from the level reached in 1920. Mr. Thos. N. McCarter. president of the company, 
 testifying Iiefnre the utilities board on June 30, I92r, estimated that this wage reduction 
 would amount to about $900,000 per annum. 
 
 Note 7 (Page 670). In December, 1920, not having succeeded in getting rid of 
 jitney competition, the Public Service Railway Company filed a new rate schedule call- 
 ing for a lo-cent fare, to be effective January i, 1921. This rate was suspended by the 
 old Board of Public Utility Commissioners for three months. During a part of this 
 
770 Electric Railway Problem I 
 
 period the regulating power in New Jersey was paralyzed by a deadlock between the 
 Governor and the Legislature with respect to the appointment of a new board, after 
 the members of the old board had been removed. Finally, when the new board got to 
 functioning, the Public Service Railway lo-cent fare schedule was suspended for another 
 three months' period until July i, 1921. After public hearings, the new board refused 
 to recognize the continuance of the emergency that arose during the war period, and on 
 May 20. 1921. dismissed the lo-ccnt fare application, pending the final completion of the 
 valuation proceeding started two years earlier. 
 
 The Ford, Bacon & Davis appraisal, procured by the State House Commission under 
 the terms of the 1920 street railway valuation act, fixed the value of the Public Service 
 Railway property at $125,000,000. This valuation was considered by the Utilities Board 
 along with the testimony of witnesses for the company, for the municipalities and for 
 the board itself in the old proceeding. On July 14, 1921, the board rendered its decision, 
 fixing the valuation of the property at $82,000,000, and the "permanent" fare at seven 
 cents with a charge of two cents for a transfer. 
 
 Note 8 (Page 7ii). For changes in this law made by the 1921 legislature, see 
 Note 2 of Appendix A. 
 
INDEX 
 
 TO 
 
 ANALYSIS OF THE ELECTRIC RAILWAY PROBLEM 
 
 Abandonment of unprofitable lines : effect of, 
 on new capital requirements, 29; due to over- 
 building, 63-64; Eastern Massachusetts Street 
 Railway Company, 64; general discussion, 
 Ch. XXXV, 322-326. 
 
 Accident expense : reduction of, in Philadel- 
 phia (C. J. Joyce), 270. 
 
 Adamson Law : Chief Justice White on, 550- 
 551. 
 
 .Ainey, William D. B. : on overcapitalization, 
 40-41; on effect of fare increases, 174; on 
 service at cost, 491. 
 
 .Akron, Ohio: (See also Northern Ohio Trac- 
 tion & Light Co.) ; wage rates, 533, Note 1 
 of Ch. XLIIL 
 
 Albany, N. Y. : (See also United Traction 
 Company) ; Note 2 of Ch. XLIH, Note 3 
 of Ch. XLIIL 
 
 AUentown, Pa.: (See Lehigh Valley Transit 
 Co.) 
 
 Almert, Harold : connection with Public Serv- 
 ice Railway valuation, 662, 688. 707-708. 
 
 Amalgamated Association of Street and Elec- 
 tric Railway Employes: (See also Labor); 
 defends wage increases, 11-12; wage theory 
 (W. J. Lauck), 13-14, wage scales, Jan. 1, 
 1920, 532-533, Jan. 1. 1921, Note 1 of Ch. 
 XLIII; increase in number of locals, 534; 
 program of, Ch. XL\T, 564-597 ; extent of 
 organization. 598; relation to Philadelphia 
 plan (T. E. Mitten), 603-604; relation to 
 Milwaukee plan (J. D. Mortimer), 612; pro- 
 gram contrasted with cooperative and Plumb 
 plans, 616. 
 
 .American Electric Railway Association : mini- 
 mizes overcapitalization, 41-42; compilation 
 to show effect of fare increases, criticized. 
 178-180; statistics of track abandonment, 
 323 ; statistics of track in receivers' hands, 
 329; on continuation of private ownership, 
 529. 
 
 Committee on Valuation : treatment of de- 
 preciation, 53. 698; personnel of, 345-346; 
 report of, 346-352, Note 1 of Ch. XI ; the- 
 ory of "created value," 350, 689. 
 
 Committee on Zone Systems : definitions, and 
 
 discussion of zone rates, 221-222. 
 Committee on One-Man Car Operation : 272- 
 273, 276, 277, 278-280. 
 Amortization : of excess capitalization, neglect 
 of, Ch. X, 43-45 ; of normal accrued depreci- 
 ation, Ch. XI, 46-54, 401-402; of entire capi- 
 tal, Glasgow, 53; of superseded property, (C. 
 W. Beall) 151-152, (G. E. Tripp) 366-367; 
 of capital, under service at cost, 438-439; of 
 capital, proposed policy for Cleveland, 453- 
 454, (D. F. Wilcox) 455. 
 .Anderson, Henry C. : connection with Public 
 
 Service Railway valuation, 661. 
 .Appreciation of land : Massachusetts Public 
 Service Commission on (Bay State Case), 
 375. 
 .Arbitration: (See also Wage boards, Continu- 
 ity of service) 
 
 of franchise disputes: in Cleveland, 444; 
 under Jenks bill, 463-464; in Cincinnati, 
 484. 
 of labor disputes: in Des Moines, 537-538; 
 compulsory (T. L. Sidlo), 543-544; Massa- 
 chusetts Special Commission on, 544-545 ; 
 objections to Massachusetts bill, 545-549; 
 Canadian compulsory investigation act, 
 549; Samuel (Rompers on, 559; T. S. Will- 
 iams on, 559; under Philadelphia plan, 
 608. 
 .Atlanta, Ga. : (See also Georgia Railway & 
 Power Co.) ; wage rates, 533, Note 1 of Ch. 
 XLIII. 
 .Automobiles: (See also Jitneys); number in 
 1917, compared with street cars, 2; effect on 
 credit, Ch. XX, 99-112. 
 
 Babcock, E. \'. : on regulation (Pittsburgh), 
 429, 430; on service at cost, 501, 502; on pub- 
 lic ownership with private operation, 507. 
 
 Babson, Roger W. : on jitney competition, and 
 regulation, 104-106, 292-293; on change in 
 value of securities, 121-122; on taxation, 
 paving and other charges, 254-255 ; on muni- 
 cipal ownership, 470-471. 
 
 771 
 
-72 
 
 Index 
 
 Baker, Newton D. : on Cleveland reorganiza- 
 tion, 51 ; on absence of overbuilding in Cleve- 
 land, 61-62; on zone systems. 238-239; on 
 use of trailers in Cleveland, 269; on regula- 
 tion, 427-428; on Cleveland plan. 446-451. 
 Baltimore. Md. : 1917-1919 comparison of fares 
 and traffic, 184, 206. of fares and revenue;. 
 190. 209. 
 Banker control : Ch. XIV, 67-74. 
 Barker, \V. S. : connection with Public Serv- 
 ice Railway valuation, 707. 708-709. 
 Barry, John G. : on loss of credit, 7; on in- 
 creased cost of materials, and need of fare 
 increases, 124-125. 
 Battle Creek, Mich.: 1917-1919 comparison of 
 fares and tralVic, 187, 206, of fares and rev- 
 enues. 193, 209; wage rates. 533, Note 1 of 
 Ch. II, Note 1 of Ch. XLIII. 
 Bauer, R. S. : on overbuilding. 64; on banker 
 control, 73; advocates free street car serv- 
 ice, 309; on Boston Elerated plan, 471. 
 Bay State System: (See Eastern Massaclni- 
 
 setts Street Railway Co. ) 
 Beall, Charles W. : on amortization of super- 
 seded property, 151-152; on effect of local 
 conditions on selling price of securities, 399; 
 on effect of readjustment in rale of return, 
 499. 
 Beeler, John A.: on remedies, 137-139; on ef- 
 fect of fare increases. 174-175: on operating 
 economies and increased earnings. 263-265, 
 267-268; on standardization of equipment, 
 269-270; operating economies suggested, 271; 
 on automobile and jitney competition, 288- 
 289; on jitney regulation, 292; on contribu- 
 tions by property owners for extensions, 317 ; 
 on aljandonment of lines, 326; on regulation. 
 433; on need of public cooperation, 715. 
 Bemis. Edward \V. : on x-aluation. 381-382; on 
 service at cost, 488; connection with Public 
 Service Railway valuation. 702. 
 Berkeley, Calif.: (See San I'rancisco-Oakland 
 
 Terminal Railways Co.) 
 Bertron, Samuel K. : on demand for securities, 
 7; on remedies, 135-136: on public owner- 
 ship. Note 2 of Ch. X.XIII. 
 Bethlehem. Pa.: (See l.chigh \allev Transit 
 
 Co.) 
 Birmingham. .Ma.: 1917-1919 comparison of 
 fares and Iraflic. 187. 205. of fares and rev- 
 enues, 19.1, 208; wage rates. 533. Note 1 of 
 Ch. XLIII. 
 Bliss, William C. : on increased costs and lalwr 
 control, 11; on jitney competition. 106-107; 
 on remedies. l.W-139; on Rhode Island zone 
 system. 224-226. 
 Bliss, Zenas \V.: on taxation of the Rho<Ic 
 
 Island Company, 83. 
 Blood. William H. : connection with Public 
 Service Railway valuation, 687-688. 
 
 Board: (See also Wage boards) 
 
 of award : Merchants .■\ssociation plan, 556. 
 of directors: employe representation on (J. I 
 
 D. Mortimer), 613-614. 
 of conciliation: in Wisconsin (J. D. Mor- 
 timer). 615. 
 Bond discount : American Electric Railway 
 Association. Committee on Valuation, on, 
 351 ; treatment of, in valuation (G. E. 
 Tripp). 364. 
 Bonds of utilities under public ownership: (See 
 also Securities) ; forms of security for, 514- 
 527; in State of Washington, 515-520; Wis- 
 consin provisions, 525-527. 
 Boston Elevated Railway Company : deprecia- 
 tion policy (J. 1). Mortimer), 56; depreci- 
 ation and maintenance (F. J. McLeod), 57- 
 58; changes in fare, 164; effect of fare in- 
 crease (H. Loring), 177-178; 1917-1919 com- 
 parison of fares and traffic, 183, 199, 207, ol 
 fares and revenues. 189. 210; financial con- 
 dition. 196-197 : comparison of fares ant 
 traffic with Philadelphia Rapid Transit Com 
 pany. 198; comparison of fares and traffii 
 with New Vork City. 198; public subsidies 
 311-312; value of securities of (B. Warren) 
 398-400; service-at-cost plan, 464-471; usi 
 of public credit. 506; 1919 strike data. 531 
 wage rates, 532, Note 1 of Ch. XLIII; wagi 
 increases, 581-583; recent fare experiments 
 Note 2 of Ch. XX\ 11. 
 Bovden, Roland W. : on prevention of strikes 
 
 545. 
 Bradlec, Henry G. : on importance of the in 
 dustry, 2-3; on credit situation. 7; on ne^ 
 capital requirements, 21-23. 25-28; testimon 
 criticized, 25, 27-30; on overcapitalizatioi 
 38-39; on remedies, 136; on effect of far 
 increases, 169; on savings in power. 269; o 
 valuation. ,%7-.i68 ; on .service at cost. 4''v 
 Bridge repairs and tolls : freedom from, i 
 Cleveland (J. J. Stanley). 251; G. C. Cun 
 min on, 256; F. H. Sisson on, 257; reli« 
 from (R. T. Higgins). 291. 
 Bridgeport. Conn.: (Sec also Connecticut) 
 jilnev and street car traffic. 102; wage r.;:r 
 532, Note 1 of Ch. XLIII. 
 "Brokerage" : defined by A. E R. \. Commi 
 
 fee on \'aluation, 349. 
 Brooklyn Rapid Transit Co.: (See also Ne 
 York City) ; 1918-1919 taxes (of subsidi; 
 ries). 86; 1917-1919 comparison of fare ai 
 traffic. 18,1. of fare and revenue. 189; wai 
 rates. 532. Note I of Ch. XLIII; strik 
 Note 2 of Ch. XLIII. 
 Budget : company, vmder Cincinnati plan, 48 
 484. (W. A. Draper) 487; family (W. 
 Ogburn), 572-579. 
 Buffalo. N. V. : 1917-1919 comparison of far 
 and traffic, 184, 205. of fares and revenui 
 
Index 
 
 773 
 
 190. 208: wa-c rates, 332. Note 1 of Ch. 
 XLIII. 
 
 Buffalo & Lake Erie Traction Co.: (See Erie. 
 Pa.) 
 
 Bugbee. Newton A. K. : letter of D. F. Wil- 
 cox to. re New Jersey situation. 661-663; 
 statement and policv of, Note 3 of Appendix 
 A. 
 
 Bullock, Charles J. : on taxation. 80, 82-83 ; on 
 taxation relief, 257-258; on "equal taxation" 
 and limited tax exemption, 307-308. 
 
 Caldwell. Hugh M, : investigation of Seattle 
 railway situation, 521. 
 
 Calgarv. Alta. : wage rates, 533, Note 1 of Ch. 
 XLlil. 
 
 California: jitney competition, (P. Shoup) 99- 
 100. ( R. R. Commission) 106; commission 
 regulation (W. E. Creed), 419-420. 
 
 Camden, N. J. : (See also Public Service Rail- 
 way Co.) ; wage rates, 532, Note 1 of Ch. 
 XLIII. 
 
 Canton, Ohio: (See also Northern Ohio Trac- 
 tion & Light Co.) ; wage rates, 533, Note 1 
 of Ch. XLIII. 
 
 Capital: (See also Return on capital. Credit. 
 Securities, Refunding) ; new, amount re- 
 quired annually. Ch. VI, 21-30; necessity of 
 new, Ch. VII, 31-34; cost of, in relation to 
 other costs. 117-118; necessary conditions for 
 new (H. Erickson). 158-159; scarcity of 
 free, 388 ; necessity of stability of values to 
 attract, 388; requisites for welfare of, 714. 
 
 Capital Traction Company : ( See Washington, 
 D C.» 
 
 Capitalization: (See also Overcapitalization, 
 Regulation) ; net, total and per mile, for 
 1917, 1 ; compared with steam reailroads, 1 ; 
 increase over 1902, 16: annual additions (ta- 
 ble), 23, 28; methods of figuring, 24-28: 
 Massachusetts policy, 39-40, (J. B. East- 
 man ) 57 ; Cleveland Railway Company, 45 ; 
 holding company abuses in Massachusetts, 
 67-69: ratio of earnings to, in Cleveland, 87; 
 regulation of, Ch. X\'III, 92-96; total net, 
 1917. 330; per mile of track. 331; relation 
 to value (F. H. Sisson), 335-337; relation 
 to value at beginning of war (M. L. Cooke), 
 341 ; relation to fares in Cleveland, 446 ; of 
 Pittsburgh Railways, 512. 
 
 Carlton. Frank T. : on compulsory arbitration, 
 547-548. 
 
 Carr. lames O : on commission regulation, 
 417-419. 
 
 Car trust certificates: W. H. Heulings on. 126. 
 
 Chapin. Robert Cort : on family incomes, 569- 
 570. 
 
 Cliicago. Illinois: operating plan not service at 
 cost. 163; 1917-1919 comparison of fares and 
 traffic. 184. 199. 205, 207, of fares and rev- 
 enues, 189, 208, 210; comparison of fares and 
 
 traffic, surface lines with elevated, 201 ; 1919 
 strike data, 531 ; wage rates, 532, Note 1 of 
 Ch. XLIII; 1917. 1919 and 1920 valuations 
 of surface lines, 727, 728; depreciation and 
 maintenance on surface lines. 744 ; 1920 wage 
 increase on surface lines. Note 1 of Ch. II ; 
 fare increase on surface lines, Note 1 of Ch. 
 XV. 
 
 Cincinnati, Ohio: changes in fare, 164; 1917- 
 1919 comparison of fares and traffic, 185, 206, 
 of fares and revenues, 191, 209; franchise 
 taxes (W. C. Culkins), 250-251; saving by 
 rerouting, 267 ; rate of return, 403 ; service- 
 at-cost plan. 478-487; comments on plan (C. 
 K. Robinson ) , 502-503 ; wage rates, 532, 
 Note 1 of Ch. XLIII. 
 
 Civil service: relation to public ownership, Ch. 
 XLVIII, 618-620. 
 
 Clark, Harlow C. : on franchise obligations, 
 85; on possible remedies, 131-132; on fare 
 increases, 162-163; on regulation, 430-431. 
 
 Clark, William J.: on overcapitalization, 39; 
 on possible improvements in motors, 290; 
 on Henry Ford's gasoline car, 290. 
 
 Cleveland Railway Company : wage arbitra- 
 tion, 6; financial policy, 19; replacement pol- 
 icy, 33, 52, 394 ; capitalization, 45 ; depreci- 
 ation percentage (H. J. Davies), 48-49; con- 
 dition of property (Board of Arbitration), 
 48-49; criticism (J. D. Mortimer), 50-52, 
 55-56; reorganization (N. D. Baker, J. J. 
 Stanley), 51; construction policy (N. D. 
 Baker), 62; policy as to banker control, 73; 
 ratio, earnings to capitalization, 87 ; operat- 
 ing ratios, 124; changes in fare, 163-164; 
 1917-1919 comparison of fares and traffic, 
 184, 199, 208, of fares and revenues, 190, 
 210; taxation and paving obligations and 
 comparison with Public Service Railway, 
 251-252; use of trailers (N. D. Baker), 269; 
 contributions by property owners for exten- 
 sions (J. J. Stanley), 317; rate of return. 
 391-394. 403-404: local regulation in (J. J. 
 Stanley), 426-427; features of Tayler plan, 
 440-456; wage rates. 531-532, Note 1 of Ch. 
 XLIII; 1919 strike data. 531; schedules of 
 working time, 584-585 ; shortcomings of Tay- 
 ler plan, 635-636; 1919 value, 729, 730; dis- 
 cussion of Tayler plan, in connection with 
 Denver situation, 738-743 ; maintenance and 
 depreciation, 744 ; recent wage changes. Note 
 1 of Ch. II; achievements under Tayler plan. 
 Note 2 of Ch. XI ; 1920 fare increase. Note 
 1 of Ch. XIII. 
 
 Collective bargaining: (See also Unions); 
 under New York Public Service Commission 
 bill, 553-554; under Philadelphia plan, 605- 
 608. 
 
 Colorado Public L'tilitics Commission: valua- 
 tion of Denver Tramway Co., 727-738; treat- 
 ment of depreciation in Denver case, 744. 
 
774 
 
 Index 
 
 Columbus, Ohio: 1917-1919 comparison of fares 
 and traffic, 186-205, of fares and revenues, 
 191, 209; 1919 strike data, 531; wage rates, 
 533, Note 1 of Ch. XLIII. 
 
 Competition: (See Automobiles, Jitneys). 
 
 Congestion : 
 of business districts: effect of zone plan (W". 
 C. Bliss), 224-225; W. D. George on, 240; 
 relation to city planning, 3Z2-323. 
 of population: effect of fare policy, 221; W. 
 C. Bliss on, 224-226 ; effect of zone fares 
 (L. S. Storrs), 235; N. U. Baker on, 239; 
 U. C. Jackson on, 239-240; W. D. George 
 on, 240; C. H. Mote on, 240-241; \V. Jack- 
 son on, 241-242; relation to city planning, 
 322-323. 
 
 Connecticut: overbuilding in (R. T. Higgins), 
 65; use of police power in (L. S. Storrs), 
 89-90; jitney competition in (L. S. Storrs), 
 101-103; effect of fare increases in (L. S. 
 Storrs), 170-171; 1917-1919 comparison of 
 fares and traffic (Connecticut Company), 
 184, 206, of fares and revenues. 190-209; 
 zone systems in (L. S. Storrs), 232-235; 
 public subsidies in (L. S. Storrs), 314; wage 
 rates, 532, Note 1 of Ch. XLIII. 
 
 Constitutional limitations: as to subsidies, in 
 New York and Massachusetts, 305-307. 
 
 "Construction costs": defined by .^. E. R. .•\. 
 Committee on \'aluation, 349. 
 
 Contingencies: M. E. Cooley on, 354-355; treat- 
 ment of, by Interstate Commerce Commis- 
 sion in Te.\as-Midland case. 377-378. 
 
 Continuity of service : imixirtance of, 541 ; In- 
 dustrial Conference on. 551-552; plans for 
 (New York State), 552-560. 
 
 Contracts: inviolability of, 117, 721; municipal, 
 efTect of regulation on, 405 ; of individual 
 employes with company, 555-556. 
 
 Contributions by property owners: (See also 
 Subsidies) ; for extensions, in Cleveland. ( I. 
 J. .Stanley) 317. (J. .A. Heeler) 317. 
 
 Conway, Thomas : on effect of wage increases, 
 12; on labor relations, 1.^4-155; on limit.itions 
 of fare increases, 172-174; on relation of 
 fare increases to reveiuios. 211. 213; on re- 
 lief from ta.xes and other burdens. 257; on 
 subsidies and public ownership. 315-316; on 
 rate of return, 400; on commission regula- 
 tion, 423-425. 
 
 Cooke. Morris L. : on lianker control and hold- 
 ing companies. 70-71 ; on inefficient manage- 
 ment and war conditions. 128; on inefficiency 
 of management. 262-263; on relation of capi- 
 tali;:ation to value at beginning of war, 34\ ; 
 on reorganization. 341 ; on commission regu- 
 lation, 425-426; on service at cost, 488-489, 
 .W3. 
 
 Cooley, Mortimer E. : on effect of wage in- 
 creases, 12; on depreciation, 46-47; experi- 
 ence in valuation work, 346; on valuation. 
 
 353-361, 369-370; on increase in rate of re- 
 turn, 388; connection with Public Service 
 Railway valuation, 661, 681-691, 693-706. 
 Cooperation: (See also Labor) 
 
 labor: Philadelphia plan, part played in re- 
 routing (C. J. Joyce), 266-267; W. J. 
 Lauck on, 567; fixing of wages under. 568; 
 general discussion, 598-611; Milwaukee 
 plan, 611-616. 
 public : in regard to Cleveland plan. ( X. D. 
 Baker) 446. (Sanders) 452; cannot su- 
 persede public control, 675 ; the price of. 
 715; proper methods of, 725. 
 Cooperative Welfare .\ssociation (Philadel- 
 phia) : 608-609. 
 Coppage vs. Kansas: Justice Pitney quoted on 
 
 freedom of contract, 545. 
 Corunna, Mich.: (See Owosso, Mich.) 
 "Cost of consolidation" : A. E. R. A. Commit- 
 tee on Valuation on, 350. 
 Cost of living: (See also Living wage); re- 
 lation of wage increases to (\V. J. Lauck), 
 11-12, 13-14; amount of increase in. 571; 
 going down, Note 2 of Ch. XLIII. Note 2 
 of Ch. XLVI. 
 Cost of .service: defined. 303-304; danger of 
 
 Ijecoming prohibitive, 674. 
 Council Bluffs. Iowa: (See Omaho & Council 
 
 Bluffs Street Railway Company). 
 Council of National Defense : Highways Trans- 
 port Committee on motor truck competition, 
 298. 
 Couzens. James: on public ownership. 146-147. 
 "Created value'': A. E. R. .\. Committee on 
 \aluation on. 350. 689; claimed by Public 
 Service Railway Co., 689. 
 Credit: (See also Receiverships. Refunding); 
 necessity for restoration of. Ch. II. 6-8; in- 
 terrelation with labor and public relations, 
 Ch. IV. 15; normal conditions favorable to, 
 Ch. V, 16-20; responsibility for loss of, Ch. 
 XIX. 97-98; methods of restoring. Ch. 
 XXIII. 129-139; relation of net earnings to, 
 Ch. XX\T, 157-159; H. Loring on. 476; 
 public, use of. Ch. XLII. .505-529. 
 Reasons for loss of: general. Ch. VHI. 35; 
 overcapitalization, Ch. IX. 36-42. Ch. X, 
 43-45 ; unamortized depreciation, Ch. XI, 
 4<)-.i4 ; unearned dividends and neglect of 
 maintenance. Ch XII, 55-60; overbuilding, 
 Ch. XIII, 61-66; holding companies and 
 banker control. Ch. XIV. 67-74: uniform 
 5-cent fare, Ch. X\'. 75-77; special taxa- 
 tion and franchise obligations. Ch. X\I. 
 78-87; service requirements. Ch. X\'II. 
 88-91 ; public regulation of capitalization, 
 Ch. X\lll. 92-9t); jitnev competition. Ch. 
 XX. 99-112; demands of lalyir. Ch. XXI. 
 113-115: decreased value of monev. Ch. 
 XXII. 116-128. 
 
Index 
 
 //3 
 
 reed, W. E. : on taxes and franchise obliga- 
 tions, San Francisco-Oakland Terminal Rail- 
 ways Co., 83-84; on regulation of capitaliza- 
 tion. 95-96; on commission regulation in 
 California. 419-420. 
 rrowell. Howard H. : connection with Public 
 Service Railway valuation, 687, 688. 
 ulkins, W. C. : on franchise ta.xes, Cincin- 
 nati, 250-251 ; on Cincinnati plan, 47'l, 484- 
 486; retirement as Director of Street Rail- 
 ways. Note 5 of Ch. XLI. 
 Cumberland County Power and Light Com- 
 l| pany, Portland, Maine : effect of fare in- 
 » crease (A. H. Ford), 174; percentage in- 
 j creases in fares and revenues (1919), 179; 
 I 1917-1919 data on fares and traffic, 188, on 
 I revenues, 194; zone system (A. H. Ford), 
 , 228-229; wage rates, 533, Note 1 of Ch. 
 I XLIII; recent fare increase. Note 5 of Ch. 
 
 ; XXIX. 
 
 Cummin. Gaylord C. : on jitney competition and 
 classification of companies. 107-108; on rem- 
 edies, 138; on paving charges and bridge 
 rentals, 255-256 ; on difficulty of valuation, 
 
 1 i72; on rate of return, 402. 
 
 Dallas, Texas: jitney competition in (W. B. 
 Head). 108-109; fare under service at cost, 
 164; 1917-1919 comparison of fares and traf- 
 fic, 187, 205, of fares and revenues, 193, 208; 
 fare limits in (\V. B. Head), 501. 
 
 l^ane County Circuit Court : treatment of de- 
 preciation and going value, 736. 
 
 Danforth, Richard E. : statements regarding 
 jitneys, 666-668. 
 
 Davies, Henry J.: on Cleveland depreciation, 
 48. 
 
 Dayton, Ohio: 1917-1919 comparison of fares 
 and traffic, 187, 206, of fares and revenues, 
 193, 209; wage rates, 533, Note 1 of Ch. 
 XLIII. 
 
 DeBerard. Frederick B. : on public ownership. 
 141-145. 
 
 Denver. Colo. : 1917-1919 comparison of fares 
 and traffic, 186, 206. of fares and revenues, 
 192. 209; wage rates, 533, Note 1 of Ch. 
 XLIII; Report on Certain Aspects of the 
 Traction Problem of. Appendix B, 717-748; 
 overheads allowed in Denver Union Water 
 Case, 733 ; going value allowed in same, 735 ; 
 strike. Note 2 of Ch. XLIII. 
 
 Depreciation: (See also Amortization); T. D. 
 Mortimer on, 49-50, 51-52, 55-56; Public 
 Service Railway Co., 53, 697-698; A. E. R. A. 
 Committee on \'aluation. treatment of, 53, 
 351 ; San Francisco Muncipal Railway, 53- 
 54; Boston policy (J. D. Mortimer), 56; 
 Massachusetts policy (J. B. Eastman), 56- 
 57; in valuation (G. E. Tripp), 364; Boston 
 Elevated (F. J. McLeod). 468-469; L. R. 
 Nash on. 497-498 ; method used in Seattle, 
 
 521-524; under Philadelphia plan (J. D. 
 Mortimer), 599-6(X); discussion re Denver 
 situation. 7.36-737, 744-748; Cleveland treat- 
 ment, 746. 
 
 Normal accrued : effect of amortizing, on 
 credit, 18; failure to amortize, Ch. XI, 
 46-54; treatment in Knoxville water case, 
 746. 
 Current : M. E. Cooley on. 47 : Boston Ele- 
 vated (F. J. McLeod). 57-59; Public Serv- 
 ice Railway, 59. 
 
 Des Moines. Iowa: 1917-1919 comparison of 
 fares and traffic, 187, 205, of fares and rev- 
 enues. 193, 208; wage rates, 533, Note 1 of 
 Ch. XLIII; 1919 strike, 531. 538-539; arbi- 
 tration provisions, 537-539; overhead and 
 going value allowance in Gas Case, 733, 735. 
 
 Detroit, Mich.: 1917-1919 comparison of fares 
 and traffic, Detroit United Railway, 184- 
 199, (interurban lines) 205, (one-fare zone) 
 206, of fares and revenues, 189, (interurban 
 lines) 208, (one-fare zone) 210; ta.xation un- 
 der municipal ownership plan, 259; use of 
 trailers, 269; municipal ownership fare pro- 
 visions of charter. 310-311; determining fare 
 under municipal operation, 525 ; wage rates, 
 532, Note 1 of Ch. II, Note 1 of Ch. XLIII; 
 1919 strike data. 531 : schedules of working 
 time, 584; 1915 valuation, 727. 728: proposed 
 purchase price (1919), 729, 730; recent wage 
 changes. Note 1 of Ch. II; recent fare 
 changes. Note 1 of Ch. XV ; municipal own- 
 ership program. Note 2 of Ch. XXVIII, 
 Note 1 of Ch. XXXIV. 
 
 Development costs : M. E. Cooley on. 358-359 ; 
 Massachusetts Public Service Commission 
 on (Bay State case), 375; in Public Service 
 Railway Co. valuation, 698-701, 707, 708, 709. 
 
 Devine. Edward T. : connection with Denver 
 investigation. 719. 
 
 Discipline : under Philadelphia cooperative plan 
 (T. E. Mitten), 604. 
 
 Distance tariff: (See Zone fares). 
 
 Dividends: unearned, Ch. XII, 55-60. 
 
 Doherty, Henry L. : on loss of credit. 70 ; on 
 effect of fare increases. 169-170; on relief 
 from special burdens. 257; on local regula- 
 tion in Toledo, 428 ; on regulation, 428-429. 
 
 Douglas, Professor Paul H. : on Seattle's ex- 
 periment with municipal traction. Note 4 of 
 Ch. XLII. 
 
 Draper, Walter A. : on regulation, 426 ; on in- 
 centive under service at cost, 486-487 ; on 
 budget plan (Cincinnati), 487. 
 
 Earnings : 
 
 gross: totals. 1902-1917 (table). 27; ratio of, 
 to capitalization in Cleveland, 87. 
 
 net: statistics of (J. W. Welsh), 157; de- 
 crease in (H. Erickson). 157-159; relation 
 of. to credit, 157-159. 
 
776 
 
 Index 
 
 Eastern Massaclmsetts Street Railway Com- 
 pany : rehabilitation of. 33 ; abandonment of 
 track. 64; changes in tare. 164; fare system 
 and its effect. 176-177; data on fares and 
 traffic, 184. on 1917-1919 revenues. 190; zone 
 system, 226; public subsidies. 312-313; serv- 
 ice-at-cost act (H. Loring), 312; decision of 
 Massachusetts Public Service Commission in 
 rate case. 374-375; value of securities. 399; 
 service-at-cost plan. 471-476; 1919 strike 
 data. 531 ; wage rates, 532, Note 1 of Ch. 
 XLIII; 1916 valuation, 728-729; recent fare 
 reductions. Note 2 of Ch. XXVII. 
 Eastman, Joseph B. : on credit situation, 8; on 
 overcapitalization. 40; on depreciation and 
 capitalization policy in Massachusetts, 56- 
 57 ; on holding company abuses in Massa- 
 chusetts. 69; on rcRulation of capitalization 
 in Massachusetts. 93; on jitney competition. 
 100; on public ownership. 145-146; on zone 
 systems. 227-228; on paving requirements, 
 256; on operating economies and proper 
 maintenance. 271 ; on service at cost in Mass- 
 achusetts, 471. 
 Economics: (See Operation, Power). 
 Edmonton. .Mta. : wage rates. 533. Note 1 of 
 
 Ch. XLIII. 
 Edwards. Gov. Edward I.: letter of D. F. 
 Wilco.x to. re New Jersey situation. 664-665 ; 
 refused to serve on valuation commission. 
 Note 3 of .Appendix A. 
 Efficiency: (See Management'). 
 Eight-hour day : sought by Amalgamated .As- 
 sociation, 58.? ; in certain cities. 585 : consc- 
 (piences of. 585. 
 "Elastic 6c Fare Ordinance" (Denver) : 743- 
 
 744. 
 Elizabeth. N. J.: (Sec also Public Service Rail- 
 way Co.) ; wage rates, 532. Note 1 of Ch. 
 XLIII. 
 Elmes. Cecil Frederick : connection with Pub- 
 lic Service Railway valuation. 692. 
 Employes Mutual Henefit .Association: in Mil- 
 waukee (J. 1). Mortimer), 612, 613-615; in 
 St. Louis. 614. 
 Engineers Valuation Board: (Sec Pittsburgh). 
 F.ciuipment : standardization of. (\V. H. Heul- 
 
 ings) 126. (J. .\ Heeler > 269-270. 
 Erickson. Halford: on decrease in net earn- 
 ings. 157-159; on conditions necessary for 
 new capital, 158-159; on cost of capital, 394- 
 395. 
 Erickson. Oliver T. : municipal ownership and 
 fare policies in Seattle. Note 4 of Ch. XI. II. 
 Erie, Pa.: 1917-1919 comparison of fares and 
 traffic. 188. 207. of fares and revenues. 194, 
 210; wage rates, 533. Note 1 of Ch. XLIII. 
 F.xlensii'us : (See also .'^iH^cial asscssnii-nts. 
 Subsidies) ; paid for by property owners 
 (J. J. Stanley). 317; J. A. Bceler on, 317; 
 construction of, 322; franchise defects as 
 
 to. in Cleveland (F. Sanders), 452; neces- 
 sity of. as affecting fares and ownership, 
 722-723. 
 
 Fagan. Charles A.: on neglected maintenance, 
 60; on Pittsburgh zone experiment. 223; on 
 public attitude in Pittsburgh. 425; on pub- 
 lic regulation in Pittsburgh, 425. 
 
 "Fair value": (See Valuation). 
 
 Fall River, Mass.: (See also Eastern Massa- 
 chusetts Street Railway Co.) ; wage rates, 
 -.32. Note 1 of Ch. XLIII. 
 
 Fare increases: (See also Fares); complexity 
 of problem. 116-118; need for (J. G. Barn), 
 125; H. C. Clark on, 131; S. R. Bertron on, 
 135; purpose of. Ch. XXVII. 160-164; effect 
 of. Ch. XXVIII, 165-217; discussion of, as 
 solution of problem, 327-328; effect on East- 
 ern Massachusetts Company (H. Loring), 
 474-476; service-at-cost cities compared with 
 others, 495; efforts of Public Service Rail- 
 way to obtain. .Appendix A, 659-716; in 
 Seattle under municipal ownership. Note 4 
 of Ch. XLII. 
 
 I'"ares: (See also Zone fares. Fare increases); 
 uniform 5-ceut rate, discussion of, Ch. XV, 
 75-77; H. J. Pierce on continuing 5-cent rate, 
 132; list of cities retaining 5-cent fare, 160; 
 rates, in various cities. 161-162; effect of 
 service at cost on. 163-164; average for vari- 
 ous cities, 203-204; New York City— use of 
 motor buses to compel restoration of 5-cent 
 rate. 287-288; regulation of jitney (R. \V. 
 Babson), 292-293; "knocking down" and 
 failure to collect, in Indiana (C. H. Mote), 
 300; low, advocated by F. F. Ingram, 309- 
 310; Detroit provisions under municipal own- 
 ership, 310-311; early profits under 5-cent 
 rate, 328-329; in Cleveland. 44.1 445-446; 
 under Montreal contract, 462-463; on Bos- 
 ton Elevated. 468; on Eastern Massachusetts, 
 474. 475: under Massaclmsetts service-at-cost 
 act. 477; under Cincinnati plan. 482. 485; 
 limits, in Dallas (\V. B. Head). 501; de- 
 sirability of upiicr limit. 739; examples of 
 pre-war achievements under 5-cent fare. Note 
 2 of Ch. XI ; recent changes re 5-cent fare. 
 Note 1 of Ch. XV. 
 "iMtty-fifty" bill: (See Loring. Homer). 
 Fire insurance: policv of Philadelphia Rapid 
 
 Transit Co. (C. J. Joyce). 270. 
 I'isber. Irving: on decreased value of money, 
 119-121; on increased rate of return. .188- 
 3'A). 
 I'ord. A. H. : on effect of fare increases in 
 Portl.iud. Me. 174; on zone system in Port- 
 land. Me.. 228-229. 
 lord. Henry: substitution of gasoline for elcc- 
 tricitv, 66. 281; comment by W. J. Clark, 
 290. ' 
 
Index 
 
 777 
 
 Ford, Bacon & Davis : appraisal cited, 44 ; se- 
 lected to make New Jersey valuation. Note 
 1 of Appendix A ; report of, filed. Note 3 of 
 Appendix A ; valuation by, based on assump- 
 tion of 10-cent fare. Note 7 of Appendix A. 
 
 Fort Wayne & Northern Indiana Traction Co. : 
 percentage increases in fares and revenues, 
 180. 
 
 Fort Worth, Texas : 1917-1919 comparison of 
 fares and traffic. Northern Texas Traction 
 Co., 188, (city lines) 205, (interurhan) 206, 
 of fares and revenues, 194, (city lines) 208, 
 (interurban) 209. 
 
 Foss, Eugene N.: on banker control, 72-73; on 
 public ownership, 143-144, 509-510; on regu- 
 lation in Mas.sachusetts, 406-407. 
 
 Fowler municipal ownership bill : personnel 
 management provisions of, 619; determina- 
 tion of value under, 639-640. 
 
 Franchise obligations: discussion of, Ch. XVI, 
 78-87; relief from, Ch. XXX, 244-259. 
 
 Franchises: significance of, 4. 
 
 Franchise taxes : in Rhode Island (Z. W. 
 Bliss), 83; special, in New York, 85-86, (D. 
 F. Wilcox) 246; L. R. Nash on. 250; in Cin- 
 cinnati (W. C. Culkins), 250-251; in Mon- 
 treal, 251. 
 
 Franchise values : G. E. Tripp on, 248. 
 
 Funds: (See also Depreciation); interest 
 (Cleveland), 443; contingent reserve (Mon- 
 treal), 461; tolls reduction (Montreal), 461- 
 462; reserve (Boston Elevated), 465-467; 
 reserve (Cincinnati), 481; reserve under 
 Massachusetts service-at-cost act, 477 ; for 
 public utility acquisition (State of Wash- 
 ington), 516-517; municipal street railway 
 Ixnid (Sea^ttle). 517-518; for municipally 
 owned utilities, 526. 
 
 Gadsden, Philip H. : on credit situation, 6 ; on 
 effect of readjustment in rate of return, 499. 
 
 Gauges : influence of, 63. 
 
 George, W. D. : on control of service, 88; on 
 zone system, 240 ; on abandonment of un- 
 profitable lines, and increased fares, 325-326 ; 
 on commission regulation, 425. 
 
 Georgia Railway & Power Co. : 1917-1919 com- 
 parison of fares and traffic, 186, 206, of fares 
 and revenues, 192, 209; wage rates, 533, Note 
 1 of Ch. XLIII. 
 
 Glasgow municipal tramways : amortization 
 policy, 53 ; financial condition, 643. 
 
 "Going concern" : defined by A. E. R. A. Com- 
 mittee on \'aluation, 350. 
 
 "Going value" : ( See also Created value. De- 
 velopment costs. Going concern) ; discussion, 
 735-736. 
 
 Gompers, Samuel : on compulsorv arbitration, 
 559. 
 
 Grand Rapids. Mich. : 1917-1919 comparison of 
 fares and traffic, 188, 206, of fares and rev- 
 
 enues, 194, 209; wage rates, 533, Note 1 of 
 Ch. XLIII. 
 
 Great Britain: zone fares in, 219, 221, (\V. 
 Jackson) 241-242; bus operation in (W. 
 Jackson), 289; comparison of track mileage 
 and interurban development in, and in United 
 States, 322, (L. S. Storrs) 324; e.xtent of 
 public ownership in, 641 ; comments on W. 
 L. Madgen's paper on tramway situation in, 
 642-643. 
 
 Guaranties: (See also Subsidies); of bonds 
 (F. H. Sisson), 134-135; on Eastern Massa- 
 chusetts, 472; effect of public, on credit (L. 
 R. Nash), 316-317; of return on capital 
 (Bcston Elevated), 466-467. 
 
 Halifax, N. S. : wage rates, 533, Note 1 of Ch. 
 XLIII. 
 
 Harlan, Justice: on valuation (Smyth vs. 
 .Ames), 380. 
 
 Harrisburg. Pa. : 1917-1919 comparison of fares 
 and traffic, 188, 206, of fares and revenues, 
 194, 209. 
 
 Hartford, Conn.: (See also Connecticut); 
 wage rates, 532, Note 1 of Ch. XLIII. 
 
 Haynes, Paul P.: resolution on valuation (Na- 
 tional .Association of Railway and Utilities 
 Commissioners), 380-381. 
 
 Head, W. B. : on jitney competition (Dallas), 
 108-109; on jitney regulation in Dallas. 295; 
 on regulation in Texas, 429; on fare limits, 
 501. 
 
 Henry, Charles L. : on jitney competition. Pa- 
 cific Electric Co., 100; on motor truck com- 
 petition, 298; on Indiana Public Service 
 Commission, 421. 
 
 Heulings, William H. : on financing purchases 
 and standardizing equipment, 126. 
 
 Higgins, Richard T. : on overbuilding in Con- 
 necticut, 65; on remedies, 136; advocates 
 paving and ta.xation relief, 257 ; on repeal of 
 public burdens, 291 ; on service at cost, 490. 
 
 Historical cost method of valuation: (See Val- 
 uation). 
 
 Hoboken, N. J.: (See also Public Service Rail- 
 way Co.) ; wage rates, 532, Note 1 of Ch. 
 XLIII. 
 
 Holding companies: Ch. XIV, 67-74. 
 
 Holmes, Justice : quoted on labor organization 
 (Vegelahn vs. Guntner), 546. 
 
 Holyoke, Mass. : zone system, 227. 
 
 Hornell Traction Company : percentage in- 
 creases of fares and revenues, 179. 
 
 Houston, Texas: 1917-1919 traffic, 188. 
 
 Howell, Horace L. : connection w ith Public 
 Service Railway valuation, 687, 688. 
 
 Hudson &• Manhattan Railroad Company: 1918- 
 1919 taxes, 86; 1917-1919 comparison of fare 
 and traffic, 18.3, of fare and revenue, 189. 
 
77% 
 
 Index 
 
 Illinois: 1913 municipal ownership law. pro- 
 vision as to self-support of utility, Note 3 
 of Ch. XXXIV. 
 Illinois Public Utilities Commission: \-aluation 
 of Chicago Surface Lines (1917 and 1920). 
 727. 728; recent changes in organization. 
 Note 2 of Ch. XL. 
 Incentive : under Jenks bill. 463 : under service 
 at cost. 486-487! 741-742; M. R. Maltbie on. 
 487; L. R. Nash on. 500-501; E. V. Bab- 
 cock on. 501 ; C. K. Robinson on. 502-503 ; 
 service vs. profits, Ch. XLIX, 621-622. 
 Profits as: 151; under service at cost, 402- 
 404; in Cleveland. (N. D. Baker) 448-449. 
 (F. Sanders) 453. 
 Income: (See Earnings). 
 Indebtedness : 
 municipal: for cities over 30,CXK), 513. 514. 
 state : amount of. 513. 
 Indiana Public Service Commission : on In- 
 dianapolis Traction & Terminal Co.. 334- 
 iii: commented on by C. L. Henry. 421. 
 Indianapolis Traction & Terminal Company : 
 1917-1919 comparison of fares and traffic. 
 185. 206. of fares and revenues. 191, 209; 
 comparison of revenues with those of Phila- 
 delphia Rapid Transit Co., 302; orders of In- 
 diana Commission and reports of public di- 
 rectors, 332-335 : service at cost suggested 
 for, 490; 1918 \-aIuation, 730; recent fare 
 changes. Note 1 of Ch. XV; ser\Hce at cost 
 rejected. Note 6 of Ch. XLI. 
 Industrial Conference: on continuity of serv- 
 ice. 551-552. 
 Ingram. Frederick F. : advocates low fare and 
 
 land value ta.x. 309-310. 
 Interborough Consolidated Corporation : for- 
 mation of. 415-416. 
 Interborough Metropolitan Company : forma- 
 tion of, 416; relation to subwav contracts, 
 416. 
 Interborough Rapid Transit Company: (See 
 also New York City); 1918-1919 taxes, 86; 
 1917-1919 comparison of fare and traffic. 183. 
 of fare and revenues. 189; offers made. 415; 
 preferential. 416-417; 1919 strike data. 531. 
 Interest during construction : Interstate Com- 
 merce Commission on (Texas-Midland Re- 
 port). 379. 
 International Railwav Companv : (See Buffalo. 
 
 N. Y.) 
 Interstate Commerce Commission : importance 
 of valuation rulings of. 375-376; valuation of 
 Texas-Midland Railroad. .V6-379; overheads 
 in Texas-Midland case, 733; treatment of re- 
 placements, 747. 
 Interurban lines: mileage of. 2; effect of jit- 
 ney competition (C. L. Henry). 100; one- 
 man cars not adapted to (C. VV. Kellogg). 
 273; motor truck competition (C. L. Hcnryl. 
 29fi; de\Tlopment in Great Britain and United 
 
 Sutes (L. S. Storrs), 324-325; fare situa- 
 tion in Indiana (C. L. Henry). 421. 
 
 Investment Bankers .\ssociation : report of 
 committee on public service securities, 29, 
 Note 1 of Ch. \'I. 
 
 Investments: (See also (Capital. (Capitalization, 
 Securities) ; nature of (D. F. Wilcox). 149- 
 151. 
 
 Jackson. Dugald C. : financial difficulties of 
 companies antedating war. 127; on zone sys- 
 tems. 237. 239-240; on jitney competition and 
 regulation. 296-298; on service at cost, 491- 
 493. 
 
 Jackson, Walter: on jitney competition, 110- 
 112, 289; on zone system. 241-242; on econo- 
 mies in power, 268-269; on bus operation in 
 Great Britain, 289. 
 
 Jackson, Mich. : 1917-1919 comparison of fares 
 and traffic, 187. 207. of fares and revenues, 
 193. 210: wage rates. 533. Note 1 of Ch. II. 
 Note 1 of Ch. XLI II. 
 
 Jenks service-at-cost bill: rate of return. 401; 
 chief features of. 463-464; introduction, and 
 "self-sustaining" feature, 320. Note 4 of Ch. 
 XXXIV. 
 
 Jersey City, N. J.: (See also Public Service 
 Railwav Company) ; wage rates, 532, Note 
 1 of Ch. XLIII. 
 
 Jitneys: effect of, on credit, Ch. XX. 99-112; 
 competition of. relation to fares (T. Con- 
 way). 173: control of. Ch. XXXII. 286-299; 
 Public Service Railway Co."s attack upon, 
 666-673. Note 4 of .\ppendix .\ ; general re- 
 lation of, to street railways, 721-722; begin- 
 ning of state regulation of, in New Jersey, 
 Note 4 of .\ppendix .\ ; statistics of, in 
 Newark. Note 5 of Appendix .\. 
 
 Johnson. Tom L. : part taken in Cleveland val- 
 uation (N. D. Baker). 446-447; campaign 
 methods of (N. D. Baker). 449-450. 
 
 Jones, Stiles P.: on overcapitalization. 42. 591- 
 593. 
 
 Joyce. Coleman J. : on operating improvements 
 in Philadelphia. 265-267 ; on reduction of ac- 
 cident expense in Philadelphia. 270; on fire 
 insurance policy of Philadelphia Rapid Tran- 
 sit Co.. 270; on operating economies in Phil- 
 adelphia. 270-271 ; reads Mr. Mitten's state- 
 ment on Philadelphia plan, 301. 
 
 Kalamazoo. Mich. : 1917-1919 comparison of 
 fares and traffic. 187, 205. of fares and rev^ 
 enues. 193. 208; wage rates. 533, Note 1 of 
 Ch. II. Note 1 of Ch. XLIII. 
 
 Kansas City Railways Co.: capitalization. 45; 
 1917-1919 comparison of fares and traffic, 
 185. 205. 206. of fares and revenues, 191, 
 208. 209: 1919 strike data. 531; %-aluation. 
 (1913). 727. 72a (1920). 730. 
 
Index 
 
 779 
 
 Kellogg. Charles \V. : (See also American 
 Electric Railway Association. Committee on 
 One-Man Car Operation); on one-man cars, 
 272-273, 275-276. 278, (for interurban lines) 
 273-274. 
 
 Knoxville water case : treatment of accrued de- 
 preciation. 746. 
 
 Kutz. Charles W. : on public ownership. 138; 
 on zone system. 241 ; on paving requirements 
 and municipal ownership of roadbed. 256. 
 
 Labor: (See also Amalgamated Association, 
 \\ ages. Strikes. Right to strike. Cost of liv- 
 ing) ; total employes (1917). 4; fundamen- 
 tal importance of, Ch. III. 9-14; interrela- 
 tion with credit, and public relations of. Ch. 
 IV. 15: increasing demands of. Ch. XXI, 
 113-115; relative increase in cost of. 117; at- 
 titude of (T. Conway). 154-155; cooperative 
 relations. Ch. XXXl'lI. 300-302: relation of 
 city to, under Cleveland plan (F. Sanders). 
 452-453; general discussion of. Ch. XLIII. 
 530-536; recognition of public relations of, 
 Ch. XLIV. 537-540; participation in man- 
 agement. Ch. XL\'II. 598-617: employes as 
 civil ser\-ants. Ch. XL\III. 618-620; wages, 
 Jan. 1, 1921. Note 1 of Ch. XLIII. 
 
 Lambert. Miles B. : on increased costs of ma- 
 terials. 125-126. 
 
 Lansing. Mich.: 1917-1919 comparison of fares 
 and traffic. 187. 206. of fares and revenues. 
 193. 206; wage rates. 533. Note 1 of Ch. II. 
 Note 1 of Ch. XLIII. 
 
 Lapp. John A. : report of D. F. Wilcox on 
 Denver situation transmitted to, 717. 
 
 Lauck, W. Tett : on recognition of union, 567- 
 568; on living wage. 569-570. 579, 583. 586- 
 588: on eight-hour day. 583; on increased 
 productivity. 588-589: on early financial mis- 
 management. 593-595 ; on Philadelphia plan. 
 598-599. 
 
 Brief for the .Amalgamated Association: de- 
 fends wage increases. 11-12: on wage the- 
 ory-. 13-14; on overcapitalization. 39-40, 41; 
 on financial exploitation, 71-72: on rela- 
 tion of wages to revenues, 114-115; on im- 
 portance of public interest, 564; on rights 
 of capital, 564; on employes' interest in 
 rehabilitation. 565; on recognition of union, 
 566-567. 
 
 Lawrence, Mass.: (See also Eastern Massa- 
 chusetts Street Railway Company) ; wage 
 rates. 532. Note 1 of Ch. XLIII. 
 
 Layovers: reduction of (T. A. Beeler). 265. 
 
 Lehigh Valley Transit Co.: 1917-1919 com- 
 parison of fares and traffic. 186. 206. of fares 
 and revenues. 192. 209; wages. Note 1 of Ch. 
 XLIII. 
 
 Lincoln Gas and Electric Company vs. Lincoln : 
 treatment of rate of return by Justice Pit- 
 ney. 386. 
 
 Living wage : \V. J. Lauck on, 568-569 ; R. C. 
 Chapin on. 569-570; Lauck & Sydenstriker 
 on. 570; W. F. Ogburn on. 570-579. 
 
 London. Out.: wage rates, 533, Note 1 of Ch. 
 XLIII. 
 
 Loring. Homer : on credit situation, 8 ; on 
 Massachusetts capitalization policy. 39-40; 
 on jitney competition, 103-104; on public 
 operation and pri\-ate ownership, 136-137; 
 on effect of fare increases, 176-178; on one- 
 man cars, 276: on subsidies for Eastern 
 Massachusetts lines, and suggested "fifty- 
 fifty" bill, 312-313; on rehabilitation of East- 
 ern Massachusetts property. 474; on effect 
 of fare increases on Eastern Massachusetts 
 lines. 475 ; on credit needs. 476. 
 
 Los .\ngeles : jitney competition in, 99-100; 
 1917-1919 comparison of fares and traffic, 
 184. 205. 206, of fares and revenues, 190, 208. 
 209: 1919 strike data. 531; wage rates, 532. 
 Note 1 of Ch. XLIII: 1913 raluation, 728; 
 recent fare increase. Note 5 of Ch. XL. 
 
 Louisville. Ky. : 1917 traffic estimate, 186; wage 
 rates, 533. 
 
 Lowell, Mass.: (See also Eastern Massachu- 
 setts Street Railway Co.) : wage rates. 532. 
 Note 1 of Ch. XLIII. 
 
 Lynn. Mass.: (See also Eastern Massachusetts 
 Street Railwav Co.); wage rates, 532, Note 
 1 of Ch. XLIII. 
 
 MacFarland. Grenville S. : on public ownership. 
 146; on Boston and Cleveland plans. 469-470. 
 
 Madgen. William L. : paper on British trac- 
 tion situation, commented on. 642-643. 
 
 Magnitude of industry : ( See also Capital. La- 
 bor, Mileage, Population served. Revenues, 
 Taxation. Traffic ) ; Bradlee. Henr>- G.. on. 
 3; increase of, as affecting credit, 16-17. 
 
 Mahoning & Shenango Railway & Light Co. : 
 (See Youngstown. Ohio). 
 
 Maintenance: (See also Depreciation) ; neglect 
 of ordinarj-, Ch. XII. 55-60; conserving 
 property by proper (J. B. Eastman). 271; 
 relation of. to serv-ice-at-cost plans, 436-437 ; 
 under Montreal contract, 459-460: on Boston 
 Ele%-ated (F. J. McLeod). 468-469. 
 
 Maltbie. Milo R. : on overcapitalization, 41 ; on 
 neglect of maintenance. 60; on special assess- 
 ments. 317-318. (under private ownership) 
 318; on incentive. 487; on service at cost, 
 489-490; connection with Public Service 
 Railway \-aIuation, 702. 
 
 Management: inefficient (M. L. Cooke). 128; 
 efficiency in. (J. .\. Beeler) 137-138. Ch. 
 XXXI. 260-285; cooperation with labor. Ch. 
 XXXIII. 300-302; labor's participation in, 
 595-596, Ch. XLVII. 598-617. 
 
 Manchester. England : financial policy in. 642- 
 643. 
 
780 
 
 Index 
 
 Massachusetts : policy in regard to capitaliza- 
 tion, 39-40; overbuilding, 64-65; holding 
 company abuses, 67-69; regulation of capi- 
 talization in, (T. N. McCarter) 92-93, (J. 
 B. Eastman) 93; automobile competition in 
 (Legislative Commission). 1(X)-101 ; jitney 
 competition (L. S. Storrs), 101-103; public 
 initiative and efficiency (E. N. Foss), 144; 
 constitutional obstacles to public subsidies 
 ( Public Service Commission ) , 306-307 ; tax- 
 ation to support electric railways, 308-309; 
 public subsidies in (Boston Elevated and 
 Eastern Massachusetts), 311-314; capitaliza- 
 tion per mile of track, compared with rest 
 of country, 331 ; Public Service Commission 
 valuation formula, 373-374 ; regulation in, 
 406-407; service at cost in, 464-478. 
 
 Massachusetts Public Service Commission : on 
 constitutional obstacles to subsidies. .^06-307 ; 
 on taxation to support street railways. 308- 
 309; valuation formula of. 373; Middlesex 
 and Boston report. .^73-374; Bay State rate 
 case decision, 374-375 ; Bay State valuation, 
 728-729. 
 
 Massachusetts Special Street Railway Commis- 
 sion : duties of. 311 ; recommends amendment 
 of Boston Elevated act. 311-312; recom- 
 mends increased public subsidies, 313; pro- 
 poses plan of public control, with subsidies, 
 313-314; on public ownership, 508: minority 
 statement. 508-509; on compulsory arbitra- 
 tion, 544-545; proposes arbitration bill, 544- 
 545; objections to latter, 545-549. 
 
 Materials, cost of: increases in. (\V. C. Bliss) 
 11. (B. \V. \Varren> \.l (]. G. Barry) 124- 
 125, (M. B. Lambert) 125-126; relation to 
 other increases in cost. 117. 
 
 McCartor. Thomas N. : on regulation of capi- 
 talization in Massachusetts. 92-93; statistics 
 on decreased values of Public Service Rail- 
 way and Public Service Corporation securi- 
 ties. 122; on 9-cent fare in New .Icrsey. 668- 
 669: on emergency relief, 684; personal in- 
 terest in valuation results. 696-697. 
 
 McElroy, J. M.: referred to. on financial pol- 
 icy of Manchester. England. 642-643. 
 
 McLeod. Frederick T.: on credit situation. 8; 
 on Boston Elevated depreciation and niain- 
 tcnanre, 57-58; on competitive overbuilding 
 in Massachusetts, 64-65 ; on holding com- 
 pany abuses in Massachusetts, 69; on public 
 ownership, 1.^7 ; on effect of fare increases, 
 175-176; on Boston Elevated, 468-469. 
 
 Memphis, Tenn. : 1917-1919 comparison of 
 fares and traffic. 186, 205, of fares and rev- 
 enues. 1<32. 2tt8: wage rales. 533, Note 1 of 
 Ch. XLIII; service at cost for. Note 1 of 
 Ch. XLl. 
 
 Merchants .'Xssociation of New York; on pub- 
 I'C ownership. 142-143; prniioses bill for con- 
 tinuity of service, 553, 555-557. 
 
 Metropolitan Strict Railway Company : over- 
 capitalization of (G. E. Tripp). 38. 44. 
 
 "Mexican dollar" theory. 691, 693-694. 
 
 Michigan Railway Co.: 1917-1919 comparison 
 of fares and traffic. 187, 206. of fares and 
 revenues, 193, 209; succeeded by Michigan 
 United Railways Co., Note 1 of Ch. II. 
 
 Michigan United Railways Co. : recent wage 
 changes. Note 1 of Ch. II. 
 
 Middlesex & Boston Report (Massachusetts 
 Public Service Commission) : 373-374. 
 
 Mileage: 1917 total, 1; compared with steam 
 railroads, 1; classification. 2; increase over 
 1902, 16. 
 
 Miller, Nathan L. : New York City Transit 
 Commission fostered by. Note 3 of Ch. 
 XXXI V, Notes 3 and 4 of Ch. XL. m 
 
 Milner service-at-cost plan: (See Toledo). B 
 
 Milwaukee Electric Railway & Light Com- 
 pany: depreciation (J. D. Mortimer). 49-50; 
 overbuilding (J. D. Mortimer). 62; per- 
 centage increases of fares and revenues. 178- 
 179; 1917-1919 comparison of fares and traf- 
 fic. 185. 206. of fares and revenues. 191. 209; 
 central zone system, 222-223 : experiences 
 witli commission regulation, 407-411; 1919 
 strike data, 531; cooperative plan, 611-616; 
 1920 valuation, 729, 730. 736; recent fare 
 changes, Note 1 of Ch. XXIX. 
 
 Minneapolis, Minn.: (See Twin City Rapid 
 Transit Co.) 
 
 Minnesota: "Home rule" in. 413: deviations 
 from home rule. Note 1 of Ch. XL. 
 
 Mitten, Thomas E. : (Sec also Joyce. Coleman 
 .1.) ; on service at cost. 491 ; on extravagance 
 of employes, 579; on Philadelphia overcapi- 
 talization, 601-602; on Cooperative Plan, 602- 
 605, 609-610. 
 
 Mohler, Charles K. : analysis of certain fea- 
 tures of Public Service Railwav valuation, 
 703. 
 
 Money : effect of decreased value on new capi- 
 tal recpiirements, 29-30; decreased x-alue of, 
 Ch. XXII, 116-128. (G. E. Tripp) 36.1 ef- 
 fect on investors, 118-119. 390-391. (G. E. 
 Tripp) 364-366, (I. Fisher) 120-121. 388-390, 
 692-693 : co.st of securing, (Massachusetts 
 Public Service Commission in Bay State 
 case) 375. (Interstate Commerce Commis- 
 sion in Texas-Midland Report) 378-379. 
 
 Monopoly: relation to credit, 16; private, ne- 
 cessity of regulation over, 673. 
 
 Montreal. Quebec : faro system, and effect on 
 traffic and revenue. 215-216; comparison with 
 Toronto. 217; franchise taxation. 251; serv- 
 ice-at-cost contract. 456-463: comments on 
 plan (C. K. Robinson), 502; wage rates, 533, 
 Note 1 of Ch. XLIII. 
 
 Mortimer. James P. : on depreciation, 49-50, 
 55-56: on Cleveland plan, 50-52, 55-56. 455: 
 
Index 
 
 781 
 
 on Boston depreciation policy, 56 ; on over- 
 building (Milwaukee), 62; on use of police 
 power in Wisconsin, 90-91 ; on limitations of 
 fare increases, 172; on jitney competition in 
 Kenosha, 295-296; on public guaranty in 
 Kenosha, 316; on operating economies and 
 abandonment of unprofitable lines, 326; on 
 "watered stock," 331-332; on return on capi- 
 tal, 395 ; on regulation in Wisconsin, 407- 
 409, 411-412; on service at cost, 491; on 
 Philadelphia plan, 599-601 ; on Milwaukee 
 cooperative plan, 611-615; on Wisconsin 
 Board of Conciliation, 615. 
 
 Mote. Carl H. : on jitney competition, 107; on 
 zone system, 240-241 ; on "knocking down" 
 (Indiana), 300-301; on overcapitalization 
 (Indiana), 332-333; on service at cost, 490. 
 
 Motor trucks : competition of, for interurban 
 freight (C. L. Henry), 298. 
 
 Municipal ownership: (See Public ownership 
 and operation). 
 
 Murphine, Thomas F. : on reasons for Seattle 
 railway purchase, 520; on labor conditions in 
 Seattle. 585. 
 
 Nash. Luther R. : on franchise ta.xes, 250; on 
 effect of public guaranties on credit, 316; on 
 regulation, 433 ; on service at cost, 493-495, 
 496-499, 500-501. 
 
 Nashville, Tenn. : 1917-1919 comparison of 
 fares and traffic, 187. 205. of fares and rev- 
 enues, 193, 208; 1919 strike data, 531; wage 
 rates, 533. Note 1 of Ch. XLIII. 
 
 National Association of Railway and Utilities 
 Commissioners: resolution on valuaton (P. 
 P. Haynes), 380-381. 
 
 National Consumers League : on compulsory 
 arbitration, 557-559. 
 
 National War Labor Board : quoted on credit 
 situation, 6; relation to Federal Commission, 
 6; on wages, 9-10; dealings with wage dis- 
 putes, 530. 534 ; dealings with strikes, 539. 
 
 New Bedford, Mass.: (See Union Street Rail- 
 way Company). 
 
 New Brunswick plan: 471. 
 
 New Haven, Conn.: (See also Connecticut); 
 wage rates, 532, Note 1 of Ch. XLIII. 
 
 New Jersey : criticism of zone plan in, by 
 .Associated Municipalities, 231 ; Local Trans- 
 portation Issues in, Appendi.x A, 659-716; 
 Street Railway Valuation Act amended. 
 Note 2 of Appendix A. 
 
 New Jersey Board of Public Utility Commis- 
 sioners : on zone fares. 220 ; on zone system 
 for Public Service Railway, 229-230,' 231- 
 232; rate of return allowed in Passaic gas 
 case, 387; criticised by C. L. S. Tingley, 423; 
 decision in Public Service Railway case. 
 Note 2 of Ch. XXVII. Note 7 of Appen- 
 dix A. 
 
 New Orleans, La. : effect of fare increases in 
 (J. K. Newman). 171; 1917-1919 compari- 
 son of fares and traffic, 185, 206, of fares and 
 revenues, 191, 209; taxation (J. K. New- 
 man), 250; finances (J. K. Newman), 338; 
 wage rates, 532, Note 1 of Ch. XLIII. 
 
 New York City : increase in traffic, 3 ; ta.xation, 
 85-86; operating ratios, 123; 1917-1919 com- 
 parison of fares and traffic, 183, 199, 205, 
 of fares and revenues, 189, 208; comparison 
 of fares and traffic with Boston Elevated, 
 198, 200; with Public Service Railway Com- 
 l)any, 200; explanation of average fare fig- 
 ure, 204; use of motor buses to compel res- 
 toration of S-cent fare, 287-288; indirect sub- 
 sidies in, 318-320; criticism of Public Service 
 Commission in (J. L. Quackenbush), 413- 
 417; 1919 strike data, 531; wage rates 
 (Brooklyn, Staten Island), 532, Note 1 of Ch. 
 XLIII ; results of year ending June 30, 1920, 
 Note 2 of Ch. XVI ; subway policy affected 
 by 1921 law. Note 3 of Ch. XXXIV; changes 
 in public service commission law affecting. 
 Notes 3 and 4 of Ch. XL. 
 
 New York Railways Company: 1918-1919 taxes, 
 86; 1917-1919 comparison of fare and traffic, 
 183, of fare and revenues, 189; receivership, 
 414, 416. 
 
 New York Public Service Commission, First 
 District : proposes hill for continuity of serv- 
 ice, 553-555, 557-560; changes in law affect- 
 ing. Notes 3 and 4 of Ch. XL. 
 
 New York State: (See also Jenks bill); con- 
 stitutional obstacles to public subsidies. 306; 
 plans for continuity of service, 552-560. 
 
 New York State Railways: 1917-1919 compari- 
 son of fares and traffic, 184, 206, of fares and 
 revenues. 190, 209; wage rates, 532, Note I 
 of Ch. XLIII. 
 
 Newark. N. J.: (Sec also Public Service Rail- 
 way Co.) ; wage rates, 532, Note I of Ch. 
 XLIII; jitney traffic in, 666-668. 
 
 Newman, J. K. : on overcapitalization, 38; on 
 loss of credit, municipal ownership and serv- 
 ice at cost, 133-134 ; on effect of fare in- 
 creases, 171; on taxation, 249-250; on prob- 
 lems of reorganization, 337-338; on plan of 
 reorganization, 338-340; on theory of valua- 
 tion, 361; on valuation, 370; on rate of re- 
 turn, 401. 
 
 Niagara Falls, N. Y. : (See International Rail- 
 way Co. ) 
 
 Nixon, Lewis: on taxes and paving require- 
 ments, 252-253. 
 
 Norfolk, Va. : (See also Virginia Railway & 
 Power Co.) ; wage rates, 532, Note 1 of 
 Ch. XLIII. 
 
 Northern Ohio Traction & Light Co. : 1917- 
 1919 comparison of fares and traffic. 186, 
 206, of fares and revenues, 191, 209; wage 
 rates, 533, Note 1 of Ch. XLIII. 
 
782 
 
 Index 
 
 Northern Texas Traction Co.: (See Fort 
 Worth, Texas). 
 
 Oakland, CaHf. : (See also San Francisco- 
 Oakland Terminal Railways Co.) ; wage 
 rates, 532, Note 1 of Ch. XLIII. 
 
 Oakwood Street Railway Co.; (See Dayton, 
 Ohio). 
 
 Obsolescence: G. E. Tripp. Commissioner 
 Beall. etc., on, 151-152; M. E. Cooley on, 
 357-358. 
 
 Ogburn, William F. : on living wage, 570-579. 
 
 Omaha & Council Bluffs Street Railway Co. : 
 1917-1919 comparison of fares and traffic, 
 186, 205, of fares and revenues, 192, 208; 
 wage rates, 533, Note 1 of Ch. XLIII. 
 
 One-man cars : policy of Stone & Webster, 
 196; C. W. Kellogg' on, 272-273; A. E. R. .\. 
 Committee on One-Man Car Operation on, 
 272-273; general discussion of (Kellogg, 
 Tripp, Tingley and Loring quoted), 273-281; 
 in Detroit, Note 4 of Ch. XI II. 
 
 Operating ratios: general statistics, 122-123; 
 in New York City, 123; in Cleveland. 124. 
 
 Operation, economies in: (See also One-man 
 cars. Power, economics in); Ch. XX.XI. 2t)()- 
 285; J. D. Mortimer on. 326; J. A. Beelcr 
 on, 326; relation to scrvice-at-cost plan, 435- 
 437. 
 
 Oregon Public Service Commission : Portland 
 valuation, 727. 
 
 "Organization expense" : defined by A. E. R. A. 
 Committee on \'aluation, 349. 
 
 Ottawa, Out. : wage rates, 533, Note 1 of Ch. 
 XLIII. 
 
 Overbuilding: Ch. XI 11. 61-66. 
 
 Overcapitalization: (Sec al.so Watered stock. 
 Capitalization, Holding companies. Banker 
 control); efftfct on credit. Ch. IX, ,?6-42 ; 
 amortization of, Ch. X. 43-45 : in Philadel- 
 phia. (W. S. Twining) 283-284, (T. E. Mit- 
 ten) 601-602; J. D. Mortimer on. 331-332; 
 F. H. Sisson on. 3i2; in Indiana (C. H. 
 Mote), .332-333; of Indianapolis Traction & 
 Terminal Co. (A. F. Potts), 3.U-.W4 ; In- 
 diana Public Service Commission on, 334- 
 335; S. P. Jones on, 591-593; W. .1. Lauck 
 on, 593-595; an issue in New Jcrsev, 671- 
 672. 710. 
 
 Overhead charges: treatment by A. E, R. A. 
 Commillec on Wtluation, ,W9-3.50: M. E. 
 Cooley on, 356; treatment by Massachusetts 
 Public Service Commission in Bay State rale 
 case, 374-375. 733; treatment by Interstate 
 Commerce Connnission in Texas-Midland 
 case, 376-379, 733; treatment by Wisconsin 
 Railroad Commission, 733 ; in Des Moines 
 Gas case, 733; in Denver Union Water case, 
 733. 
 
 Owosso (and Corunna), Mich.: 1917-1910 com- 
 parison of fares and traffic. 187. 207. of fares 
 and revenues, 19,1, 210. 
 
 Pacific Electric Company: (See Los Angeles 
 Calif.) 
 
 Pardee, John H. : on need of change in publi 
 relations, 155-156. 
 
 Passaic gas case: rate of return allowed (N. 
 Board of Public Utility Commissioners). 
 387 ; rate of return discussed (Justice 
 Swayze), 387-388. 
 
 Paterson, N. J.: (See also Public Service Rail- 
 wav Co. ) ; wage rates, 532, Note 1 of Ch. 
 XLIII. 
 
 Paving: (See also Franchise obligations) ; C. J. 
 Bullock on. 82; San Francisco-Oakland Ter- 
 minal Railways Co. (W. E. Creed), 84; re- 
 lief from (H. J. Pierce), 132; D. F. Wilcox 
 on, 246-247; J. K. Newman on, 249-250; 
 treatment of, in Cincinnati (W. C. Culkins), 
 250-251; in Cleveland, 252; Lewis Nixon on, 
 252-253 : general discussion of charges, 253 ; 
 L. S. Storrs on, 253-254; R. W. Babson on. 
 254-255; G. C. Cummin on, 255-256; C. W. 
 Kutz on, 256; J. B. F.astmatl on, 256; V. H. 
 Sisson on, 257; T. Conway on, 257; relief 
 from (R. T. Higgins), 291. 
 
 Pawtucket, R. I.: (See Rhode Island Co.) 
 
 Pennsylvania Public Service Commission : re- 
 port on Pittsburgh Railways Co.. 371 ; com- 
 mented on, by C. L. S. Tingley, 423 ; pro- 
 cedure commented on by T. Conway, 42,<- 
 424; commented on by W. D. George, 425. 
 
 PennsyKania Public Service Company Law 
 provisions of, 371-372; eflfect of, in Pitt.-,- 
 hurgh valuation, 372. 
 
 People's Railway Co.: (See Dayton, Ohio). 
 
 Peters. A. J. : on wage rates for Boston Ele- 
 vated, 581-582. 
 
 Philadelphia Rapid Transit Company: 1917- 
 1919 comparison of fares and traffic, 183, 
 199, 205, of fares and rc%-enues. 189, 208; 
 comparison of fares and traffic with Boston 
 Ele\'ated, 198; with Public Service Railwa>. 
 200-201 ; reduction of accident expense (C. .1 
 Joyce), 270; fire insurance policy (C. j 
 Joyce), 270; operating economies (C. j. 
 Joyce), 270-271; city's attitude toward (\V. 
 S. Twining), 282-285; Philadelphia plan (T 
 E. Mitten), 301 ; comparison of revenues with 
 those of Indianapolis Traction & Terminal 
 Co., 301-302; Co-operative Plan, 598-611; 
 recent wage changes. Note 1 of Ch. II; re- 
 cent fare increase. Note 1 of Ch. X\'. 
 
 Pierce, HcnrA- T. : on continuing 5-cent fare. 
 132-l.U 
 
 Pingrec. Hazen S. : pioneering efforts of, 68' 
 
 Pitney, Justice: treatment of rate of return 
 Lincoln Gas & Electric Light Co. vs. Linci-; 
 386; quoted on labor contract rights (Cop- 
 page vs. Kansas), 545. 
 
 Pittsburgh, Pa : 1917-1919 comparison of fares 
 and traffic, 184, 199, 207, of fares and rev- 
 enues, 190, 210; discussion of fares and 
 
Index 
 
 783 
 
 traffic, 202; zone system, 223: fare system 
 and effect of zoning (VV. D. George), 240; 
 report of Engineers \'aluation Board, 368- 
 371, 706; report of Pennsylvania Public Serv- 
 ice Commission, 371 ; public attitude in (C. 
 A. Fagan), 425; public regulation in (C. A. 
 Fagan), 42S ; regulation in (E. V. Babcock), 
 429-430; capitalization in, 512; 1919 strike 
 data, 531 ; wage rates, 532, Note 1 of Ch. 
 XLIII. 
 
 Plumb Plan : Amalgamated Association's de- 
 mands opposed to, 563 ; commented on, 616- 
 617. 
 
 Police power: (See also Service, Regulation); 
 use in bettering service. Cb. X\'II. 88-91. 
 
 "Politics" under public ownership : J. K. New- 
 man on, 133; E. N. Foss on, 144; F. B. 
 deBerard on. 144-145; S. R. Bertron on, 
 Note 2 of Ch. XXIII. 
 
 Population served : 4. 
 
 Portland, Maine; (See Cumberland County 
 Power & Light Co.). 
 
 Portland, Ore. : 1917-1919 comparison of fares 
 and traffic, 186, 206, of fares and revenues, 
 192. 209; wage rates, 533, Note 1 of Ch. 
 XLIII: valuation per mile, 727, 730. 
 
 Potts. Alfred F. : report on Indianapolis Trac- 
 tion & Terminal Co., 333-334. 
 
 Power, economies in: (See also Operation, 
 economies in) ; J. A. Beeler on, 268; VV. 
 Jackson on. 268-269; H. G. Bradlee on, 269. 
 
 Productivity, increased: W. J. Lauck on, 588; 
 .■\. Sturgis on, 590-591 ; as determining wages 
 (J. D. Mortimer), 612-613. 
 
 Profits: past (\V. H. Taft), 37; as controlling 
 motive, 151. 722; D. F. Wilcox on, 152-153; 
 early, from 5-cent fare, 328-329. 
 
 "Promotion expense" : defined by A. E. R. A. 
 Committee on Valuation, 348; M. E. Cooley 
 on, 355. 
 
 Promoters' profits : treatment by Massachu- 
 setts Public Cervice Commission (Bay State 
 Case), 375. 
 
 Providence. R. I.: (See also Rhode Island 
 Co.) : 1919 strike data, 531 ; wage rates, 532, 
 Note 1 of Ch. XLIII; 1919-1920 results un- 
 der zone plan. Note 2 of Ch. XXIX. 
 
 Public, the: two conceptions of the term, 560- 
 561. 
 
 Public hostility: G. E. Tripp on, 37-38; F. H. 
 Sisson on, 38, 154; \V. H. Taft on, 154. 
 
 Public operation with private ownership: H. 
 Loring on. 136-137: F. T. McLeod on, 137; 
 Boston Elevated. 464-471 ; Eastern Massa- 
 chusetts Street Railway Co., 471-476. 
 
 Public ownership and operation : G. E. Tripp 
 on, 129; H. C. Clark on. 131-132; H. J. 
 Pierce on, 132-133: J. K. Newman on, 133; 
 S. R. Bertron on, 135-136, Note 2 of Ch. 
 XXIII; R. T. Higgins on, 136; H. Loring 
 on, 137; F. T. McLeod on, 137; J. A. Beeler 
 
 on, 138; C. W. Kutz on, 138; H. L. Stuart 
 on, 139; general discussion, Ch. XXIV, 140- 
 148; of roadbed (C. W. Kutz), 256; taxation 
 under, in Detroit. 259; fare provisions under, 
 in Detroit, 310-311; T. Conway on, 314; re- 
 semblance of Cleveland plan to (N. D. 
 Baker), 451; F. Sanders on, 453; R. VV. 
 Babson on, 470; use of public credit, 506- 
 527; employe relations. Ch. XLVIII, 618- 
 620; the ultimate solution, Ch. LIV, 635-643;' 
 favored in dissenting report of Massachusetts 
 Special Commission, Note 1 of Ch. XX ; De- 
 troit program, Note 2 of Ch. XXVTII; 
 Seattle experience. Note 4 of Ch. XLII. 
 
 Public ownership with private operation : C. 
 VV. Kutz on, 138; of roadbed (C. VV. Kutz). 
 256; E. V. Babcock and C. K. Robinson on, 
 507. 
 
 Public relations: (See also Cooperation); sig- 
 nificance of franchise rights and of com- 
 panies' appeal to Federal Commission, 4-5 ; 
 interrelation with credit and labor, Ch. IV, 
 15; need of change in (J. H. Pardee), 155- 
 156. 
 
 Public Service Commissions: (See also Police 
 power. Service, Regulation) ; H. L. Stuart 
 on, 93; R. Schaddelee on, 97-98, 291-292. 
 
 Public Service Railway Company (New Jer- 
 sey) : current replacement costs, 32-33; de- 
 preciation policy, 53 ; depreciation and divi- 
 dend policy (Utilities Commission), 59; 
 decrease in values of securities (T. N. 
 McCarter), 122; 1917-1919 comparison of 
 fares and traffic, 183, 199, 207, of fares 
 and revenues, 189, 210; comparison of fares 
 and traffic with Philadelphia, 200-201, with 
 New York City, 200-201 ; zone system, 229- 
 232; comparison with Cleveland Railway. 
 252; 1919 strike data, 531; wage rates, 532. 
 Note 1 of Ch. XLIII; general relation to 
 local transportation issues in New Jersey, 
 Appendix A, 659-716; recent wage changes. 
 Note 1 of Ch. II ; application for 10-cent 
 fare. Note 2 of Ch. XXVII, Note 7 of Ap- 
 pendix A; failure of attack on jitneys. Note 
 4 of Appendi.x A ; new wage agreement ef- 
 fective August 1, 1921, Note 6 of Appendix 
 A ; valuation of. by Ford, Bacon & Davis, 
 Note 7 of .Appendix A. 
 
 Puget Sound Traction, Light & Power Com- 
 pany: (See also Seattle, Wash.); purchase 
 by Seattle, 517-520. 
 
 Purdy. Lawson : on special assessments, 528. 
 
 Quackenbush, James L. : on public service com- 
 missions, 88-89, 413-417; on public ownership, 
 510-511. 
 
 Railroad Valuation Act of March 1, 1913: terms 
 of, 376. 
 
7S4 
 
 Index 
 
 Read, William T. : letter of D. F. Wilcox to, 
 re New Jersey situation, 661-663; action of, 
 as member of Valuation Commission, Note 
 3 of Appendix A. 
 
 "Readiness-to-serve": (See Standby charge). 
 
 Receiverships : relation of wage increases to 
 (1". H. Sisson), 10; statistics on (J. W. 
 Welsh), 64; A. E. R. A. on miles of track 
 in receivers' hands, ill; Secretaries of Com- 
 merce and Labor, on companies in receivers' 
 hands, 327; when advisable, 723-724. 
 
 Record, George L. : connection with Public 
 Service Railway case, 664. 
 
 Refunding; difficulty of, 19-20. 
 
 Regulation: (See also Jitneys); origin and 
 significance of, 4-5, 677; relation of over- 
 capitalization to, 36-37; of capitalization, (Th. 
 -Will, 92-96; abandonment of (R. W. Bab- 
 son). 104-106; failure of (G. E. Tripp), 
 129; criticism of commission (R. Schadde- 
 lee), 291-292; state vs. local, 293-294; of jit- 
 neys, 288, (R. W. Babson) 292-293, (1. A. 
 Bceler) 292, (L. S. Storrs) 294-295, in Dal- 
 las (W. B. Head) 295. (D. C. Jackson) 
 297-298; of motor trucks (C. L. Henry), 
 298; state, unrestricted, Ch. XL, 405-433; 
 commission, compared with service at cost, 
 435 ; local, in Cleveland, 443-444 ; abandon- 
 ment of, Ch. LI, 624-625; inadequacy of, Ch. 
 LH, 626-630, 677-678; necessity of, in case 
 of private monopoly, 673; endangered by 
 financial distress of companies, 674-675. 
 
 Rehabilitation: necessity for, 33-34; of Boston 
 Elevated, 467; of Eastern Massachusetts 
 property (H. Loring), 474. 
 
 Relief: (See Fare increa.scs. Remedies). 
 
 Remedies : ( See also Fare increases. Subsi- 
 dies) ; abandonment of regulation, (R. W. 
 Babson) 104-106. Ch. LI, 624-625; for credit 
 situation. Ch. XXIII, 129-139, 157; suggest- 
 ed, 343-344 ; Paul Shoup on, 421 ; the four 
 choices, Ch. L, 623; commission regulation. 
 Ch. LH. 626-630; service at co.st. Ch. LIH. 
 631-634; public ownership and operation, 
 Ch. LIV, 6.?5-643; recommendations in Den- 
 ver report, 725. 
 
 Reorganization: Ch. XX.XVI, 327-342; as rem- 
 edy for financial embarrassment (W. H. 
 Taft), 324. 
 
 Replacements: Public Service Railway, i2-Zi\ 
 Cleveland Railway, ii. 394, 444; J. D. Mor- 
 timer on, 411; Montreal policy, 459-460. 
 
 Reprixluction cost melhixl of valuation: (See 
 \'alualion). 
 
 Return on capital : metho<ls of increasing, Ch. 
 XXVI, 157-1.59; rate of, general discussion, 
 Ch. XXXIX, .?8.';-404; j. D. Mortimer on, 
 412-413; under service-at-cost plans, 4.W-439, 
 740; in Cleveland. 440-441 ; in Montreal. 460- 
 461; under Jrnks hill, 464; on Boston Ele- 
 
 vated, 465-466; on Eastern Massachusetts, 
 473; L. R. Nash on, 498-499; variable rate 
 of (T. L. Sidlo), 499; flexibility of, 499- 
 500, (L. R. Nash) 500; relation between high 
 rate and market value of stocks, Denver, 
 731. 
 
 Revenues : total for 1917, 1 ; compared with 
 steam railroads, 1; per passenger (1917), 4; 
 increase over 1902, 17 ; collected in advance. 
 17-18; relation of wages to (W. J. Lauck), 
 114-115; effect of increased fares on, Ch. 
 XXVIII, 165-217; loss of, through dishon- 
 esty and carelessness of emploves (C. H. 
 Mote), 300. 
 
 Richmond, Va. : (See also Virginia Railway & 
 Power Company ) ; wage rates, 532, Note 1 
 of Ch. XLIII. 
 
 Rhode Island Company : Z. W. Bliss on taxa- 
 tion, 83; W'. C. Bliss on jitnev competition, 
 106-107; data on 1917-1919 fares, traffic and 
 revenues, 185, 191 ; meaning of fare and rev- 
 enue statistics, 1%-197; zone svstem (W. C. 
 Bliss), 223-226: 1919 strike data. 531; wage 
 rates, 532, Note 1 of Ch. XLIII. 
 
 Riding habit : significance of, 214. 
 
 Right to strike: D. F. Wilcox on, 153-154; 
 limitation of, Ch. XLV, 541-563. 
 
 Robinson, Charles K. : on service at cost, 501- 
 503; on public ownership with private oper- 
 ation, 507; on Pittsburgh capitalization, 512. 
 
 Rochester, N. Y. : (See also New York State 
 Railways) ; wage rates, 532, Note 1 of Ch. 
 XLIII; service at cost for. Note 1 of Ch. 
 XLI. 
 
 Routing: improvement of (J. A. Becler), 265; 
 in Philadelphia (C. J. Joyce), 265-266; sav- 
 ing in Cincinnati, 267. 
 
 Ryan, John .\. : connection with Denver inves- 
 tigation, 719. 
 
 St. Louis, Mo. : 1917-1919 comparison of fares 
 and traffic, 184, 206, of fares and revenues, 
 189, 209; wage rates, 532, Note 1 of Ch. 
 XLIII. 
 
 St. Paul, Minn.: (See Twin Citv Rapid Tran- 
 sit Co.) 
 
 Salt Lake City, Utah: 1917-1919 comparison of 
 fares and traffic, 187. 206. of fares and rev- 
 enues. 193. 209; wage rates, 533, Note 1 of 
 Ch. XLIII. 
 
 San .■\ntonio. Texas : 1917-1919 comparison of 
 fares and traffic, 188. 205, of fares and rev- 
 enues, 194. 208; wage rates, hil. Note 1 of 
 Ch. XLTII. 
 
 ."^an Diego. Calif. : adopts zone svstem. Note 
 5 of Ch. XL. 
 
 San Francisco, Calif.: depreciation policy. Mu- 
 nicipal Railway, 53-.=;4, 746; 1917-1919 com- 
 parison of fares and traffic, 184, 205, of fares 
 and revenues, 190. 208: results of municipal 
 operation, 524; wage rates, 532, Note 1 of 
 
Index 
 
 785 
 
 Ch. XLIII ; 1916-1917 maintenance and de- 
 preciation (Municipal Railway), 744. 
 
 San Francisco-Oakland Terminal Railways 
 Companv ; taxes and franchise obligations 
 (W. E. 'Creed), 83-85; 1917-1919 comparison 
 of fares and traffic, 185, 206, of fares and 
 revenues, 191, 209; wage rates, 532, Note 1 
 of Ch. XLIII; 6-cent fare, Note 5 of Ch. 
 XL. 
 
 Sanders. Fielder: on Cleveland plan. 452-453; 
 on miniicipal ownership, 453. 
 
 Schaddelee. Richard: on holding companies, 
 70; on public service commissions, 97-98; on 
 jitney competition, 110, 291-292; on commis- 
 sion regulation, 291, 421-423; on rate of re- 
 turn. 400. 
 
 Schedules : 
 
 improvement of: (I. A. Beeler), 264-265; 
 
 in Philadelphia (C. J. Joyce), 266-267. 
 of working time : Detroit, 584 ; Cleveland. 
 584-585 ; method of determining under 
 Philadelphia plan, 604-605 ; statistics of, 
 Philadelphia and Detroit, 610. 
 
 Schenectady : 1917-1919 comparison of fares 
 and traffic, Schenectady Railway, 188, (city 
 lines) 205, (interurban) 206, of fares and 
 revenues, 194, (citv lines) 208, (interurban) 
 209; wage rates, 533, Note 1 of Ch. XLIII. 
 
 Schreiber. Martin : connection with Public 
 Service Railway valuation. 687, 689. 
 
 Scranton Railway Company : dividend and 
 maintenance policy (C. L. S. Tingley), 59- 
 60; 1917-1919 comparison of fares and traf- 
 fic, 187. 207, of fares and revenues. 193, 210; 
 wage rates, 533. Note 1 of Ch. XLIII. 
 
 Seattle. Wash.: 1917-1919 comparison of fares 
 and traffic, 185, 205, of fares and revenues, 
 191, 208: method of acquiring railway, 517- 
 520; results of railway operation, 520-524; 
 1919 strike data. 531 ; wage rates, 532. Note 
 1 of Ch. XLIII ; purchase price of railway, 
 729, 730; fare increase. Note 1 of Ch. XV, 
 Note 4 of Ch. XLII; Councilman Erickson's 
 policy with respect to street railway purchase 
 and fares. Note 4 of Ch. XLII ; Mayor Cald- 
 well's investigation of street railway pur- 
 chase. Note 4 of Ch. XLII. 
 
 Second Avenue Railway Company (New York 
 City): 1918-1919 taxes, 86; receivership (J. 
 L. Quackenbush), 414. 
 
 Secretary of Commerce and Secretary of La- 
 iKir : letter of Mav 15. 1919, to the Presi- 
 dent, in. 
 
 Securities: (See also Capitalization. Regula- 
 tion. Reorganization); demand for, (H. L. 
 Stuart) 6-7, (S. R. Bertron) 7; ratio of 
 stocks to bonds. 18-19. 94-95; not retained 
 by promoters (G. E. Tripp). 54; change in 
 value of electric railway (R. \V. Babson), 
 121-122; of utilities in general. 122; guaranty 
 of bends (F". H. Sisson), 134-135; shrink- 
 
 age in value of, 335 ; ratio of stock to funded 
 debt, 335 : fate of outstanding ( F. H. Sis- 
 son), iid-iZl ; treatment of, in valuation (G. 
 E. Tripp), 364; value of, Boston Elevated 
 (B. Warren), 398-399, 400, Eastern Massa- 
 chusetts, 399. 
 
 Security holders : relative effects of high prices 
 on stockholders and bondholders, 118-119, 
 (Fisher) 120-121, 388-390, 692-696, 731, 12,1 - 
 738. 
 
 Self-supporting: meaning of, for street rail- 
 ways, 303-304. 
 
 Service: (See also Police power) ; personal na- 
 ture of, 9; use of police power for better- 
 ment of, Ch. XYII, 88-91; as controlling 
 motive, 151, (D. F. Wilcox) 152-153; con- 
 tinuity of. 153, (D. F. Wilcox) 153-154; 
 ways of improving (J. B. Eastman), 271; 
 regulation of jitney (R. W. Babson), 292- 
 293; free, advocated by R. S. Bauer, 309; 
 control of, under service at cost, (Cleve- 
 land) 443-444. (Montreal) 458, (Boston Ele- 
 vated) 465, (Eastern Massachusetts) 472, 
 (Massachusetts service-at-cost act) 478, 
 (Cincinnati) 482-483, (Denver) 741; value 
 of. effect of jitney competition on, 671. 
 
 Service at cost: (See also Cleveland, Cincin- 
 nati, Montreal, Boston Elevated, Eastern 
 Massachusetts, Youngstown) ; G. E. Tripp 
 on. 130-131; H. C. Clark on, 131-132; J. K. 
 Newman on, 133-134; S. R. Bertron on, 135; 
 J. A. Beeler on. 137-138; effect on fares, 
 163-164: incentive under. 402-404: relation to 
 commission regulation. 406; J. D. Mortimer 
 on, 412; Ohio cities adopting, 426; general, 
 Ch. XLI, 434-504, Ch. LI II. 631-634; analy- 
 sis of Denver ordinance. 738-744. 
 
 Shoup, Paul: on jitney competition, 99-100; 
 on remedial measures, 420-421. 
 
 Sidlo. Thomas L. : on financial policy of Cleve- 
 land Railway Co., 19; on return on capital, 
 499: on compulsory arbitration, 543-544. 
 
 Sisson, Francis H. : on effect of wage increases, 
 10; on public hostility and overcapitalization, 
 38; on indebtedness, 44. 12; on effects of war 
 prices on credit. 126-121 ; on public guaran- 
 ties, 134-135; on public ownership, 140-141; 
 on justification for public hostility. 154; on 
 effect of fare increases, 169; on paving and 
 other charges, 257 ; on efficiency of manage- 
 ment. 261 ; on abandonment of unprofitable 
 lines, 323-324; on overcapitalization, 332; on 
 relation of capitalization to value, 335-336; 
 on fate of outstanding securities, 336-331 ; on 
 importance of the valuation, 368; on rate of 
 return. 397-398; on regulation, 432. 
 
 Skip-stop plan: effect of (G. C. Cummin), 
 267: in Philadelphia (C. J. Joyce), 267; J. 
 A. Beeler on, 267. 
 
 Smvth vs. Ames : Justice Harlan's decision, 
 380. 
 
786 
 
 Index 
 
 Sommer, Frank H. : connection with Public 
 
 Service Railway case, 665. 
 Special assessments: (See also Contributions 
 by property owners) ; M. R. Maltbie on, 
 317-318. 528; Lawson Purdy on. 528. 
 Special franchise tax: (See Franchise tax). 
 Spokane. Wash.: 1917-1919 comparison of fares 
 and trafflc, 187. of fares and revenues, 193; 
 wage rates. 533. Note 1 of Ch. XLlll. 
 SpraRue. Frank j.: on future of the industry 
 
 and on cfTect of competition, 290-291. 
 Springfield, Mass.: jitney competition (B. 
 Warren), 100; 1917-1919 comparison of 
 fares and traffic. 186, 206, of fares and rev- 
 enues, 192, 209; zone .system. 226-227; wac;c 
 rates. 533, Note 1 of Ch. XLIIl. 
 Squires, Benjamin M.: on Canadian compul- 
 sory investigation act, 549. 
 Standardization: (See Equipment). 
 Standby charge: Public Service Railway Com- 
 pany. 230-231, 237-238. 
 Stanley, John T. : on Cleveland reorganization, 
 51; on relation of bankers to credit. 73; on 
 franchise requirements, 251 ; on contribu- 
 tions by proix-rty owiiers for extension in 
 Cleveland, 317; on rate of return in Cleve- 
 land. .Wl-392; on regulation, 426-427. 
 Statistical fables: New York City traffic, 3; 
 wage rates, 13; earnings and construction 
 expenditures. Stone &• Webster companies, 
 22; annual capital additions, 2i. 2S: gross 
 earnings and capital investment, 27 ; taxa- 
 tion statistics, 79; taxes and franchise obli- 
 gations, 81 ; taxes, San I'rancisco-Oakland 
 Terminal Railways, 84; percentage of taxes 
 to revenue. New York City, 86; jitney and 
 street car traffic, Bridgeport, Conn., 102; 
 ratio of salaries and wages to operating rev- 
 enues, 113: operating revcn\ic per employe, 
 114; operating ratios, 123; operating ratios. 
 New York City. 123, Cleveland. 124: aver- 
 age cost of supplies. 124; rates of fare in 
 \'arious cities. 16.1; percentage increases in 
 faros and revenues. (Milwaukee) 179. ( Hor- 
 nell) 179, (Cumlx-rland County) 179: rela- 
 tion of traffic to fare increases on principal 
 U. S. systems (Table I), 18,M88: relation 
 of revenues to fare increases on principal 
 U. S. systems (Table II), 189-194; traffic 
 compari.sons, princinal U. S. systems, 6 
 months basis (Table III), 199; formulas 
 for relations of fares, traffic and revenues. 
 203 ; sninmary, traffic compared to fare in- 
 creases, principal V. S. systems (Table IV), 
 205-207 ; summary, rcveiuies compared to 
 fare increases, principal U. S. systems (Ta- 
 ble \'), 208-210; general summary, effect of 
 fare increases upon traffic and revenues, 
 principal U. .S. systems (Table \I). 212; 
 comparison of fares, traffic and revenues. 
 Montreal with Toronto, 217; Cleveland taxes 
 
 (1918), 252; Public Service Railway taxes 
 (1918), 252; comparison of financial results 
 under one-man car operation with those un- 
 der heavier equipment, 279; total net capi- 
 talization (1917), 330; increase in gross rev- 
 enues. Eastern Massachusetts. 476; income 
 per passenger in Cincinnati. 485 ; comparison 
 of servicc-at-cost cities with others as to 
 effect of fare increases, 495; depreciation 
 percentages, Seattle, 521-522; revenue and 
 expense statement, Seattle Municipal Kail- 
 way (1919), 523; table of strikes, with rev- 
 enue losses (1919), 531; wage rates in prin- 
 cipal cities, (Jan. 1, 1920) 532-533, (.Ian. 1, 
 1921) Note 1 of Ch. XLIII; length of runs, 
 Detroit and Philadelphia, 610; jitney traffic 
 in Newark. N. J.. 667; valuation compari- 
 .sons. 727. 730; distribution of San Francisco 
 Municipal Railwav net earnings. Note 2 of 
 Ch. XI. 
 Stone & Webster: earnings and construction 
 expenditures, 22; one-man car operation, 
 196; purchase arrangement with Seattle, 517- 
 .520, Note 4 of Ch. XLII; connection with 
 Public Service Railway valuation, 661-662. 
 Stops, location of: (See also Skip-stop plan); 
 J. A. Heeler on. 267. 
 
 Storrs, Lucius S. : on use of police power in 
 Connecticut. 89-90; on jitney competition, 
 Massachusetts and Connecticut. 101-l(i3; on 
 limitations of fare increases, 170-171 ; zone 
 system in Connecticut, 232-235; on justice of 
 paving and other charges, 253-254; on jit- 
 ney competition and regulation, 294-295 ; on 
 public subsidies, 314-315; on track mileage 
 and intenirban development in Great Brit- 
 ain and United States, .125. 
 
 Streets : significance of rights in. 4. 
 
 Strikes: (See also Right to strike); preven- 
 tion of (W. C. Bliss), 11: table of. with 
 revenue losses (1919), 531; effect of automo- 
 bile on, 5.34-535: in Des Moines, 538-539; 
 National War Latvir Board's dealing with, 
 5.W; in Toronto, 549; in Philadelphia. 605- 
 606; in 1920 and first half of 1921, Note 2 
 of Ch. XLIII. 
 
 Stuart, Harold L. : on demand for securities, 
 6-7; on public service commissions, 93; on 
 public ownership, 139; on rate of return, 
 .W-.W; on regulation, 431-432. 
 
 Sturgis, .■Xrthur: statistics of wage rates, 569, 
 571, 589- .590; on increased productivity, 590- 
 591 ; on efTect of wage increases, 591. 
 
 Subsidies, public: (See also Remedies); Ch 
 XXXIW 303-321. 
 
 Summary and outline of analysis of electric 
 railway problem, with final conclusions in- 
 dicated: 644-657. 
 
 Superseded property: (Sec al.so Obsolescence) ; 
 A. E. R. A. Committee on Valuation on. 
 350; G. E. Tripp on, 366. 
 
Index 
 
 787 
 
 Surplus: use of, to meet losses, 118; as equal- 
 izer. 402; under service-at-cost plan, 439. 
 
 .Swayze, Justice: on rate of return (Passaic 
 gas case), ,587, 671. 
 
 Syndicates: (See Holding companies). 
 
 Syracuse, N. Y. : (See also New York State 
 Railways) ; wage rates, 532, Note 1 of Cli. 
 XLIII.' 
 
 Systems, statewide : 195. 
 
 Taconia. Wash. : 1917-1919 comparison of fares 
 and traffic, 188, 207, of fares and revenues, 
 194, 210; wage rates, 533, Note 1 of Ch. 
 XLIII. 
 
 Taft, William H. : on credit situation, 6; on 
 relation of wages to finances, 10; on over- 
 capitalization and past profits, 37 ; on reme- 
 dies, 138; on public ownership, 140; on jus- 
 tification for public hostility, 154; on limi- 
 tations of fare increases, 168; on ta.xation, 
 247-248; on policy of public subsidies. 321; 
 on reorganization and abandonment of un- 
 profitable lines, 324. 
 
 Taxation: (See also Franchise taxes); total 
 (1917), 4; special, Ch. XVI. 78-87; relation 
 to rise in costs, 117; H. J. Pierce on, 132; 
 R. T. Higgins on, 136; relief from, Ch. 
 XXX, 244-259, 286: of private vehicles. 286- 
 287; "equal." and limited exemption from 
 C. J. Bullock), 307-308; Massachusetts Pub- 
 lic Service Commission on taxation to sup- 
 port street railways, 308-309; of land values 
 to make up deficit in revenues ( F. F. In- 
 gram). 309-310; Massachusetts Special Street 
 Railway Commission on, 313 ; relation to 
 service-at-cost plans, 437 ; in Cleveland, 443 ; 
 N. D. Baker on, 451. 
 
 Tayler grant: (See Cleveland Railway Com- 
 pany). 
 
 Taylor. A. Merritt : on valuation, .361-362. 
 
 Terre Haute. Ind. : 1917-1919 comparison of 
 fares and traffic, Terre Haute. Indianapolis 
 & Eastern Traction Co., 188. (city lines) 205. 
 (interurban) 207. of fares and revenues, 194, 
 (city lines) 208, (interurban) 210. 
 
 Te.xas-Midland Railroad : report of Interstate 
 Commerce Commission on valuation of, 376- 
 379. 
 
 Third Avenue Railroad Company (New York 
 City) : overcapitalization. 44. 
 
 Third .\ venue Railroad Company (New York 
 City): 1918-1919 taxes, 86; 1917-1919 com- 
 parison of fare and traffic, 183, of fare and 
 revenue. 189. 
 
 Tingley, C. L. S. : on dividends and mainte- 
 nance policy (Scranton). 59-60; on increased 
 costs, 127; on effect of fare increases, 169; 
 on commission regulation, 423. 
 
 Toledo. Ohio: 1917-1919 comparison of fares 
 and traffic, 186, 207, of fares and revenues, 
 192, 210; local regulation in (H. L. Doher- 
 
 ty), 428; wage rates, 533, Note 1 of Ch. 
 XLlll; 1920 value, 729, 730; Milner service- 
 at-cost plan. Note 6 of Ch. XL. 
 
 Toronto, Ont. : fare system and efTect on traf- 
 fic and revenue, 216-217 ; comparison with 
 Montreal, 217; wage rates, 533, Note 1 of 
 Ch. XLIII; valuation, 727-728; municipal 
 ownership program. Note 5 of Ch. XXVIII. 
 
 Track: comparison of mileage in Great Brit- 
 ain and United States, 322, (L. S. Storrs) 
 324-325. 
 
 Traffic: total for 1917, 2; compared with steam 
 railroads, 2; increase in, 2-i; New York 
 City increase, 3; increase over 1902. 16; ef- 
 fect of increased fares on, Ch. XXVIII, 165- 
 217. 
 
 Trailers : use of, in Detroit, 269, in Cleveland 
 (N. D. Baker). 269. 
 
 Transfers, abolition of: H. J. Pierce on. 132. 
 
 Transmittal, letter of: Delos F. Wilcox to 
 Charles E. Elmquist, Chairman, June 8, 1920, 
 
 -X. 
 
 Transportation areas (or districts) : suggested 
 by Massachusetts Special Street Railway 
 Commission, 313; to avoid city boundary dif- 
 ficulties, 511. 
 
 Trenton. N. J. : 1917-1919 comparison of fares 
 and traffic, 188. 207, of fares and revenues, 
 194. 210; wage rates, 533, Note 1 of Ch. 
 XLIII. 
 
 Tripp, Guy E. : on new capital requirements, 
 21; on overcapitalization, 37-38, 44; on pro- 
 motion policy, 54; on uniform fare. 76; on 
 failure of old methods of control and on pos- 
 sible remedies. 129-131 ; on obsolescence. 151- 
 152; on limitations of fare increases, 168; 
 on zone systems, 236-237 ; on taxation. 248 ; 
 on one-man cars. 274; on valuation. 362-367. 
 
 Troy: (See also United Traction Company); 
 Note 2 of Ch. XLIII, Note 3 of Ch. XLIII. 
 
 Twin City Rapid Transit Co. (Minneapolis and 
 St. Paul. Minn.) : 1917-1919 comparison of 
 fare and traffic, 184. 205. of fare and rev- 
 enues, 190, 208. 
 
 Twining, William S. : criticism of Philadelphia 
 Rapid Transit Company, report of Nov. 14, 
 1919, 282-284. 
 
 Union Street Railway Company, New Bedford. 
 Mass.: 1917-1919 comparison of fares and 
 traffic. 188, 205. of fares and revenues, 194, 
 208; compared with Eastern Massachusetts, 
 476; 1920 situation. Note 1 of Ch. XV. 
 
 Unions, recognition of: (See also Collective 
 bargaining) ; National War Labor Board on, 
 566; W. J. Uuck on, 566-.S68. 
 
 I'nited Railroad.^ : (See San Francisco). 
 
 United Railways Co.: (See St. Louis. Mo.) 
 
 L'nited Railways and Electric Co.: (See Bal- 
 timore, Md.) 
 
788 
 
 Index 
 
 United Traction Co. (Albany, Troy, etc.) : 
 strike. Note 2 of Cli. XLIIl. 
 
 Utah Light & Traction Co.: (See Salt Lake 
 City). 
 
 Utica. N. Y.: (See also New York State Rail- 
 ways) ; wage rates, 532, Note 1 of Ch. XLIIL 
 
 Vahey, James H. : on Massachusetts compul- 
 sory arbitration bill, 545-549. 
 
 Valuation: Ch. XXXVIII, 345-3»4; methods 
 of certain valuation engineers, 44; as basis 
 for rate fi.\ing and purchase price, 385; J. 
 D. Xliirtimer on, 411-412; Cleveland method 
 (N. U. Baker), 446-447; under service at 
 cost, (C. K. Robinson) 503, 739; under mu- 
 nicipal ownership, 639; under I'^owler bill, 
 639-640; New Jersey Commission, 661-663, 
 711-712; conflicting theories and their re- 
 sults, 681-712; general significance of. 725- 
 727 ; analysis of Denver mctliods and re- 
 sults, 725-738; New Jersey act amended. 
 Note 2 of -Appendix A; by l"ord, Bacon & 
 Davis, Note 7 of Appendix A. 
 
 Xancouvor, B. C. : wage rates, 533, Note 1 of 
 Ch. XLIIL 
 
 Van Winkle, Marsliall : connection with Pub- 
 lic Service Railway case, 664. 
 
 Vegelahn vs. Guntner: Justice Holmes quoted 
 on labor organization, 546. 
 
 Victoria, B. C. : wage rates, 533, Note 1 of Ch. 
 XLIIL 
 
 Virginia Railway & Power Co.: 1917-1919 com- 
 parison of fares and traffic, 185, 205, of fares 
 and revenues, 191. 208; wage rates, 532, Note 
 1 of Ch. XLUl. 
 
 M'age boards : under New York Public Serv- 
 ice Commission bill. 554. 
 
 Wages: (See al.so Cost of living. Labor, Living 
 wage) ; National War Labor Board on, 9- 
 10; W. H. Taft on relation to finances, 10; 
 F. H. Sisson on cflFect of increase. 10; eflfect 
 of increases (W. C. Bliss), 11; W. J. Lauck 
 (Brief) defends increases, 11-12; efTect of 
 increases, (M. E. Cooley) 12. (T. Conway) 
 12; rates and increases (J. W. Welsh), 13; 
 W. J. l-auck on waite ihcnry. 14. on relation 
 to revenues. 113-115: increased (C. L S. 
 Tingley). 127; in Cleveland since war, 530- 
 531 : National War l_ihor Board's dealings 
 with disputes, 5M). 5.W : rates in principal 
 cities. (Jan. 1. l<>2«(i 532-5.U (Jan I. I<)21 i 
 Note 1 of Ch XLIII; determination of. un- 
 der New York Public Service Commission 
 bill. 553-554: average rates at different \w- 
 rio<ls, (.\. Slurgis) 569, 571. (Magmisson) 
 571; increase in (Boston Elevated). .SSl- 
 583; effect of increases (.\. Sturgis). .'!91 ; 
 under Pliiladcl|>hia plan. 605-606; recent 
 changes. Note I of Ch. II. Note 2 of Ch 
 Xl.lll, Note 3 of Ch. XLIIL 
 
 Wakelee, Edmund W. : on capitalization of 
 
 franchises, 672. 
 Walsh, John J. : on public subsidies, 314. 
 War conditions : effect on value of money and 
 on credit, Ch. XXII, 116-128; scarcity of 
 free capital due to. 388. 
 Warren. Bentley W. : on increased costs, 13; 
 on jitney competition, Springfield, Mass., 
 100; on valuation, 345; on value of securities 
 of Boston Elevated, 398-399. 
 
 Washington. D. C. : 1917-1919 comparison of 
 fares and traffic, 185, 206, of fares and rev- 
 enues, 191, 209; zone system for (C. W. 
 Kutz), 241; wage rates, 532, Note 1 of Ch. 
 XLIII; 1919 valuation, 730; fare increase. 
 Note 1 of Ch. XV. 
 
 Washington, State of : provisions as to borrow- 
 ing for public utilities, 515-520. 
 
 Washington Water Power Co.: (See Spokane, 
 Wash.) 
 
 "Watered stock": (See also Overcapitaliza- 
 tion) ; M. E. Cooley on, 355. 
 
 Welsh. James W. : on wage rates, 13; annual 
 capital additions, 23 ; statistics on receiver- 
 ships and abandonment, 64; taxation statis- 
 tics, 79-80, 81 : on operating ratios, 123 ; net 
 income statistics, 157. 
 
 White. Chief Justice: quoted on status of rail- 
 wav labor (.^damson Law, Wilson vs. New), 
 550-551. 
 
 Wilcox. Delos F. : testimony on public own- 
 ership, 147-148; on fundamental questions 
 involved, 149-150; service vs. profits as con- 
 trolling motive. 152-153; continuity of serv- 
 ice, 153-154; on financial reorganization, 340- 
 341. 
 
 Address, Conference of Mayors, Philadel- 
 phia, 1914, on nature of public utility in- 
 vestments, 150-151. 
 The .\iuials, March, 1915. on taxation of 
 
 public utilities, 244-247. 
 Letter to Cleveland Street Railroad Commis-, 
 sioner. October 3, 1919, on amortization of| 
 capital, 455. 
 
 Willcox. O. B. : on new capital requirements, 
 29. 
 
 Williams, Timothy S. : on compulsory arbitra-^ 
 tion, 559. 
 
 Wilmington, Del. : 1917-1919 comparison of 
 fares and traffic, 187, 206, of fares and rev-i 
 cnues. 193, 209; wage rates, 533, Note 1 of 
 Ch. XLIII. 
 
 Wilson vs. New: Chief Justice White quoted,! 
 550-551. 
 
 Wilson, Woodrow : on 8-hour day, 583. 
 
 Winnipeg. Man. : wage rates, 5.^3, Note I of ' 
 Ch. XLIII. 
 
 Wisconsin : use of police power (J. D. Mor- 
 timer), 90-91; law providing for public guar- 
 
Index 
 
 789 
 
 amies (J. D. Mortimer), 316; rate of re- 
 turn in (J. D. Mortimer), 395; regulation 
 in. 405-413; restrictions on borrowing for 
 public utilities, 525-527; Board of Concilia- 
 tion (J. D. Mortimer), 615; valuation over- 
 heads allowed by Railroad Commission, 733 ; 
 attitude of Commission on cash working 
 capital, 734. 
 
 Witt, Peter : relation of Cleveland capitaliza- 
 tion to fare, 446. 
 
 Wolff. Mark: analyses of cost and capitaliza- 
 tion of Public Service Railway Company, 
 685-686. 707, 708, 710. 
 
 Worcester. Mass. : 1917-1919 comparison of 
 fares and traffic, 186, 207, of fares and rev- 
 
 enues, 192, 210; wage rates, 533, Note 1 of 
 Ch. XLIII. 
 Working capital: limited requirements an aid 
 to credit, 17-18; defined by A. E. R. A. Com- 
 mittee on Valuation, 350; M. E. Cooley on 
 need for, 355-356; not a proper item in valu- 
 ation for rate making, 734-735. 
 
 Youngstown, Ohio: changes in fare, 164; 1917- 
 1919 comparison of fares and traffic, 186, 206, 
 of fares and revenues, 192, 209; wage rates, 
 533, Note 1 of Ch. XLIII. 
 
 Zone fares: Ch. XXIX, 218-243; to combat 
 jitney competition, 668, 669. 
 
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