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 University of California. 
 
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kn 13 1911 
 
 CURRENT 
 RAILWAY 
 PROBLEMS 
 
 SAMUEL O. DUNN 
 
 OF THE 
 
 UNIVERSiTY 
 
 OF 
 
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Digitized by the Internet Archive 
 
 in 2007 with funding from 
 
 Microsoft Corporation 
 
 http://www.archive.org/details/currentrailwayprOOdunnrich 
 
CURRENT 
 RAILWAY PROBLEMS 
 
 By 
 
 SAMUEL O. DUNN 
 
 Editorial Director 
 Railway Age Gazette 
 
 WITH THE COMPLIMENTS 
 OF THE PUBLISHER 
 
 Published by the 
 Railway Age Gazette 
 1911 
 

 'Jj-//iM^-' 
 
CONTENTS 
 
 Valuation of Railways, with Especial Reference 
 to the Physical Valuation in Minnesota 5 
 
 Shall Railway Profits be Limited? 39 
 
 Railway Rates and Railway Efficiency 59 
 
 The New Long and Short Haul Law 69 
 
 218549 
 
,.^^ 
 
VALUATION OF RAILWAYS, WITH ESPE- 
 CIAL REFERENCE TO THE PHYSICAL 
 VALUATION IN MINNESOTA.^ 
 
 During recent years there has been much discussion of 
 valuation of the physical properties of railways as a basis 
 for public regulation of their rates. The subject has been 
 moved a good way from the field of academic theory to 
 that of applied theory by the exhaustive physical valuation 
 of the railways of Minnesota which recently was completed 
 by the railway commission of that state. 
 
 There were "physical valuations" before that in Minnesota, 
 notably that in Texas in 1894; that in Michigan in 1900; and 
 that in Wisconsin in 1903. But the valuation in Texas re- 
 cently was admitted by the engineer who made it to be en- 
 tirely out of date; and it never was entitled to much respect.* 
 None of these valuations was so exhaustive as that in Min- 
 nesota, and those in Michigan and Wisconsin were made as 
 
 ^ An article by the writer having the above title was published in 
 the Journal of Political Economy in April, 1909. In view of subsequent 
 developments regarding the question of valuation of railways it has 
 seemed worth while to make substantial additions to it. The additional 
 matter is enclosed in brackets. The article is here reprinted by 
 permission. 
 
 - "Doubtless many of them (the railways) are now considerably un- 
 dervalued by the commission. The valuations now in use were made 
 in 1894-6 when land, rights of way, terminal facilities and construction 
 materials were at their lowest value. In addition, the commission has 
 not given the roads any credit for the permanent improvements made 
 by them, the general settling and seasoning of the properties, or the 
 advance in value due to the general growth of the community. If a 
 thorough revaluation were made by the commission it is believed that 
 the margin between actual value and capitalized value would be wiped 
 out in the case of many roads." — "Railroad Transportation in Texas," 
 by Charles S. Potts, Adjunct Professor of Law and Government, Uni- 
 versity of Texas; page 155. 
 
6 /. Cyi}R^N-T-RAItWAV -.PROBLEMS. 
 
 bases for taxation, not rate-regulation. The Railroad Com- 
 mission of Washington finished a physical valuation of the 
 railways in that state for purposes of state-regulation at 
 about the same time that the Minnesota commission com- 
 pleted its work. But the valuation in Washington relates 
 to only a few roads, built and operated under somewhat un- 
 usual conditions, while the Minnesota valuation relates to 
 nineteen carrying and six switching, or terminal, roads, hav- 
 ing an aggregate line-mileage of 7,596 miles and an aggregate 
 track-mileage of 10,438 miles, built and operated under phy- 
 sical and commercial conditions similar to those in a large 
 part of the country. On the whole, it is believed that the 
 valuation in Minnesota affords the best materials in ex- 
 istence for what may perhaps fittingly be termed a "concrete" 
 study of valuation as a basis for rate-regulation. 
 
 A brief study of this sort will be attempted in this article. 
 I shall try, first, to describe, and, second, to discuss the 
 method and results of the valuation in Minnesota; third, to 
 outline the only method of valuation that, it seems to me, 
 finally will stand the scrutiny of enlightened economists or 
 of the Supreme Court of the United States; and, fourth, to 
 indicate in what ways, and to what extent, a fair and legal 
 valuation could advantageously be used as a basis for rate- 
 regulation. 
 
 [The foregoing did not do entire justice to the valuation 
 in Washington. The commission of that state decided that, 
 as is contended later in this article, a valuation for rate- 
 making purposes must, to comply with the decision of the 
 federal supreme court in the Nebraska rate case, take ac- 
 count not only of the value of the physical property of a 
 railway, but of all elements that enter into its value as a 
 going concern. For a description of the method used, see 
 an article by J. C. Lawrence, a member of the commission, 
 in the Raihvay Age Gazette, February 18, 1910, page 359.] 
 
I. 
 
 The plan of the Minnesota commission contemplated a valu- 
 ation based solely on the original cost of construction and 
 the estimated cost of reproduction of the physical properties. 
 Mr. Dwight C. Morgan, an engineer of experience and ability, 
 was employed to take direct charge of the work. Mr. Morgan 
 found that records to show the original cost of the older and 
 more important lines were not available. The valuation made 
 is, therefore, based solely on the estimated cost of reproduc- 
 tion of the physical properties, new, and also in their present 
 condition. 
 
 [In other words, the commission started with the premises 
 (1) that the value of the railway was merely the value of its 
 physical properties: (2) that the value of the physical prop- 
 erties was what it would cost to reproduce them; and (3) 
 that rates should be so regulated as to limit the roads to a 
 "fair return" on this cost, or value. The words ''cost" and 
 "value," it will be noted, were used as synonymous and inter- 
 changeable, although they certainly are not so used in any 
 other practical business affairs whatever. Nor are they 
 synonymous by any definition of the technical economists.] 
 
 A meeting of the members of the commission and its 
 engineers with railway officers representing 95 per cent of 
 the mileage in Minnesota was held on January 26, 1906, and 
 a plan of co-operation agreed upon. The wages and prices 
 actually paid in 1905 were adopted as unit costs of labor and 
 materials. A subsequent review showed that the wages and 
 prices of that year were about the average for the five-year 
 period, 1902-7, and the valuation was made as of June 30, 
 1907. 
 
 The railways were supplied with blanks prepared by the 
 commission on which to enter, with estimates of their cost of 
 reproduction, all the multitudinous items composing their 
 physical properties, from land for right-of-way, yards and 
 
8 CURRENT RAILWAY PROBLEMS. 
 
 terminals to locomotives and fish-plates; from the brick in 
 the large passenger stations in Minneapolis and St. Paul to 
 the smallest shop tools; from the draw-spans in the bridge 
 across the Mississippi river to the timber in culverts. A com- 
 plete set of blanks was filled out for each 100 miles of main 
 line; branches were treated according to their special con- 
 ditions. 
 
 After the blanks were filled out and returned by the rail- 
 ways, representatives of the commission checked them by a 
 thorough and elaborate method. 
 
 The railways provided a special train, consisting of a loco- 
 motive and business car, for which the state paid the actual 
 running-cost. One or more members of the commission and 
 two of its engineers, accompanied by general or division offi- 
 cers of the road on whose line the train happened to be, went 
 in this train over each road. The detailed reports of the road 
 were taken along. The train moved slowly to permit con- 
 stant observations of the character and standards- of con- 
 struction and maintenance. Frequent stops were made, often 
 once in a mile, usually once in two miles, sometimes only 
 once in five miles, when the party got out, and the commis- 
 sion's engineers ascertained the amount and nature of the 
 ballast for some distance along the roadway, the depth and 
 character of cuts and fills, the weight and age of rails and 
 fastenings, the number of ties per mile, etc. The facts found 
 were constantly compared with the reports of the railways, 
 and noted in the engineers' field-books. The terminals in 
 Minneapolis, St. Paul and Duluth were examined foot by 
 foot. Stations, shops, cattle-pens, etc., were investigated, and 
 the railways' reports about them checked with the same 
 thoroughness. 
 
 Rolling stock used on interstate roads was appraised on a 
 mileage basis, it being assumed that the standards of each 
 interstate road were about the same for its entire line as they 
 were in Minnesota. 
 
 To ascertain the cost of reproduction of land used for 
 
VALUATION OF RAILWAYS. 9 
 
 right-of-way, yards and terminals, the commission sent 
 special agents throughout the state, who examined the official 
 county records to find what prices had been brought by land 
 that had been sold since January 1, 1900, within one and one- 
 half miles of any railway. Particular pains were taken to 
 find what railways had paid for land for railway purposes 
 subsequent to the date named. In reaching a determination 
 of the true value of lands adjacent to railways records of 
 55,000 bona-fide sales, aggregating 1,300,000 acres and in- 
 volving considerations approximating $100,000,000 were used. 
 Records also were used of bona-fide sales of land to recently 
 built railway lines, aggregating 7,000 acres, located in various 
 parts of the state, and involving considerations amounting to 
 $4,200,000. 
 
 The investigations of the commission showed that it cost 
 an average of about three times as much to get land for rail- 
 way right-of-way, exclusive of the terminals at St. Paul, Min- 
 neapolis and Duluth, as to get it for other purposes. It 
 was found that to get land in St. Paul for terminals cost an 
 average of one and three-fourths times as much as to get it 
 for other purposes ; in Minneapolis, one and three-fifths times 
 as much; and in Duluth, one and one- fourth times as much. 
 It was also found that where a railway bought land by agree- 
 ment it usually acquired it cheaper than where it got it by the 
 exercise of the power of eminent domain through condemnation 
 proceedings. 
 
 [As has already been remarked, one of the premises of the 
 commission was, and one of the premises in most arguments 
 for "physical valuation" is, that "cost of physical production" 
 and "value" as applied to a railway are synonymous terms; 
 and it may seem as if it would be very easy, if this assumption 
 be correct, for engineers to find the "value" of a railway. 
 But important differences arose between the commission's 
 engineers and those of the railways as to how even the cost 
 of reproduction should be ascertained.] 
 
 There was a sharp cleavage of opinion (for example) 
 
10 CURRENT RAILWAY PROBLEMS. 
 
 between the commission and the officers of the railways over 
 the basis on which land used for right-of-way, yards and 
 terminals should be appraised. The railway officers con- 
 tended that the valuation should be based on what the data 
 collected showed it would cost now to acquire the land for 
 railway purposes. The commission contended that it should 
 be based on what it would cost now to acquire the land for 
 other-than-railway purposes. In other words, the commis- 
 sion's view was that if farm lands were worth $100 per acre, 
 adjacent railway right-of-way should be appraised at $100 
 per acre, not at $300 per acre, the price that the data col- 
 lected showed it probably would cost now to get it for railway 
 right-of-way if it were unoccupied. The result of this differ- 
 ence of opinion was that the commission made two ap- 
 praisals, "Estimate A" and "Estimate B." In "Estimate A" 
 it appraised railway land on the basis of what it would cost 
 to get it now for railway purposes. In "Estimate B" it 
 appraised it at what it would cost to get it for other-than-rail- 
 way purposes. In "Estimate B" it also omitted any allowance 
 for solidification and adaptation of roadbed. 
 
 Railway engineers usually add 10 per cent to their estimates 
 of the cost of projected lines for "contingencies." As he was 
 valuing lines already built, Mr. Morgan thought an allowance 
 of 5 per cent would be enough. He allowed for interest dur- 
 ing construction at the rate of 4 per cent. 
 
 The railways were asked to furnish estimates not only of 
 the "cost of the reproduction, new" of their properties, but 
 also, making an allowance for depreciation due to wear and 
 tear, to estimate their "present value." This, with a few ex- 
 ceptions, they did not do, because there was no unanimity 
 among railway officials as to the elements proper to be con- 
 sidered in making up an estimate of present value. The 
 officers of some of the lines contended that, as their proper- 
 ties were well maintained, there was no depreciation to be 
 allowed for; that seasoned properties were more valuable 
 than new. 
 
VALUATION OF RAILWAYS. 11 
 
 The Minnesota proportion (on a mileage basis) of the 
 capitalization of the nineteen carrying railways in that state 
 is $334,979,692. The aggregate capitalization of the six 
 switching or terminal railways in the state, with a line mileage 
 of 18.7 miles, is $8,003,000, making an aggregate capitalization 
 for all the mileage in the state of $342,982,692, or $45,153 per 
 mile. The railways estimated the total cost of reproduction, 
 new, of their physical properties, as of June 30, 1906, at 
 $500,675,780, or $65,909 per mile. The commission's estimates 
 (as of June 30, 1907) compare with the foregoing figures as 
 follows : 
 
 Estimate A. — Cost of reproduction, new, all lines, $411,- 
 735,195, or $54,204 per mile; present value, all lines, $360,- 
 480,161, or $47,457 per mile. Cost of reproduction, new, 19 
 carrying lines, $397,299,471, or $52,430 per mile; present value, 
 19 carrying lines, $347,051,336, or $45,799 per mile. Cost of 
 reproduction, new, 6 switching lines, $14,435,724, or $770,933 
 per mile; present value, 6 switching lines, $13,428,824, or 
 $717,160 per mile. 
 
 Estimate B. — Cost of reproduction, new, all lines, $373,820,- 
 141; omitting allowance for adaptation and solidification of 
 roadbed, $360,961,548, or $47,520 per mile; present value, all 
 lines, $322,565,107; omitting allowance for solidification and 
 adaptation, $309,706,514, or $40,772 per mile. Cost of repro- 
 duction, new, carrying lines, omitting allowance for solidifica- 
 tion and adaptation, $350,106,321, or $46,202 per mile; present 
 value, $299,858,186, or $39,571 per mile. Cost of reproduction, 
 new, switching roads, omitting allowance for solidification and 
 adaptation, $10,855,227, or $579,718 per mile; present value, 
 $9,848,327, or $525,945 per mile. 
 
 It will be noted that the average capitalization of all lines, 
 $45,153 per mile, is less than the average valuation per mile 
 upon any of the bases except "Estimate B, present value," 
 omitting allowance for adaptation and solidification of road- 
 bed. It should also be remarked that over $37,000,000 of the 
 difference between "Estimates A" and "B" is due to the fact 
 
12 CURRENT RAILWAY PROBLEMS. 
 
 that in "Estimate A" land is appraised on the basis of its cost 
 of reproduction for railway purposes, while in "Estimate B" 
 it is appraised on the basis of its cost of reproduction for 
 other-than-railway purposes. The commission, as already in- 
 dicated, regards the latter as the correct basis for valuation. 
 
11. 
 
 The Minnesota valuation raises several questions regarding 
 the factors that should enter into an estimate of the cost of 
 reproduction of the physical properties of a railway. Space 
 will permit of reference to only the most important. The 
 commission and its engineers held that owing to depreciation 
 in the value of equipment, rails, etc., the "present value" of 
 the properties was less than their "cost of reproduction, new." 
 The officers of some of the railways contended that such de- 
 preciation, if any, was offset by appreciation in value of the 
 property due to seasoning. There is some ground for both 
 of these contentions. A rail, a car, a locomotive, loses in 
 market value, becomes "second hand," the moment it is put in 
 service; and it gradually w^ears out or becomes obsolete. 
 For this reason there should be some deduction for deprecia- 
 tion. But the roadway of a new railway appreciates in value 
 for a number of years owing to what the commission called 
 "adaptation and solidification." How railway engineers and 
 operatives regard the matter is illustrated by the fact that the 
 Chicago, Milwaukee & St. Paul began running through 
 freight trains over its Pacific coast extension in July, 1909, 
 but would not let even the large prospective travel to the 
 Alaska- Yukon-Pacific Exposition at Seattle tempt it to begin 
 running through passenger trains over the extension until 
 July, 1910. It was felt that the line would not be safe for 
 fast trains until then. 
 
 [The St. Paul did not even begin running fast through 
 passenger trains on its coast extension in July, 1910, but has 
 now postponed the' establishment of this service to April, 
 1911, which will be almost two years after the opening of the 
 line for freight service. While it is thus refraining, from 
 considerations of public expediency, from operating the line 
 to its full capacity, depreciation of the rails, ties, bridges. 
 
14 CURRENT RAILWAY PROBLEMS. 
 
 buildings, etc., is going steadily on. There is, however, a limit 
 beyond which depreciation of a composite structure such as a 
 railway does not go. Little by little the various parts of the 
 composite whole are being repaired and renewed. If these 
 repairs and renewals are made as they should be deprecia- 
 tion of these various parts does not proceed beyond, say, 50 
 per cent of the original cost. The limit of depreciation on a 
 well-managed railway is reached in about five years.* After 
 that depreciation of some parts is entirely offset by repairs 
 and renewals of other parts. Meantime, appreciation in the 
 value of the physical property is steadily going on. At this 
 moment the roadbed and embankments of the St. Paul's coast 
 extension are being solidified; its water courses are being 
 established; other similar changes are taking place; and for 
 10 years after the time of its original construction its physical 
 property will be increasing in value, not merely because of 
 permanent improvements representing the investment of new 
 capital, but because of changes that take place in its track 
 due to the operation of the railway and to the operation of 
 natural forces on it. Other things equal, merely because of 
 these things, the physical plant of a railway which is 10 years 
 old or more and has been properly maintained is a better 
 transportation machine than the plant of one that has just 
 been finished, in spite of the fact that the former may be said 
 to have undergone depreciation and would therefore have a 
 lower estimated cost of physical reproduction, new, than the 
 latter.] 
 
 Now, if there ought to be a deduction from the estimated 
 cost of reproduction, new, of old roads, owing to depreciation 
 of rails, rolling stock, etc., should there not be an allowance 
 for appreciation, due to seasoning of the roadbed? It would 
 seem there could only be one fair answer. Yet the commis- 
 sion not only deducts an aggregate of over $51,000,000 for de- 
 
 ^ See an article by Frederic A. Delano, President of the Wabash 
 Railroad, entitled, "The Application of a Depreciation Charge in Railway 
 Accounting," in the Journal of Political Economy, November, 1908. 
 
VALUATION OF RAILWAYS. 15 
 
 preciation, but also, in "Estimate B," withholds the compara- 
 tively small aggregate allowance of $12,858,593 that is made in 
 "Estimate A" for "adaptation and solidification." 
 
 [The correctness and validity of the valuation of the 
 Minnesota commission has been subjected to the test of litiga- 
 tion in the cases involving freight and passenger rates fixed by 
 the state legislature and the state commission. Charles E. Otis, 
 who was appointed special master in chancery by the United 
 States Circuit Court for the district of Minnesota to hear these 
 cases, in his report to the court on September 21, 1910, takes 
 the position taken in this article, viz., that reasonable allowance 
 must be made for "solidification of roadbed," in estimating 
 cost of reproduction.] 
 
 Another important question is the proper basis of valuing 
 land used for right-of-way, yards and terminals. The com- 
 mission found that it always costs much more to get land for 
 railway purposes than it would to get the same land for farms, 
 or to build residences, factories or office buildings. But it 
 says in its report : 
 
 "It seems to us that the term *cost of reproduction* could 
 never have been used by the courts in a sense that would 
 cause an entirely imaginary and artificial value to be placed 
 upon property actually owned and in the possession of the 
 railway. ... We are asked to . . . proceed upon the theory 
 that the land, although of its present value, is not in the pos- 
 session of the railway, and that to acquire it it would be neces- 
 sary to pay this additional amount known as the railway value. 
 The result of this would be that the true, or market, value of 
 the land would be disregarded and an artificial value placed 
 upon it, on an hypothesis that has no existence in fact." 
 
 It seems to the present writer that the method the commis- 
 sion favors, not the one it opposes, disregards the actual facts. 
 The question being considered is what constitutes the "true, 
 or market, value" of land for railway purposes. Land has one 
 value for farm purposes; it has another value for city-resi- 
 
16 CURRENT RAILWAY PROBLEMS. 
 
 dence purposes; and another for railway purposes. Its value 
 today for one of these purposes may be $100 per acre, and a 
 little later $200 or $300, and the amount that it will bring at 
 any given time for the very purpose for which it is to be used 
 is its value for that specific purpose. As Professor Mortimer 
 E. Cooley said approvingly in an article regarding the physical 
 valuation of the railways in Michigan that was made under 
 his supervision: "The true cash value of a thing has been 
 defined as the price upon which a purchaser and a seller mu- 
 tually agree, and at which a transfer actually takes place." 
 Now, land actually costs more for railway than for other 
 purposes because (1) its acquisition and use for railway pur- 
 poses involves damage to adjacent property not acquired that 
 must be paid for, and (2) land that it is learned is in the 
 direct path of a coming railway, and will be absolutely re- 
 quired by it, attains a monopoly value. If land that a farmer 
 had just bought for $100 an acre would have cost a railway 
 $300 an acre, would it be reasonable to say that $300 an acre 
 is its "true, or market, value" for farm purposes ? And, if not, 
 with what fairness or reason can it be argued, as the com- 
 mission argues, that $100 an acre, being the value of land for 
 farm purposes, is the "cost of reproduction" or "true value" of 
 land used for railway purposes, when the railway has paid for 
 it, or would have to pay for it if it were unoccupied, $300 
 an acre? 
 
 The commission doubtless would answer that if a railway 
 actually has paid $300 an acre it is entitled to a fair return on 
 that amount of investment, but that it is not fair for the exist- 
 ing roads to earn a return on any such amount, because they 
 got most of their land at a price much less than its present 
 estimated cost of reproduction for railway purposes. But 
 does the commission think it unfair for a farmer, who, per- 
 haps, paid only $L25 an acre for his land, to sell it now for 
 $100 an acre, or to earn a return on its greatly increased 
 value? It probably would answer that the railway, being a 
 public-service corporation, has not the same legal or moral 
 
VALUATION OF RAILWAYS. 17 
 
 right as the farmer to earn a return on the increment in the 
 value of its land. 
 
 Let us examine this theory. Minnesota's mileage of rail- 
 ways in proportion to its area is small compared with the 
 mileage of the eastern states. In order to fill out its large 
 dimensions with population and commerce its existing lines 
 must build many new branches, and perhaps some entirely 
 new railways will have to be constructed. If the state says 
 that it will let these new branches and new lines earn a re- 
 turn only on the farm or town-lot value of the land that they 
 must buy, and not on the three or four times greater amount 
 that they must pay for it to get it for railway purposes, the 
 new branches and new trunk lines are not apt to be speedily 
 forthcoming. And if it decides to let new lines earn a re- 
 turn on what their land actually costs, it cannot deny to ex- 
 isting lines the opportunity to earn a return on the probable 
 cost of reproduction of their land for railway purposes. For 
 the new branches necessarily will compete with existing 
 branches of old lines. The new trunk line necessarily will 
 compete with the old lines. And, therefore, to hold down 
 the rates on the old lines so that they could not earn a re- 
 turn on the total estimated cost of reproduction of their lands 
 for railway purposes, would necessarily be to hold down the 
 competitive rates of the new lines so that they could not 
 earn a fair return on what their land actually had cost; for 
 shippers at competitive points always will ship by the line 
 that makes the lowest rates. In that case, the new lines 
 would either not earn a fair return on their investment in 
 land, or, in order to earn a fair return, they would have to 
 make up by high rates on business at non-competitive points 
 the losses they suffered on business at competitive points. A 
 railway commission can hardly be imagined encouraging rail- 
 ways to pursue such a policy. 
 
 [The view expressed in this article, that the proper basis of 
 valuation of real estate used for railway right-of-way and 
 terminals is what it would cost the railway now to acquire it 
 
18 CURRENT RAILWAY PROBLEMS. 
 
 for railway purposes, and not its value for farm and other 
 purposes, is the view taken by Master in Chancery Otis in the 
 Minnesota rate case. The Master in his report said: 
 
 "The right of eminent domain is given to the company for 
 the purpose of preventing the property owner from taking 
 advantage of the necessity of the company as to any particular 
 tract. While it is intended to secure to him its full and fair 
 value for any purpose for which it is best adapted — and to 
 this end an appeal is given to the courts from unrighteous 
 awards — we are not to lose sight of the fact that railroads 
 must be constructed along continuous lines, and that the to- 
 pography of the lands through which the lines are projected 
 has much to do with their availability for railway purposes, 
 and that such availability necessarily and properly enhances 
 their value, for which the owner is entitled to compensation, 
 and so it comes about that properties so available and favorably 
 situated for the purpose have a much greater value than other 
 adjoining or adjacent properties not so conditioned." 
 
 It has recently been contended that when a valuation is be- 
 ing made for the purpose of rate-regulation, railways should 
 not be credited with the "unearned increment" in their land. 
 It is interesting to note that the Master in the Minnesota rate 
 case emphatically holds that the unearned increment must 
 be taken into consideration, and for authority, quotes the fol- 
 lowing statement made by the Supreme Court of the United 
 States in the case of Wilcox v. Consolidated Gas Company 
 (212 U. S. 19, 41, 52) : "There must be a fair return upon 
 the reasonable value of the property at the time it is being 
 used for the public. . . . And we concur with the court below 
 in holding that the value of the property is to be determined 
 as of the time when the inquiry is made regarding the rates. 
 If the property which legally enters into the consideration of 
 the question of rates has increased in value since it was ac- 
 quired, the company is entitled to the benefit of such increase." 
 
 Continuing, the Master says: 
 
 "This clearly shows that the company is to share as well as 
 
VALUATION OF RAILWAYS. 19 
 
 the public in the general growth and prosperity of the coun- 
 try. . . . The roads under consideration were constructed 
 and completed many years ago, and what may have gone into 
 them, if it could be determined with reasonable certainty, 
 would not take into consideration the changed condition of 
 the country since their original construction. Its growth and 
 prosperity — in which the companies are entitled to share — 
 and by reason of changed conditions and lapse of time it has 
 little weight in arriving at present value."] 
 
 The tax board of Michigan, in valuing the roads of that 
 state for taxation, appraised railway land at 100 to 125 per 
 cent in excess of its value for other purposes. The tax board 
 of Wisconsin, in valuing the roads in the state for taxation, 
 appraised railway land at 150 per cent, more than its value 
 for other purposes. Can it be that the difference between 
 the bases of appraisals of land in Michigan and Wisconsin, 
 and in Minnesota, is due to the fact that in the former cases 
 foundations were being laid on which to fix what the rail- 
 ways should pay to the public, while in Minnesota a founda- 
 tion was being laid on which to fix what the public should pay 
 to the railways? Such variances of opinion between public 
 officials in such circumstances are not calculated to encourage 
 implicit confidence in the impartiality of valuations. 
 
 The foregoing reasoning leads to the conclusion that in a 
 fair physical valuation some deduction should be made from 
 the cost of reproduction, new, for depreciation of rails, 
 bridges, equipment, etc. ; that, on the other hand, some com- 
 pensating addition should be made for adaptation and solidi- 
 fication of roadbed; and that land should be appraised on 
 the basis of its estimated present cost of reproduction for 
 railway purposes. If this be correct the commission's "Esti- 
 mate A, Present Value," is based on more nearly correct 
 economic principles than any other of its estimates. Whether 
 it is accurate from an engineering point of view could be de- 
 termined only by engineers familiar with each of the railways 
 appraised. 
 
20 CURRENT RAILWAY PROBLEMS. 
 
 [Master in Chancery Otis put even higher valuations on 
 the railways directly involved in the litigation heretofore re- 
 ferred to than the commission's "Estimate A, Cost of Re- 
 production, New." The following are the commission's "Es- 
 timate A, Cost of Reproduction, New," of the Northern Pa- 
 cific, the Great Northern and the Minneapolis & St. Louis, and 
 the Master's valuations: 
 
 Northern Great Minn. 
 
 Pacific. Northern. & St. L. 
 
 Commission's estimate ... $69,397,955 $107,074,102 $16,622,245 
 
 Master's valuation 90,204,545 138,425,291 21,608,464 
 
 While, as already stated, the commission, in order to ar- 
 rive at the present values of the properties, made reductions 
 from their estimated cost of reproduction, new, on account of 
 depreciation, the Master made his estimates entirely on the 
 basis of cost of reproduction, new. On this subject he said: 
 
 "A large part of the depreciation is taken care of by constant 
 repairs, renewals, additions and replacements, a sufficient sum 
 being annually set aside and devoted to those purposes, so 
 that this, with appreciation of roadbed and adaptation to the 
 needs of the country and of the public served, together with 
 working capital hereinafter mentioned, fully offsets all de- 
 preciation and renders the physical properties of the roads 
 not less valuable than their cost of reproduction new. . . . 
 There is another element which may properly be considered 
 in connection with the question of depreciation and as an 
 offset to it. It has been necessary that the companies should 
 have on call a large sum of money for the conduct of the 
 business and to meet emergencies. No doubt a large part of 
 it draws a low rate of interest while on deposit in banks, but 
 it must be that very considerable amounts are idle and un- 
 productive and must be considered as an element of value in 
 the matter of rate-making. In view of all the foregoing con- 
 siderations it follows without question that there should be no 
 deductions on account of depreciation."] 
 
III. 
 
 When a fair physical appraisal has been made of what 
 worth will it be, economically or legally, as a basis for fixing 
 rates ? 
 
 In the course of his argument in his report to show that 
 the cost of reproduction of railway land for railway purposes 
 is not the proper basis of valuation, Mr. Morgan, engineer 
 of the commission, says : "Cost of reproduction and value as 
 a utility have no necessary logical relation." If the cost of 
 reproduction of the physical property for railway purposes has 
 no necessary relation to utility, can there be any necessary 
 relation between its cost of reproduction for farm purposes 
 and its utility for transportation purposes? Obviously, no. 
 But utility is one of the elements and the most important 
 element, in the value of everything that properly can be 
 regarded as capital. Consequently, it would seem, there is 
 no necessary relation between the cost of reproduction of the 
 physical property of a railway and its value; and an estimate 
 of the cost of reproduction of the physical properties of the 
 railway is not a true valuation of the railway at all. 
 
 That the cost of reproduction of the physical plant of a 
 railroad is an element in its value is clear. No one would 
 pay the same for two railways of the same mileage, having 
 the same earnings per mile, if one had a decrepit physical 
 plant and the other had a good one. But, on the other hand, 
 no one would pay the same for two railways that had equal 
 mileage and equally good plants, if one had only half as much 
 earnings per mile as the other. 
 
 [Suppose that an inventory of the physical assets of a rail- 
 road should show that it would cost $30,000 per mile to re- 
 produce it and that on no rates it could make could it earn 
 a return on more than $20,000 per mile. This is by no means 
 a supposition without any basis of fact. For example, a road 
 
22 CURRENT RAILWAY PROBLEMS. 
 
 may have been built at a cost of $30,000 per mile into a district 
 affording a large lumber traffic. In course of time, if the 
 cutting of timber progresses rapidly, the amount of available 
 traffic from this source will begin to decline, and the more 
 traffic there is for the road each year the less there will be 
 for it in later years unless some other source of traffic is de- 
 veloped. If it turns out that the country is not adapted to 
 the development of any other industry, the time will come 
 when the road will be left without any traffic at all. Then, 
 regardless of its cost of physical reproduction, what will its 
 value be? It will be nothing, because the property can earn 
 nothing. The property of a railroad is not economically dif- 
 ferent from any other kind of property. The present value 
 of anything depends on the highest practical use to which it 
 can be put. There are lots in the residence districts of Chi- 
 cago which, with the buildings on them, formerly had a high 
 value because they were situated where people of large means 
 desired to live. These districts have ceased to be fashionable 
 residence districts and the houses on them are now used for 
 boarding houses. The houses and lots together are now 
 worth much less than it would cost to reproduce them, simply 
 because under present conditions the earning capacity of prop- 
 erty in these particular districts has declined. A banker loan- 
 ing money on such property now would not be guided by 
 what it cost nor by what it would cost to reproduce it, but 
 wholly by its value based on the rents which the property 
 will yield — in other words, on its earning capacity. There are 
 publishing concerns which could be sold for millions of dol- 
 lars, but which have no physical plants whatever. They get 
 their printing, binding, etc., done at outside printing plants 
 and their whole physical equipment consists of office furniture. 
 In what, then, does their value consist? Obviously, it con- 
 sists only in their earning capacity, and if through bad man- 
 agement their earning capacity were destroyed they would be 
 rendered absolutely valueless. On the other hand, if their 
 physical equipment were destroyed there would be no sub- 
 
VALUATION OF RAILWA 
 
 stantial reduction at all in their value. A mercB 
 a retail business that can be sold for $100,000. 
 investment in the building he occupies and in his 
 goods may not exceed $50,000. Why can he sell his business 
 for $100,000? Because its earning capacity gives it a value of 
 $50,000 in addition to the value of $50,000 given to it by 
 the purely physical properties. The same reasoning applies to 
 railways.] 
 
 It will be replied, perhaps, that the earnings of a railway 
 cannot be considered in making a valuation of it as a basis 
 for rate-regulation, because earnings depend on rates, and the 
 reasonableness of rates is the very thing to be determined. 
 But earnings do not depend solely, or even mainly, on rates. 
 Gross earnings depend both on rates and on the density and 
 nature of the traffic. Probably no two roads charging the 
 same rates ever had the same gross earnings per mile, be- 
 cause one is almost sure to apply the rates to a greater den- 
 sity of traffic than the other. Net earnings depend as much 
 on operating expenses as on gross earnings. Two roads 
 might have approximately the same mileage, rates, density and 
 nature of traffic, and gross earnings, and yet have very dif- 
 ferent net earnings, because of differences in operating ex- 
 penses. 
 
 The density of traffic, other things equal, depends on the 
 skill that has been used in locating the property, in co-operat- 
 ing with entrepreneurs in building up industries on its lines, 
 in getting good traffic connections, etc. 
 
 [A railway does not get up to its full earning capacity for 
 years after its original construction is completed. In fact, 
 it may be said that a railway never does get up to its full 
 earning capacity. Every big railroad has a number of high- 
 priced men who devote all of their energy and talents to 
 campaigning and working to obtain traffic, not merely by at- 
 tracting it from other roads, but by increasing the agricul- 
 tural productivity of the land along their lines, discovering 
 and securing the development of new mines, attracting fac- 
 
24 CURRENT RAILWAY PROBLEMS. 
 
 tories, etc. The difference between the abounding prosperity 
 of one line and the bankrupt condition of a competing road 
 may be altogether due to the fact that the traffic department 
 of the one has been energetically and skilfully managed 
 while the traffic department of the other has not been so 
 managed. A valuation based entirely on the cost of repro- 
 ducing the properties of the two roads would take no account 
 of this. But would not this be entirely to ignore one of the 
 most important factors in the real value of a railway?] 
 
 Similarly, low operating expenses, other things equal, indi- 
 cate high operating skill. The road with the greater density 
 of traffic, or the lower operating expenses, has more utility 
 for its owners because it earns them more clear money. It 
 has more utility for the public because it hauls more travelers 
 and goods, or handles an equal number and amount at a 
 lower cost. Can there be any question, then, that it is a more 
 valuable property both to the public and to its owners than 
 its competitor with an equally good physical plant but a 
 smaller business and higher operating expenses? And since it 
 actually is more valuable, is it not solemn nonsense to place 
 on it the same "valuation" as on its competitor? 
 
 The sum of the costs of reproduction of a watch-case, main- 
 spring, jewels, etc., is the value of a watch as junk, but not 
 its value as a watch. Its value as a watch depends mainly 
 on how it will run. Similarly, the cost of reproduction of the 
 locomotives, culverts, fish-plates, etc., of a railway is not it's 
 value as a railway. Its value as a railway depends on 
 whether it is so located and so organized and operated as to be 
 of great or small utility to the public, of great or small profit 
 to its owners. Rate-regulation based on physical valuation 
 alone would put a premium on extravagant construction and 
 operation and a discount on skilful management. tr^^ 
 
 It is believed that valuation of railways based solely on the 
 cost of the physical properties is as unsound legally as it is 
 economically. In the case of Reagan v. Farmers' Loan & 
 Trust Co., 154 U. S., 362, 412, the Supreme Court of the 
 
VALUATION OF RAILWAYS. 25 
 
 United States held that a railway was not necessarily entitled 
 to earn a return on its cost of construction, saying: 
 
 "It is unnecessary to decide, and we do not wish to be un- 
 derstood as laying down as an absolute rule, that in every case 
 a failure to produce some profit to those who have invested 
 their money in the building of a road is conclusive that the 
 tariff is unjust and unreasonable. . . . The construction may 
 have been at a time when material and labor were at the high- 
 est price, so that the actual cost far exceeds the present value ; 
 the road may have been unwisely built, in localities where 
 there is not sufficient business to sustain a road." 
 
 In such event the road will not be upheld in charging ex- 
 cessive rates even to pay a return on its actual cost. If the 
 "present value" of the property be less than its "actual cost" 
 the owners must take the consequences. This would seem to 
 imply rather plainly that the court regarded the value of a 
 property as something entirely different from its cost, and 
 that a road is legally entitled to earn a return on its value, 
 whether that be less or greater than its cost. 
 
 In Smyth v. Ames, 169 U. S., 466, the Supreme Court men- 
 tioned the cost of original construction and permanent im- 
 provements, the cost of reproduction, the amount and market 
 value of stocks and bonds outstanding, the probable earning 
 capacity of the property under particular rates prescribed by 
 statute, and the sum required to meet operating expenses, as 
 factors to be considered. It added: "We do not say that 
 there may not be other matters to be regarded in estimating 
 the value of the property." 
 
 [It will be noted that in this case the court referred to the 
 probable earning capacity of the property under particular 
 rates prescribed by statute, and the sum required to meet op- 
 '^I'ating expenses. Now, the only measures of the probable 
 earning capacity of the property under particular rates are 
 the nature and the density of the traffic. It follows that these 
 things must be considered in making a valuation. As to op- 
 erating expenses, which the court also mentioned as a factor 
 
26 CURRENT RAILWAY PROBLEMS. 
 
 to be considered, what have they to do with the estimated cost 
 of reproducing the physical plant? Obviously, the only bear- 
 ing they have on the value of the railway is that the higher 
 they are, other things equal, the less net earnings will be ; and 
 that the lower they are, other things equal, the more net earn- 
 ings will be. In other words, they affect the value of the prop- 
 erty by affecting its capacity to earn profits.] 
 
 The advocates of physical valuation seldom go back farther 
 in the decisions of the Supreme Court than Smyth v. Ames. 
 But four years before in the case of C, C, C. & St. L. Rail- 
 way V. Backus, 154 U. S. 439, 445, 446, it used the following 
 language : 
 
 "But the value of property results from the use to which it 
 is put and varies with the profitableness of that use, present 
 and prospective, actual and anticipated. There is no pecu- 
 niary value outside of that which results from such use. . . . 
 Will it be said that the taxation must be based simply on the 
 cost, when never was it held that the cost of a thing is the 
 test of its value? Suppose there be two bridges over the 
 Ohio, the cost of the construction of each being the same, one 
 between Cincinnati and Newport, and another 20 miles below 
 and where there is nothing but a small village on either shore. 
 The value of the one will, manifestly, be greater than that of 
 the other, and that excess of value will spring solely from the 
 larger use of the one than of the other." 
 
 The meaning of the last sentence is not changed by substi- 
 tuting for the phrase, "the larger use" the phrase, "the greater 
 density of traffic." The Backus case was a tax case; but it is 
 too obvious for dispute that what the court said here about 
 value applies equally to appraisals for taxation and for rate- 
 regulation. 
 
 [In the very recent case of the Missouri, Kansas & Texas 
 Railway Company v. Love, et al. (177 Fed. 493, 496, 497), 
 Judge W. C. Hook of the United States Circuit Court, third 
 division, used language indicating that he believes that not 
 merely the cost of reproducing the physical property of a rail- 
 
VALUATION OF RAILWAYS. 27 
 
 way, but its ability to earn profits and to serve the public, 
 must be taken into consideration in making a valuation of it. 
 Said Judge Hook: 
 
 "An established railway system may be worth more than 
 its original cost and more than the mere cost of its physical 
 reproduction. It has passed the initial period of little or no 
 return to its owners which, of greater or less duration, almost 
 always follows construction and is not infrequently marked 
 by default and bankruptcy. The inevitable errors in its build- 
 ing which finite minds and hands cannot avoid have been 
 measurably corrected, time and effort have produced a com- 
 mercial adjustment between it and the country it was intended 
 to serve, relations have been established with patrons, and 
 sources of traffic have been opened up and made tributary. In 
 other words, the railway, unlike one newly constructed, is 
 fully equipped and is doing business as a going concern. It 
 has attained a position after many experiences common to 
 railway enterprises which entail loss and cost not paid from 
 current earnings, and which correspondingly make for 
 value."] 
 
 We may reasonably conclude, therefore, that not only the 
 cost of reproduction of the physical property for railway pur- 
 poses, but also its strategic location and the ability with which 
 it is managed as indicated by the great or small density of its 
 traffic and its relatively large or small operating expenses, 
 must be given due weight in fixing its valuation for rate- 
 regulation, and that any valuation for rate-regulation that 
 does not give due weight to these and any other factors that 
 enter into its utility as an instrumentality of transportation 
 will not secure the approval of the Supreme Court of the 
 United States. It will not be easy t© work out a formula for 
 valuation that will give due weight to such factors; but the 
 difficulty of making a valuation that shall be legal and fair is 
 not a sufficient reason for not trying to make fair and legal 
 any valuation that may be undertaken. 
 
 The view taken by the very able Railroad Commission of 
 
28 CURRENT RAILWAY PROBLEMS. 
 
 Wisconsin in deciding the passenger-rate cases in 1907 seems, 
 in the main, to coincide with the opinions expressed in this 
 paper. The state tax commission had made a physical valua- 
 tion of railways based on cost of reproduction. In this val- 
 uation land used for railway purposes was appraised at two 
 and one-half times the value of the adjacent land. In de- 
 ciding the case of Buell v. C, M. & St. P. Railway the com- 
 mission accepted as correct the tax commission's physical val- 
 uation of the St. Paul road. This valuation, based on cost 
 of reproduction, new, was $62,970,177; less depreciation, 
 $50,832,356. The commission said that to take the latter figure 
 as a basis for rate-regulation "leaves out of account the value 
 of the plant as a going concern, the business it has built up, 
 the connections it has made." And after quoting from the de- 
 cision of the United States Supreme Court in Smyth vs. 
 Ames, the commission continued: 
 
 "We have carefully considered this matter of valuation and 
 the various elements that should be taken into account as de- 
 cided by the court. Our conclusion is so near to the cost of 
 reproduction, new ($62,970,000), that we have concluded to 
 adopt that valuation; not because it happens to be made on 
 any particular basis, but because it is equivalent to a com- 
 posite value arrived at after taking into account the various 
 elements suggested by the court." 
 
 If the Minnesota commission should follow the example 
 of the Wisconsin commission it would take its very highest 
 estimate — "Estimate A, Cost of Reproduction, New," amount- 
 ing to an aggregate of $411,735,195, or $54,204 per mile—as the 
 correct basis for regulation of rates.* 
 
 * As already noted, Master in Chancery Otis adopted an even higher 
 valuation than the commission's ''Estimate A, Cost of Reproduction, 
 New." 
 
IV. 
 
 Under the present system of railway-regulation in the 
 United States part of the valuation of any railway must be 
 allocated to state and part to interstate business before it can 
 be used as a basis for fixing rates. For, while the same termi- 
 nals, roadway, locomotives, and cars are used for hauling both 
 state and interstate traffic, the rates on state traffic are regu- 
 lated by state authorities; those on interstate traffic, by fed- 
 eral authorities. The basis on which this division of valua- 
 tion should be made seems almost insoluble. The Wisconsin 
 commission appears in the passenger-rate cases to have made 
 the division on the basis of gross earnings. The members of 
 the Railroad Commission of Washington agreed on the valua- 
 tion recently placed on the railways in that state, but they 
 disagreed entirely on how the valuation should be divided. 
 Chairman Fairchild contends that the division should be based 
 on net earnings. On that basis 65 per cent, of the valuation 
 of the Great Northern in the state should be allocated to state 
 and 35 per cent, to interstate business, and its state rates 
 should be slightly reduced and its interstate rates left un- 
 changed. Commissioners Lawrence and Jones favor allocat- 
 ing the valuation on the basis of the cost of operation, in 
 which case 45 per cent, of the valuation of the Great Northern 
 should be allocated to state and 55 per cent to interstate busi- 
 ness, and its state rates should be radically lowered and its 
 . interstate rates substantially raised. Now, since such a wide 
 divergence of opinion has developed between the members of 
 a single state commission, are there not apt to develop even 
 wider differences of opinion between the state and the inter- 
 state commissions? In that case we might be treated to the 
 spectacle of a state commission regulating the state rates of a 
 road on 45 per cent, of its valuation, and the interstate com- 
 mission regulating its interstate rates on 35 per cent, of its 
 
30 CURRENT RAILWAY PROBLEMS. 
 
 valuation, in which event it would earn nothing on the 
 remaining 20 per cent, of its valuation. The federal courts 
 would then have to arbitrate between the warring com- 
 missions. 
 
 Probably the only way fairly and rationally to settle this 
 question, if valuation is to be used at all as a basis for rate- 
 regulation, would be to have a single valuation made and all 
 rates, state and interstate, regulated by a federal commission. 
 This, no doubt, would require an amendment of the Federal 
 Constitution, the obstacles in the way of which are familiar. 
 
 [Master in Chancery Otis held that the railways of Minne- 
 sota could not apply the rates fixed by the legislature and rail- 
 way commission of Minnesota without either correspondingly 
 reducing their interstate rates or unfairly discriminating 
 against interstate commerce. He therefore held that the rates 
 were in violation of the Federal Constitution, not only because 
 they were confiscatory in that they would not yield the rail- 
 ways 7 per cent, on a fair valuation, but also because they in- 
 terfered with interstate commerce. If his findings shall be 
 upheld by the courts, it may be that no amendment to the 
 Constitution will be necessary in order to give the federal 
 government virtually exclusive jurisdiction over the regula- 
 tion of rates.] 
 
 A valuation based solely on cost of physical reproduction 
 probably would result in such a road as the Denver & Rio 
 Grande, with its difficult mountainous construction and com- 
 paratively small earnings, being appraised per mile as high 
 as, or higher than, a road such as the Union Pacific, with its 
 relatively easy construction and large gross and net earnings. 
 An appraisal that gave due weight to the Union Pacific's 
 greater density of traffic and lower operating expenses would 
 result in a much higher valuation being placed on it. Even 
 then, perhaps, it would be found that the Union Pacific's earn- 
 ings were larger in proportion to its valuation than the rate- 
 regulating authority considered fair. But if its rates were, 
 consequently, reduced to what was deemed fair all the com- 
 
VALUATION OF RAILWAYS. 31 
 
 petitive rates of the Denver & Rio Grande would also have 
 to be reduced, with the result that its earnings would be made 
 less than anybody would consider fair. Conditions such as 
 these would be met all over the country. Would the regulat- 
 ing authority then fix rates so that the weak lines could earn 
 a fair return — 6 per cent, say — and the strong lines more ? Or 
 would it fix rates so that the strong roads could earn only 6 
 per cent, and the weak lines little or nothing? 
 
 [This question was presented in a very practical way in the 
 Minnesota rate case. The three roads directly involved were 
 the Great Northern and the Northern Pacific, which are very 
 strong roads, and the Minneapolis & St. Louis, which is a 
 weak line. The Master in Chancery said: 
 
 "Abandonment of either of these roads would be a great 
 public calamity, and if we can conceive of them being sud- 
 denly obliterated, their immediate reconstruction would fol- 
 low in response to public necessity, which shows that they 
 must be worth what it would cost to reproduce them and that 
 a return based on such cost would not be oppressive. The 
 Minneapolis & St. Louis along its entire line comes into sharp 
 competition with strong intersecting lines and while, as be- 
 fore stated, it subserves a useful purpose and operates in re- 
 sponse to public demand, it can be maintained only by the ex- 
 ercise of the highest economy and watchfulness in its opera- 
 tion, and to succeed it must be given greater latitude than is 
 necessary with respect to the more favorably located and pros- 
 perous lines of railway. Necessarily, to get business, its rates 
 must conform to those existing on the other roads where 
 competition is an element, but where this does not exist it is 
 entitled to rates not so controlled by competition and with 
 reasonable limits must, to exist, be given a free hand in the 
 conduct of its business."] 
 
 No matter how a valuation was made, obviously it would 
 be almost worthless in determining how much any specific 
 rate, as on stone or dry goods, ought to be. The detailed 
 classifications and schedules of rates would have to be made 
 
32 CURRENT RAILWAY PROBLEMS. 
 
 as now; for if it were attempted to make the rate on each 
 commodity pay all the direct and indirect expenses of hauling 
 that commodity and its pro-rata share of the entire return 
 on the valuation, the movement of the higher classes of com- 
 modities would not be facilitated or increased, but the move- 
 ment for any considerable distance of all the cheaper and bulk- 
 ier commodities — grain, coal, lumber, iron ore, etc. — quickly 
 would be^ stopped. 
 
 [The popular idea seems to be that rates are so adjusted as 
 to earn a return on the capitalization of the railway; that 
 many railways are over-capitalized and charge excessive rates 
 in order to earn a return on their excessive capitalization, and 
 that valuation should be substituted for capitalization as the 
 basis of rate-making. The great trouble with this theory is 
 that it is entirely false. Most traffic managers do not know 
 the capitalization of their railways and would pay no atten- 
 tion to it in fixing rates if they did. The principle of dimin- 
 ishing costs is exemplified to such marked degree in railway 
 operation that it is exceedingly difficult to determine how re- 
 munerative is any specific rate or whether it is remunerative 
 at all. Fixed charges, including interest on bonds, taxes and 
 rentals of terminals, equipment, tracks, etc., go on whether 
 the amount of traffic handled be increased or not. Whatever 
 business can be got which will add more to earnings than the 
 handling of it adds to expenses is worth having, no matter 
 how low is the rate that must be made to get it. Now, obvi- 
 ously, the amount of the capitalization or valuation of a road 
 has absolutely nothing to do with the question whether partic- 
 ular traffic will add more to the gross earnings of a railway 
 than it will add to its gross expenses. Of course, it is con- 
 ceivable that if all railways were over-capitalized, and the 
 traffic could bear considerably higher rates, rates as a whole 
 might be advanced with a view to paying a return on the 
 total capitalization. But the number of roads that are over- 
 capitalized is relatively small, and over-capitalization of these 
 roads actually tends to keep rates down rather than to cause 
 
VALUATION OF RAILWAYS. 33 
 
 them to be raised. An over-capitalized road is always ex- 
 tremely anxious to increase its earnings. It would lose busi- 
 ness by raising its rates when other roads did not raise them. 
 On the other hand, by cutting rates it may get business from 
 other roads that it could not otherwise get, and often this 
 actually happens. For example, seven years ago the Chicago 
 Great Western, which is well known to be over-capitalized, re- 
 duced the proportional rate on dressed meats from Missouri 
 river to Chicago from 23j^ cents to 18^ cents per 100 pounds 
 in consideration of a contract by the large meat packers to 
 give it a bigger share of their traffic. When this contract ex- 
 pired last spring an attempt to get the rate advanced was 
 made. The roads generally favored an advance except the 
 Chicago & Alton, which is regarded by the public as 
 one of the classic examples of an over-capitalized road. 
 As the Alton did not advance the rate another road re- 
 frained from advancing it. This was the Wabash, which also 
 is an over-capitalized road. The reason why the Wabash did 
 not raise the rate was that it could not afford to lose any 
 business which might yield it some profit, however little. If 
 the popular theory that over-capitalization causes railways to 
 raise rates were correct, these roads would have been the 
 leaders in advancing this rate, whereas one of them reduced 
 the rate in opposition to the wishes of all of its competitors, 
 and the other two kept the reduced rate in effect after all 
 competing lines raised it. The very remote relation between 
 capitalization and rates emerges only when railways resist a 
 general reduction or seek a general advance in rates on the 
 ground that such reduction will make it impossible, or such 
 advance is necessary to enable them, if they maintain satis- 
 factory service, to pay satisfactory returns on reasonable 
 capitalizations.] 
 
 The only way that a valuation of railways, even if made in 
 the fairest and wisest possible way, could be used for any 
 just and practical purpose, would be as a guide in determin- 
 
34 CURRENT RAILWAY PROBLEMS. 
 
 ing whether or not the various railways are earning more or 
 less than a fair return. 
 
 [Even if it were found that some roads were earning more 
 than a fair return, valuation would give no clue to what rates 
 should be reduced. It might be that a shipper would come 
 in and complain that his rate was too high and ought to be 
 reduced because the road was earning an excessive return and 
 that investigation would show that in proportion to other rates 
 his rate was already extremely low, and that the road's large 
 return was being derived from other rates. On the other 
 hand, valuation might show that some roads were not earn- 
 ing a fair return. Upon the theory of those who advocate 
 valuation, the rates ought in that case to be raised. But it 
 might be that its rates were already high and that an advance 
 in them would cause destruction of traffic which would ac- 
 tually reduce its net earnings. In that event on this theory, 
 the advance in the rates would have made them more un- 
 reasonably low than they were before. Of two roads handling 
 the same kind of traffic between the same points on the same 
 rates, one may have very large net earnings and the other 
 very small or none. If we are to use the total return as the 
 test of reasonableness of rates, shall we say in such cases that 
 the rates are unreasonably high or unreasonably low? After 
 the valuation was made the various rates and schedules of 
 rates would have to be made as they are now ; that is, in pro- 
 portion to what the various kinds of traiHc will hear. A great 
 many persons who advocate valuation of railways as a basis for 
 rate-making do so because it has served pretty well as a basis 
 for adjusting the charges of other public utilities. But a rail- 
 way differs from other public utilities in several important 
 particulars. In the first place, a public utility such as a street 
 railway handles only one kind of business, whereas a railway 
 handles a great many different kinds of traffic which cannot 
 bear the same rates. In consequence, while the adjustment 
 of the rates of a street railway or a waterworks is a compara- 
 tively simple matter, the adjustment of the rates of a steam 
 
VALUATION OF RAILWAYS. 35 
 
 railway, which apply not only to passengers, but to 8,000 or 
 10,000 different commodities, is a very complex matter. Again, 
 a public utility such as a street railway or a waterworks has 
 a monopoly of its business, while in every territory there are 
 numerous railways which cost different amounts, whose valu- 
 ations would be different and which operate under different 
 conditions, but which must make the same rates on competi- 
 tive business. Again, the business of such a public utility as 
 a street railway or a waterworks company does not fluctuate 
 much from year to year, while that of a steam railway fluc- 
 tuates greatly. In the calendar year 1908, following the panic 
 in 1907, the gross earnings of the railways of the United 
 States declined $300,000,000, while the earnings of the street 
 railways actually increased. The recent decision of the Su- 
 preme Court of the United States in the Consolidated Gas 
 Company case has been frequently cited as a precedent estab- 
 lishing the right of the public to limit the profits of railways 
 to 6 per cent. But in its decision in this case the court plainly 
 indicated that it held that it was reasonable to restrict the 
 Consolidated Gas Company to 6 per cent, because the invest- 
 ment in it involved so little risk. The court said : 
 
 "In an investment in a gas company, such as complainant's, 
 the risk is reduced almost to a minimum. . . . The court be- 
 low regarded it as the most favorably situated gas business 
 in America. . . . Under the circumstances, the court held 
 that a rate which would permit a return of 6 per cent, would 
 be enough to avoid the charge of confiscation, and for the rea- 
 son that a return of such an amount was the return ordinarily 
 sought and obtained on investments of that degree of safety 
 in the city of New York. Taking all facts into consideration, 
 we concur with the court below on this question, and think 
 complainant is entitled to 6 per cent, on the fair value of its 
 property devoted to the public use." (212 U. S. 19, 49, 50.)] 
 
 Any valuation for the purpose of rate regulation should be 
 made by the federal government, so that each road would be 
 appraised as a whole. Is it worth while to spend a large sum 
 
36 CURRENT RAILWAY PROBLEMS. 
 
 of money to make one wholesale valuation for this purpose? 
 If this question had been asked two years ago most shippers 
 and railway commissioners would have answered in the af- 
 firmative and most railway officers would have answered in 
 the negative. Since then a good many railway officers have 
 modified their opinions or entirely changed them. The pop- 
 ular view is that the railways as a whole are greatly over- 
 capitalized and that they are charging excessive rates to pay 
 dividends on watered stock; and this view is constantly caus- 
 ing enforced reductions in passenger and freight rates. On 
 the other hand, railway managers, while conceding that some 
 roads are over-capitalized, express confidence that a fair ap- 
 praisal of all the railways, based even on cost of reproduc- 
 tion alone, would far exceed their aggregate net capitalization 
 — arrived at by eliminating duplications due to intercorporate 
 ownership of securities — and that a fair appraisal based on 
 all the factors that ought properly to be considered would, for 
 all the railways, far exceed their present gross capitalization, 
 and demonstrate that railway earnings and dividends are not 
 excessive, but quite the contrary. The Minnesota and other 
 valuations lend support to this view. 
 
 [The popular notion of the present attitude of railway heads 
 toward valuation is erroneous. It is assumed that they op- 
 pose a valuation for fear that it would show that the roads 
 are over-capitalized and are earning too much. The numer- 
 ous railway presidents with whom I have talked have been 
 unanimous in saying that even a valuation based merely on 
 the estimated cost of reproducing the physical properties would 
 greatly exceed not only the net, but the gross capitalization 
 of the railways as a whole. It is probable that even a com- 
 mission unfairly disposed would find it impossible, if it really 
 took into consideration all the assets of the roads, to make a 
 valuation that would be less than the gross capitalization. 
 This opinion is based upon actual results of the valuations that 
 have been made in Wisconsin, Michigan, Minnesota and 
 Washington. In Washington the commission placed on two 
 
VALUATION OF RAILWAYS. 37 
 
 of the three large roads in the state valuations exceeding their 
 capitalizations per mile. The exception was the Oregon Rail- 
 road and Navigation Company. The Commission put on it 
 a valuation of $19,500,000, which is substantially less than its 
 capitalization. The tax commission has since put on it a valu- 
 ation for taxation of $27,500,000, which is substantially in ex- 
 cess of its capitalization. The only state where a valuation 
 has been made which is greatly less than the capitalization of 
 the roads is in Texas. Perhaps this fact requires no com- 
 ment, since the policy of Texas toward corporate property of 
 all kinds is pretty well known. It is significant, however, that 
 while the railroad commission's valuation is only $212,794,586, 
 and the capitalization of the Texas roads is $427,988,103, the 
 state tax board values the properties for taxation at 
 $411,594,825.' 
 
 It may safely be said that railway officers now oppose valu- 
 ation, not because they think it would show that the roads as 
 a whole are over-capitalized, but because they think a valua- 
 tion based merely on the estimated cost of reproducing the 
 physical properties would be an economic absurdity, and that 
 an attempt to fix rates on it would be saved from being absurd 
 only because it would be so destructive of the best interests 
 of the roads and of the public. 
 
 The economist cannot look at this subject from exactly the 
 same point of view as the railway officer. His duty is to 
 consider how a fair valuation can be arrived at, whether it 
 would be an important guide in fixing rates or would merely 
 
 1 "In the recent hearing before the Interstate Commerce Commission, 
 Mr. R. A. Thompson, who for many years had been the chief engineer 
 to the Texas Railroad Commission, testified that it was his deliberate 
 opinion that the physical property of the railways of Texas was worth 
 on an average $30,000 per mile of line. That is, he believes that the 
 railways cannot be replaced at the current prices of land, labor and 
 materials for less than $30,000 per mile, an amount approximately equal 
 to the total outstanding stocks and bonds." — Potts, "Railroad Trans- 
 portation in Texas," page 194. The Railroad Commission's valuation is 
 but $17,015 a mile. 
 
38 CURRENT RAILWAY PROBLEMS. 
 
 satisfy public curiosity, what its costs would be, and whether 
 the expenditure would probably be warranted by the advan- 
 tages derived by the public. When the Supreme Court, in the 
 case of Smyth v. Ames, said that a railway was entitled to 
 a fair return on the fair value of its property, it did not say 
 that this is all which it legally may be allowed to have or 
 which it ought to be allowed to have in the interest of the pub- 
 lic welfare. It simply said that this is the least to which a rail- 
 way can be restricted without confiscating its property con- 
 trary to the constitution. If it is the intention of the public 
 to allow and compel the railway to charge rates which are 
 reasonably proportioned to the value of the service it renders, 
 and when it does so to allow it to earn a return as large in 
 proportion as those earned in other businesses, due allowance 
 being made for difference of hazard involved, a valuation 
 would serve no purpose that would justify the expenditure of 
 the millions of dollars that would have to be laid out to make 
 it. On the other hand, if it is the intention of the public to try 
 to restrict the railway to the very least to which a railway 
 can be restricted without confiscation — in other words, 
 to allow railways to have only the very least of which they 
 cannot constitutionally be deprived — then valuation might 
 serve some useful purpose. It would mark the limit where 
 confiscation would begin.] 
 
 A general valuation would set a limit below which reduc- 
 tions of rates and earnings by public authority could not go. 
 If it showed that any road, or all the roads, earn no more 
 than a fair return, it would be notice that for every future 
 reduction in rates there must be a compensating advance. If 
 it showed that any road, or all the roads, earn less than a fair 
 return, it would practically authorize an increase in rates. 
 Therefore, while many persons are advocating valuation of 
 railways as a means of getting reductions of rates, not a few 
 railway managers of prominence are disposed to regard the 
 project as a possible effective means of preventing further 
 reductions, or even securing advances. 
 
SHALL RAILWAY PROFITS BE LIMITED?^ 
 
 Unless all signs fail, the phase of the "railway problem" 
 which will occupy the largest place in the public mind and in 
 public discussion for some years is the question whether rail- 
 way profits shall be limited ; and if so, how and to what extent. 
 Both the Interstate Commerce act and various state laws pro- 
 hibit railway rates which are "unduly discriminatory" or "un- 
 just and unreasonable," the latter phrase meaning as here 
 used, excessive — exorbitant. Everyone agrees that these are 
 salutary provisions. It is commonly assumed that large profits 
 result from high rates. It is therefore concluded by many 
 that to keep rates from being exorbitant railway profits must 
 and should be restricted. 
 
 This theory has been voiced in many quarters. Mr. Geo. A. 
 Rankin, in a recent book,^ advocates concentrating the control 
 of all the railways of the United States in one holding corpo- 
 ration limited to a net return of 5 per cent. In many pro- 
 ceedings before railway commissions and courts the same 
 doctrine that the public may and therefore ought to restrict 
 each railway to a "fair return" is being urged by those who 
 favor reductions of rates by action of public authorities or 
 who oppose advances in rates sought by the railways. Efforts 
 are being made to secure the passing of legislation which will 
 establish the principle of limitation of profits and provide spe- 
 cial machinery for carrying it out. The plan to have the 
 Interstate Commerce Commission make a valuation of all 
 the railways, which plan was approved by the House of Rep- 
 resentatives at the last session of Congress but rejected by 
 
 ^ Reprinted, by permission, from the Journal of Political Economy, 
 October, 1910. 
 
 2 An American Railway Transportation System: A Criticism of the 
 Past and Present and a Plan for the Future. 
 
40 CURRENT RAILWAY PROBLEMS. 
 
 the Senate, is advocated on the ground that the roads should 
 be restricted to a "fair return," and that what is a "fair re- 
 turn" cannot be known without ascertaining the value of their 
 properties. Typical of many bills introduced in the last 
 Congress was that of Representative William R. Smith of 
 Texas. This bill would have required the Commission to fix 
 all interstate rates so that they would "yield only a reasonable 
 sarily involved in fixing fair and reasonable rates, no one, per- 
 haps, would question the constitutionality or expediency of 
 net return on a fair value of the carrier's property as deter- 
 mined by the commission." 
 
 If it were indisputable that limitation of profits is neces- 
 the proposed policy. But railway counsel and managers, and 
 some competent students of railway affairs, contend that 
 limitation of profits is not necessarily involved in just and 
 effective regulation of rates, but is a different and even an- 
 tagonistic policy. The cornerstone of the theory that limita- 
 tion of profits is essential to effective regulation of rates is the 
 assumption that there is a fixed causal relation between rates 
 and profits owing to which they rise and fall together. Now, 
 this is not true. It is true that a railway with high rates may 
 earn large profits, and that a railway with low rates may cam 
 small profits. But it is also true that a railway with low rates 
 may earn large profits, and that one with high rates may 
 earn small profits. The average rate per ton per mile of the 
 Central of Georgia in 1909 was almost 11 mills and its net 
 earnings per mile were $1,500, while the average rate per ton 
 per mile of the Lake Shore & Michigan Southern was only a 
 little over 5 mills, and its net earnings per mile were $9,350. 
 It is true that raising rates may increase profits and that a re- 
 duction of rates may reduce profits. But raising rates may 
 reduce profits and a reduction of rates may cause, or at least 
 be accompanied by, an increase of profits. Which result will 
 follow always depends on the effect upon the volume of the 
 traffic. The average rate per ton per mile in the United 
 States declined from 9.41 mills in 1890 to 7.59 mills in 1907, 
 
LIMITING RAILWAY PROFITS. 41 
 
 or 19 per cent; and meantime the average net earnings of 
 the railways of the country increased from $2,300 to $3,696 
 per mile, or 61 per cent. 
 
 The profits of a railway are affected by many factors of 
 which the amount of the rate is but one. Profits are the differ- 
 ence between gross earnings and expenses. Gross earnings 
 depend on the nature and density of the traffic as well as on 
 the rates applied to it. Expenses, both in the aggregate and 
 per unit of traffic, depend on how much and what kind of 
 traffic is handled, on what kind of a territory it is hauled 
 through, and on what kind of a management the railway has. 
 Of two roads handling the same kind of traffic, between the 
 same points, on the same rates, one may have very large net 
 earnings and the other only small net earnings or even none. 
 If we are to use profits as the test of the reasonableness of 
 rates, shall we say in such cases that the rates are unreason- 
 ably high or unreasonably low? A road might be earning 
 more than a "fair return." Its rates on the theory under con- 
 sideration would be held unreasonable. By advancing them it 
 might destroy enough traffic to reduce its earnings to a "fair 
 return." Would it thereby make its rates reasonable? A 
 road might be earning exactly a "fair return." By a reduction 
 in its rates, causing a large increase in its traffic, or by im- 
 provements in its plant or operating methods, causing reduc- 
 tions in its operating expenses, it might raise its net earn- 
 ings above a "fair return." Would this reduction in its rates, 
 or these improvements in its plant or methods, make the 
 rates of this road unreasonable? 
 
 The foregoing considerations show that limiting profits is 
 really quite a distinct thing from requiring reasonable rates. 
 The constitutionality and expediency of legislation to limit 
 profits must, therefore, be decided on other grounds than 
 that of regulation to secure fair and reasonable rates. 
 
 Many persons, including most railway commissioners and 
 numerous lawyers, think that it has been settled by decisions 
 of the Supreme Court of the United States that the profits of 
 
42 CURRENT RAILWAY PROBLEMS. 
 
 railways may constitutionally be limited. Mr. Justice Harlan ' 
 said in the opinion of the court in the Nebraska Rate Case^ 
 that "what the [railway] company is entitled to earn is a 
 fair return on the fair value of that which it employs for the 
 public convenience." This is interpreted to mean that a "fair 
 return" is all to which a railway is entitled. It is argued that 
 the "fair value" of the property is that for which it could be 
 physically reproduced, and that a "fair return" is the current 
 rate of interest on good securities. It is therefore concluded 
 that a valuation of the properties of railways should be made, 
 and that rates should then be so adjusted from time to time 
 that each road will earn only the current rate of interest on 
 its valuation. 
 
 Counsel for the railways and some able constitutional law- 
 yers repudiate this interpretation of Justice Harlan*s state- 
 ment.* Justice Harlan did not say that all the railway com- 
 pany is entitled to demand is a fair return, but that this is the 
 least to which it is entitled. That he did not mean that this 
 is the maximum which it may be entitled to receive is indi- 
 cated by a statement made four years later by Justice Brewer 
 in rendering the opinion in Cotting v. Godard:^ 
 
 "As to parties engaged in performing a public service, 
 while the power to regulate has been sustained, negatively 
 the [supreme] court has held that the legislature may not 
 prescribe rates which if enforced would amount to a confisca- 
 tion of property. But it has not held aMrmatively that the 
 legislature may enforce rates which stop only this side of 
 confiscation. . . ." 
 
 1 Smyth V. Ames, 169 U.S. 466, decided in 1897. 
 
 2 See, for example, an address by Walker D. Hines, chairman of the 
 Executive Committee and general counsel of the Atchison, Topeka & 
 Santa Fe, before the Traffic Club of Pittsburgh, March 18, 1910. Also 
 an address by United States Senator W. J. Bailey of Texas, eminent 
 as a constitutional lawyer, before the New York Bar Association, 
 January 20, 1910. 
 
 * 183 U.S. 79, 91. Italics are the present writer's. 
 
LIMITING RAILWAY PROFITS. 43 
 
 This shows that the court had not up to that time held that 
 railway profits might be limited; and it has not so held since. 
 What, then, would it probably hold if the point were squarely 
 presented to it? 
 
 The Interstate Commerce act as amended by the Hepburn 
 and the recent Mann-Elkins acts provides that after the Inter- 
 state Commerce Commission shall find a rate unduly dis- 
 criminatory or unreasonable, it shall "determine and 
 prescribe what will be the just and reasonable rate ... to 
 be thereafter observed in such case as the maximum to be 
 charged." Now, the minimum rate a railway can ever 
 reasonably accept is one which will develop traffic that 
 will add a little more to its earnings than to its expenses. 
 If the traffic developed adds $100 to expenses and but 
 $99 to earnings, obviously the rate is lower than the 
 railway can reasonably accept. The maximum rate a rail- 
 way can ever reasonably charge is one which falls a little 
 short of the value of the service rendered for it. If 100 
 pounds of a commodity are worth $1 in A and $1.25 in 
 B, and the rate per 100 pounds from A to B is 25 cents, the 
 owner will gain nothing by shipping it from A to B. But if 
 the rate be but 20 cents it will cost a little less than the value 
 of the service rendered by transporting the commodity from 
 A to B ; and the owner can ship it at a profit. Now, railway 
 counsel argue, in view of these facts it is evident that what 
 the Interstate Commerce act means is that the commission 
 cannot reduce a rate, no matter what profits the railway is 
 making, unless the rate exceeds the maximum reasonable 
 value of the service rendered for the rate — in other words, is 
 extortionate. In support of this view they call attention to 
 the fact that when the Hepburn bill was pending it was pro- 
 posed to give the Commission authority to fix absolute rates, 
 and that it was also proposed to empower it to fix minimum 
 as well as maximum rates. Both these propositions were 
 rejected, because Congress thought it might be desirable in 
 some cases for the railways to make lower rates than those 
 
44 CURRENT RAILWAY PROBLEMS. 
 
 fixed by the Commission. But it cannot be assumed that 
 Congress meant to encourage the railways to make any rates 
 unreasonably low. It must follow that it meant that the Com- 
 mission should fix, not rates which would limit railway profits 
 to a "fair return," but merely rates which would relieve and 
 protect shippers and travelers from unfair discrimination or 
 extortion; and that if the commission, as the law stands, 
 should try to regulate rates with a view — not to making each 
 and every one of them a reasonable compensation for the 
 service rendered for it — but for the purpose of limiting or 
 reducing the profits derived by the railway from its rates as 
 a whole, the courts would hold that it had undertaken to 
 exercise a power which Congress had not attempted to con- 
 fer on it by existing law, and that therefore its action was 
 illegal. 
 
 But what authority over rates and profits Congress has con- 
 ferred on the Commission by the Interstate Commerce Act 
 as it stands, is a different question from the question as to 
 what further authority Congress and the state legislatures 
 might in future exercise themselves or delegate to the Com- 
 missions. The really interesting and important question is, 
 could legislation, either state or national or both, constitu- 
 tionally be passed and enforced which should require railway 
 rates to be so regulated as to limit the profits of each or all 
 of the railways to the current rate of interest or any other 
 basis which the lawmakers or the commissions might con- 
 sider a fair return; or has the railway a right of property to 
 demand and receive a reasonable compensation for each ser- 
 vice it renders, which right cannot be taken away or inter- 
 fered with, practically regardless of how much its profits in 
 the aggregate may be? 
 
 Most railway commissions and many lawyers believe 
 such legislation to limit profits would be upheld. For, 
 they reason, the railway is engaged in a public service; 
 it exercises the power of eminent domain; and therefore 
 Congress and the state legislatures, or commissions to 
 
LIMITING RAILWAY PROFITS. 45 
 
 which they delegate the requisite power, may regulate its 
 charges in any way they believe for the public good, so 
 long as they do not contravene those provisions of the 
 fifth and fourteenth amendments to the federal Constitu- 
 tion which prohibit confiscation of property. Many railway 
 lawyers and other persons who have studied the subject re- 
 ject this view. They believe there are limitations on the 
 power to regulate public service concerns besides those im- 
 posed by the fifth and fourteenth amendments. The authority 
 of the states to regulate rates is a police power derived from 
 the common law. The power of Congress to regulate them 
 is derived from the Interstate Commerce clause of the 
 federal Constitution, which, like other parts of the Constitu- 
 tion, must be interpreted in the light of the common law.* 
 Now, it never was the common law that the profits of one en- 
 gaged in a public service could be limited. Justice Brewer in 
 Cotting V. Godard' defined the rule of the common law to be 
 that the person who engaged in a public service had "a right 
 to charge for each separate service that which was a reason- 
 able compensation therefor." If a shipper thought a carrier 
 had charged him an exorbitant rate he might sue the carrier 
 'to recover the excessive portion. The court then determined 
 whether the charge was reasonable, not by computing how 
 much profit the carrier was making from its entire business, 
 but by ascertaining what the particular service was worth by 
 reference to the skill with which the service was rendered, its 
 value to the shipper, what was customarily paid for like 
 services under similar conditions, etc. Justice Brewer in the 
 opinion in Cotting v. Godard indicated that the common-law 
 
 * "The code of constitutional and statutory construction which is 
 gradually formed by the federal courts in the application of the Con- 
 stitution, and the laws and treaties made in pursuance thereof, has for 
 its basis the common law. . . ." — Cyclopedia of Law and Procedure, 
 VIII, 385. 
 
 •183 U.S. 79, decided in 1901, four year* after Smyth v. Ames. 
 
46 CURRENT RAILWAY PROBLEMS. 
 
 rule was still in effect, and could not be abrogated by statute. 
 He said: 
 
 'Its [the legislature's] prescription of rates is prima facie 
 evidence of their reasonableness . . . but it does not 
 follow therefrom that the legislature has power to reduce 
 any reasonable charges because by reason of the volume of 
 business done by the party he is making more profit than 
 others in the same or other business. The question is always, 
 not, What does he make as the aggregate of his profits but, 
 What is the value of the services which he renders to the one 
 seeking and receiving such services. . . . The amount of 
 the aggregate profits may be a factor in considering the ques- 
 tion of the reasonableness of the charges, but it is only one 
 factor, and is not that which finally determines the question 
 of reasonableness.'* 183 U. S. 79, 97. 
 
 As the decision in this case turned on other points than 
 the reasonableness per se of the rates involved, these remarks 
 of Justice Brewer are regarded as obiter dicta; but his state- 
 ment that legislatures cannot reduce any charge conforming 
 to the common-law standard of reasonableness merely be- 
 cause a concern's profits are large is significant. Of course, 
 if a legislature cannot do this, a commission cannot. 
 
 In other cases the Supreme court has indicated that there 
 are limitations on the power of public authorities to regulate 
 railways besides those which prohibit confiscation. In the 
 case of Monongahela Navigation Company v. U. 5./ which 
 was decided some years before Catting v. Godard, the court 
 said: 
 
 "For each separate use of one's property by others, the 
 owner is entitled to a reasonable compensation, and the num- 
 ber and amount of such uses determines the productiveness 
 and the earnings of the property, and therefore, largely its 
 value." 
 
 In Lake Shore & Michigan Southern Railroad Company 
 
 « 
 
 1 148 U.S. 312. 328. 
 
LIMITING RAILWAY PROFITS. . 47 
 
 V. Smith,^ speaking of the property right of railways in the 
 management of their affairs, it said: 
 
 "What the company may choose voluntarily to do furnishes 
 no criterion for the measurement of the power of a legisla- 
 ture. Persons may voluntarily contract to do what no legis- 
 lature would have the right to compel them to do." 
 
 And in the recent case of Interstate Commerce Commission 
 V. C. G. W. Ry.^ which arose under the Elkins law, and was 
 decided after the Hepburn act was passed, it said: 
 
 "It must be remembered that railways are the private prop- 
 erty of their owners; that while, from the public character of 
 the work in which they are engaged, the public has the power 
 to prescribe rules for securing faithful and efficient service 
 and equality between shippers and communities, yet, in no 
 proper sense, is the public a general manager." 
 
 Those who think that railway profits cannot be limited 
 construe these statements to mean that public authorities 
 may so regulate railways as to require them to give the public 
 good and adequate service at fair and reasonable rates; but 
 that if they go farther than this, and seek to direct the inter- 
 nal management of the railways and to say what profits they 
 may earn and what dividends they may ^ay, they encroach 
 on the private side of the carriers and invade prerogatives 
 and rights which the Constitution, so long as the carriers 
 continue to be private property, reserves to their owners and 
 managers. 
 
 Many persons will think that if this is the correct view 
 the situation is unfortunate, and that the Constitution should 
 be so amended as specifically to empower and require public 
 authorities to restrict railways to an average return approxi- 
 mating the current rate of interest on either their cash in- 
 vestments or the value of their physical properties. It is con- 
 tended that as railway corporations are created by, derive all 
 
 «173 U.S. 684, 697. 
 ^209 U.S. 118, 119. 
 
48 CURRENT RAILWAY PROBLEMS. 
 
 their power from, and in maintaining a public highway, exer- 
 cise a function of, the state, the public has at least a moral 
 right to limit their profits. 
 
 The question of most importance after all, however, is not 
 what the public has a legal or an abstract moral right to do, 
 but what it is to its interest to do. If it is reasonably sure 
 to inure to the good of the public to limit railway earnings 
 as proposed, this limitation ought to be made. The interest of 
 the public is superior to all other considerations. But when 
 we consider all that would be involved in carrying out the 
 policy of limitation of railway profits in the way that is 
 advocated, and when we consider all the effects that this 
 policy would probably produce, it may be doubted whether the 
 majority will regard it as expedient. 
 
 Regulation of railways should aim to secure three main 
 objects: (1) safe, good, and adequate transportation; (2) 
 rates which do not unfairly discriminate; and (3) the lowest 
 rates compatable with good service. The criterion of the ex- 
 pediency of any policy is the way in which it is adapted to 
 attaining these ends. 
 
 To carry out effectively the proposed policy of regulation 
 through limitation of profits would require extension of 
 regulation to almost every detail of the railway business. The 
 Supreme Court has said that the public is in no proper sense 
 the general manager of the railways. It would have to be- 
 come their general manager to carry out this policy. The 
 railway commissions would have to be authorized to fix the 
 basis, or valuation, on which a return might be earned, and 
 also the percentage of return to be allowed. Then they 
 would have to exercise absolute control over railway ac- 
 counting. For each road constantly spends money for main- 
 tenance of equipment, track, etc., and also for permanent im- 
 provements. Now, maintenance is chargeable to operating 
 expenses, while permanent improvements are chargeable to 
 capital account; new securities entitled to the "fair return" 
 could be issued against them. But as to just where expendi- 
 
LIMITING RAILWAY PROFITS. 49 
 
 turcs for maintenance and expenditures for permanent im- 
 provements begin expert opinions differ. The railway man- 
 agements, desiring to build as broad a basis of valuation and 
 capitalization as possible, would be disposed to charge all of 
 the expenditures within this "twilight zone" to permanent 
 improvements; and to prevent them from unreasonably swell- 
 ing their capitalizations railway commissions would have to 
 be empowered, and would have to exercise firmly and in 
 great detail the power, to determine to what account each 
 item of expenditure should be charged. 
 
 Again, profits are the margin between earnings and ex- 
 penses. The management of a railway, seeing that its profits 
 were about to pass the limit of a "fair return," might prefer 
 to check their growth by unnecessarily increasing its expenses 
 rather than by reducing its rates. To prevent the railways 
 from thus anticipating the government in limiting their 
 profits commissions probably would have to be given authority 
 to say what wages should be paid by them, what prices they 
 should pay for materials — in short, to control their expendi- 
 tures as thoroughly as their rates. 
 
 It is sometimes said that if the dividends railways might 
 pay were limited they would invest their surplus profits in 
 permanent improvements and extensions; and that more ade- 
 quate and efficient facilities of transportation would result. 
 It is not uncommon now for a road to earn 10, 15, or even 
 20 per cent, annually, and to pay out in dividends only 6 or 8 
 per cent., the surplus earnings being spent on extensions and 
 improvements. This, it is said, is clearly more to the inter- 
 est of the public than for a road to pay out its entire net 
 earnings annually to its security holders; and if all railways 
 were required to pursue a similar policy the public would 
 benefit greatly. But railways do not voluntarily limit the 
 profits that they earn. They merely limit the amount of 
 their profits that they pay out in dividends. And they do not 
 limit the amount that they pay out in dividends because they 
 think the stockholders ought not to have more, but because 
 
50 CURRENT RAILWAY PROBLEMS. 
 
 they desire, by investing part of past earnings in the improve- 
 ment of the plants, to give the public safer and better service, 
 and to maintain or increase the earning capacity of the roads 
 so as to enable them in the long run to pay the stockholders 
 more than they could if improvements were not made out of 
 earnings. Now, under a policy of governmental limitation of 
 profits, not the dividends, but the net earnings, of each rail- 
 way would be restricted to the current rate of interest. Con- 
 sequently, unless a company refused to pay its stockholders 
 the current rate of interest, it could not have any surplus earn- 
 ings to invest in improvements; and if its earnings equaled 
 the current rate of interest it would not withhold any of 
 them to invest in improvements, because no doubt the main 
 object of a railway in investing earnings in improvements 
 is to increase its profits; and no increase of profits would be 
 allowed. 
 
 The principal purposes of improvements in methods of 
 operation are the same as those of improvements in indus- 
 trial plants, viz., to give the public better service and to 
 reduce operating expenses, and thereby increase profits. As 
 under the proposed policy no increase in profits exceeding 
 the current rate of interest would be allowed, there apparently 
 would be, after net earnings reached that point, as little in- 
 centive for the management to improve its operating methods 
 as to improve its plant. In fact, there would be a deterrent 
 to attempting improvements. At present improvements are 
 undertaken with the hope of increasing profits, but always 
 with the knowledge that their cost may turn out to exceed 
 their worth. Under the proposed policy, if an attempted im- 
 provement turned out unprofitably the road would have to 
 bear the loss; while if it turned out well, none of the benefit 
 would go to the railway's stockholders in the form of in- 
 creased dividends, but all of it would go to shippers and 
 travelers in the form of reduced rates. 
 
 So it would seem that the enterprise, initiative, and plans 
 for making improvements in plants and methods in order to 
 
LIMITING RAILWAY PROFITS. 51 
 
 reduce the expenses of operation would have to be supplied 
 by railway commissions, which would have to be given large 
 power and discretion to coerce inert and refractory railway 
 managements along the path of progress. It will be hard for 
 most persons to believe that under this plan the development 
 and improvement of transportation facilities would go on as 
 rapidly and cheaply as in the past. Public commissions, how- 
 ever intelligent and powerful, hardly could get railway mana- 
 gers and owners to make as great improvements as they 
 make voluntarily under the stimulus of the desire and expec- 
 tation of gain. 
 
 Another consequence of this policy would be the necessity 
 of obtaining in the money market in the form of new capital 
 all the financial means for making permanent improvements 
 in our railways. This, if it could be done, would probably 
 result in a rapid increase in railway capitalization. English 
 railways have followed this method in making their perma- 
 nent improvements, and this is one of the main reasons why 
 they are capitalized for $314,000 a mile, while the net capitali- 
 zation of the railways of the United States is but $59,259 
 a mile.' 
 
 But could these financial means be secured in the money 
 market? If railway capital were to be both limited to, and 
 guaranteed, the current rate of interest, plenty could be ob- 
 tained. But those who advocate limiting profits repudiate 
 suggestions that the maximum return fixed by the public shall 
 also be guaranteed by the public as a minimum. Can it 
 reasonably be expected that capitalists would invest billions 
 in railways knowing that they would have only a very re- 
 stricted control over their property, and would not be allowed 
 more than the current rate of interest, and might receive less 
 or even nothing? 
 
 Let us now consider what effects the proposed policy would 
 
 * Twenty-second Annual Report of the Interstate Commerce Com- 
 mission (for 1909), 56. 
 
52 CURRENT RAILWAY PROBLEMS. 
 
 have on rates. It would not help to eliminate unfair dis- 
 criminations. For discrimination consists entirely in the rela- 
 tion of rates. A road all of whose rates are low and which is 
 not earning its operating expenses can discriminate just as 
 unlawfully and perniciously as one that is enormously pros- 
 perous. Discrimination being entirely a matter of the relation 
 of rates, it can only be corrected by changing their relation. 
 While limitation of profits would not help to remove or pre- 
 vent discriminations, it is conceivable that it might sometimes 
 have the opposite effect. Suppose a community alleged that 
 a railway which was earning exactly a "fair return" was dis- 
 criminating against it. The commission could not reduce the 
 rates of the complaining community, because that might 
 reduce the earnings of the railway below a "fair return." 
 It could not raise the rates of the favored community 
 because no existing law gives a commission power to raise 
 a rate. And the road could not raise its rates to the 
 favored community because that might increase its profits 
 above a "fair return." How, then, could the discrimination 
 be corrected? 
 
 It is commonly assumed that limitation of profits would 
 tend to make rates low. This is the main reason why it is 
 advocated. The average rate per ton per mile in the United 
 States in 1870 was 18.89 mills. In 1887, when the Interstate 
 Commerce act was passed, it had been reduced to 9.84 mills, 
 or 52 per cent. Between 1887 and 1906, in which latter year 
 the Hepburn act went into effect, it declined from 9.84 mills 
 to 7.48 mills, or 24 per cent. Government regulation had no 
 hand in the great and innumerable reductions prior to 1887 
 reflected in the decline in the average rate. They were made 
 by the traffic managers of the railways. It had very little 
 hand in the great and innumerable reductions in the period 
 1887-1906. Practically all were made by the traffic managers. 
 The traffic managers voluntarily made these reductions for 
 two reasons. First, each of them sought, by lowering his 
 rates, to capture business from competitors. Competitive 
 
LIMITING RAILWAY PROFITS. 53 
 
 rate-making has now been greatly reduced — although not 
 wholly eliminated — ^by railway combinations and consolida- 
 tions and by legislation requiring the roads to publish all their 
 rates, and to give extended notice of proposed changes. The 
 second reason why the traffic managers reduced rates was 
 that they hoped thereby to develop so much additional traffic 
 that the net returns from it on the lower rates would exceed 
 the net returns from a smaller traffic on the higher rates. 
 Often this hope was disappointed; then, whenever practicable, 
 the old rates were restored. The desire to increase earnings 
 is just as prevalent and strong today as ever; and the traffic 
 managers still manifest it not only by raising the rates on 
 commodities the volume of whose movement they think will 
 not thereby be reduced, but also by reducing them on com- 
 modities the volume of whose movement they think will 
 thereby be largely increased. They seek constantly to make 
 that adjustment which will 3rield the railway the largest per- 
 manent return, and they know that in the long run they will 
 get the largest return by making no rates that are lower, and 
 none that are higher, than the traffic easily can bear. The 
 enormous increase of traffic shows that, as a whole, the rates 
 of American railways are not burdensome to commerce, but 
 are admirably adapted to foster its growth. 
 
 Now, it is obvious that limitation of profits would deprive 
 the traffic manager of every railway which was earning a "fair 
 return" of all incentive voluntarily to make reductions in 
 rates. At present if the traffic manager has a movement of 
 empty cars in one direction, and a shipper convinces him 
 that by making a certain reduction in rates he can develop 
 traffic that will fill his empty cars and add something more to 
 his road's earnings than to its expenses, he will promptly 
 make the reduction. But under a policy of limiting profits 
 he would not be keen to experiment with reductions in rates, 
 for he would know that if he did not develop as much traffic 
 as he expected to, and a loss of net eslrnings resulted, it 
 would have to be borne by the railway, while if an increase of 
 
54 CURRENT RAILWAY PROBLEMS. 
 
 net earnings resulted, it would be wiped out by further reduc- 
 tions of rates by public authorities. 
 
 It may be answered that if the traffic managers did not 
 make reductions the regulating authorities would. But it has 
 never yet been demonstrated that the railways, as a whole, are 
 now earning more than a fair return on a fair valuation. 
 Most of those who have studied the subject believe that a 
 fair valuation would show that to reproduce the railways of 
 the country as a whole would cost much more than their 
 present aggregate capitalization/ Now, the net earnings of 
 the railways as a whole do not exceed the average current 
 rate of interest on their present aggregate capitalization. The 
 dividends declared in 1909, applied to all the stock outstand- 
 ing, averaged only 4 per cent. On the theory of a "fair return 
 on a fair valuation" general reductions in rates by the regu- 
 lating authorities probably could not now be justified. And 
 if the conclusion reached in a previous part of this paper is 
 correct — viz., that this policy would tend to reduce the enter- 
 prise of railway management, and thereby to increase ex- 
 penses of operation — it probably would make it impossible for 
 regulating authorities to require general reductions, and, on 
 the other hand, render it possible for the railways, on the 
 ground that they were not earning a "fair return," legally to 
 make even greater general advances than they are now seek- 
 ing to justify on the ground of increasing expenses of 
 operation. 
 
 It may be replied that while the railways as a whole are 
 not earning excessive profits, there are some that are; and 
 
 * Their net capitalization in 1909, according to the Interstate Com- 
 merce Commission, was $13,711,867,733. United States Senator A. B. 
 Cummins, of Iowa, is an advocate of limitation of profits, yet in a 
 speech before the Traffic Club of Chicago on February 8, 1910, he said 
 he believed a valuation would show it would cost $20,000,000,000 to 
 reproduce the physical properties of the railways. He therefore opposes 
 a valuation. He contends that railways are not entitled to the "un- 
 earned increment" in their properties. 
 
LIMITING RAILWAY PROFITS. 55 
 
 that while the policy of limitation of profits might not lead 
 to general reduction of rates, or even prevent general ad- 
 vances, it at least would prevent advances and justify reduc- 
 tions on those roads which are earning more than a "fair 
 return." Hitherto in this paper I have treated the railways 
 of this country as if they were a single system. The fact that 
 they are not, far from making the carrying out of the policy 
 of limitation of profits through regulation of rates more 
 feasible and expedient, makes it much less so. For railways 
 vary as widely in their abilities and characteristics as the men 
 who manage them. In every section there are some whose 
 traffic is relatively heavy, whose operating expenses are rela- 
 tively small, and whose net earnings per mile are relatively 
 large. In the same sections there are other roads whose traffic 
 is relatively light, whose operating expenses are relatively large, 
 and whose net earnings are relatively small. Everywhere 
 these two classes of roads compete for business. They must 
 make the same rates or the road which makes the lowest rates 
 will get all of the competitive business; and therefore if the 
 regulating authorities so reduced or held down the rates of the 
 stronger roads as to limit their profits to a "fair return" the 
 weaker roads would be restricted to less than a "fair return." 
 If the rates of the stronger roads, such as the Pennsylvania, 
 the Lake Shore & Michigan Southern, the Burlington, the 
 Chicago & Northwestern, the Louisville & Nashville, and the 
 Union Pacific, should be so held down or lowered as to 
 restrict their net earnings to the current rate of interest, the 
 net earnings of other roads would be reduced much below it, 
 and many would be bankrupted. 
 
 The policy of governmental control and limitation of profits 
 through regulation of rates does not seem well adapted to 
 secure any of the main objects of regulation of railways. It 
 appears to be more apt to injure than to benefit the public. 
 The most equitable, effective, and beneficial way to determine 
 and fix reasonable rates is to proceed in much the same way 
 that the courts determined what was a reasonable rate under 
 
56 CURRENT RAILWAY PROBLEMS. ' 
 
 the common law. When an individual rate or a schedule of 
 rates is in question, whether that rate or schedule is fair and 
 reasonable cannot be determined merely by reference to how 
 much profit the railway is making in the aggregate. For if 
 the road's profits were small, it might be held that the rate or 
 schedule was reasonable; whereas the fact might be that the 
 particular rate or schedule in question was excessive and that 
 the smallness of the road's profits was due to the excessive- 
 ness of this rate or schedule, or to the lowness of its other 
 rates, or to bad management. And if its profits were large 
 it might be held that the particular rate or schedule in ques- 
 tion was excessive; whereas the fact might be that that rate 
 or schedule actually was unfairly low and that the road's 
 profits were all derived from other and higher rates. Simi- 
 larly, if the large profits of a single road were considered, it 
 might be held that its rates were excessive; whereas investi- 
 gation might disclose that other roads hauling the same kinds 
 and amounts of traffic, under substantially similar conditions, 
 for the same rates, were making small or no profits; which 
 would show that the differences in profits were mainly or en- 
 tirely due to differences in the skill of the managements. The 
 Interstate Commerce Commission said in one of its opinions 
 in Central Yellow Pine Association v. Illinois Central Rail- 
 road Co., et. al (10 I. C. C. 505, 539, 540, 538) : 
 
 "While the Supreme Court has undertaken to point out 
 'certain elements' to be considered in determining the rea- 
 sonableness of an entire system of rates, it has not named any 
 as shedding light upon the reasonableness of a* rate on a 
 single commodity like lumber. It is evident that such ele- 
 ments are widely variant in the two cases. Where an entire 
 system of rates is involved, the principal, if not the only ques- 
 tion, is, whether the revenue yielded by the rates on all traffic 
 is a fair return on the value of that which is 'employed for 
 the public convenience* — a question, the determination of 
 which, as we have shown, can have only a very remote, if 
 
LIMITING RAILWAY PROFITS. 57 
 
 any practical, bearing on the reasonableness of a rate on a 
 single article of traffic. On the other hand, where the rate 
 on a single article is in issue, the question (which could not 
 arise in the former case), whether the rate is unjustly dis- 
 criminatory or unduly preferential, may be presented, and the 
 reasonableness of the rate depends upon the value, volume 
 and other characteristics affecting the transportation of the 
 particular commodity to which it is applied." 
 And again: 
 
 "The rate on one article of traffic may be reasonably high 
 and the carrier fail to earn a fair return on the value of the 
 entire property employed for the public convenience because 
 of unreasonably low rates on other traffic, and vice versa, the 
 rate on one article of traffic may be unremunerative or un- 
 reasonably low and the return to the carrier from its entire 
 business may be fair or reasonably high, the deficiency under 
 the rate on the one article of traffic being made up by the rates 
 on the balance of the traffic." 
 
 Some consideration ought and must be given to the profits 
 of railways in determining what rates they should be allowed 
 to charge. Considering any particular territorial group of rail- 
 ways as a whole, or the railways of the entire country as a 
 whole, it seems quite obvious that their earnings must be 
 sufficient to pay reasonable operating expenses, fixed charges 
 and, on the average, as large dividends, in proportion to the 
 risks of investment, as are paid on investments in banks, fac- 
 tories, farms, jobbing houses, etc., or capital will to so large 
 an extent quit seeking investment in railways as to so greatly 
 arrest their development and extension that they will become 
 incapable of satisfactorily handling the growing traffic which 
 the proportionately larger investments in and development of 
 other businesses will cause to be offered to them. But the 
 profits of any particular railway or group of railways are not, 
 and should not be used as, the sole or even the main criterion 
 of whether any particular rates, or even entire schedules of 
 
58 CURRENT RAILWAY PROBLEMS. 
 
 rates, are reasonable. There should also be considered the 
 nature of the services rendered; their value to the shippers re- 
 ceiving them ; how the profits of the railways affected compare 
 with those of other industrial concerns in the same territory; 
 the density and nature of the traffic ; how much the traffic can 
 reasonably bear; how much other railways than those in- 
 volved charge for similar services and earn on similar rates, 
 etc. If, in view of these considerations, the rates seem un- 
 reasonably high per se they should be reduced; and if they 
 seem unreasonably low per se they should be allowed to be 
 advanced. The courts have held that railways cannot charge 
 extortionate rates per se, even if they cannot otherwise make 
 any profit, and it would seem that if they do make reasonable 
 rates it is neither equitable nor expedient to reduce their rates 
 merely because their profits are large. It would seem that the 
 most effective way to get low rates would be, not to provide 
 that the reasonableness of a railway's rates should be meas- 
 ured by the amount of its profits, and that the greater its 
 earnings grew the lower it would have to make its rates, but 
 to provide, if some practicable way of carrying out such a plan 
 could be devised, that the reasonableness of the profits should 
 be measured by the reasonableness of the rates, and that the 
 lower a road made its rates the larger should be the profits 
 that it would be allowed to enjoy. 
 
RAILWAY RATES AND RAILWAY 
 EFFICIENCY.! 
 
 Louis T. Brandeis, attorney for the eastern shippers in the 
 rate advance cases, has relieved the monotony of the hearings, 
 and added much to the gayety of nations but very little to the 
 sum of useful knowledge, by asserting, and undertaking to 
 show^ how, the railways of the United States can reduce 
 their operating expenses $365,000,000 a year. Mr. Brandeis' 
 statement and the evidence he has introduced to support it 
 merit serious consideration, because they have been printed 
 broadcast over the country, and, therefore, no doubt, have 
 tended to give to the uninformed the impression that Amer- 
 ican railways are very inefficiently operated. 
 
 The first comment that suggests itself regarding the posi- 
 tion taken by Mr. Brandeis is that it involves the abandon- 
 ment of the theory on which the shippers heretofore have 
 opposed advances in freight rates. Their contention has been 
 that the railways have so greatly increased the efficiency of 
 their plants and operating methods during the past ten years 
 that, in spite of the advances that have taken place in the 
 costs of labor and materials, they do not need higher rates. 
 Obviously, the contention that the railways have greatly in- 
 creased the efficiency of their plants and operations and do 
 not need an increase in earnings, and the contention that they 
 are inefficiently operated and should get the additional revenue 
 they need by abandoning their inefficient methods, are not 
 quite compatible. The railways of the United States, with 
 the smallest capital expenditure per mile of any railways in 
 the world, have carried freight and passengers at the lowest 
 rates in the world, while paying the highest wages for labor 
 
 *An editorial in the Railway Age Gasettet December 2, 1910. 
 
60 CURRENT RAILWAY PROBLEMS. 
 
 and the highest prices for materials in the world. This does 
 not indicate inefficient management. The manufacturers of 
 the United States, while paying the highest wages of any 
 manufacturers in the world, have, in the main, charged the 
 highest prices of any manufacturers in the world for their 
 goods. Mr. Brandeis cites the great improvements in methods 
 in manufacturing plants as examples to be imitated by the 
 railways. One of two things is true: either the factories of 
 the United States, whose owners Mr. Brandeis represents, 
 are not as efficientlly operated as American railways are oper- 
 ated, or there has been no justification for the manufacturers 
 raising their prices as much as they have in the last ten years, 
 while railway rates have remained practically stationary.^ 
 
 There were 239,052 miles of railway in the United States 
 on June 30, 1910. Their operating expenses per mile in the 
 fiscal year 1910 were $7,727, of which $1,563 was charged to 
 maintenance of way and structures, $1,746 to maintenance of 
 equipment, $3,895 to transportation and the rest to general 
 and traffic expenses. The average reduction per mile in op- 
 erating expenses which would have to be effected to obtain 
 the aggregate economy suggested by Mr. Brandeis would be 
 $1,527, which could be secured by a reduction of 14 per cent, 
 in the cost of transportation, 30 per cent, in expenditures for 
 maintenance of way and structures, and 30 per cent, in 
 
 ■The following is from the Bulletin of the Bureau of Labor for 
 March, 1910: "Wholesale prices in March, 1910, were higher than at 
 any time in the preceding 20 years, being 7.5 per cent, higher than in 
 March, 1909; 10.2 per cent, higher than in August, 1908; 21.1 per 
 cent, higher than the average yearly price of 1900; 33.8 per cent, 
 higher than the average price for the ten years 1890 to 1899; and 
 49.2 per cent, higher than the average yearly price of 1897." 
 
 Compare the foregoing with the following regarding railway rates for 
 the same years, except for 1910, the official figure for which is not yet 
 available: The average rate per ton per mile in the year ended June 30, 
 1909, was 7.63 mills, or 1.19 per cent, higher than in 1908; 4.66 per 
 cent, higher than in 1900; 9 per cent, lower than the average rate for 
 the ten years 1890 to 1899; and 4.38 per cent, lower than the average 
 rate of 1897. 
 
RAILWAY RATES AND EFFICIENCY. 61 
 
 expenditures for maintenance of equipment. The average 
 operating ratios of the railways of the United States would 
 have to be reduced from about 67 per cent, to 53 per cent. 
 Everyone familiar with railway affairs knows that many 
 great economies have been made within the past decade, and 
 that many more can be effected. Mr. Harrington Emerson, 
 who has been widely quoted as saying that the railways are 
 worse managed than any other industries really said in his 
 testimony before the Interstate Commerce Commission: "I 
 do not think that the management of the railways has de- 
 teriorated at all in ability. I think, on the contrary, that it is 
 fully up to if not ahead of the average ability, and probably 
 ahead of what it was some years ago." But everyone who is 
 aware how fast operating expenses have increased in spite of 
 the great improvements in plants and operating methods 
 which have been made knows that talk of effecting any such 
 reductions in operating expenses as Mr. Brandeis and his 
 witnesses outlined is the merest moonshine. The larger econ- 
 omies have been carried out. Only the smaller remain to be 
 made. If, in spite of the larger ones, operating expenses have 
 increased so fast, how can it be expected that they will not 
 continue to increase in spite of the smaller ones? 
 
 The greatest obstacle in the way of effecting even the 
 economies that are possible is that the railways cannot secure 
 from the shippers, the public and their employees the co- 
 operation which is necessary to render them practicable. 
 One of the criticisms made by Mr. Brandeis of railway opera- 
 tion is that cars and engines are not loaded, as heavily as they 
 might be, and that the average movement of a freight car is 
 only 25 miles a day. The railway managers have been 
 struggling for years to remedy these conditions, and Mr. 
 Brandeis* clients and other shippers have prevented their cor- 
 rection. The two main things necessary to get cars loaded 
 more heavily is to raise the minimum carload weights and to 
 hold at terminals cars carrying less-than-carload freight until 
 they are fully loaded. The railways in recent years have 
 
62 CURRENT RAILWAY PROBLEMS. 
 
 made many advances in carload minimums ; but the opposition 
 of the shippers has been so strong that carload minimums 
 are lower now, compared with the average capacity of cars, 
 than they were ten years ago. The shippers at Pittsburgh, 
 Chicago, St. Louis and numerous other cities have within 
 recent years successfully solicited the railways to put in oper- 
 ation numerous package cars running to all parts of the 
 United States on regular schedules for the handling of less- 
 than-carload freight. A car which runs on a regular schedule 
 must be started on its journey when the time comes for it to 
 leave whether it has a full load or not. The abolition of pack- 
 age cars would enable the roads to get heavier loading per car. 
 But do the shippers want them to effect economy in this way, 
 or would they rather pay a somewhat higher rate for the 
 better service? 
 
 The only way that engines could in all cases be loaded to 
 their maximum capacity would be to hold cars at terminals 
 until the maximum trainload each engine could pull had been 
 accumulated. That would result in increased economy in 
 railway operation. But would the shippers submit to economy 
 being secured in that way? There is constant complaint from 
 shippers that traffic does not move expeditiously enough 
 now. Mr. Brandeis himself criticises because the average 
 movement of a freight car is but 25 miles a day. But how 
 could the railways detain cars until they got the maximum 
 tonnage rating of each engine, and at the same time increase 
 the average movement per car per day? 
 
 The statement that freight cars move an average of only 25 
 miles a day is true, but, as made by Mr. Brandeis, utterly 
 misleading. The average speed of freight cars when in mo- 
 tion is not 25 miles a day, but about 10 miles an hour. The 
 only way to form a correct opinion as to how efficiently 
 freight cars are handled on the average by the railways is to 
 consider in detail the average car's movement from the time 
 it is started to be loaded until it has completed its trip and 
 been unloaded. The average time required for the loaded 
 
RAILWAY RATES AND EFFICIENCY. 63 
 
 and empty car movement involved in the average haul of 
 freight in the United States is about 12 days, and the average 
 distance the car moves about 330 miles. Two days' free time 
 is usually allowed for loading and also for unloading (not 
 including Sundays and holidays, for which additional free 
 time is allowed), and the statistics of the demurrage bureaus 
 show that the delays of the car at terminals by the shippers 
 and consignees for loading and unloading average about 4^/2 
 days for each movement. This leaves an average of 7j^ 
 days during which the car actually is in the possession of the 
 railway and gives an average movement of about 44 miles 
 per day. This time during which the car is in the possession 
 of the railway includes all legitimate detention of it, such as 
 for switching in and out at both terminals, for switch- 
 ing for classification in yards en route, for rigid in- 
 spection and frequent shoppings, and for transfer of lading 
 by reason of enforcement of the stringent safety appliance 
 regulations now in effect. It includes the period during 
 which cars are held for reconsignment to accommodate ship- 
 pers, and also the periods during which cars are in shops ; 
 and, on the average, about 5 per cent, of the total number of 
 cars are in the shops at any given time. It also includes the 
 movement not merely of loaded cars, but also of empty cars; 
 and, of course, the average movement of empty cars is much 
 less than of loaded cars, because the empty car stands on the 
 sidings for much longer periods, which periods of idleness are 
 included in the average movement. The effect of a heavy 
 reduction in traffic and a consequent proportionate increase 
 in the number of empty cars on the average movement of all 
 freight cars was strikingly shown just after the panic of 1907. 
 In October, 1907, when traffic was very heavy, the average 
 movement of all the cars in the United States was 24.8 miles 
 per day. In April, 1908, there were substantially 700,000 idle 
 cars, including those in shops ; and in that month the average 
 movement per day was but 19.6 miles, or 20 per cent, less 
 than it was in October, 1907. Now, there are four months in 
 
64 CURRENT RAILWAY PROBLEMS. 
 
 every year when practically all the freight cars in the country 
 are busy, and eight months when a large part of them arc not 
 in service, and, of course, the great number of cars idle dur- 
 ing these eight months pulls down the figure showing the 
 average movement. 
 
 When all these conditions are taken into consideration it 
 does not seem at all surprising that the average movement of 
 a freight car is but 25 miles a day. It also appears perfectly 
 evident that those who are best situated to increase this 
 average movement are the shippers, who have actual posses*- 
 sion of the car for loading and unloading more than one- 
 third of the time, who have practical possession of it for a 
 considerable time for reconsignment, and whose failure to 
 provide a more uniform traffic throughout the year makes it 
 necessary for eight months of the year to have thousands of 
 cars standing idle on side tracks. 
 
 The question of car efficiency is more than a matter of mere 
 movement. Probably the best combination unit of car per- 
 formance is that of ton-miles per car per day, which was 
 invented by the committee on car efficiency of the American 
 Railway Association. The statistics of the association show 
 that this item is increasing. The average number of tons 
 hauled one mile per car per day in April, 1907, was 348, and in 
 November, 1909, the record figure of 413 ton-miles per car 
 per day was made, an increase of over 18 per cent. This 
 increase was secured by better car loading and a reduction 
 of empty mileage. The increase in efficiency would have been 
 much greater if the efforts to secure it had met less opposi- 
 tion from the shippers. 
 
 One of the main obstacles to increasing car and locomo- 
 tive efficiency is the congested condition of yards and ter- 
 minals. And this condition, it would seem, can be remedied 
 only by the expenditure of large sums of money, which must 
 either be derived from earnings or obtained by the sale of 
 securities to the payment of the interest and dividends on 
 which earnings must be applied. 
 
RAILWAY RATES AND EFFICIENCY. 65 
 
 Experience in the shops of many private concerns and of 
 not a few railways has proved that very substantial economies 
 might be effected in railway shops as a whole in the United 
 States. But the difficulties in the way of introducing efficiency 
 methods in railway shops are much greater than in other 
 shops. If the manufacturer wishes to adopt efficiency meth- 
 ods and his employees object, he can lock them out or shut 
 down his plant until they come to terms. But the railway, 
 being a public service corporation, cannot close its shops 
 whenever it pleases and keep them closed as long as it likes. 
 That would mean that its transportation service would rapidly 
 become impaired, and in course of time would cease alto- 
 gether; and this the law and public opinion will not tolerate. 
 Labor unions usually oppose efficiency methods, because such 
 methods are based on the theory that each man should be 
 paid in proportion to the quality and quantity of the work he 
 does and tend to stimulate each employee to do a greater 
 amount of work than he otherwise would do, which results 
 in the employment of fewer men than otherwise would be 
 employed. Nowhere has the introduction of efficiency meth- 
 ods been, or is it now, more stubbornly opposed by labor 
 unions than it is in railway shops; and it is the deliberate 
 judgment of practically all persons competent to form an 
 opinion that before more efficient methods could be introduced 
 in all railway shops it would be necessary to go through the 
 worst railway strike that ever took place in this country. 
 The only reason why the railways do not try forcibly to adopt 
 more efficient methods and take the risk of provoking strikes 
 is that they they fear that a misguided public sentiment would 
 side with the labor unions instead of with the roads.' 
 
 ^ Mr. Brandeis has made the error of treating the business of railway 
 transportation as if it were a manufacturing industry. ^ But running a 
 railway is not like manufacturing; it is more like keeping house. 
 
 For example, one of the largest items in the operating expenses on 
 every great railway line is the salaries of its station agents. Suppose 
 one of Mr. Brandeis' efficiency experts should go to a country railway 
 station and study the movements of the station agent throughout the 
 24 hours of the day. Suppose he could show kim how to sell tickets 
 
66 CURRENT RAILWAY PROBLEMS. 
 
 It is not only in shops that railway employees are compara- 
 tively inefficient, and demand, and often get, two days' pay for 
 one day's work. One of the reasons why the locomotive en- 
 ginemen employed on the railways west of Chicago are 
 threatening to strike is that the railway managers have re- 
 fused to pay substantially twice as high wages to engineers 
 running Mallet engines as to those running other freight en- 
 gines. The Mallets have been introduced to effect economies 
 and increase efficiency. Their purpose would be nullified if the 
 wages paid to employees on trains where they are used were 
 based on what the engines do instead of on what the men do. 
 Making speeches or introducing evidence before the Inter- 
 state Commerce Commission will never make it practicable 
 for railways to get a dollar's work for every dollar that they 
 
 with one hand, while he made out freight way bills with the other. 
 We doubt very much whether the agent would be any happier or better 
 contented with his job after he had been thoroughly "efficientized" ; 
 and as the railway must have a whole man at each station, and cannot 
 get its business dene with 5/16ths or 27/32ds or any other fraction of 
 a man, there is no place that we can see where any saving would 
 result in the railway pay-roll. 
 
 The case of the station agent at a country station is not exceptional 
 but typical of railway service. Take another very large class of railway 
 servants — the engineers and firemen on locomotives. These men are 
 already performing feats of efficiency engineering by doing several 
 things simultaneously, such as watching for signals, attending to in- 
 jectors and graduating the throttle. There is no chance for Mr. Bran- 
 deis's efficiency experts to save anything in engine-runners or firemen's 
 wages; and, as for teaching the one how to handle his machine more 
 economically, and the other how to fire coal so as to save fuel and 
 prevent smoke, the railways already have, and have had for many years, 
 Traveling Engineers at work engaged upon this very task. . . . 
 
 It is not a new idea, either, that the railways might operate their 
 repair shops more economically. As a matter of fact, many railway 
 officers have for years been working on the problem of . introducing in 
 their repair shops the piece-work system, the premium system and other 
 advanced methods of paying for labor on the basis of its efficiency. 
 Many such experiments have shown good results; others have succeeded 
 in strangling the business^ with red tape, and the resulting saving has 
 appeared on the wrong side of the ledger. 
 
 We agree with Mr. Brandeis that the end of economies in^ railway 
 operations has not been reached, as has been pointed out in these 
 columns at various times, nor is it likely to be. The great difficulty 
 with railway operations at present is that the men in charge are so 
 overburdened with routine matters that they have as a rule no time or 
 energy to spare for the study of new means and methods of saving 
 over those which have been long in use. — From editorial in Engineering 
 News, December 1, 1910. 
 
RAILWAY RATES AND EFFICIE: 
 
 pay in wages. That will be rendered practicable — ^if it^ 
 either by appeals to the good sense of employees or by the 
 stern arbitrament of strikes and lockouts. 
 
 Government regulation, by forcing railway executives to 
 apply their time, thought and energies to protecting rather 
 than to improving their properties, is tending strongly to 
 make railway operation inefficient. Railway managers, being 
 human, cannot do two things at once. The more thought and 
 energy they must give to defending the roads, the less they 
 have left for devising methods for reducing operating ex- 
 penses. As the Railway Age Gazette has said before, "not 
 only does government regulation as now carried on hinder 
 the higher officers from initiating plans for improving opera- 
 tion, but it also interferes with their giving adequate consid- 
 eration to plans worked out by their subordinates; and, of 
 course, the important schemes of subordinates cannot be car- 
 ried out until they have been digested and approved by their 
 superiors. The public needs to be reminded that for whatever 
 reduces the efficiency or increases the cost of railway opera- 
 tion it must, in the long run, foot the bill in the passenger 
 and freight rates that it pays, or in the impaired service that 
 it will receive, or in both. The public will be much more apt 
 to get improved service at reasonable rates if it gives the 
 railway managers a chance to devote more time to the ad- 
 ministration of their properties than if it continues to compel 
 them to give so much of their time to the defense of them." 
 
 But, after all, why, on the shippers' theory, should the rail- 
 way managers be interested in the question of railway effi- 
 ciency? The shippers take the ground that the railway is 
 entitled to a fair return and no more, and that the railways 
 of the United States as a whole are earning a fair return now. 
 If this be true, what object can railway managers have in 
 trying to increase efficiency of operation?^ The only effect 
 
 ^ It has long been foreseen that, when this principle is established 
 in the operation of any public utility, a large part of the incentive 
 to economical and efficient operation is taken away. If a railway com- 
 pany saves money by conducting its operations with especial efficiency 
 
68 CURRENT RAILWAY PROBLEMS. 
 
 would be to increase the earnings of the roads above a fair 
 return and to invite reductions in rates and earnings. That 
 would benefit the shippers, but it would not benefit the stock- 
 holders of the railways; and the railway managers' employ- 
 ment, their salaries and their promotions come from the 
 stockholders. The application of the "fair return" theory to 
 the railway business would be the surest way to deaden rail- 
 way enterprise and prevent the economies which Mr. Brandeis 
 claims could be made. The only public policy which will tend 
 to promote railway efficiency will be for the government to 
 say in effect to the railways that they must not charge higher 
 than reasonable rates and that they must give good service, 
 and that so long as they meet these requirements they will be 
 allowed to earn profits as large in proportion as those earned 
 in other businesses. The only incentive that has ever been 
 effective in promoting efficiency in the management of con- 
 cerns owned by private capital has been the hope and prospect 
 of gain to the owners ; and until human nature is revolu- 
 tionized it will continue to be the only effective incentive. 
 
 and economy, and the only result of this economy is to bring about 
 a reduction in the rates for carrying passengers and freight, it is self- 
 evident that a chief incentive to saving is removed. Conversely, a rail- 
 way may be so mismanaged that money will be wasted in any one of 
 the hundred ways by which a railway's expense account may be swollen. 
 If those responsible for such mismanagement can simply raise freight 
 rates so that the net earnings will be maintained notwithstanding the 
 increased expense, then we shall not only see an end to economy in 
 the railway business but we shall open a wide door to all sorts of 
 extravagance and graft, the cost of which will fall on the public. — 
 From editorial in Engineering News, December 1, 1910. 
 
THE NEW LONG AND SHORT HAUL LAW.^ 
 
 The railways have until February 17, 1911, to decide what 
 they are going to do about the new long and short haul 
 section of the Interstate Commerce act. The power given to 
 the Interstate Commission by this section of the Mann-Elkins 
 act is second in importance among the powers given by it 
 only to that conferring on the commission authority to re- 
 strain advances in rates. There is a widespread impression 
 that under the new law the commission can and probably 
 will rigorously prohibit railways from making higher rates 
 for shorter than for longer hauls except in the most unusual 
 circumstances. It is desirable that this impression be cor- 
 rected. The order issued by the commission on October 19, 
 regarding the steps to be taken by the roads toward complying 
 with the amended long and short haul section, gives no defi- 
 nite indication as to the specific policy that the commission in- 
 tends to pursue in administering it, but it does seem to make 
 plain that the commission will not try to enforce this section 
 rigidly. For the commission to try to do so would be to dis- 
 regard the clear intention of Congress, for a bill to prohibit 
 railways from in any case charging more for a shorter than 
 for a longer haul was introduced at the last session and de- 
 feated. The main difference between the section finally 
 adopted and that in the original Interstate Commerce act is 
 that the original act made it "unlawful for any common carrier 
 ... to charge or receive any greater compensation in the 
 aggregate for the transportation of passengers or of like 
 kind of property, under substantially similar circumstances 
 and conditions, for a shorter than for a longer distance over 
 the same line"; while the amended act strikes out the words 
 under substantially similar circumstances and conditions, and 
 
 ^An article in the Railway Age Gazette t November 25, 1910. 
 
70 CURRENT RAILWAY PROBLEMS. 
 
 makes clearer the intention of Congress that before a railway- 
 may charge a higher rate for a shorter haul it must get the 
 express consent of the commission. Until February 17 the 
 roads may continue to make rates as they have heretofore. 
 After that they must not charge a higher rate for a shorter 
 haul unless they first get the explicit authorization of the 
 commission, or invalidate the law by litigation. 
 
 While negatively it is clear that Congress did not intend 
 the railways to be absolutely prohibited from charging a 
 higher rate for a shorter haul, it is not clear when Congress 
 meant that this might be permitted. There was a strong feel- 
 ing that the existing method of making rates was wrong; but 
 as to just what ought to be done to make it right the law- 
 makers did not feel entirely sure, so they turned the whole 
 job over to the commission. Under the old law some guid- 
 ance was given to the commission by the words "under sub- 
 stantially similar circumstances and conditions." They 
 plainly implied that where circumstances and conditions 
 were substantially dissimilar a higher rate for a shorter 
 haul might properly be charged. The fact that these words 
 were deliberately stricken out by the Mann-Elkins bill 
 shows that some substantially dissimilar circumstances and 
 conditions which the courts have held to justify non-observ- 
 ance of the long and short haul principle do not justify it in 
 the opinion of Congress. But under just what circumstances 
 the long and short haul principle may be disregarded seems 
 to be left by the act, if the fourth section be read alone, to be 
 determined entirely by the commission. 
 
 Most railway lawyers do not believe, however, that if the 
 question is ever litigated the courts will hold that the com- 
 mission has such unlimited discretion. They contend that 
 the railway has a property right in the beneficial use of its 
 property. This includes the right to make any rate which is 
 not unfairly discriminatory or unreasonable. They argue that 
 there are certain conditions in which the fixing of a higher 
 rate for a shorter haul is neither unreasonable nor unfairly 
 
LONG AND SHORT HAUL LAW. 71 
 
 discriminatory. It follows that the right of a railway under 
 such conditions to charge a higher rate for a shorter haul is a 
 property right which cannot be taken away. If it be answered 
 that the law does not absolutely take this right away, but gives 
 the commission discretion to determine when it may be exer- 
 cised, it is replied that this does not cure the defect in the 
 provision. The commission is an administrative body of dele- 
 ' gated powers. Congress cannot confer on such a body au- 
 thority without laying down the rule by which it is to be 
 guided in exercising it; and the new long and short haul sec- 
 tion gives no such guidance. 
 
 On this theory the law cannot be upheld as constitutional 
 unless it shall be read as a whole, and it shall be held that in 
 some other part of it Congress has laid down the rule which is 
 to guide the commission. It is contended that if the rule is 
 laid down anywhere it is the first section, which requires 
 rates to be reasonable for the service, and in the third 
 section which prohibits them from being unfairly dis- 
 criminatory. Under this interpretation a railway which 
 desires to disregard the long and short haul principle must 
 first apply to the commission. If the commission de- 
 nies its application the road may appeal to the courts on 
 the ground that the adjustment of rates it proposes to 
 make would not be unreasonable or unduly discriminatory. 
 And if the court finds that this contention is true, it 
 will nullify the commission's ruling just as in previous 
 years it nullified its orders when the courts differed from it 
 as to whether certain circumstances were dissimilar within 
 the intendment of the original Interstate Commerce act. 
 On this theory the new long and short haul section differs 
 from the corresponding part of the old law a great deal as 
 that part of the new law giving the commission jurisdiction of 
 rates in general differs from the one in the Hepburn act. 
 Under the Hepburn act the commission had no control over 
 the initiation of rates. It could act with reference to a raise 
 in rates only after the raise had been made. Under the new 
 
72 CURRENT RAILWAY PROBLEMS. 
 
 law it may restrain an advance until it has determined 
 whether it is reasonable. Similarly, under the old law a rail- 
 way might itself determine whether particular circumstances 
 and conditions were sufficiently dissimilar to justify departure 
 from the long and short haul principle and make rates ac- 
 cordingly, and the commission could not interfere with them 
 until they were in effect. Under the new law the railways are 
 prohibited from disregarding the long and short haul principle 
 without first having got the consent of the commission; the 
 railway cannot make an unreasonable or discriminatory ad- 
 justment and keep it in effect until some shipper complains 
 and gets it changed. 
 
 Some lawyers are inclined to think that the courts may 
 hold that Congress did give the commission complete discre- 
 tion to determine whether a higher rate may or may not be 
 made for a shorter haul, and that its action in doing so is 
 constitutional. The decisions of the Supreme Court of the 
 United States construing the long and short haul clause of the 
 original Interstate Commerce act do not throw much light 
 on the question; for practically all, if not all, turned on the 
 meaning of the words "substantially similar circumstances 
 and conditions," which are not now in the fourth section. But 
 in 1901 the Supreme Court rendered a decision which is re- 
 garded as having more or less of a bearing on the matter. 
 This was in the case of the Louisville & Nashville vs. Ken- 
 tucky (183 U. S. 503). 
 
 The constitution of Kentucky contained a provision identical 
 with the long and short haul clause of the original Interstate 
 Commerce act, and the Kentucky legislature passed a law 
 to give effect to it. The state railway commission, which was 
 created by the state constitution, prohibited the railways from 
 in any case disregarding the long and short haul principle 
 without its express consent. The Louisville & Nashville dis- 
 obeyed the commission's order and was prosecuted. It 
 contended that the Kentucky law was unconstitutional on 
 much the same grounds on which it is now contended that 
 
LONG AND SHORT HAUL LAW. 73 
 
 the new federal long and short haul law is unconstitutional. 
 The Supreme Court of the United States decided against the 
 railway. 
 
 There are several important points, however, in which this 
 case differed from any that could arise under the Interstate 
 Commerce act. The Kentucky commission was created by the 
 state constitution, while the Interstate Commerce Commission 
 exercises only powers delegated to it by Congress. The long 
 and short haul clause was in the Kentucky constitution, while 
 the federal long and short haul clause is merely an enactment 
 of Congress. The Kentucky law and the action of the com- 
 mission administering it had been upheld by the Kentucky 
 supreme court, and it is a familiar principle that the federal 
 courts will uphold the interpretation put by a state court on a 
 state law or constitution if this can be done without violating 
 some provision of the federal constitution. The Kentucky 
 constitution and the law passed to give effect to it laid down 
 a rule for the commission to follow, by indicating that the 
 long and short haul principle might be departed from where 
 conditions were substantially dissimilar, while the present 
 federal law does not lay down any such rule. It would seem 
 that the only question on which the Kentucky case might be 
 a precedent for a case arising under the existing federal law 
 would be whether a law or an order of a commission which 
 absolutely prohibits the charging of a higher rate for a shorter 
 haul deprives a railway of its right of property to make 
 reasonable rates. This question was directly raised in the 
 Kentucky case, and the federal Supreme Court said : 
 
 "Though it be conceded that ownership in a railway is 
 property, it is property of a kind that is subject to the regula- 
 tions prescribed by the state. We do not wish to be under- 
 stood as intimating that if, hereafter, the railroad commission 
 should fix and establish rates of a confiscatory character, the 
 company would be without the protection which courts of 
 equity have heretofore given in cases of that description. 
 What we now say is that a state corporation voluntarily 
 
74 CURRENT RAILWAY PROBLEMS. 
 
 formed cannot exempt itself from the control reserved to 
 itself by the state by its constitution, and that the plaintiff in 
 error, if not protected by a valid contract, cannot successfully 
 invoke^ the interposition of the federal courts, in respect to 
 the long and short haul clause in the state constitution, on the 
 ground, simply that the railroad is property." 183 U. S. 
 503, 513. 
 
 In other parts of its decision the court repeatedly indi- 
 cated that it based its decision "upon the proposition that 
 the company takes and holds its franchise and property sub- 
 ject to the conditions and limitations imposed by the state in 
 its constitution." Now, of course, the same thing could not 
 be said of any railway which contested the constitutionality 
 of the federal long and short haul law, because no road has 
 taken and holds its franchise and property subject to any such 
 federal constitutional conditions and limitations. 
 
 In view of all these circumstances it seems improbable that 
 the Kentucky case can be considered a precedent indicating 
 what the Supreme Court will decide regarding the consti- 
 tutionality of the new federal long and short haul clause. Of 
 course, if it is a precedent, it indicates that the court will 
 uphold the law. But A. P. Thom, general counsel of the 
 Southern Railway, undoubtedly expressed the consensus of 
 legal opinion when, at the hearing before the Interstate Com- 
 merce Commission on October 8, he contended that either the 
 amended fourth section must be construed merely to give the 
 commission the initiative to permit making of rates that 
 are not unreasonable or unfairly discriminatory, or it must 
 be held unconstitutional. 
 
 Probably, sooner or later the question of the constitution- 
 ality of the new long and short haul law will be fought out 
 in the courts. Meantime, the disposition of most railway 
 legal and traffic officers is to try to work out and agree with 
 the commission on some adjustment of rates which will make 
 possible the avoidance of litigation. Heretofore there have 
 been some violations of the long and short haul principle 
 
LONG AND SHORT HAUL LAW. 75 
 
 which cannot be defended on sound economic or ethical 
 grounds, and there have been others which are defensible on 
 these grounds but which seem so indefensible to the general 
 public that in the long run the roads might gain by eliminating 
 them from their tariffs. If, therefore, the commission does 
 not lay down rules which seem to the railway officers alto- 
 gether too drastic, there is ground to hope that some adjust- 
 ment which will be reasonably satisfactory will be reached 
 without litigation. 
 
 The cases where higher rates have been made for shorter 
 than for longer hauls present the most infinite variety. 
 The Supreme Court, in its opinion in the case of East Ten- 
 nessee, Virginia & Georgia et al. vs. Interstate Commerce 
 Commission (181 U. S. 1, 20), suggested a case where disre- 
 gard of the long and short haul principle would be plainly 
 unfair. 
 
 "Take a case," said the court, "where the carrier cannot 
 meet the competitive rate to a given point without transport- 
 ing the merchandise at less than the cost of transportation, 
 and therefore without bringing about a deficiency which would 
 have to be met by increased charges upon other business. 
 Clearly, in such a case, the engaging in such competitive 
 traffic would both bring about an unjust discrimination and a 
 disregard of the public interest, since a tendency towards 
 unreasonable rates on other business would arise from the 
 carriage of traffic at less than the cost of transportation to 
 the particular places." 
 
 As there are some examples of disregard of the long and 
 short haul principle that are plainly indefensible, so there are 
 many which are conclusively defensible. The best, of course, 
 are those where railways meet active and controlling water 
 competition at more distant points which they do not meet at 
 intermediate points. The commission, even in its early at- 
 tempts to administer the original Interstate Commerce act, 
 never held that where water competition was active and con- 
 trolling a lower rate might not be charged for a longer haul, 
 
76 CURRENT RAILWAY PROBLEMS. 
 
 although it did differ from the roads about whether they could 
 thus fix rates without its previous consent. The best exam- 
 ples of lower rates for longer hauls made to meet water 
 competition are found in the southeast and on the Pacific 
 coast. There has been nothing said or done to indicate 
 that the commission will refuse to let the roads make lower 
 rates from New York to San Francisco, for instance, or from 
 New York to New Orleans, than to intermediate points. The 
 law as it now stands not only gives the commission authority 
 to say whether a lower rate may be made for a shorter haul, 
 but also authorizes it "from time to time to prescribe the 
 extent to which such designated common carrier may he 
 relieved from the operation of this section." The theory on 
 which the railways have acted in the past has been that where 
 water competition was controlling they could make any dif- 
 ference between the water rates and the rates for the longer 
 and the shorter hauls that they liked so long as the rate for the 
 longer haul was not positively unremunerative and the rate 
 for the shorter haul was not excessive. It is evident, how- 
 ever, that the commission now has — whether it had before or 
 not — the authority to limit the amount of the discrimination 
 which may be made between the intermediate and the more 
 distant points. 
 
 Of course, the defense advanced for the distinction made 
 between the more distant and the intermediate points in cases 
 such as this is that the railways do not make the rates to the 
 more distant points. The water lines make them. They 
 must meet the rates fixed by the water lines or go out of 
 business at the more distant points. But because competition 
 forces them to accept a lower rate to the more distant point 
 than they otherwise would is no reason why they should be 
 prevented from charging a reasonable rate, even though a 
 higher one, to the intermediate point. They could not afford 
 to make rates as low in proportion on all of their lines as 
 they make to meet water competition. If they were required 
 to do this they would have in many cases to refrain from 
 
LONG AND SHORT HAUL LAW. 11 
 
 meeting water competition. The result would be that they 
 would lose any profit that they make by hauling traffic to the 
 more distant point, and, in order to earn a fair return, they 
 might have to raise their rates to the intermediate points; 
 in any event, the enforcement of a rigid long and short haul 
 rule would be of no benefit to many intermediate points. 
 
 One fact very commonly overlooked is that the railways 
 of the United States do not encounter water competition 
 from river and coastwise water lines alone. Ocean steam- 
 ships carry a large amount of grain from the Pacific coast 
 around Cape Horn to Europe. There are times on the return 
 trip when they can hardly get enough traffic for ballast. In 
 consequence, they make very low rates from Europe to the 
 Pacific coast on many bulky commodities. One of these is 
 cement, which they carry in large quantities from Belgium. 
 To meet this competition the railways make a very substan- 
 tially lower rate on cement shipped from Hannibal, Mo., and 
 Buffington, 111., to the Pacific coast than to intermediate 
 points. They could not make their present coast rates their 
 maxima. If they were required to do so they would simply 
 quit hauling cement to the coast and the Belgian producer 
 would get all the business. 
 
 A good example of lower rates for longer hauls made to 
 meet both rail and water competition that really covers the 
 entire earth is afforded by the rates on grain and its products. 
 Flour shipped from the United States to Liverpool meets 
 there the competition of wheat and flour hauled there by rail 
 and water from Canada, Russia and Argentine. It must be 
 laid down there at a freight rate which will enable it to be 
 sold at a profit. To enable the American producer to meet 
 the competition in the markets of the world the rate on flour 
 for export from Minneapolis to New York is made 21^ 
 cents, while the rate to interior points is higher — to Paterson, 
 N. J., for instance, it is 25 cents. 
 
 Still another example of the same kind is afforded by the 
 rates made by the Chicago, Milwaukee & St. Paul on cotton 
 
78 CURRENT RAILWAY PROBLEMS. 
 
 piece goods moving to the Orient. The rates from different 
 places vary, but, generally speaking, it may be said that the 
 rate from points in the Southeast to Spokane is $2.50; to the 
 Pacific coast, $L32, and that the proportion of the through 
 rate received by the St. Paul and its connections on cotton 
 piece goods moving from the Southeast to the Orient is 94 
 cents. The reason why the lower proportional rate is made 
 on goods moving to the Orient is that these goods may move 
 either westward through the United States and across the 
 Pacific ocean, or eastward over the Atlantic ocean and 
 through the Suez canal to the Orient. The other trans- 
 continental railways formerly made lower proportional rates 
 on goods moving to the Orient than to the coast, but when 
 they were required to publish the inland proportions of these 
 rates they raised them to the same basis as the Pacific coast 
 rates, rather than disclose to the public what revenue they 
 had been getting from Oriental business. The St. Paul has 
 been able to get a good deal of this business since it became 
 a transcontinental line. 
 
 On economic grounds the justification for making lower 
 rates for longer hauls when, as in these cases, it is absolutely 
 necessary in order to meet competition not only with coast- 
 wise steamships but with ocean steamships moving over all 
 the waters of the earth, seems complete. The German state 
 railways and other railways of Europe also make lower rates 
 on export than on domestic business. Nevertheless, the 
 course of the railways of the United States in thus making 
 rates has been the object of bitter criticism. It is an inter- 
 esting question to what extent some of the roads will con- 
 tinue to make rates in this way, even if they get the consent 
 of the commission — and if not its consent, that of the courts — 
 to do so. The western transcontinental lines are confronted 
 by the fact that in a few years the Panama canal will be 
 done and that then the coastwise steamships can make much 
 lower rates between the Atlantic and Pacific coasts than now. 
 Furthermore, it is doubtful if the bitter sentiment the exist- 
 
LONG AND SHORT HAUL LAW. 79 
 
 ing rate adjustment has excited against the roads can ever be 
 changed except by a change in the method of making rates. 
 The Interstate Commerce Commission in the various Pacific 
 coast rate cases has held that the rates of the railways to 
 intermediate points are unreasonable per se. Furthermore, 
 as the Panama canal soon will be finished, it seems to some 
 railway officers desirable that any discriminating done in 
 future should be in favor of the interior country, since the 
 railways will always get all of the traffic there, while they are 
 apt to have to fight harder and to make lower rates for the 
 coast traffic. In these circumstances, it seems worthy of con- 
 sideration whether the roads would not gain in the long run 
 by raising their rates to the coast to a basis where they would 
 be reasonable regardless of water competition. With rates 
 made on this basis they would be able to get some traffic 
 from the Eastern seaboard to the coast, for some traffic will 
 seek the railway rather than the waterway even though the 
 railway rate is much higher. On the other hand, there is no 
 doubt that if the railways raised their coast rates they would 
 lose a very large part of their traffic from the Eastern sea- 
 board to the coast. But some railway officers are a little in- 
 clined to think that what they would lose in this way would 
 be less than they will lose in the long run by continuing to 
 make extremely low rates to the coast, which may be invidi- 
 ously compared with their relatively higher rates to the 
 interior. 
 
 As is well known, the rates of the roads to the coast have 
 been blanketed from the Eastern seaboard back to the Mis- 
 souri river. In other words, lower rates have been made 
 from Chicago, for example, to the coast than to intermediate 
 points as well as from New York. This has been done to 
 enable manufacturers and jobbers in the Middle West to 
 compete with Eastern manufacturers and jobbers, for business 
 on the Pacific coast. In other words, it has been due to com- 
 mercial competition. The Interstate Commerce Commission 
 has pretty clearly indicated to the railway officers that the 
 
80 CURRENT RAILWAY PROBLEMS. 
 
 commission would not approve of the continuance of this 
 method of rate-making, and has intimated that Chicago 
 should be used as a dividing line and that, while from points 
 east of it rates may continue to be made lower to the coast 
 than to intermediate points, from Chicago and points west 
 of it the railways must desist from making lower rates to 
 the coast than to the interior. To draw the dividing line at 
 Chicago would be rather arbitrary. Starch now moves in 
 considerable quantities from Keokuk, Iowa, which is west of 
 Chicago, to the Atlantic and thence by boat to the Pacific 
 coast. South Bend, Ind., is only a short distance east of Chi- 
 cago, and yet when the transcontinental lines a short time 
 ago raised the rate on wagons from South Bend to the Pa- 
 cific coast from $L25 to $L35 they found this change was 
 sufficient to cause the traffic to begin to move to the Atlantic 
 and thence by boat to the Pacific coast. In consequence, they 
 restored the old rate. But, no doubt, the commission feels 
 that if a line is to be drawn at all it must be drawn arbitrarily, 
 and that Chicago is as good a place to draw it as anywhere. 
 If this is done the rates from Chicago to the coast will have 
 to be made the maxima to intermediate points. This would 
 make it necessary for the roads to reduce all of their rates 
 to intermediate points to the basis of their present coast 
 rates, for the commission has held that any higher rates to 
 Spokane from the East than those now made to the coast are 
 unreasonable. On the other hand, it would not prevent the 
 roads from raising their rates to the coast. If they reduced 
 their rates to the interior and at the same time raised their 
 rates to the coast they would suffer for some time a very 
 heavy reduction in revenue from both their interior and their 
 coast traffic, which would have to be made good — ^if it ever 
 were made good — by an increase in the traffic to the interior. 
 The difficulties which the southeastern lines would meet in 
 complying with a rigid long and short haul rule are perhaps 
 even greater than those which would be met by the trans- 
 continental lines. Not only are the southeastern states com- 
 
LONG AND SHORT HAUL LAW. 81 
 
 pletely bounded on the east and south by the Atlantic ocean 
 and the gulf of Mexico, but there are many navigable rivers 
 running from the ocean and the gulf into the interior. The 
 roads have been able heretofore to hold their own against 
 the waterways because they have been permitted to make 
 lower rates where they have met water competition than 
 where they have not. In its earlier decisions — for example, 
 in the case of Board of Trade of Troy, Ala., vs. Alabama 
 Midland — the commission held that water competition which 
 was merely potential did not justify disregard of the long and 
 short haul principle. If the commission should so rule now 
 and the courts should uphold it, the southeastern lines would 
 have to choose whether they would reduce all their inter- 
 mediate rates or raise their rates to the more distant points. 
 If they adopted the former alternative, their revenues from 
 their local business would be heavily reduced. If they 
 adopted the latter alternative they would at once attract water 
 competition. The water competition might then become 
 active and controlling, in which event, under the old ruling 
 of the commission, the roads would be justified in reducing 
 their longer haul rates once more. If by this reduction they 
 succeeded in destroying the water competition once more they 
 would be placed in a peculiar predicament, for the Mann- 
 Elkins act put into the Interstate Commerce act an entirely 
 new provision regarding water competition. This appears in 
 section four, and is as follows : 
 
 "Whenever a carrier by railroad shall in competition with 
 a water route or routes reduce the rates on the carriage of 
 any species of freight to or from competitive points, it shall 
 not be permitted to increase such rates unless after hearing 
 by the Interstate Commerce Commission it shall be found 
 that such proposed increase rests upon changed conditions 
 other than the elimination of water competition." 
 
 Now, the water competition having ceased to be active, it 
 would seem that under the rule laid down by the commission 
 in its earlier decisions the roads would have to quit making 
 
82 CURRENT RAILWAY PROBLEMS. 
 
 lower rates for the longer hauls. But they could not raise 
 rates which had been made to meet water competition with- 
 out proving that there had been some change in the condi- 
 tions besides the elimination of water competition. It would 
 seem that in that event if the commission stuck to its old 
 rule, and the law were not modified, the southeastern rail- 
 ways would have no alternative but to reduce all of their 
 intermediate rates. It will be recalled that the Supreme 
 Court in its decision construing the original Interstate Com- 
 merce act overruled the commission, and held that where 
 water competition actually had existed and would revive if 
 railway rates were raised there existed a dissimilarity of 
 circumstances and conditions which authorized the railway 
 to make a lower rate for the longer haul. In view of these 
 decisions of the courts and the changed personnel and greater 
 experience of the commission, it seems not improbable that 
 the commission may hold in construing the Mann-Elkins act 
 that where potential water competition exists it justifies a 
 lower rate for a longer haul, although it is easily conceivable 
 that it may rule now as it did originally. In that event there 
 would most certainly be litigation with the railways in the 
 southeast, as their traffic is still so light that they could not 
 stand very heavy reductions in their earnings. 
 
 In addition to effective and controlling water competition, 
 it has been generally recognized that where one of two rail- 
 ways running between competitive points has a substantially 
 /onger line than the other, it is justified in meeting the rates 
 made by the shorter line between the competitive points, 
 while charging higher r^tes to intermediate points. The de- 
 fense of the practice is the same in this case as where a rail- 
 way meets controlling water competition at one point which 
 it does not meet at another point. The only place, it is be- 
 lieved, where the long and short haul rule has been consist- 
 ently and rigidly enforced is in Iowa. The popular notion 
 is that where this is done all of the intermediate rates will 
 be reduced so that they will be no higher than the rate via 
 
LONG AND SHORT HAUL LAW. 83 
 
 the long line for the longest haul. This has not been the 
 result in Iowa. In that state the longer line between any 
 two points, in preference to decreasing its earnings by reduc- 
 ing its intermediate rates, has usually refrained from meeting 
 the rate of the shorter line to the competitive point. The 
 efifect has been to keep the longer line from getting any 
 profit that it might have derived from the competitive busi- 
 ness and to deprive the people at the points where there are 
 more than one road from getting any of the benefits of com- 
 petition. Who benefits and who is hurt by this policy depends 
 mainly on how much difference there is between the lengths 
 of the competing roads. In many cases a road which is 
 longer than a competing line between two points is shorter 
 than the same line between two other points, and what it loses 
 by not competing between the two former places it gains by 
 its competitor refraining from competing between the two 
 latter. But it seldom happens that the advantages and dis- 
 advantages of a road balance each other. There are some 
 roads which are the short lines between most competing 
 points and other roads which are the long lines between most 
 competing points. Obviously, in these circumstances, rigid 
 enforcement of the long and short haul rule will benefit the 
 former and the shippers living on them and injure the latter 
 and the shippers living on them, for the long line, being 
 unable in many cases to make rates to the competitive points, 
 must get its revenue mainly from its local traffic, which in- 
 volves the necessity of making high rates on this traffic. 
 Whether a long line will, where the long and short haul rule 
 is rigidly enforced, meet the rates of the short line at com- 
 petitive points and reduce its local rates, or will refrain from 
 meeting competition and keep up its local rates, depends 
 largely on the relative amounts of the local and the competi- 
 tive traffic. If the terminal points are large cities, such as 
 Kansas City and Chicago, or St. Paul and Chicago, it prob- 
 ably will prefer to stay in the competitive business and reduce 
 its local rates. On the other hand, where, as in Iowa, there 
 
84 CURRENT RAILWAY PROBLEMS. 
 
 is no very great difference between the sizes of the various 
 cities, the opposite policy is apt to be adopted. 
 
 While railways under the conditions existing in Iowa may 
 submit without a determined contest in the courts to the en- 
 forcement of a rigid long and short haul rule, because the 
 amount that they lose by it is relatively small, it seems incon- 
 ceivable that they would do so where the amount involved 
 was very large. For example, the Chicago & North Western 
 and the Harriman lines between Chicago and Spokane are 
 much longer than the Hill lines. For the former either to 
 make their rates to Spokane their maxima to intermediate 
 points or to quit meeting the competitive rates to Spokane 
 would involve loss of a large amount of revenue; and it is 
 not conceivable that in such circumstances railways would 
 submit to enforcement of the long and short haul rule with- 
 out a stubborn legal contest. It is worth noting in this con- 
 nection, also, that while, where the amount that a railway 
 will lose by applying the long and short haul rule is small, 
 the courts might not hold that enforcement of it was uncon- 
 stitutional, enforcement of it which would involve the loss 
 of a large amount of revenue might be held confiscatory of 
 the property of the longer line. 
 
 The main prerequisite to a satisfactory settlement of the 
 long and short haul question — as well as of all other impor- 
 tant railway questions — is that the public shall get the rail- 
 way's point of view, and the railways the public's point of 
 view. Persons without any special knowledge of railway 
 affairs who discuss violations of the long and short haul 
 principle usually talk as though they think the discriminations 
 railway managers make between communities are willful and 
 malicious. A little thinking would convince them this is not 
 true. The railway manager is equally interested in the devel- 
 opment of all the communities along his lines, and he nat- 
 urally would rather get the same or a higher rate for a longer 
 as for a shorter haul, simply because the longer haul costs 
 more, and because the practice of charging lower rates for 
 
LONG AND SHORT HAUL LAW. 85 
 
 longer hauls excites public discontent. It ought to be clear, 
 therefore, that when a lower rate is made for a longer haul 
 there must be conditions beyond the control of the traffic 
 manager which prompt, or even compel, him to do so, and 
 the public ought to study and understand these conditions 
 before in any given case it condemns this method of rate- 
 making. 
 
 On the other hand, it is daily becoming clearer that rail- 
 ways cannot be managed solely according to the principles 
 which their managers believe to be right. Railway managers 
 ought to do all that they can to educate public sentiment, so 
 that the public will be able to form a fair and intelligent 
 opinion of the effect on the public interest of the policies 
 followed by the roads. Where laws are passed which wan- 
 tonly attack the constitutional rights of the railways they are, 
 no doubt, justified in litigating them. But if satisfactory rela- 
 tions are ever to be established between the railways and the 
 public, the railway managements must recognize the fact that 
 some things which it would be right and desirable for them 
 to do if the public could be made to see that they are right 
 and desirable may become wrong from the railway and the 
 public standpoint when the public persistently and uncompro- 
 misingly condemns them. There are many discriminations 
 in rates which railway men believe operate to the public good 
 but which the public — often ignorantly — condemns. If the 
 public cannot be convinced that such discriminations are right, 
 it may be better to desist from making some of them, pro- 
 vided the railway can do so without reducing its profits below 
 a fair return. The result of antagonizing public sentiment in 
 regard to some matters of this kind is to provoke attacks on 
 the railways which may in the long run cause them and the 
 public more loss than the railways and the public would suffer 
 from the railways coihplyj;!^ with some 'qf> the public's unrea- 
 sonable demands. \/ '/'» i V » '»' * 
 
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