smimiifM^mif^^ ( f THE UNIVERSITY OF ILLINOIS LIBRARY ^i^i.7^r?}7(f^f*j(r7}^rjjsjF?^jr;iitji 'hi ::v;;a;r-:.";c':-i: Return this book on or before the Latest Date stamped below. A charge is made on all overdue books. University of Illinois Library L161— 1141 THE ANNALS OF THE AMERICAN ACADEMY OF POLITICAL AND SOCIAL SCIENCE ISSUED BI-MONTHLY VOL. XXVI, No. 3 NOVEMBER 1905 Editor: EMORY R. JOHNSON ASSOCIATE editors: SAMUEL McCUNE LINDSAY, JAMES T. YOUNG PHILADELPHIA American Academy of Political and Social Science 1905 Copyright 1905, by the American Academy o£ Political and Social Science All rights reserved ^ NATIONAL REGULATION OF RAILROADS By Hon. Martin A. Knapp, Chairman, Interstate Commerce Commission. If I may venture to say anything upon a subject which has nearly exhausted discussion it will be to emphasize one or two points which perhaps have not been sufficiently noted and to out- line certain considerations which I regard as fundamental. The agitation for a more efficient control of interstate carriers is the outgrowth of an insistent public sentiment and expresses a deter- mined purpose to correct existing abuses. Since the passage of the act to regulate commerce in 1887, which in many respects was un- derstood to be a tentative and ex])erimental measure, no important ^ change or enlargement of its provisions has been made, except the addition of the excellent Elkins law, although its limited scope and insufficient restraints have long been apparent. Meanwhile the rail- way mileage has increased upwards of 50 per cent., revenues have more than doubled, numerous lines formerly independent have been merged into great systems or otherwise brought under unified con- trol, and many other conditions have arisen which were not foreseen or taken into account when the original law was enacted. The time has arrived when this scheme of regulation should be carefully revised not only in its substantive features, but also to an extent in its methods of administration. This does not imply that the present law should be discarded and some new theory of regulation be given a trial. There is little reason to discredit the act of 1887 or warrant the effort to belittle its operation. It is a statute of broad and beneficent aim based upon principles which are concededly wholesome and correct. Indeed, when we remember that the enormous power of the Congress under the commerce clause of the Constitution had lain dormant for nearly a hundred years, when we call to mind the amazing rapidity of rail- way construction during the two speculative decades that followed the Civil War, when we take into account the conditions which had grown up with that extraordinary development and realize that practices which are now regarded with reprobation were then looked [613] 241752 3 The Annals of the American Academy upon with tolerance and found little condemnation in the average conscience, it is quite remarkable that a law should have been passed which expresses such just rules of conduct and which contains such comprehensive and salutary provisions. It is the part of wisdom, as I believe, not to attempt any radical departure from the principles and purposes of this enactment, but to supply needed legislation for correcting its defects, strengthening its provisions and aug- menting its authority. The Basis of Regulation. In the statements before the Senate Committee and in current discussions in the press and elsewhere there is, as it appears to me, some confusion of thought and a degree of failure to make proper distinctions. In many quarters it seems to be supposed that the one thing requisite is to increase the powers of the Interstate Com- merce Commission ; whether that shall be done or not is the chief point of controversy. To my mind that is only one side, and per- haps not the most important side, of this complex and obstinate problem. Without disagreeing at all with those who advocate an enlargement of the commission's authority, for I am in full sym- pathy with their purposes, it is entirely clear to me that other mat- ters are of equal if not greater consequence. There is much to be considered and decided before we come to the qviestion of admin- istrative power, which is merely the machinery for giving effect to measures of regulation. We must begin by prescribing in the statute law, with as much precision and certainty as the case admits, the rules of conduct which it is the province of administration to apply and enforce. The substantive law must first be made ample and explicit, clear and comprehensive in its definition of legal duty and as exact as may be in its restraints and requirements. The obli- gations of the railroads to the public, the restrictions which limit their freedom or abridge their privileges, the standards by which the lawfulness of their conduct is to be gauged, must all be found in the regulating statute as the necessary foundation of adminis- trative action. It is one thing to enact a code of laws to be ob- served by the carrying corporations, it is quite another thing to pro- vide the means for securing conformity to that code and giving effect to its requirements. If the substantive provisions of the [614] National Regtdation of Railroads 3 statute are inadequate or defective, if its standards of obligation and duty are insufficient or inexact, the shortcoming cannot be made good by administrative machinery, however elaborate or carefully constructed. This is the point to which I specially desire to direct attention, because just here is found the explanation, for the most part, of whatever disappointment or failure has attended the effort to give effective operation to the act of 1887. The refusal of the courts to enforce disregarded orders of the commission has shown in practically every instance not that the facts had been incorrectly or unfairly found and reported, but that the ascertained and admitted facts, whatever injustice or wrongdoing they might appear to es- tablish, did not disclose any violation of legal duty. The courts have not affirmed that certain practices condemned by the commis- sion were right and just, and ought to be permitted to continue, they have merely declared that those practices are not imlazvful. So far from furnishing grounds for questioning the fitness or fair- ness of the commission, which really is quite beside the mark, these very decisions by exposing defects in the substantive provisions of the statute si:pply a persuasive argument in favor of its amendment. Had the present law established a different tribunal or relied upon the federal courts to make it effective, the practical result would have been precisely the same. The distinction here sought to be emphasized is made apparent, at least to my mind, when we take our observation from the correct point of view. Under the commerce clause of the Constitution all legislative power over interstate carriers is vested in the Congress. That power, as was decided by the Supreme Court so far back as 1825, is plenary and 'exclusive and subject to no limitations except such as are found in the Constitution itself. But the Congress cannot delegate its regulating authority by general or wholesale enactment; to do so would be little more than the declaration of a sentiment. It may legislate as minutely as it chooses ; for any prac- tical purpose it must legislate not only on general lines but as specifically as the nature of the case permits as to each and every matter which is made the subject of regulation. It cannot transfer its authority to an administrative body of its own creation, or even to the federal courts, to be exercised at discretion, except within limits and probably within somewhat narrow limits. In that which [615] 4 The Annals of the American Academy is enacted must be found alike tlie things required and the things forbidden. If the statute itself does not impose a duty or restraint in respect of a particular matter, there can be as to that matter no basis for adjudging that the act complained of is unlawful. In this connection it should be remembered that the common law obliga- tions of interstate carriers, if there be any, are of little value as restraints upon wrongdoing. The misconduct which injures and the practices which work injustice are not malum per se, and there- fore they can be corrected only by legislative enactment. That is to say, "regulation" in all important and essential respects must be regulation by the Congress. The written law must go to the full extent of prescribing requirements, imposing restraints and fixing limitations, not only in general terms but as specifically as the nature of the particular subject admits; and if the statute is wanting in this regard, if its standards of duty and liability are not ample and plainly defined, the injustice not reached or forbidden because of that defect will go without correction. In a word, the substantial features of any adequate scheme of public control must be incor- porated and defined in the provisions of an act of Congress. That which the statute law does not specifically condemn and definitely enjoin, the carrier is legally free to do or omit. The importance of what has thus been said will perhaps be bet- ter understood by pointing out its practical applicaton. The task in hand is to devise a system of regulating laws which, while pre- serving the benefits of private ownership, shall furnish sufficient control over railway carriers to ensure transportation charges which are reasonable and relatively just. Whatever difference of opinion there may be as to whether rates in general are higher now than they ought to be, or are liable to be excessive in the future if public authority does not amply prevent, there is a unanimous demand that rebates and every sort of private preference shall be done away with, and that rate adjustments as between different localities and articles of traffic shall be free from any unjust discrimination. Now, to secure the results which all right-minded persons desire in this regard, it is evident that the regulating laws must at the out- set require the publication of rates and charges and thereby provide, at least prima facie and for the time being, a legal standard of com- pensation for the service offered. In short, we must begin with pro- viding an open and common rate readily ascertainable by the pub- [6 1 6] National Regulation of Railroads 5 lie which measures while it remains in force the lawful charges of the carrier. Obviously, then, so long as observance of the standard rate is obligatory, whether it be established by the carrier's voluntary action, as is now the case, or prescribed in the first instance by public authority, the next problems of regulation are of two dis- tinct and unlike classes. Stated in another way, there are two gen- eral but dissimilar things to be accomplished, each involving its pecu- liar difficulties. It is at once necessary to devise measures for ensuring conformity to the common standard and also to provide means by which the standard itself may be changed or its reason- ableness tested. There is a fundamental difference between deal- ing with a rebate or secret concession of any kind and correcting an established and observed rate which is found to be excessive or relatively unjust. Yet adequate provision must be made for both these things in the statute law, independent of its administra- tion, or the regulating scheme will be incomplete and disappointing. Unless both results are actually secured by substantive enactment, unless favoritism of every sort is prevented on the one hand, and on the other there are efficient means of altering an unreasonable or unjust rate which all shippers are compelled to pay, the public will lack needful protection and the duty of the carrier be incapable of enforcement. It requires little reflection to perceive that the only efficient mode of dealing with the entire range of offenses which result from departures from the published rate is to place them in the category of criminal misdemeanors. Civil remedies for such wrongdoing are of insignificant value, for they neither afford redress to those who are injured by secret practices nor do they operate with any force to prevent the recurrence of similar misconduct. On the other hand, the appropriate means for bringing about the reduction of an unrea- sonable rate or a change in unjust rate relations preclude the use of criminal penalties. Within the limits of an honest difference of judgment — the limits of actual controversy — the rates established by the carrier and charged to all alike cannot in reason be made the basis of criminal liability, although they may afterwards be adjudged in some degree excessive or unfairly related. For one purpose, therefore, the suitable legislation will differ in essential character from that adapted to the other. To reach one class of offenses we must have penal statutes and criminal courts, to reach the other [617] 6 The Annals of the American Academy class we must have standards of obligation applied and enforced by a civil tribunal. The failure to observe this primary distinction in general and in particular will leave the regulating enactment, how- ever carefully devised and developed, more or less faulty and un- workable. Nor is it enough to recognize these unlike and diverse aims in framing the statute law ; it is equally needful that each requirement be met with substantive provisions of comprehensive scope and adequate detail. Let me illustrate with examples drawn from the act of 1887. And first, a defect in its penal provisions through failure to define, as to a distinct class of dishonest transactions, an offense that could he proved. It was undoubtedly intended to provide that a shipper who accepted a rebate should be guilty of a misdemeanor. That certainly ought to be the law. But the courts held, in construing the language of the second section, that it was not enough to show the payment of less than the tariff rate on a given shipment, but that in addition there must be shown the payment of a higher rate by another shipper for a like and contemporaneous service. That is, it was necessary to prove discrimination in fact as between the accused and some other shipper before there could be a conviction. As a practical matter this was ordinarily out of the question. For instance, it appeared that dressed beef was carried for a long time and in large quantities from the Missouri River to Chicago at materially less than tariff rates, but it also appeared that the same rate was allowed to all the packers. Although the concessions, or rebates, amounted to thousands and thousands of dollars, there was no actual discrimination as between different shippers, so far as could be ascertained, and therefore in a legal sense no criminal wrongdoing by any of them ! Fortunately this loophole through which shippers escaped for years was stopped effectually, as is believed, by the Elkins law which makes the published tariff the legal standard and departure from that standard the punishable offense. But the point to be observed is that gross misconduct could be indulged in with impunity not because of any administra- tive shortcoming, but solely because the substantive law contained a provoking defect. To illustrate the other and distinct phase of the subject, refer- ence may be made to the long and short haul question. The charging of a higher rate to a nearer than to a more remote point, [618] National Regulation of Railroads 7 though perhaps not the most serious, is undoubtedly the most aggra- vating form of discrimination. So obnoxious were tariff adjust- ments of this sort, so flagrantly wrong in many cases, that the Congress plainly intended to provide a specific remedy in the fourth section of the act to regulate commerce. The greater charge for the lesser distance was therefore prohibited "under substantially similar circumstances and conditions," and a long course of litiga- tion followed over the legal meaning of the quoted phrase. With- out reciting the cases in which this question arose, it is sufficient to say, taking the decisions together, that dissimilarity exists where competition, not merely of carriers but of markets as well, is pres- ent at the more distant place and absent or less forceful at the intermediate place, and that where dissimilarity is found the prohibi- tion does not apply. Now, as a matter of fact, the higher charge for the shorter haul is rarely if ever exacted except on account of some competitive condition at the more distant point not existing at nearer places. It follows, therefore, that the exception to the rule covers practically all the actual cases and leaves the rule itself with little or nothing to act upon. A provision designed to have potent and remedial effect has been construed into a mere abstraction. I do not criticise the decisions of the courts upon this section. As a matter of statutory construction they were doubtless right. Nor is it to my present purpose to argue that the section should be amended and some practical limitation placed upon rate adjustments of this kind. That is for the Congress to determine. But I call attention to the fact that discrimination, however unjust, caused by lower charges for a longer distance — the shorter distance charges being reasonable per se — is not now unlawful, and that there must be a substantive change in the statute before there can be any administrative control or restraint upon this class of discriminations. It is primarily the subject of enacted regulation quite apart from the status or authority of the tribunal of administration. Another example relates to a matter of undoubted importance. The present law in no way abridges the freedom of carriers to determine for themselves in the first instance the rates they shall charge, except the general requirement that such rates shall be reasonable and non-discriminatory, and there is no serious pro- posal to withdraw or limit their right to initiate such schedules as they may deem proper to establish. It is assumed that carriers will [619] 8 The Annals of the American Academy continue to exercise their own judgment, as they do now, in de- ciding originally what rates they will publish and apply. This being so, it is apparent that some prescribed notice must be required of proposed changes in published tariffs. If there were no limitations upon the right of carriers to advance or reduce the rates which they have initiated, they could obviously make changes at pleasure which would be little better than not to publish rates at all. The sixth section of the act allows advances to be made on ten days' notice and reductions on three days' notice. This is the only requirement which goes to the stability of rates, a matter which deserves more attention than it sometimes receives. Plainly enough it is now feasi- ble for a traffic manager to make an agreement or have an under- standing with a given shipper, in consideration of tonnage secured, to publish a reduced rate at a certain date which may be done easily by giving a notice of three days. The tonnage in question having been obtained at this reduced rate, the carrier may at once give ten days' notice of advance to the previous figure and restore the old rate when that time has expired. The result is equivalent to a secret rebate paid to the shipper of the difference between the two rates. Neither court nor commission can now prevent a transaction of the kind suggested because the method employed is under statu- tory sanction. In a word, such a discrimination is not unlawful, and therefore cannot be reached or corrected so long as tariffs may be legally changed upon the short notice above stated. Believing that stability of rates is a matter of primary public concern and ought to be secured to a much greater degree than is now^ the case, I am strongly of the opinion that the required notice of tariff changes should be considerably extended. But my point now is that this is a regulation which pertains to the substantive law^ and that any injustice which results from authorized changes on such short notice cannot be corrected by strengthening the administrative ma- chinery. Again, the existing law permits connecting carriers to form through routes and establish joint through rates, which are usually much less than the sum of their local rates, but this they now do by voluntary action and not by virtue of any legal requirement. They are free to make such arrangements and to discontinue them as and when they see fit. The failure or refusal of connecting roads to form through routes and provide through rates sometimes inflicts [620] National Regulation of Railroads 9 manifest hardship, and the fact that such rates cannot be compelled is claimed to discourage the construction of local and branch lines. Inasmuch as mutual service of this sort rests in the option of the carriers, it is not infrequently the case that shippers are obliged to pay full local rates over two or more roads because their managers cannot or do not agree upon lower through rates and their division. It follows that if needful joint service at proper rates is to be se- cured in such cases, it must be made obligatory in the substantive regulation. Another instance of what I have in mind suggests a matter of great economic significance, and that is the relation of domestic to export and especially to import rates. It often happens now that traffic is carried from its origin in a foreign country to an interior destination in the United States at a total through rate very much less than the domestic rate from the same port of entry to the same destination. In a commercial sense of course the foreign article is carried under unlike circumstances and conditions ; and this has been held by the Supreme Court to justify or permit import rates lower than domestic rates. Incidentally it may be noticed that the practical result of this ruling is at variance with our tariff policy and that in particular instances the difference in favor of the im- ported article may defeat the purpose of protective duties. However that may be, the act as construed in this regard, like the construc- tion of the long and short haul clause, contains no practical restraint upon discriminations of this class, and this defect in the substantive law, if it be deemed a defect, cannot be obviated by changes in administrative methods or authority. The same observations may be made in respect of many other matters which now give rise to well-founded complaints of dis- crimination, such as private car lines, terminal roads, elevators and the like. Some of these matters, at least under given circumstances, may be within the scope of the present law. Others are not em- braced within its terms or are claimed by the carriers to be unaffected by its provisions. Until this claim has been passed upon by the court of last resort, which means protracted litigation, the discrim- inating effect of facilities and practices now unregulated must be suffered to continue. If some requirement or prohibition suited to the nature of the case is not embodied in the regulating statute the exempt transaction, however unjust or injurious, will remain a law- [621] lo The Annals of the American Academy ful exercise of the carrier's volition and so beyond the jurisdiction of courts or commissions. Only that which the statute enjoins can be required ; only that which it makes unlawful can be prevented. Thus it appears, if I am not mistaken, that in some important respects the foundation of the act of 1887 is badly constructed or incomplete to a degree not always appreciated. The partial failure of that act to accomplish its beneficent purpose arises mainly, as I conceive, not because the administration of the law has been lax or incompetent, nor altogether because judicial declaration has de- prived the commission of authority over rates which it was origi- nally supposed to possess, but because the substantive provisions of the statute do not provide the necessary groundwork for more suc- cessful effort. While I firmly believe that the powers of the com- mission should be enlarged, I also believe that it is even more essen- tial to extend and recast the enacted rules of conduct and thereby provide the basis of eft'ective control. It is for the Congress by its regulation to further enjoin, require, limit, restrict or forbid as may be needful or appropriate, and this is a matter which properly pre- cedes the question of administration. Tribunals of Regulation. After the rules of conduct and standards of obligation to be observed by carriers have been determined and defined in the regu- lating statute, according as the Congress may determine, we come to the question of the agency and methods of administration. It is not now the extent or degree of authority to be exercised, but the kind of tribunal to perform the administrative duty. Shall the enforcement of the law be remitted to the federal courts or shall there be a commission to exercise legislative rather than judicial authority? In answering this question we must keep in mind the unlike and separable things to be accomplished by our scheme of regulation. As already stated, the only suitable means of securing the observance of published tariffs are criminal penalties for dis- regard or evasion, while the appropriate methods for bringing about such changes in those rates as justice may require are limited to civil proceedings. It is assumed that this distinction will be ob- served in framing the legislation and in every effort to give effect to its provisions. [622] National Regulation of Railroads II Manifestly the criminal remedy can be applied only by the courts. In this respect there is no difference between a misdemeanor under the regulating statute and a misdemeanor under any other law. Both must be dealt with in the same way, and this implies in the one case as in the other a strictly judicial procedure. Therefore, all those provisions which are designed to prevent the payment of rebates and kindred practices, of whatever character or description, must be enforced by courts of proper jurisdiction, and can be enforced in no other way. But when we consider the other field of administration, where authority is to be exercised not to secure conformity to the published standard of charges, but to change the standard itself when found unreasonable or relatively unjust, it seems plain to me that a judicial tribunal is neither suitable nor adequate. The fundamental objec- tion to any proposal to devolve upon the courts the duty of regu- lating in this direction, that is, making required changes in tariff schedules, is that the questions involved are essentially legislative and not judicial. The thing to be done is not the appropriate sub- ject of judicial determination. The courts cannot apply the requisite remedy. If the charge for a given service is fifty cents a hundred pounds and that charge is excessive, the needful change is the substitution of a lower charge for the future. This is distinctly a legislative function. The same may be said with equal certainty with reference to relative rates which discriminate between differ- ent localities or articles of traffic. The proper readjustment in such cases involves considerations which courts do not take into account, but which come within the broader range of legislative discretion. That the courts will not exercise jurisdiction to prescribe either absolute or relative rates appears to be plainly affirmed by the Su- preme Court in the Reagan case, 154 U. S., 362, in the following language : "The courts are not authorized to revise or cliange tlie body of rates unposed by a legislature or commission; they do not determine whether one rate is preferable to another, or what under all circumstances would be fair and reasonable as between the carriers and the shippers ; they do not engage in any mere administrative work." This distinction is tersely stated by Mr. Justice Brewer in the maximum rate case in these words : [623] 12 The Annals of the American Academy "It is one thing to inquire whether the rates which have been charged and collected are reasonable — that is a judicial act; but an entirely different thing to prescribe rates which shall be charged in the future — that is a legis- lative act." Undoubtedly the courts can and will under statutory authority, and to an important extent without it, exercise such jurisdiction as will indirectly affect rates for the future, but they cannot and will not undertake to prescribe the schedule which shall take the place of one found excessive or unfairly adjusted. They can prevent the administrative encroachment of constitutional rights, but they can- not be authorized to correct the injustice of an unreasonable or preferential rate by substituting a just and reasonable standard of charges. At best and at most the control of rates by judicial action is an indirect, uncertain and limited scheme of regulation. If that plan is adopted it is quite certain that we must enter upon a long litigation to find out how much the courts can do, how much they will do and how they will do it. Broadly speaking, the judicial machinery is provided to punish those who violate criminal laws and to decide private as distin- guished from public controversies. A tariff rate which is too high or which unduly discriminates does not constitute an individual grievance merely, but affects every person who may be required to pav that rate for a transportation service. The continuance of an unjust rate or its correction is a matter of public concern, and matters of public concern, apart from the enforcement of criminal laws, are ordinarily the appropriate subject not of judicial but of legislative determination. The notion may be far-fetched and will doubtless be combatted, but I am disposed to regard a tariff rate which has been legally established as analogous to a civil law. It answers to the broad definition of such a law because it is in effect a rule of conduct which measures the obligation of shipper and carrier alike. As a practical matter so far as the public is concerned, it does not seem to me to very much matter whether a given rate is established by the voluntary action of the carrier, by the exercise of public authority in the first instance, or by direct legislation. In either case it fixes with substantially the force of an enactment the price at which pub- lic carriage can be obtained. If that rate is departed from by any sort of forbidden preference or concession, a condition exists which [624] National Regulation of Railroads 13 seems to me exactly like the violation of a criminal statute, as is now the case, and courts are constituted to prevent and punish such transgressions. But if the rate is itself wrong, no matter how it came to be in force, if its application produces actual or relative injustice, a condition exists which is altogether similar to an unwise or oppressive act of legislation that ought to be amended or repealed. If rates were established, as they might be, by direct legislation, it would be manifestly absurd, assuming they were not confiscatory, to provide for their alteration by resort to the courts. The appeal in such case would be to the legislature as the only source of relief. Likewise, if rates were fixed in the first instance by public authority, as is done in several states, the courts could not interfere except to protect constitutional rights. It seems plain to me that in such cases there could be ordinarily no question for judicial cognizance. Now, how does the way in which a given rate was originally im- posed affect the nature of the appropriate tribunal of regulation? If rates fixed in the first instance by the legislature or by a com- mission with delegated powers could not be the subject of judicial inquiry, why is it that rates established by the carriers themselves should be subjected only to judicial investigation and control? In a certain sense and for certain purposes the reasonableness of a transportation charge presents a judicial question. Such a question arises when a rate has been paid which is claimed to be unreasonable and suit is brought to recover the excess. But a rate may be claimed to be excessive from the standpoint of the public, without regard to any instance of individual hardship, and that rate presents a legislative question. It does not follow, therefore, even if rate control goes no further than to require the discon- tinuance of unreasonable charges without undertaking to prescribe for the future, that a legislative tribunal is not the proper one to determine the controversy. The circumstance that courts may in some cases and to some extent consider and decide such questions is not at all inconsistent with the idea that they are essentially legislative. The view I take and the distinction I draw may be indicated by an example. The present grain rate from Chicago to New York, established by the carriers, is 17^ cents per hundred pounds. Now, I do not believe it would be possible by competent evidence in a judicial proceeding to prove that this rate is unreasonable. On the [625] 14 The Annals of the American Academy other hand, if pubHc authority should fix that rate at 15 cents — the rate recently in force — either by direct legislation or through a com- mission, I do not believe it possible for the carriers to prove by competent evidence that 15 cents would be confiscatory or in any way encroach upon their constitutional rights. Between these two rates there is a margin of two and a half cents which may be said to measure the sphere of legislative discretion. The courts might decide in a case within 'their jurisdiction that a given rate is not unreasonably high, but it does not follow that a lower rate on the same article imposed by public authority would be adjudged unrea- sonably low and therefore be restrained. In other words, a rate which the courts would not condemn in a suit to recover damages nor enjoin as the result of judicial inquiry, if that could be done, may be a higher rate in given circumstances than the public ought to be required to pay, just as a rate imposed upon the carrier which the courts would not condemn as confiscatory or for any other reason may be lower than the carrier should be permitted to charge. It is both true and right that courts, generally speaking, decide the cases that come before them upon the legal evidence submitted and in accordance with settled principles of jurisprudence, and do not, as a rule, directly, if at all, take into account the economic con- sequence of their decisions. On the other hand, the legislature in determining whether existing rules of conduct shall be changed or new rules adopted is not controlled by evidence or by judicial pre- cedent, but acts presumably upon the broadest considerations of public welfare. It is not too much to say that every controversy involving the adjustment of freight rates presents an economic problem whose solution should be determined with the view of promoting the largest public advantage consistent with the just rights of the carrier. The courts decide questions of legal right; legislatures consider, when their action is governed by intelligence, the probable effect of their enactments upon all the interests likely to be affected. These comments have reference to the distinct nature of the judicial function as distinguished from the legislative func- tion. It is further to be observed that a scheme of rate regulation by the courts would doubtless be held unconstitutional, as numerous decisions affirm and as pointed out in the lucid opinion furnished by Attorney-General Moody to the Senate Committee. Therefore, from whatever point of view this matter is observed, it seems plain [626] National Regulation of Railroads 15 to me that the questions here referred to are distinctly legislative questions and that the proper tribunal of regulation, whether its authority be greater or less, is legislative and not judicial. Administratiz'e Authority. Having provided the needful code of substantive law and decided that it shall be administered by a commission and not by a court, so far as the regulation of rates is concerned, the next thing to determine is the measure of authority which the administrative body shall be permitted or required to exercise. Under the present law, as it has been interpreted, the commission cannot in any case determine what rate shall be observed in the future. It can only decide whether the charges fixed by the carriers conform to the standard of reasonableness and relative justice, and if found other- wise, direct their discontinuance. Whether the law shall be so amended as to authorize the commission, after investigating a com- plaint upon notice and opportunity to be heard, to prescribe the future rate in that case, if the complaint is well founded, is the stoutly controverted ciuestion. I do not undertake to discuss this question for I can add nothing to what has already been said. Be- sides, the purpose of this paper is to outline certain principles of regulation rather than to argue for an increase of official authority. I am firmly convinced that the agency entrusted with the enforce- ment of such rules of conduct as may be enacted in relation to rates should be a commission and not a court, whether the authority devolved upon the regulating tribunal be limited to the present or extend into the future. I realize that the power to decide, even in contested cases and subject to judicial review- — which is all that is proposed and even more — what rates shall be charged in the future is a very important power and involves grave responsibihty. Per- sonally, as a member of the commission, I do not covet the exercise of that power and should welcome some other adequate solution of the question at issue ; but how can any other plan be relied upon to provide proper and sufficient control over railroad rates and prac- tices? The argument for denying such control virtually admits, as it seems to me, that the freedom of the carriers to make such obtain- able rates as they may deem for their interest is not to be materially abridged. However far-reaching may be the proposal to invest a [627] i6 The Annals of the American Academy commission in any case with actual authority over future rates, is not the denial of that authority, to be exercised by a legislative tribunal, a far more serious proposition? Effect of Administrative Action. One further observation. If an administrative tribunal rather than a court is the selected agency for enforcing the enacted rules of conduct in respect of rates, whatever be the extent or degree of its authority, the orders which it is empowered to make should be self-enforceable and not as now only prima facie findings for the purpose of legal proceedings. It is not sufficient or suitable that the administrative body charged with the duty of giving effect to the regulating statute, and exercising such authority as the Congress may confer, should be obliged, when its directions are disregarded, to become a suitor in the courts to enforce its own determinations. When the commission has investigated and decided, when it has promulgated such an order as it may be authorized to make, its duty in the premises should be fully discharged and ended. Sub- ject to such judicial review as will protect against the abuse or unreasonable exercise of delegated authority, the lawful directions of the regulating tribunal, unless restrained or set aside by the courts, should take effect and be obligatory substantially the same as legislative enactments. Whether it be deemed sufficient to provide only for condemnation and orders of desistence, or whether in addi- tion authority be bestowed to prescribe for the future, however much or little the power with which administration is invested, the legislation should be so framed as to compel the carrier to comply with an authorized requirement or to resort to the courts for its suspension or annulment. Therefore, as I conceive, the problem of enacting or amending laws for the regulation of interstate carriers includes the four ele- ments which I have thus briefly described. To my mind they are quite distinct and separable as I have endeavored to explain. Each presents its peculiar phases and furnishes its special field of con- troversy. The task of legislating upon this subject is difficult and the need urgent. It cannot be doubted that a correct analysis and clear apprehension of the principles involved will aid a wise and useful outcome. LIMITATIONS UPON NATIONAL REGULATION OF RAILROADS By O. E. Butterfield, Attorney for the Michigan Central Railroad, Detroit, Mich. This paper is written from the point of view of those who are engaged in the management of the railroad business. For con- venience of treatment, the subject is divided into three parts: i. The Extent of the Federal Power over Railroads. 2. Limitations by Economic Laws. 3. Limitations by Common Law. 1. The Extent of the Federal Pozver over Railroads. The federal power over railroads is confined to their operations in respect to commerce with foreign nations, among the several states and with the Indian tribes. The courts have held that when an article of commerce begins to move from a point in one state to an ultimate destination in another state, or even to a destination in the same state, if it is to pass into another state in transit, inter- state commerce with respect to that article begins. But there is still a very considerable movement of freight and passengers upon the railroads of this country which is confined within the limits of a single state and is entirely beyond the power of Congress to regu- late. Most of the equipment of nearly every railroad, however, is used from time to time in the movement of interstate commerce, and national regulations respecting safety appliances therefore include practically all the railroad equipment in the country. Over that portion of the business of the railroads included in the term "interstate commerce," the power of Congress is absolutely exclusive whether actually exercised or not. Even in the absence of any enactment by the federal government the states are powerless to [629] 1 8 The Annals of the American Academy enact laws which would amount to a regulation of interstate com- merce. The Supreme Court of the United States has said that the non- exercise by Congress of this power in respect to the regulation of commerce among the states is equivalent to a declaration that such commerce shall be free from any restrictions or impositions. The power to regulate has been held also to include power 'to prohibit commerce among the several states in cases where commerce affects injuriously the public welfare, as in the case of the sale of lottery tickets. Aside from provisions for the general welfare of the public and the employees of the railroad companies found in the requirements respecting the instrumentalities of commerce, the federal regula- tion is most influential upon the rates which may be charged for the transportation service. Congress, undoubtedly, has power to pre- scribe reasonable rates for such transportation, either maximum, minimum or absolute. The magnitude of the problem as it is pre- sented in this country and the manifest difficulty of dealing with it in a deliberative body so large as the Congress have naturally sug- gested the assignment of the labor to a commission ; but the pro- vision of the Constitution is that Congress shall have power to regu- late. The fixing of rates is a legislative function and it is a well settled rule of law that Congress may not delegate its legislative functions to any subordinate board or body. The question arises whether Congress may delegate to a commission the power to pre- scribe transportation rates, — whether an act purporting to confer such power upon a commission would not be void as being an at- tempted delegation of a legislative function entrusted by the Con- stitution to the Congress. The authorities agree that Congress may prescribe certain rules which shall be applicable to certain conditions and entrust to some executive officer or administrative board the determination of the question whether those conditions are present in a given case. Con- gress, for example, may authorize the President to suspend, by proclamation, the free introduction of certain commodities from a country which does not afford reciprocal treatment to our products, leaving to him the determination of the question of fact, whether the treatment accorded by such country is in fact reciprocal. Such an act was held not to be a delegation of legislative power and there- [630] Limitations Upon National Regulation of Railroads 19 fore not unconstitutional. (Field vs. Clark, 143 U. S., 649.) Or, Congress may leave to a board of inspectors the determination of the question whether teas presented for import are of inferior grade within the meaning of the act. (Buttfield vs. Stranahan, 192 U. S., 470.) But, if the act purports to transfer to a subordinate board or body any function which is properly legislative in its nature, whether its exercise be limited or unlimited, it should be held to be void. It would not be permissible for Congress to confer upon a com- mission the power to fix transportation rates for the future, sub- ject only to the limitation that such rates should be ''reasonable." Such an act should be held void as a delegation of legislative power. It would be permissible for Congress to pass an act declaring that transportation rates should be reasonable, and conferring upon a commission, subject to a judicial review, the power to determine a maximum rate, any increase of which would be extortion, and a minimum rate, any decrease of which would be considered confisca- tion. But between these two extremes. Congress alone has the power to exercise the federal authority to prescribe. The term "reasonable" as used in the law on the subject of rates for quasi public service is intended to define rates which are not so high, when considered from the point of view of the public with reference to the value of the service rendered, as to amount to ex- tortion, and on the other hand are not so low, when consideped from the point of view of the carrier with reference to the return upon the investment, as to amount to a taking of property without due process of law or confiscation. Between these two extremes, there may be, and usually is, a considerable latitude within which rates may be raised or lowered and still be reasonable. If Congress de- clares that the rates shall be reasonable, it simply declares that they shall not be so high as to amount to extortion, nor so low as to amount to confiscation, and it would be competent to commit to a commission the power to determine, subject to judicial review, the question whether a given schedule is outside the limit or not, in other words to fix the maximum and the minimum. But it would not be competent for Congress to give to any commission absolute discre- tion to fix the rates for the future within these limits of reasonable- ness, for that would be a delegation of legislative power and abso- lutely beyond the jurisdiction of the courts to review. The judicial power to review legislation on this subject extends only to relieving [631] 20 The Annals of the American Academy the carrier from rates which amount to confiscation, or the shipper from rates which amount to extortion ; but in the review of the action of a commission fixing maximum and minimum rates the judicial arm of the government would guarantee to the carrier a rate which would be measured by the fair value of the service rendered and any maximum rate thus fixed below that point would be set aside. If the lowest rate for a given transportation service which would allow the carrier a fair return 'upon his investment is eighty cents and the highest which would not amount to extortion is one hundred cents, the Congress might prescribe a rate of ninety cents, but a commission exercising a power to fix maximum or minimum rates could not lawfully adopt ninety as the minimum and ninety as the maximum. The courts would review such a proceeding and upon a proper showing would set it aside. We are not unmindful of a number of decisions of the Supreme Court of the United States, which are cited as giving support to a different view, but we do not so understand them.^ II. Limitations Imposed by Economic Laws. There are certain limitations upon the exercise of the power of the government to regulate railroad rates which must be observed in the formulation of any statute designed to regulate rates. It is a common opinion among those who listen with approval to de- clamations in favor of government regulation of railroad rates that at the present time the rates for the transportation of freight by railroads in this country are prescribed by the traffic managers at will and that there is nothing to prevent their increase to almost any extent. This opinion is erroneous. Traffic managers of the rail- roads of this country do not make rates at will. There are at least two classes of limitations by which they are at all times controlled : (a) Limitations by economic laws; (b) Limitations by common law. The first class of limitations upon the power of the traffic man- agers of the railroads of this country over rates is imposed by eco- nomic law. Any attempt at regulation of railroad rates by Congress which does not observe these limitations will be certain to fail to 1 Stone 1^5. Farmers' Loan and Trust Co., ii6 U. S. 307; Reagan vs. Farmers' Loan and Trust Co., iS4 U. S. 362; Interstate Commerce Commission vs. C. N. O. & T. P. Ry. Co., 167 U. S. 479. [632] Limitations Upon National Regulation of Railroads 21 satisfy the country as a whole, and if enforced and persisted in will do more harm than good to the commercial interests of the nation. The law to which we refer is the law of competition in trade. In the first place, we must not lose sight of the very great variety of articles of commerce which are offered to the railroads for transportation. Some combine great value with very small weight or volume, while others combine great weight or volume with little value. Some are perishable. Some are frail. Some are alive. Some are dead. Some require two or three cars coupled together to support them, while others need no car at all but move upon wheels of their own. Some go on fiat cars exposed to the storm ; others will spoil if they are not kept dry. Some are so com- bustible that they cannot be placed near the engine. Some are ex- plosive and will be discharged by rough handling of the car. Some must have water in transit and some must have ice, and some must be accompanied by an attendant. These considerations and others, which might be mentioned, necessitate classification of freight; and classifications have been made in which some ten thousand different commodities which are from time to time offered to railroads for transportation, are named and classified ; and such classifications are in force all over the country. But classification of freight overcomes only a few of the diffi- culties which confront the rate-makers. Railroad business differs from almost every other kind of business in that it is not the carrier that can render the service with the least expense to itself that offers the lowest rate. If a railroad has been built between two points which furnish business sufficient to enable it, with reasonable rates, to pay operating expenses and a dividend, it is considered that any additional business which it may be able to secure, even though it may divert it from some other carrier having a direct route, is almost clear profit. It therefore happens that nearly every railroad company, in addition to what may be called its legitimate business, attempts to secure, by joint arrangement with its connections, traffic between points which are reached by it with its connections, not in a direct line but in a roundabout route, and in order to secure such traffic it offers rates much below what would be considered "reason- able" for the business which naturally belongs to it and which it is best qualified by reason of location to handle, and offers rates also 2 2 The Annals of the American Academy much below what the owners of a more direct route will demand for carrying the business. It often happens therefore that a railroad company having the shorter line between two important points may be compelled to meet the competition of a number of connecting lines constituting a route which is much longer and far away from the direct line. The Michigan Central has a joint rate in force from Detroit to East St. Louis, and also to East Fort Madison, both being Missis- sippi River crossings. The rate to East Fort Madison is higher than the rate to East St. Louis, and that higher rate is applied to traffic destined to East Fort Madison. If, however, the traffic is destined to Omaha, the lines by way of East St. Louis will compete for the business and the carriers reaching East Fort Madison there- fore publish another lower rate to that point for traffic destined beyond, which does not exceed the rate to East St. Louis. This lower rate is called a proportional rate. Then there may be situated on the line of a railroad an industry making use of large quantities of raw material, all coming from some particular mine or quarry from which this particular industry takes the entire output. Here will be an extensive traffic in one par- ticular commodity between the mine or quarry and this one industry, with which no other traffic comes into competition, and the carriers have found it advisable to publish a special rate for such business, known as a commodity rate. A number of articles, such as grain, coal, live stock and dressed meats, which move in very large quan- tities in one direction are handled upon a commodity rate. It sometimes happens that a territory served by a carrier may have a product, peculiar to that territory, which seeks a market far away, and instead of making rates on that product varying with each station in the territory, it has been deemed fair to establish a rate which shall apply to all the stations in the territory, so that all within that district may sell their product at the same price and receive the same net proceeds after payment of the freight. Such rates are called group rates and they are quite common in some parts of the country. The cost of water transportation from Chicago to New York is made the basis for the determination of the rates between the Atlantic seaboard points and a very large portion of the country ; the rates to other points, by concerted action on the part of the [634] Limitations Upon National Regulation of Railroads 23 principal carriers, being made a certain percentage of the Chicago rate. Thus the rate from New York to Cincinnati is 87 per cent. of the Chicago rate; to St. Louis, 116 per cent.; to Louisville, 100 per cent.; to Cleveland, 71 per cent.; etc. In some sections of the country the areas of these groups are defined, bounded and pub- lished upon a map which is placed in the hands of the traffic man- agers of the interested roads. The groups vary in size and their area is regulated by commercial conditions. These various classes of rates, as well as the classification of freight, are made necessary by commercial considerations, and result from the laws of trade which must be given effect and recognition in any attempt at national regulation. The plan of grouping has been objected to as denying to the producers in some parts of the territory included in the group, the advantage to which their location, that is, their proximity to the market, is supposed to entitle them ; and it is likely that if the government should attempt to prescribe rates, there would be an effort made to have the group system abandoned. But it has been demonstrated in the experience of Germany that it is for the best interest of the nation to put the entire territory upon an equal foot- ing as far as possible, rather than to allow to each farmer some advantage in freight rates over his next neighbor who may live a short distance farther away from the market, because of his geo- graphical location. In other words, rates must be such as to stimu- late production and at the same time move the product. In Ger- many, where they have had government ownership of railroads since 1879, the government prescribed a rate on grain of a certain sum per ton per mile, regardless of the distance moved and regard- less of all other conditions affecting the grain trade. The result was that grain could not move by rail from eastern Germany, where it was raised in large quantities, to western Germany, where the demand was greatest, but was compelled to seek an outlet by a devious water route with a short rail haul at both ends of the line. In 1888 the farmers of eastern Germany demanded a reduction of the grain rate so as to permit them to move it by rail, but the demand was refused on the ground that a reduction would have a tendency to raise the value of farm land in eastern Gerniany and deny to the farmers in western Germany the advantage to which they were entitled by their geographical location. In 1891 there were serious [635] 24 The Annals of the American Academy crop failures which brought great hardship upon the laborers in western Germany, and the government was constrained to reduce the rate on grain for distances over one hundred and twenty-five miles, and a sliding scale was put in force which afforded some relief and permitted the grain from eastern Germany to move into the western portion of the empire by rail ; but the rate was still much too high and much more than the traffic would bear. The farmers of southern and western Germany protested that they were being deprived of their geographical advantage and when, in 1894, the government desired to make a commercial treaty with Russia, the southern provinces, whose representatives held the balance of power, refused to assent to it unless the rates on grain were changed. The Russian treaty was very important and so an order was issued restoring the uniform rate on grain of a certain sum per ton per mile, regardless of the length of the haul. The result was that the treaty with Russia was promptly authorized. At the same time, there was a tariff on grain of $8.75 per ton and all grain imported into the German Empire was required to pay $8.75 to the government, so the government allowed to the farmers of eastern Germany a bounty of $8.75 per ton on all grain exported, to enable them to realize the same price for their grain that the farmers in western and southwestern Germany received, the latter price being regulated by the cost of imported grain at the border, plus the tariff. This illustrates the result in Germany of a government regula- tion of rates which does not recognize the necessity of limiting the rate to what the traffic will bear, but rests upon the principle that each community is entitled to the advantage resulting from its geo- graphical location. - If the strict rule of making the rate per ton per mile the same for every movement, whether the haul is long or short, be modified by adopting a sliding scale, it necessarily follows that commodities can be moved from the place of production to the market for much less if they go in a single through shipment than if they go to an intermediate dealer and are then reshipped by him. The total charge for a long haul will be less than the total charge for the movement to the same destination by means of two shorter hauls. This tends 2 See testimony of Prof. Hugo Meyer before the Interstate Commerce Committee of the United States Senate in 1905. [636] Limitations Upon National Regulation of Railroads 25 to centralize trade. Under the S3^stem of rate making in this country with the privileges of stop-over and reshipment at the balance of the through rate, and the basing point system, the jobber in the interior is able to compete with the shipper at the seaboard ; merchants far removed from the point of production of the commodity they handle are able to sell in competition with dealers residing in the locality where the commodity is produced ; and our group rates extend the markets for the products of our enterprise. We often hear the expression that the railroads have "anni- hilated distance" in this country. It is the system of rate making that has annihilated distance, and it is the annihilation of distance by the system of rate making of the railroads that is responsible very largely for our tremendous industrial development. In Ger- many, the railroads do not have that effect because their system of rate making does not recognize the laws of trade and competition. Suppose there had been maintained in this country for the last forty years, under government regulation, a system of strictly distance tariff's, there would have been no substantial industrial development in the states between the Mississippi River and the Rocky Moun- tains. The reduction of rates on grain from the prairies to the East, to a point where they would stimulate production and move the product, resulted in a reduction in the value of farm lands in the New England and Middle States and an increase in the value of farm land in the West, but this has not proved to be destructive to the industrial growth of New England and the Middle States. The increase in the farm values in the West has induced immigration to these farms, and the consequence has been a wide extension of the markets for the manufacturers of the East. The policy of the rate makers has been to build up the industries on their respective lines by making rates, as far as possible, that would permit the products of those industries to be sold far and wide in competition with sim- ilar products of industries situated in remote parts of the country. It may be said that this is no argument against government regulation. We do not make the statement primarily as an argu- ment against government regulation. What we do say is that any effort at government regulation must recognize these principles and follow the plan which the railroads themselves have adopted, or it will do more harm than good. But it is hardly likely that the gov- ernment will be able to regulate rates comprehensively, with as [637] 2 6 The Annals of the American Academy much success as the railroad managers themselves. Two great forces which control the rate makers to-day are: (i) the desire to stimulate production along their respective lines, and (2) the con- test of trade centers for supremacy. These are competitive forces of a powerful nature, and any governmental body which should undertake to fix all the rates for transportation in this country would probably be compelled to ignore the first, and would be likely to be accused of being influenced by political considerations, if it undertook to give any recognition to the second. III. Li}iiitafio)is by Comuion Laiv. We have said that there are two classes of regulations which control the rate makers of this country, the first being limitations by economic laws. Another class of limitations is made up of those imposed by common law. It has been the rule of the common law from time immemorial that when one devotes his property to a use which is of such a nature, by reason of public aid in its investment or by reason of the monopolistic character of the service rendered, that it is said to be impressed with a public interest, he is bound to content himself with charges that are reasonable. So, if a man erected in a harbor a wharf or crane which by reason of a grant of public aid in its construction, or by reason of the fact that there was no other crane in the harbor, could be said to be impressed with a public interest, it was held that he must limit his charges to such as would constitute a reasonable reward for the service rendered. In comparatively modern times and particularly in this country in the period of the Granger cases, there was an attempt to regulate charges for public utilities by legis- lation and it has been held to be a rule of common law that while the charges for such public utilities must be limited to such as constitute reasonable compensation for the services rendered, at the same time they may not be reduced by legislation to a point below what will yield a fair return to the owner upon his investment. The existing national legislation upon the subject of rates has done little more than to declare the principles of the common law, which are more than two centuries old. And after all, reasonableness is really the sole test of the validity of a rate for transportation by a common carrier. This is the limitation to which we now refer, — that rates shall be reasonable. [638] Limitations Upon National Regulation of Railroads 27 It becomes important to inquire what are the considerations which control in a determination of the question of reasonableness. We have already noted the fact that there may be a wide range of rates for the performance of a given transportation service within which any rate charged will be held to be reasonable. The lowest will be the minimum and the highest will be the maximum. The question of what is the minimum rate which will be held to be rea- sonable, generally arises upon the complaint of the carrier, while the question of what is the maximum rate, usually arises on com- plaint of some customer of the carrier, or on complaint of some public officer, and the considerations which control in determining the two questions are as far apart as the different points of view. First, then, in a review of legislative action, what will be held unreasonable upon complaint of the carrier? What is the minimum? It has been held by the courts that a railroad company is entitled to charge rates which will enable it to pay its legitimate operating expenses, taxes, the cost of maintenance, and interest upon money borrowed and actually devoted to the enterprise, and some return upon the investment represented by the capital stock. Some cases hold that the carrier is not only entitled to all these things and some return upon the investment represented by the capital stock, but a fair return. It may happen that the property devoted to the enterprise at the time of the investigation of the question of the reasonableness of the rates may be worth much more than it originally cost, or much less, and some courts hold that what the carrier is entitled to is a return upon such value at the time of the investigation, regardless of the original cost. In the application of any of these rules difficulties are likely to be encountered, for it is uncertain what deductions are to be made from the gross earnings on account of operating expenses and main- tenance, and it is also uncertain how we are to determine the actual amount of money borrowed and devoted to the enterprise and how we are to determine the amount of actual investment represented by the capital stock ; and if we adopt the other rule, allowing value to determine the investment, it is not clear what method is to be employed to measure the value. When a proper method has been adopted* for the determination of the extent of the investment, it should be held, upon the complaint of a' carrier, that he is entitled [639] 28 The Annals of the American Academy to a fair return upon his investment. This fixes the minimum of reasonableness. Second, in a review of legislative action, what will be held un- reasonable upon the complaint of a shipper ? What is the maximum ? Upon the complaint of a shipper, the net revenue of the carrier has nothing to do with the determination of the question of reason- ableness. No shipper has the right to complain of a rate or a schedule of rates simply because the carrier is able to pay large dividends. As long as the rates charged do not exceed the value of the service rendered, the shipper has no right to complain ; and the value of the service rendered is determined by commercial con- siderations, one of which is the cost of the service. Shippers are apt to forget that there has been for a number of years in this country a general upward tendency in the wages paid to the men and in the price of almost all kinds of supplies. Higher speed is demanded. Better accommodations for passengers are being constantly provided. Expensive safety appliances have been required. All these tend to increase the value of the service, and yet there are few persons who are willing that there should be any corresponding increase in the rates. On the contrary, there is a constant tendency downward in passenger rates wherever they are subject to state regulation, and the slightest increase in the average freight rate per ton per mile in the United States taken as a whole and averaged for a year, is viewed with suspicion and furnishes a text for an outburst of pas- sion against the railroads. Upon the complaint of a shipper it should be held that the carrier is entitled to the fair value of the service rendered. This fixes the maximum. A correct judgment as to the value of the service rendered in any given movement of freight depends upon the commercial con- ditions surrounding the movement, and it often happens that a complaint that rates are unreasonable may require for its proper adjudication a careful inquiry, not only into the business of the road that makes them, but also into the business of other roads, whose rates are supposed by comparison to show the injustice of the rates complained of. Between these two points : the rates which will yield a return upon the investment as the minimum, and the rates which will not exceed the value of the service rendered as the maximum, there may be, and often is, a wide range, within which the carrier is at [640] Limitations Upon National Regulation of Railroads 29 liberty to prescribe the rates under the full protection of the law. And within this range it has been judicially determined that carriers are justified in charging less for a long haul than for a shorter haul over the same line in the same direction, the shorter haul being included within the longer distance, in cases where competition con- trols the rate to the longer distance point; and that carriers may charge less for the inland portion of the transportation of export or import freight than is charged for a similar movement of domestic freight. It is probably true that these practices, both of which have been sustained by the courts, constitute the real basis of a great majority of the supposed grievances of which the shippers complain, but these practices are forced upon the carriers by trade conditions, and they are practices which distinguish the railroad business of this country from the railroad business in a country where trade con- ditions are ignored by government regulations, and where railroad construction and development is practically at a standstill. These are the practices which annihilate distance and tend to decentralize the population. The prohibition of these practices by a statute, upon the demand of the persons living nearest the great markets that they should be given the advantage to which their geographical ■location is supposed to entitle them, would stop the development of the interior and cripple the railroads and would produce restrictions upon the revenue of the carriers, which in many cases would prob- ably be held by the courts to be unreasonable ; and would impose, in other cases, rates beyond what the traffic would bear. The present adjustment of railroad rates is most complicated, but it is the result of the operation of economic laws. The railroad managers have not made rates for the transportation of freight at will. They have been forced to limit the rates to what the traffic will bear, — using that expression, not in the offensive sense, as a description of a maximum of burden to which another straw could not be added without disaster, but in the sense in which it is used among traffic managers, as representing a rate which will stimulate production and move the product and at the same time yield a fair return to the carrier upon his investment in the enterprise. Rates thus adjusted will stand the judicial test for reasonableness, and no state or federal authority should deprive the carrier of the revenue which such rates will afford. FEDERAL CONTROL OF INTERSTATE COMMERCE By Harry Earl Montgomery, Buffalo, N. Y. The Republican administration, voicing the demand of the American people, has determined to give to the federal government power to regulate and control corporations engaged in interstate commerce. The various plans presented and the bills introduced at the last session of Congress have been criticised so severely by students of economics that the first lesson in remedial legislation is being learned, — the lesson of what not to do. So clearly have the defects of the proposed remedies been shown, that a straight and narrow pathway is appearing which will lead, unless blocked b}^ political or other influences, to the passage of a law which will pre- serve the good features and at the same time eliminate the evils now existing in corporations engaged in interstate trade. The bidding of the states for the chartering of corporations has created a body of laws which confer great powers — powers our fore- fathers never dreamed would be given to any group of individuals — to those who are willing to pay a small incorporation tax in exchange for such privileges. So little supervision and control are now exer- cised by the state governments that corporations are able, through the secrecy which surrounds their actions, to override the law and to some extent to be creatures subject only to the washes and desires of the corporate managers. The fvitility of state control has become so apparent that, much against their wishes, our people are com- pelled to turn for protection to the federal government. The constitution of the United States, by the third clause of Article i, Section VIII, has reserved to Congress the power "to regulate commerce with foreign nations and among the several states," and has thereby vested in Congress the power to enact laws which will adequately control and regulate the agencies engaged in interstate trade. So well convinced are the authorities at Wash- [642] Federal Control of Interstate Commerce 31 ington that Congress possesses such power, that Commissioner Gar- field, of the Bureau of Corporations, in his first report, has said, that "It may be considered as estabHshed" that under these consti- tutional powers Congress may : (i) Create corporations as a means of regulating interstate commerce. (2) Give to such corporations the power to engage in inter- state or foreign commerce. (3) Prohibit any other corporations or individuals from engag- ing in the same. (4) As a condition precedent to the grant of such corporate powers, lay any restrictions it chooses upon the organization's con- duct or management of such corporation. (5) Tax interstate commerce at will and the instrumentalities and corporations engaged therein. (6) Provide regulations for the carrying on of interstate com- merce generally and in such local afifairs as are now left to the states in the "silence of Congress" tmder the principle established in Cooky vs. Port Wardens (12 How. 299), and in the carrying out of such powers it may use any or all means "which are appropriate, which are plainly adapted to that end, which are not prohibited, but consistent with the letter and spirit of the constitution." Congress having the power to act and the administration having determined that such power shall be used to the curbing of cor- porate greed and corporate discrimination, it becomes the duty of every American to give his best thought to the consideration of the plans suggested in order that the combined wisdom of the American people may be brought to bear on the preparation of a federal incor- poration act. To such an end the following plan is presented as a contribution to this discussion : First. The power and authority of the Bureau of Corporations in the Department of Commerce and Labor should be enlarged so as to include the right to grant charters of incorporation to all who seek to engage in interstate or foreign commerce. This bureau should not only have this power, but all corporations, joint stock companies and other forms of organizations now existing or which hereinafter may be chartered by a state government, should be prohibited from engaging in interstate and foreign commerce until chartered by this bureau. Unless this bureau has the sole right to [643] 32 The Annals of the American Academy incorporate associations engaged in interstate or foreign commerce, the effect of this plan would be defeated. Sub-companies would be organized in the different states, with or without the intervention of a holding company, and would not be subject to the control and regulation of this bureau. This bureau should have not only the sole right to incorporate associations engaged in interstate and foreign commerce, but it should have absolute charge and complete control of its corporate children. Second. Every corporation incorporated by this bureau should pay an organization tax of one-tenth of one per cent, upon the amount of capital stock authorized, and a like tax upon any sub- sequent issue. The average organization tax in the various states is about one-tenth of one per cent. Experience has shown that this is the rate which incorporators are willing to pay for the privilege of owning a corporate charter and the amount that should be charged for giving such privilege. The incorporation tax should be so low as to deter no group of men from carrying on business in a corporate capacity ; for it is to corporations, with their large aggregation of capital, that we must look for the development of our country. Corporations, when backed by large capital, expert skill and great business ability, have often conferred material benefit on the community at large, and almost invariably insured the promotion of prosperity on a durable basis. They have furnished the people with many of the commodi- ties of civilized existence at much lower prices than formerly, not only without decreasing the wages of labor, but in many instances increasing them, and eventually extending the field for a larger number of employees. India rubber goods, tobacco, leather and a great variety of other commodities are cheaper than at any former period of our country's existence ; and wages are higher to-day than they have ever been, except in war times. Without cor- porations the great railway systems of our country could not have obtained the capital required to cover our land with a network of rails and could not carry freight and passengers at the low rates charged to-day. Without corporations our manufacturers could not compete with the corporations of England, France and Germany in the race [644] Federal Control of Interstate Commerce 33 for the Asiatic and the South American markets. To extend our markets, and thereby provide an outlet for our surphis products, and thus give constant employment to our workers and toilers, is the crying necessity of our economic life ; and, in order to obtain these markets, giant corporations must be met and conquered by more powerful and far greater aggregations of capital, organized in the form of corporations. Third. The stockholders and directors of corporations organized under the Corporation Bureau should be personally liable only to the following extent: The stockholders should be personally liable, — (a) To creditors, to an amount equal to the amount unpaid on the stock held by each stockholder. (b) To the laborers, servants and employees other than con- tractors, for services performed by them for such corporation. The directors should be personally liable, — • (a) For declaring dividends from any fund other than from the surplus profits arising from the business of the corporation. (b) For loaning corporation money to any stockholder, or con- senting to the corporation discounting any note or other evidence of debt. (c) For violating any of the provisions of this act or any law of the United States. The liability of stockholders and directors of corporations, except for violations of law or breach of trust, should be so limited as to deter no one from contributing his money to corporate enter- prises. The provisions of this plan provide sufficient protection to creditors and to the general public, and no additional burdens to those hereinbefore set forth need be placed on corporate stockholders and corporate directors. Fourth. The real and tangible personal property owned by corporations chartered by this bureau should be locally assessed and taxed in the civic divisions of the states in which the property is located, the same as the real and personal property owned by individvtals. No higher or different rate of taxation and no other or different method of assessment should be applied to such corpo- rations than is applied to corporations organized under the state law or to individual citizens. The reason for such local taxation is twofold : First, the local [645] 34 The Annals of the American Academy authorities have a better knowledge of the value of property and better facilities for obtaining this knowledge, and would, therefore, make fewer mistakes, than a board of examiners appointed from Washington and not residents of the locality where such property is located ; secondly, the cities and counties of the states depend largely for their support upon the taxes levied upon the property of cor- porations located within their jurisdiction, and to withdraw this revenue would cause confusion and would increase the burdens of the local taxpayers. Fifth. Every prospectus or advertisement issued or published with a view of obtaining subscriptions for shares or for bonds of a corporation, organized or to be organized by this bureau, should give full details as to its organization ; the contracts into which the promoters or organizers have entered ; the earnings for the two previous years of all underlying corporations ; the amount of money to be used for preliminary expenses and the amount to be reserved for working capital ; and all information necessary for safe and in- telligent investment. For a false statement, or the issuing of a prospectus which does not make a full disclosure of the corporate affairs, the promoters and their associates, the officers and their agents, should be legally liable, both civilly and criminally. This knowledge is at present inaccessible. The investor who puts money into a giant corporation must guess as best he can what property he is getting, and the guess is often a bad one for him. The making public of the above-mentioned facts will remove the gravest evils from stock-watering. If the investor knows that there is only one dollar of property back of every three dollars of stock and bonds, which is the case with so many corporations whose shares are listed at the exchanges to-day, he can buy the securities at a discount sufficient to make his investment safe. When appeals are made to the public to subscribe to the capital of undertakings, it should be made obligatory on the corporate pro- moters, organizers and officers to disclose every fact known to them and unknown to the public, in order that everything be open and above board, and the parties, public and promoters alike, may deal with equal information in regard to the organization and the conduct of such companies. Corporations now in existence and engaged in interstate or foreign trade, and desiring to obtain a charter from this bureau, [646] Federal Control of Interstate Commerce 35 should furnish to the commissioner a detailed history of its organiza- tion and an itemized list of its assets and liabilities, a summary statement of which should be published in such newspapers as may be designated by the commissioner. By the possession of this report the bureau will be placed in the position by which it could investi- gate intelligently the affairs of the corporation and be able rightly to supervise its future corporate life. Sixth. Every corporation should annually, during the month of January, make and file with the corporation department a state- ment as of the first day of January, verified by the oath of its president or vice-president and its secretary or treasurer, fully set- tine: forth the following information : ( 1 ) The name of the corporation and the place and date of its incorporation. (2) The names, residence, and business or occupation of the officers and directors of the corporation. (3) The business in which the corporation is actually en- gaged, and the states, territories, districts, or insular possessions in which it is engaged in transacting such business, specifying a person residing in each such state and territory, who shall be designated by such corporation as its legal representative upon whom service of any legal process or notice issuing out of any court or of the cor- poration department may be made. (4) The cash value of the assets of the corporation and the nature and character of such assets. (5) The amount of indebtedness of the corporation, and, if such indebtedness is secured, in what manner. (6) A statement in detail of all bonds and mortgages issued by and outstanding against said corporation, showing when said bonds were issued, when the same become due, and the consideration received by the corporation for said bonds in property or money, and, if in property, the nature, situation and cash value of such property; and in case of mortgages, a statement showing the date of such mortgages, the date of their maturity, the property covered thereby, and the cash value thereof. (7) The amount of shares of stock or bonds owned or con- trolled by said corporation in any other corporation, and the propor- tion of the entire capital stock which such holding represents, both in the reporting corporation and the corporation whose shares it holds. [647] 36 The Annals of the American Academy (8) The amount of assets and liabilities of any corporation in which such reporting corporation holds stock or bonds, giving the character of such assets and liabilities and of what such assets and liabilities consist. (9) The number of shares of the capital stock of the cor- poration which have been actually issued, and the amount and value of the consideration actually received into the treasury of the cor- poration for such shares ; where the payment was made in money, then the amount in money per share ; where such payment was made in property, a description of such property as to location, character, and the cash value thereof. (10) That it is not a party to any contract or agreement for the purpose of, or which operates as, a restraint of trade or com- merce, or which results in giving to either corporation a monopoly of trade in any article of common use or utility, or which results in any business or commercial advantage over other corporations or persons engaged in like trade, business, or commerce, by virtue of such agreement or contract. That it is not a party to any pooling plan, agreement, or contract with any other corporation for any purpose which, when carried into effect, would create a monopoly of the trade or business in which such corporation or corporations is engaged, or in any degree lessen or destroy competition between corporations or between corporations and natural persons engaged in business, trade, or commerce of a similar character. (11) That no part of the capital stock of the corporation is owned, controlled, or voted by any other corporation, or by the officers of any other corporation. (12) That the corporation does not have or receive any rebate, deduction, discrimination, drawback, preference, or advantage in rates of transportation or anything incident to such transportation from any common carrier — railroad, pipe line, water carriers or other transportation company — by which its products are or may be transported, which give to it any advantage or profit directly or indirectly as against any other person or corporation who ships or desires to ship products of a similar character over such trans- portation lines under like conditions ; or if any such have been received or given, then such corporation shall state when, from whom, on what account, and in what manner it was received, mak- ing a detailed exposition of the entire transaction. [648] Federal Control of hiterstate Commerce 37 (13) If a corporation is a railroad or transportation company, or a common carrier of any kind, that during the past year it has not granted to any person or persons, corporation, or company any special rates, discriminations, advantages, or preferences whatsoever, neither has it received any such. That if at any time a corporation, organized under the federal government shall fail to file its annual report as herein provided, or shall fail to give the information required, its officers should jointly and severally be personally liable to the United States in the sum of one thousand dollars per day for every day it transacts business ; and if any such report shall contain a false statement, the officers making such false statement should be subject to a fine or imprisonment, or both. The object of compelling the making and filing of this annual report is to put on record under oath two of the officers of the cor- poration in order that the department may have an additional hold on the responsible heads of the corporation for violation of law. The annual examination hereinafter provided will enable the depart- ment to verify the correctness of the report and thus ensure the truthfulness of the statements contained therein. Seventh. The commissioner or head of this bureau, through his staff of examiners, should examine annually into the affairs of all corporations chartered by his department, inspecting their books, agreements, receipts, expenditures, vouchers, records of meetings of directors and of stockholders, and report the condition of their aft'airs as of the first of January of each year. Power should be given to compel the attendance of witnesses to be examined under oath, to call experts to testify as to values, and to require the pro- duction of all books, papers, contracts, agreements and documents relating to any subject under investigation, no matter in whose pos- session or in what part of the United States or of its dependencies such documents may be. The claim that any such testimony or evidence may tend to criminate the person giving such evidence or testimon}- should be met by a provision that any such evidence or testimony should not be used against such person on the trial of any criminal proceeding. But no person so testifying should be exempt from prosecution and punishment for perjury committed in so testifying. And if it should be found that a corporation is over- capitalized, or is violating any anti-trust or other law, the commis- [649] ;iS The Annals of the American Academy sioner of the corporation bureau, after giving to the corporation sixty days' written notice to comply with the laws, should place the evi- dence in the hands of the. Attorney-General, who should immediately commence an action to annul its charter. The commissioner should also have the power to compel cor- porations to furnish, from time to time, such statements in regard to the conduct of the corporate business, the change of stock inter- ests, the financial condition of the company, and such other data as may, in his judgment, be necessary to a complete understanding of the business and the condition of the corporation. A detailed report of the examination of the property, business, profits, and losses of every corporation chartered by this bureau, should be made each year and kept on file in the office of the com- missioner. A summary statement of the corporate assets and liabil- ities, the amount of stock issued and the amount paid thereon, in cash and otherwise, the actual amount of surplus, and the nature and mode in which it is used and invested, should be published in a government paper, designated for that purpose, and in one news- paper published in the county where the principal place of business of such corporation is located. The publication of such facts would in no wise injure the corporation, while the publication of a detailed report might paralyze or destroy the business done by corporations. It is well known that a corporation, just as a partnership or an in- dividual in business, in some years makes money, in some loses money, and in others comes out even, but in the average comes out ahead. If the creditors found at the end of a year that a corpora- tion had lost money, how long would it be before the credit of that corporation would be lost ; how long before the banks would refuse to renew or to discount its paper; how long before the creditors would place their claims in judgment and force the corporation into a receivership or into bankruptcy? Great care should be taken to protect amply the rights of privacy, while at the same time care should be exercised to protect the public by giving out such facts as they, as creditors, stockholders and prospective investors, are entitled to know. The first concern of the government which grants charters of incorporation ought to be to see that its corporate offsprings are doing a legitimate business and are not violating any of the laws. Its second concern ought to be the giving to the public of all such [650] Federal Control of Interstate Commerce 39 information as should affect the reasonable judgment of a man in determining whether he should or should not invest in a particular concern. These obligations on the part u/ the government are universally recognized, but the means to be employed to effect these ends are still a matter of keen discussion. Experience has abundantly proved that it is not practicable to allow corporations to issue their own reports without the existence of a board of inspection to verify the truth of the statements con- tained therein. Such a plan of reporting, without such inspection and verification, has been tried by the various states, and the result has been that the reports, if not so meagre as to be of no practical value, are of so complex a nature that the majority of persons are incapable of understanding or properly appreciating them. As a matter of fact, a government board of examiners is abso- lutely indispensable for the realization of compulsory publicity. With such a board, the affairs of each corporation would become known, and the purchaser of bonds and of stocks could rely upon the corporation bureau to see that corporations are not over- capitalized, and that they are doing business honestly and fairly and within the provisions of law. In this way the corporation, the purchaser of corporate bonds and of stocks and the general public will be protected. If the so-called "tobacco," "leather," "whiskey," "ice," "sugar," "steel" and "shipbuilding" trusts had been subjected to the ordeal of a thorough investigation by expert accountants and their true finan- cial condition laid before the public, a large number of serious losses would have been prevented from falling upon innocent and worthy people. The fact that industrials as well as railroad and transpor- tation companies are possessed of double attributes, of jjublic and private nature combined, opens the way to abuse of official power. The favored few in the inner confidence of the managers have advantages in the general market to which they are not justly entitled. The investigation of the refunding committee of the Pacific railroads at Washington brought out the evidence from one of the principal witnesses that the books connected with the construc- tion of the road had been burned or destroyed as useless trash, although they contained the record of transactions involving hun- [6sx] 40 The Aiuiah of the American Academy dreds of miilions of dollars, a record which became absolutely necessary to a fair settlement between the government and its debtors. There was put in evidence the fact that a certain party in interest had testified before another committee that he was pres- ent when $54,000,000 of profits were divided equally among four partners, — himself and three others. None of the books of record containing this valuable information escaped the flames. The investigation of various railroad corporations has shown that some of the managements have peculiar methods, if not delin- quencies, in bookkeeping, which if they had received rigid investi- gation and the guilty parties had been held responsible for their acts, many of the great railway corporations would not have been wrecked during the panic of 1893-95. Such annual inspection by a government board of examiners would prevent a- repetition of these evils and would ensure the cor- rectness of published reports and prospectuses, and would prove a check on the discriminations which have built up and destroyed so many corporations. "Under the present industrial conditions," Mr. Garfield, in his report, says, "secrecy and dishonesty in promotion, overcapitaliza- tion, unfair discrimination by means of transportation and other rebates, unfair and predatory competition, secrecy of corporate administration and misleading or dishonest financial statements are generally recognized as the principal evils." These evils would in a large measure disappear if the corporate managers knew that the government by an annual inspection would bring to light all their acts. The government which gives to a group of citizens a charter of incorporation, a special privilege, an advantage they did not possess as individuals, has the right to know that the privilege is not being used unfairly and illegally. If a corporation is legally organized and is conducting a legitimate business, no injury will be done it by inspection. Eighth. A progressive graded tax should be levied on the actual net profits of corporations chartered by this department above 6 per cent. Such tax might be graded as follows: i-io of the ist per cent, above 6 per cent. 1-9 of the 2(1 per cent, above 6 per cent. [652] Federal Control of Interstate Commerce 41 1-8 of the 3d per cent, above 6 per cent. 1-7 of the 4th per cent, above 6 per cent. 1-6 of the 5th per cent., above 6 per cent. 1-5 of the 6th per cent, above 6 per cent. 1-4 of the 7th per cent, above 6 per cent. 1-3 of the 8th per cent, above 6 per cent. 1-2 of the 9th per cent, above 6 per cent. 6-10 of the loth per cent, above 6 per cent. 7-10 of the nth per cent, above 6 per cent. 8-10 of the 12th per cent, above 6 per cent. 9-10 of each per cent, of profits above 18 per cent. Each corporation is rated according to the profits made. The corporate charter is valned exclusively by the prosperity of the cor- poration. A tax upon the profits would be governed by actual results and be equal in its effect upon different corporations, and be just in its general operation. Whether or not a corporation had a special privilege, in the nature of a monopoly given by the patent laws, by the tariff, by a special franchise, or by the control of the market, would make no difference in the laying of the tax. If a corporation possessed any of these privileges, it would be obliged to pay for each in proportion to its value, as evidenced by its earning power. A corporation should be permitted to earn a reasonable profit on its assets. If this permission were taken away, all incen- tive to carry on business would be killed, the affairs of corporations would be wound up, and the people would be compelled to face general disaster, the like of which the world has never known. That the percentage of profits allowed untaxed should be liberal, in view of the risk taken by the investor, no one would question. While four per cent, may be the average value of capital, we would suggest the allowance untaxed of six per cent, of actual net profits on the fair m.arket value of the tangible assets of the corporation, as this percentage would be large enough to stimulate business and not so large as to work injustice between corporations chartered by this bureau and corporations chartered by the various states. It is reasonable to assume that corporations will make all the profits they dare ; and if we place a progressive graded tax upon their profits, their incentive to overcharge and increase their profits beyond a fair amount will be taken away, and their time, thought [653] 42 The Annals of the American Academy and energy will be bestowed in bettering the quality of their pro- ducts, in extending their markets, and in holding their place in the business world. Franchises, special privileges and tariff pro- tection will not produce the valuable monopolies they are creating to-day, for upon the adoption of this plan of taxation the monopolies will not be allowed to yield the large profits that are now enjoyed. If a corporation has to pay" as a tax 9-10 of each per cent, of profits above 18 per cent., it will not risk the losing of its trade for the sake of making so small a percentage of profit, and the people will get the benefit of a cheaper price and a better article. Ninth. In determining the actual net profits earned by a cor- poration, the board of examiners should annually ascertain the fair market value of the tangible assets of the corporation, not taking into consideration the franchises, the capital stock, or its bonds. This value ma}^ be obtained by an examination of the officers of the corporation, by inspection of its books, and by expert testi- mony. The board should deduct from the total earnings of the corporation the necessary and reasonable expenses of its manage- ment, including the actual amounts spent in renewing the plant, the cost of materials purchased and used, and, in order to avoid double taxation, the taxes paid on its property to all municipalities. Having obtained these amounts, the board should by ordinary business methods figure the percentage of profits earned in relation to its cor- porate assets. Tenth. The cost of running the corporation bureau should be met in two ways : (a) By the incorporation tax. (b) By charging the various corporations examined an amount sufficient to pay the salaries and the expenses of the corporate examiners. The amount charged would only be about ten dollars a day for the time spent by the examiner in investigating the affairs of a corporation. If the bureau was conducted on economical lines, a surplus ought to be obtained from the organization tax to go into the general fund ; W'hile the amount collected as a tax on profits could go to reduce the general expenses of the government. Eleventh. Finally, the question may be asked whether the cor- poration bureau, or some commission or interstate court should be [654] Federal Control of Interstate Commerce 43 given power to review and order changes in rates and to investi- gate and punish the giving of rebates by railroads ? The annual simultaneous inspection of railroads, and of indus- trial corporations proposed in the foregoing plan will discover whether railroads are giving rebates and whether they are dis- criminating between shippers in the matter of freight rates. The present laws on the statute books provide penalties of sufficient severity for the giving of rebates and for discriminations. Their ineffectiveness is due very largely to the inability of the government to obtain the facts upon which a judgment for conviction can be obtained. While the examination of the books of the common car- riers alone might not secure the evidence required, the simultaneous examination of the affairs of transportation companies and of ship- ping corporations would undoubtedly bring to light all violations of the anti-rebate and discriminatory laws. No additional legislation appears to be needed if this proposed inspection is adopted. The railroads, by governmental inspection, being freed from the pressure compelling the giving of rebates, will, for the first time, be enabled to compete with each other on equal terms. Competi- tion will then be free and the railroad giving the best service or charging the lowest freight rates will get the business. The graded tax on profits above six per cent, will take away the desire to obtain large temporary profits at the risk of losing traffic by competing roads extending their lines to enter into direct competition. With profits taxed so heavily and competition being on terms of absolute equality, the railroads would be compelled for their own protection to keep their rates reasonable and to give good service to the public. If this plan of inspection and taxation did not furnish the relief contemplated, the changed conditions resulting therefrom would undoubtedly suggest a remedy, possibly not so drastic as the remedies suggested to-day. Our democratic Amer- ican government should not be permitted to step in and run the business of individuals by fixing the rates to be charged, whether such business be in its nature private, quasi-public or public, except as a last resort for the protection of the people when all other feasi- ble plans have failed to provide the proper checks and needful remedies. CONSTITUTIONAL DIFFICULTIES OF TRUST REGULATION Bv Warren Bigelow, Ph.B., LL. M. Of the New York Bar. The present administration at Washington, in seeking to enact laws that will curb the power of the trusts and prevent the abuses so common among them, has heeded the outcry raised by many intel- ligent people. But the popular notion seems to be that all Congress has to do is to pass laws much as Aladdin might rub his lamp, and the wished-for remedy will appear. We must not forget that Con- gress is limited in the scope of its action by a written Constitution, and that the acts of the legislative department must be done with a view to carrying out some power granted to Congress. If that body passes a law that is not in harmony with the Constitution, it will be pronounced void by the Supreme Court. I. Nowhere in the Constitution is Congress given the power to charter, regulate or control a corporation. It has long since been decided by the Supreme Court, however, that Congress has not only the specific powers mentioned in the Constitution, but also the implied powers which are necessary or proper to exercise in the performance of its specific duties. Thus, the authority vested in Congress "to establish post offices and post roads" is a definite grant of power which carries with it authority to legislate on subjects remotely connected with the mail service — authority, for example, to build a prison if that were necessary to punish those who rob the mails. There is another important clause in the Constitution which nuist not be forgotten. Article X of the amendments reads : "The powers not delegated to the United States nor prohibited by it to the [656] Constitutional Difficulties of Trust Regulation 45 states, are reserved to the states respectively or to the people." As the Constitution does not give to the federal government the right to charter or control corporations, that right must be reserved to the states or to the people ; and since corporations are in all cases created by legislation, the right must be reserved to the states. It follows that any attempt on the part of Congress to enter this field of legis- lation, is an infringement on state rights, and therefore unconstitu- tional. This conclusion must be absolutely true unless there is some specific duty imposed on Congress, the proper fulfillment of which demands that Congress legislate concerning corporations. It would then have implied power to do so. A very apt illustration is found in the chartering of a bank of the United States, which was upheld by the Supreme Court on the ground that it was incidental to the coinage and regulation of money — a prerogative vested in Congress. Yet this may not be so apt an illustration as the post office clause ; for, with respect to the chartering of a bank of the United States, the Supreme Court said that it was an attribute of sovereignty to create a corporation, and no specific right need be vested in Con- gress.^ If this be true, there is no need to seek further for con- stitutional justification for federal incorporation of interstate com- panies. The proposition is clear: let the United States charter all companies that desire to carry or sell goods among the several states. Commissioner Garfield, in his report on corporations, finds some legal difficulties in such a measure, and indeed there are some. While it may be clear that Congress can incorporate a company doing interstate business, it is not evident that it can in this way abolish the trusts already created by state legislation. With that subject we shall deal presently. The commissioner recommends "Federal License" or "Federal Franchise." Now, if any form of regulation or control is sought other than by direct federal incorporation, where shall we find authority ? Aside from that very vague article which makes Congress the custodian of the public welfare, the only constitutional clause wherein we may hope to find authority for trust legislation, is that which says : "Congress shall have power to regulate commerce with foreign nations and among the several states." Under this clause the Sherman anti-trust law was passed in 1890, "to protect trade and ' McCulloch vs. Maryland, 4 Wheaton, 316. [657] 46 The Annals of the American Academy commerce from unlawful restraint and monopoly." It provided that "any combination in form of trust or conspiracy in restraint of trade shall be illegal, and any participant in such combination . . . guilty of a misdemeanor." Up to the present year the Sherman act was so limited by judicial interpretation that it applied only to rail- roads and other common carriers. In the case of the United States against Knight Company- it was held that a monopoly for the man- ufacture of sugar did not fall within the provisions of the Sherman law because that act applied to interstate commerce only, and com- merce did not commence until after the sugar had been manufac- tured. The court freely admitted, however, that a monopoly for the manufacture of sugar might tend to raise prices, and thus indirectly interfere with interstate commerce. The breaking up of the North- ern Securities merger did not operate to extend the scope of the act, because that too dealt with common carriers. The recent "Beef Trust" decision is somewhat broader, but in that case the court found a conspiracy to exist which in their opinion was in restraint of trade. It is quite obvious that there are many abuses of the trusts which cannot be called a conspiracy in restraint of trade — abuses like the watering of stock — which tend to increase public suspicion of corporate organization, and which, as Judge Grosscup has pointed out, tend to lessen and destroy individualism by making the mass of the people withhold their capital from active business enterprise, abuses which must be checked, but which cannot be reached by the laws as they stand to-day. Legislation must be extended so as to embrace control of cor- porations in all their functions. Whatever form such legislation may take, it must be enacted with a view to carrying out the power now vested in Congress to regulate commerce. To what extent would federal legislation be justifiable as a means to that end? As John Marshall said in the case of Gibbons against Ogden :' "The power to regulate commerce is not restricted to any one mode or any one branch. The term commerce describes the commercial in- tercourse between nations and parts of nations, in all its branches, and is regulated by prescribing the rules for carrying on that inter- course." This language is full of meaning: the power is not re- stricted by any one mode of regulation or any one branch of com- 2 Reported, 156 U. S. i. ' 9 Wheaton, i. [658] Constitutional Difficulties of Trust Legislation 47 merce, and commerce is regulated by prescribing the rules for carry- ing on that intercourse. Under this decision it would seem that a rule requiring all corporate acts be made public, or a rule prescrib- ing that all commerce among the states be carried on only by indi- viduals licensed, or by corporations chartered, by the United States, would be upheld as the exercise of an implied power. Or again, if, as the court said in the sugar case, a monopoly for the manufacture of sugar may raise prices and thus indirectly interfere with interstate commerce, surely it may be added that Congress is not limited in the scope of its action to preventing direct interference. It may regulate commerce to the last and most minute detail, just as it may regulate the mail service to the last and most minute detail ; it "acknowledges no limitations other than those prescribed by law ;" and it may prevent indirect as well as direct interference with the trade among the several states. Our conclusion is that the Supreme Court would, in a test case, be justified in upholding almost any form of legislation in this field, on the ground of implied powers ; for the court would consider only this question : "Was the act of Congress designed as a means to the regulation of commerce, and is it adaptable to that end ?" The court does not ask whether the law is necessary or unnecessary,, — it asks whether it was enacted in pursuance of the carrying out of some power vested in Congress. But the Supreme Court might not uphold such legislation ; it might follow the sugar case, and say that Congress has jurisdiction only over interstate commerce as such, and that any attempt to regulate, beyond the actual trans- portation of goods from one state to another, would be ultra vires. There is naturally considerable room for conjecture as to how far the court would go. Let us take an illustration : we read much nowadays about copper mines without copper, and stock without assets — well, suppose Congress passed a law requiring all corpora- tions doing interstate business to publish sworn statements of their assets, liabilities, earnings and stock issued. Would not the Supreme Court be entirely justified in ruling that such enactment did not aflfect commerce and was therefore unconstitutional? Even if such a law were sustained, can a mining company engaged in digging ore, and an oil company engaged in boring the earth, be said to be doing interstate commerce when both perhaps sell their product to another company (though owned by the same capitalists) which [659] 48 T]ie A)i}ials of the American Academy transports the goods ? A\'hat can prevent a coterie of railroad mag- nates from organizing themselves into a terminal company, selling themselves the privilege of landing passengers and freight, and thus fleecing the small stockliolder and the public in general? None of these companies is engaged in interstate commerce. Herein lies the difficulty of all legislation designed to prevent fraud: it can, under the Constitution, be directed against "interstate" companies only, while others continue their fraud and abuses as indicated above. Something can, no doubt, be accomplished by federal interven- tion. Of the methods usually spoken of to-day, "federal incorpora- tion" seems to the author a more logical solution than mere "federal franchise," first because it does not involve the rather absurd sit- uation of a corporation created by a sovereign state being taxed, controlled and allowed to live by the sovereign United States; and secondly, for reasons which will appear in Part II. II The difficulty to be overcome in trying to solve the trust prob- lem by means of federal incorporation does not lie in the vastness of the undertaking (that is a detail of the executive function), but rather in the conflict between state and nation — in the infringement on state risrhts which it seems to involve. Several vital and intimately connected questions arise: (a) ^^'as the right to create a corporation reserved to the states by reason of the fact that it was not granted to the United States? (b) ]\Iay not both the United States and the several states enjoy the right? (c) Would it be possible for the United States to control or destroy the corporations created by the states or to prevent their engaging in interstate business? (a) As we said in Part I, the right to create a corporation was certainly reserved to the states, unless it can be said that the United States has that function irrespective of direct grant in the Con- stitution. As a sovereignty, this nation can create a corporation. Nothing further appearing, it would be fair to assume that both the federal and state governments may exercise the right concur- rently ; the United States because of its sovereignty, and the states because the power which they had before the adoption of the Con- stitution was never taken from them. Or if the "commerce clause" [660] Constitutional Difficulties of Trust Legislation 49 impliedly gave the right to the United States, at least the states may exercise the right until Congress chooses to do so.* (b) While it is feasible to have corporations chartered by dif- ferent powers operating at the same time, that situation does not help matters. Now, the doctrine is well settled that where the federal government has not acted, the states may, but when Con- gress legislates with respect to a subject matter within its jurisdic- tion, the states are thereby precluded.^ As long ago as 1824 the State of New York was prevented from creating a steamboat trust, with the exclusive privilege of navigating the waters in and about New York. Congress having theretofore provided for the licensing of coasting vessels, had thereby withdraw^n the subject-matter of navigation from state control, and the franchise granted by the New York legislature was pronounced void.® If then. Congress enacted laws providing that no corporation hereafter organized shall conduct an interstate business unless the same shall have been organized under federal law, the whole sub- ject-matter w^ould be withdrawn from state control, and the system of incorporating in one state for the purpose of exploiting the others would be at an end. But all this is not enough : it will not suffice to create good trusts in the future — w^e must rid ourselves of the bad trusts of the present. (c) One thing is essential if federal incorporation be the plan adopted : existing as well as future companies must be brought within the federal law. To condemn the charters under the power of eminent domain would vest proprietorship in the United States — perfect state socialism. To declare the charters void would, under the decision in the case of "Dartmouth College against Woodward,"^ be a violation of contract and therefore unconstitutional. There re- mains but one way in which the nation could secure control : tax the franchise or stock of state corporations doing interstate busi- ness so heavily that they avouM be forced to accept federal charters. From the days of the Boston tea party the American people have had a deadly hatred for anything resembling unjust taxation. But a prohibitive tax is not unknown in this country. Under the stress of the Civil War the United States becoming obliged to secure * Thurlow vs. Mass., s How. Rep. 504. 'Brown I's. Maryland, 12 Wheaton, 419. •Gibbons vs. Ogden, 9 Wheaton, i. ' 4 Wheaton, 518. [661] 50 Tlie Annals of the American Academy a market for its bonds, placed a prohibitive tax of lo per cent, on the issue of bank notes by state banks, and thereby forced the great majorit}^ of them to accept national charters and buy United States bonds. In support of this means of securing control it may be argued that the tax would probably be upheld by the Supreme Court as incidental to the proper regulation of interstate commerce; for taxation has ever been recognized as a means of regulation. More- over, if the United States taxed state corporations, the states could not — "for the term to regulate implies full power over the thing regulated ; it excludes necessarily the action of all others who would perform the same operation on the same thing." Xor could any state tax a federal corporation.^ There seems to be a conflict of interests in this situation. But where a conflict exists between state and nation, "that authority which is supreme must control, not yield to, that over which it is supreme." One objection raised by Commissioner Garfield in his report was that "federal incorporation" would centralize vast power in the United States. On the contrary, this fact ought not to be con- sidered an objection. The commissioner himself finds that the great difficulty attending regulation to-day lies in the diversity of state laws. Concentration of power would bring uniformity in the law as well as centralization of responsibihty : to these we had best look for the desired reforms. It is difficult to see how even compulsory federal incorporation could reach that class of evils mentioned at the end of Part I of this article, unless the nation arrogate the function of creating all cor- porations. But to take from the states by constitutional amendment, the right to create a corporation designed to operate within the state would be to spoil that nice adjustment of sovereignty between state and nation which forms so distinguishing and so highly cherished a feature of the American government. ^Many careful thinkers, however, recommend a constitutional amendment as the most prac- tical solution ; others, less careful, say, "between friends, what is the Constitution, anyhow?" and point to extra-constitutional acts in the past. * On taxation in general, see McCulloch vs. Maryland, 4 Wheaton. 316; Brown vs. Marj'- land. supra; Telegraph Co. vs. Texas, 150 U. S. 460; and Fargo w. Mich., 121 U. S. 230. [662] Constitutional Difficulties of Trust Legislation 51 III. It is true that many things have been done at Washington with- out the sanction of law ; but there is a factor in the affairs of nations as well as of men, that transcends all law : economic necessity is a compelling force not to be restrained by written constitutions. When Jefferson negotiated the purchase of Louisiana he acted contrary to his 'own tenets and without authority. A great cry was made a year ago that President Roosevelt had overridden the Consti- tution in recognizing the Republic of Panama. Perhaps he did ; at least it is clear to the writer's mind that the Republic would not have been recognized, had not the President foreseen the strategic and commercial necessity of building the canal. In 1803 it became essential for this nation to control forever the Mississippi and the commerce of North America ; a century later it became essential for this nation to control the gateway to the Pacific, and thus assure forever dominion over the western continent and the trade of the world. These things and others have been done at the call of economic necessity, and have been ratified by Congress and approved by the people because they were necessary and not because they were v/ithin the strict letter of the law. We must not, however, look for relief in the trust situation except through laws properly passed ; for in the first place, trust legislation is far more likely to be brought before the Supreme Court for adjudication than matters of foreign policy ; and in the second, the economic necessity for extra-constitutional action is not manifest when there is ample time to amend the Constitution if necessary. By an amendment, the powers of Congress might be carefully defined and the scope of its authority so extended as to give it exclusive jurisdiction to create and control all interstate companies. Some decided benefits might follow such a course. If the powers of Congress were exactly defined, the laws en- acted would not run so great a risk of being pronounced un- constitutional. Again, the United States Senators might be more ready to act under the authority of an amendment than they showed themselves to be last year. At any rate the "common people" who are interested in railroad and trusf matters (though not in the same way as many of the senators) would be in a position [663] 52 The Annals of the American Academy to demand that some action be taken by the senators and repre- sentatives, or that their chairs in Congress be vacated. Not the least objectionable feature of this plan, however, is the difficulty of the procedure. Two-thirds of both houses of Con- gress must agree on the amicndment, which must then be ratified by three-fourths of the state legislatures." If the Senate parly a whole winter over giving the Interstate Commerce Commission increased jurisdiction, we inight expect them to agree on an amend- ment in the time of our great-grandchildren. More than that, the "State Rights" doctrine is still so strong in many states that it is very much to be doubted if three-fourths of the states could be brought to see the virtue in an amendment which would vest in the national government any increased power. Another great objection to pass- ing an amendment is the fact that the necessity therefor is not absolutely apparent, and we ought not to tamper with our funda- mental law unless the need is urgent. Until Congress has exhausted its present resources (the implied powers) there is no occasion for employing other ways and means for securing regulation of the trusts. Yet, as we have said, the only way to exhaust the present resources is to pass laws designed as a means to the regulation of "commerce among the several states," and then if these laws are pronounced unconstitutional, to enact new laws — surely a tedious and somewhat dangerous method involving many possible upheavals in the financial world as well as general business depression. It is not an easy thing to pass trust laws which will be upheld, for, as we have pointed out, the authority for such enactments can be found only by a breadth and liberality of judicial interpretation such as John Marshall was wont to give to the Constitution. Without desiring to be pessimistic, we must say that even if appropriate laws were passed and sustained, no great good could be accomplished unless the enforcement thereof were vigorous and effective. The wiser policy will be to make haste slowly, and use the utmost care and skill in passing trust legislation, for the solu- tion of the problem is as difficult and as complicated as the question itself is serious, and it demands both time, and the best work of the best brains of the land. 'Const. Art. s. THE RELATION OF AUDITING TO PUBLIC CONTROL By Frederick A. Cleveland, Ppi, D., New York University, Citj' of New York. The corporation is an association of persons combined for com- mon ends. The primary principle of economic and social advantage in corporate organization is to be found in the broader co-operation made possible thereby. The corporation is the modern instrument of private and public welfare, and any consideration to be given to the subject of control by the government should proceed from the point of view of welfare to the corporation, rather than opposition to it. While practices have been permitted by officers of corpora- tions that are deserving of the severest condemnation as opposed to public interest, the hostility that is shown (especially to those forms of corporations known as "trusts") has in large measure been born of ignorance and fostered by envy — ignorance as to the char- acter of the institutions through which much of our national pros- perity has been attained, and envy that is in a measure attributable to the greater success of those who have worked through the cor- poration. Out of this hostility has developed much of harm both to the corporation and to the public. The products of misguided attack have been hasty legislation and abortive attempts at public control over the corporation as a means of hampering its prosperity — at- tempts which, in many instances, if successful, would have thwarted national progress, violated contracts, rendered uncertain business judgment and destroyed many of our best institutions. As concrete illustration of this we have the "granger legislation" of some twenty years ago, from the evil effects of which we have not yet wholly recovered — a species of legislative action which has practically driven the larger corporations out of local jurisdictions where they should have received legal protection, causing them to find cover in states far removed from investment capital interests and from the resources to be developed. [665] 54 The Annals of the American Academy And this hostility is growing. By the corporations removing themselves from the jurisdiction of hostile, local courts and legisla- tures, by seeking protection as citizens of a foreign state under the federal constitution, the demand for public control now centers in the national capitol to which are sent the political representatives of these same hostile, local constituencies. Whatever may be the mel- lowing effect of broader association, whatever the wider view gained by representatives in Congress, these representatives (measured by their constituency according to the hostility which they display toward corporations) are forced into an attitude which is threaten- ing both to corporate organization and to the integrity of the gov- ernment itself. By making the legislative lobby the chief instru- ment of corporate protection, both the government and the corpora- tion becomes corrupted till finally popular prejudice seeking expres- sion in law, through ignorant bias may seriously handicap material development. Such is the situation that citizen and stockholder must face in any effort directed toward a better adaptation of the law to the growing needs of the nation. Federal legislation may be regarded as inevitable ; it is sought alike both by the corporation and by the public ; it is sought by the one as a means of protecting corporate interest, by the other to the end of instituting forms of inquisition that may prove discour- aging to corporate activity and destructive to industrial and com- mercial welfare. What the next few years will develop will depend largely on the mutual consideration given by parties in interest to the merits of the question. Nothing could be more dangerous than legislation that comes in response to popular hatred ; neither would it be more fortunate if the law were shaped by the usual interests of corporate officials and agents, through sharp practice and deceit. The issues must be fairly considered and fairly met by both parties without regard to the wishes or dangerous contrivances of self- interested officials or peculating corporate agents who prosper by abusing the confidence of the public as well as of shareholding proprietors. Public Control and Public Welfare. To be effective, public control must be such as zvill promote rather than impair public welfare. Accepting this as our first pre- mise for reasoning, there are two classes of concepts that must be [666] The Relalion of Auditing to Public Control 55 understood and- appreciated. These may be the more clearly brought before us by the questions: (i) What is the character and signifi- cance of the institution or co-operating group known as the private corporation, and (2) What is the significance of control. The private corporation is a democratic institution ; it is the pro- totype of modern democratic government ; it is the creature of the state designed to promote both public and private welfare ; its pur- pose is to secure to its stockholders and to the public the benefits of broad association and intelligent co-operation in private business without the exercise of an arbitrary will or a Caesarian prerogative by those in official or directing position. Both creative enactment and the organic corporate structure are designed to prevent the exercise of arbitrary power by those managing community interests. Legally and organically, the corporate will is the will of the majority of the stockholding proprietors ; if the acts or policy of the corporation are not in accord with public ideals and do not proceed from the expression of the will of the majority of the stockholders, if any officer or coterie of agents does exercise arbitrary power, then legally and organically the public law makers, or the stockholders, or both are at fault for permitting their servants to assume to con- tinue to exercise this arbitrary power. It is to the end that neither public welfare nor the private pro- prietary purpose may be violated that control, both public and pri- vate, is to be instituted. It is for the purpose of making control effective, of making the corporation as well as each agent respon- sive to the state as well as to the proprietary shareholding interests — that the form of corporate organization is prescribed. The pri- mary principle of public control lies in the fact that a corporation must obtain a charter; as a means of protecting public zvelfare no corporation is permitted to enjoy rights or exercise powers except such as are granted to it. The principles fundamental to private control, or the responsibility of the corporation and its agents to shareholding proprietors, lie in the legal provisions made with respect to corporate organization. Factors of Public Control. Let us consider in detail the factors of control. As related to public welfare, the powers of control lie with the government. These [667] 56 The Annals of the Anterican Academy powers are legislative, executive and judicial. The powers of gov- ernment are both adequate and complete. The legislature as the representative of public opinion, as the corporate agent of welfare, determines for what purpose and in what manner corporate pow- ers are to be exercised ; it is through laws, general or specific, by virtue of which the corporate group obtains its charter powers, that all problems concerning public policy are to be the most effectively reached. The charter or contract of incorporation de- termines what a corporation may do or possess. Are there ques- tions pertaining to rights of succession, to capitalization, to property, to methods of acquisition, to eminent domain, to powers of purchase and control of the stock of other corporations? Is the public aggrieved because of franchises or public utility enjoyed, because of the domination of a corporation by a single stockholder through his power to purchase or acquire a majority control or because of the pooling of stock interests ? These, and all other questions which have to do with public policy or public well-being are to be fairly considered by the law-making or charter-granting branch of the government before the corporation is organized. Is the "trust" or the "holding company" an evil? Is the purpose for which the cor- poration is to be organized against public policy ? Then the remedy is primarily in legislation governing charter grants, and not in exec- utive or judicial inquisition, seeking to curtail rights granted or implied. Once a charter has been granted and accepted, or a corporation organized in accordance with the provisions of a general law, the state, by all its administrative powers, executive and judicial, is bound to enforce the contract which has been entered into between the state and the incorporators. Neither the citizen nor the govern- ment may hope effectively to reach problems pertaining to public welfare or public policy except as they themselves may control their own representatives and agents, politically appointed or selected to formulate laws defining the powers and purposes of incorporated companies. A general law of incorporation stands on the statute books as an oft'er to all who may wish to comply with its terms ; a charter is a grant on petition. This offer when accepted by incor- porators (or petition when granted) becomes a sacred compact, in- violable by executive or by court. The charter grant or acceptance, or under the general law the acceptance of legal conditions imposed [668] The Relation of Auditing to Public Control 57 becomes the basis for investment rights which must be upheld by the government in the same manner as are other institutions of pri- vate property. Legislative Inquiry as a Means of Public Control. After entering into a contract with a corporation, the only question which may be raised by the government is, whether or not the terms of the contract have been complied with. To determine this fact, the government ma}- institute any form of inquiry which it may deem most convenient or effective. The state may rely entirely on its powers of legislative inquisition, appointing commis- sions to take testimony and to inquire minutely into the good faith of the corporation and of its agents ; legislative inquiry may also be made for the purpose of determining conditions to be attached to subsequent charters granted, investigation being directed toward the problem of control of corporations to be organized rather than toward control over those existing under present laws. Executive Inspection and Examination of Corporate Records. Again, the state may constitute a regular department or corps of inspectors under the control of the executive. For example : banks are incorporated under the laws of the state. The public pur- pose of such an incorporated society is to have a responsible agent which will furnish to the community demand credits (so-called deposits) for use in business as current funds. The social advan- tage is to have provided a form of cash more convenient in use and less expensive than money. The bank offers to sell to its customer an account against which he may draw, thus saving him the expense and the risk of carrying a money stock large enough to answer the needs of his business. In passing laws for the incorporation of banks the government, as the agent of the public, is interested in knowing that the credit-account offered b}' the bank to its constitu- ency as cash is "sound," /. e., that it will be paid on demand. To this end the legislature requires that those associating themselves for bank purposes shall contribute a capital sufficient to provide the corporation with an adequate money stock out of which the credit -accounts sold to the public may be currently redeemed. Pub- lic welfare demands an adequate bona fide cash capital, and that [669] 58 The Annals of the American Academy this capital shall not be permitted to become impaired. As a means of ascertaining whether the charter provisions have been complied with, the government creates a department of banking control, the chief function of which is to inspect and to receive reports from banks. This is done that the government, through its executive branch, may have the means of currently collecting evidence of good or bad faith on the part of the corporation or its agents, and protect the public as well' as the institution itself against corporate infidelity which may thwart the purposes of its creation. In the interest of common welfare (expressed in service ren- dered for which investors may obtain remunerative return) a sav- ings bank is incorporated. With this institution, the principle of welfare is one of stimulating savings by providing an institution through which the small individual surpluses acquired through pop- ular thrift and economy may be gathered into large corporate funds — funds large enough to maintain a staff of trained agents for the protection of the savings accounts, and for the proper direction of capital into remunerative investment. Safety of investment, the best rate of return compatible with safety, and prompt payment of savings accounts are the criteria held before the legislature in the offer made to prospective incorporators ; this is the public interest which the government has in control over incorporated savings societies. The trust company is another form of corporate organization for public service. In our modern, complex community, under con- ditions of constantly widening corporate organizations, many forms of trusts have grown up on the execution of which depends the safe conduct of business, and the protection of individuals and members who may be interested in institutional results. In this, the measure of control is fidelity, conservative investment of funds and income from estates, and financial responsibility. The insur- ance association is organized for social protection against material want and private penury — for the protection of families out of the combined incorporated estate of the insured. In all of the invest- ment institutions, the shareholding proprietor, if such there be, is one who has contributed a portion of capital for the protection of trust resources, and to insure the financial responsibility of the institution organized for investment service. The stockholder of such an institution, therefore, has a double duty to perform — the [670] The Relation of Auditing to Public Control 59 one to himself, the other to the beneficiary of the corporation to which the stockholder stands in relation of proprietor. In an institu- tion which does not have the care of trust estates or trust funds, the penalty for failure on the part of the shareholding- proprietor to per- form his duty is personal loss ; in a trustee institution whatever may be the pecuniary loss to the shareholder, the law should compel a strict propriety control in the interest of the beneficiary. In such case not only the officer of the instituton, but the stockholder also stands in a position of trust responsibility. The same is true of the public service corporation. If gas is to be supplied, the organic complexity of a modern municipality may require that the government exercise extreme care in the grant- ing of charters, and that there be such inspection as to protect the public against inferiority of product. The water supply touches not alone the interest of public convenience, but also has an important bearing on public health. The transportation company is incorpo- rated to perform a service on which depends not only commercial and industrial welfare, but quite as much conditions of health and comfort which are centered in the habitat of the individual citizen. Food, air, light, recreation and business are all closely interlaced with the affairs of the public service corporation. These are insti- tutional facts that must be recognized and must be fairly dealt with by the corporation. On the other hand, the people must recognize the character of the corporation and must reckon with the fact that corporations are organized for public service and that any control which tends to hamper or weaken corporate activity must neces- sarily interfere with the usefulness of the corporation to the public itself. With reference to all incorporated institutions the government, as the representative of social order and welfare, has an interest in knowing that corporate control is exercised over the agencies or trustees entrusted with the corporate estate — an interest in control which runs not only to the institution, as such, but also to the share- holding proprietor. This interest requires that the duties and re- sponsibilities placed on the institution and on the shareholding proprietor shall be strictly fulfilled, but in case these corporate duties and responsibilities are met, every administrative controlling purpose shall have been complied with. As a means of knowing whether the corporation has complied with the charter contract, the govern- [671] 6o The Annals of the American Academy ment vests its department of inspection with power to furnish to the state evidences of infidelity or non-feasance. But with this pubhc inspection should end. The rights, powers and conditions under which the company is to operate must not be interfered with. The Courts as Instruments of Public Control, Evidences of non-performance or malfeasance having been detected through official inspection, or otherwise, the department of justice stands ready, by mandamus, by injunction, by quo warranto proceedings, by receivership, or by charter annulment and dissolu- tion, or other legal or equitable processes to enforce strict compli- ance with the contract made by the incorporators with the state. The courts may interfere either for the protection of public welfare or as a means of protecting the corporation itself against the acts of its agents. Through the courts any and all provisions made for social or corporate protection as defined in legislation, or in legal precedents of control may be strictly enforced. But any interference on the part of the government, either through its executive or judi- ciary, which goes beyond this would prove destructive to private right, and impair the purposes for which the government itself has been orgfanized. 't>' Significance of Private or Institutional Control of Corporations. In approaching the problem of control two further premises may be laid down as a basis for reasoning: (i) that any influence which tends to encourage the larger and more rapid development of these several institutional forms of co-operation is an influence which makes for social progress and individual welfare ; and con- versely, that any influence which tends to discourage the larger and more rapid development of these several forms of co-operation are influences which stand in the way of social progress and indi- vidual welfare. (2) That in institutional and social welfare must be found the largest success of the corporation itself and, therefore, that the interest of the public is the interest of the shareholding proprietors of the corporation as well as of the several corporate agents entrusted with the management of its affairs. Proceeding from the view-point of corporate success, the ques- tion of control resolves itself into terms of corporate integrity and [672] TJie Relation of Auditing to Public Control 6i efficiency of corporate management. The ideal of corporate integ- rity is that every officer and employee shall completely bury his own selfish purposes and devote his best thought and talent to the ends and purposes of the institution. Corporate fidelity is the essential principle of corporate success. It is to the private corporation what patriotism is to the public institution. Any system of control which looks to the success of the cor- poration nnist have in mind fidelity of service, and this must come from within and not from without. When corporate character has been established and a disposition exists on the part of employees to devote to the institution the best thought they have to give, the ques- tion of corporate efficiency is one which depends on the exercise of discretion in the choice of agents. But the exercise of this discretion must likewise be considered in any system of effective control ; this cannot be supplied by government inspection or legal inquisition. The control which makes for corporate success is the control which encourages the larger and more rapid development of the several forms of institutional co-operation through which the largest social welfare may be attained. This control must be within the corpora- tion itself and cannot come from without. Legal Provisions for Private Corporate Control. Before the committee appointed by the legislature of the State of New York to investigate the management of the insurance socie- ties of that state, one of the directors of the Equitable Life Assur- ance Society of the United States, and a man prominent in the affairs of many corporations, expressed the opinion that the system of direc- torship in the great corporations of to-day is such that a director has practically no power; that the director (representing the bene- ficial interests) is considered a negligible quantity by the executive officers of the society; that especially was this true when one man obtained control over the affairs of the association. Whatever may be the practice or usage in our great corporations, this statement does not accord with the spirit and intent of the law. The law con- templates a strict control over the corporation by those holding a beneficiary interest. As before suggested, the legal provisions made for private control are found in the form of organization prescribed. . The legal principle of private control is one of trusteeship — a prin- [673] 62 The Annals of the American Academy ciple most carefully and righteously guarded by the courts holdhig the trustee to the strictest account. The trust organization as an instrument of corporate control may be described as follows : ( i ) As a means of rendering possible the prevention of the exercise of arbitrary power on the part of a single stockholding proprietor, the stockholders, as such, are deprived of all rights or powers to trans- act any of the business of. the corporation ; no proprietary power or franchise of the corporation is placed in the hands of the stock- holders. The corporation as an artificial person is the sole owner and entitled to the exclusive, constructive possession of all proper- ties ; it alone has the right to exercise powers and to enjoy corpo- rate privileges. (2) A further protection to the shareholder is found in the fact that the constructively possessed artificial person (the corporation) to which has been entrusted his capital has in itself no power to act except through living, thinking, morally and legally responsible officers or agents called a board of directors ; these are selected by a majority vote of the shareholding proprietors of the corporation. (3) To make corporate trusteeship the more secure, to remove still farther the possibility for the exercise of arbitrary power on the part of those in control of the corporation, the active business of the company is taken out of the board ; while they are the direct representatives of proprietors and beneficiaries they are permitted to act in a representative capacity only, being in the posi- tion of intermediaries between stockholders and beneficiaries whom they represent, and the officers appointed by them to carry out the details of the business. (4) The actual possession of properties, and the current operations of the company are left to officers or agents — creatures of the board appointed by and responsible to it. This corporate form of organization is intended to give to the share- holder a double protection, and to the corporation itself a triple legal bulwark — a triple refinement in agency responsibility. On the first group, the shareholder, rests the responsibility for expressing the corporate will by a majority vote, and for the selection of a repre- sentative board. The second group, the board or trustees selected by the shareholders, is responsible for the general direction to be given and for the selection of the active agents and employees of the com- pany. The third group is responsible to the company through the board ; while legally under the control of the directorate, the officers' ultimate responsibility is to the stockholders — the proprietors not of, [674] The Relation of Auditing to Public Control 63 the funds and properties, but of the corporation which owns the funds and properties. With this form of organization it is possible to institute a sys- tem of corporate administration which will not only locate personal responsibility for every act of the company, but will also accurately determine the fidelity and ability of each agent. The problem of corporate administration is (i) to associate together a group of corporate servants, or agents, acting under a legally devised system of trusteeship which will effectivel}^ co-operate to carry out the pur- poses of the organization, and (2) to direct this co-operating or serving group with the highest intelligence and efficiency. Private, corporate control goes to the second administrative problem above suggested, viz.: that of fidelity (public or private) to the purpose of the organization and to the intelligence and the efficiency with tvhich each corporate agent or employee conducts himself. The problem of corporate control, therefore, must be considered as having two significant bearings: (i) being a creature of the state, created in the interest of public welfare, public control may be exercised to the end that public interests may not be violated ; (2) since the state has permitted it, as an institution, to receive con- tributions of capital as a means of accomplishing the common pro- prietary purpose, provision is made for the exercise of proprietary control over that institution and its agents as a protection to those having vested rights. Factors in Effective Private Control. With broader co-operation and consolidation, and with the in- creased complexity of organization, the problem of private corporate administration becomes an increasingly difficult one. Official and proprietary discretion must rest on intelligence. Adequate intelli- gence may come only through the operation of a thorough system of institutional record, inspection and account such as will give to those in positions of control an accurate knowledge of the details and results of business — a system of control which will give to each subordinate full credit for fidelity and ability, as well as mark the infidel and the incompetent for discipline or removal. To be effective, a system of private or institutional control must also have regard to the several classes of proprietary and trust [675] 64 TJic Ainials of the American Academy responsibility provided for in the legal form of organization. Re- sponsibility for administration is of four kinds: (i) The proprietary responsibility of stockholders; (2) the representative responsibility of a board ; (3) the operative responsibility of the officer and of his subordinates, and (4) the employees' responsibility to those in di- recting position for intelligent and faithful service. Intelligent and effective corporate .or private control, and the protection of those interests and purposes for which the corporation was created and capitalized, demands that the employee shall report to the officer, that the officer shall report to the board, that the board shall report to the share-proprietor, and that the share-proprietors shall with integrity perform their duties toward each other, toward creditors and the public in the exercise of proprietary discretion. To the end of obtaining accurate, well-classified, and well-digested information, answering to these several classes of resix)nsiblities a system of subsidiary and controlling accounts is devised and installed by which those in operative and directive trust relations may keep an accurate record of the doings. TJic Rclaliun of an Audit to Corporate Control. An audit pertains not to public control but to a system of private or i)isfifutiojial control ; it has to do with adminstrative methods with operative results obtained by the corporation as a working group, and not with questions of public policy or public welfare. The audit is a method by which an accountant inspects the system of private administration for the purpose of determining whether this gives to the corporation itself and to the corporate proprietors the control which is intended by public laws of trusteeship — to determine where this control is weak or wanting, and where, on account of adminis- trative weakness or lack of control, there has been infidelity or in- efficiency in the service. Looking at the question of control from the view-point of corporate success, auditing is a ])rimary essential without which neither the share-proprietor, the board, nor the officer himself may know whether the agent or subordinate has been faith- ful or, for that matter, the institution itself has fulfilled the purpose of its being. The audit has no direct relation or bearing to any method or system of public control as exercised under democratic, as distinguished from bureaucratic, government. [676] The Relation of Auditing to Public Control 65 The Relation of an Audit to Public Welfare. There are two general aspects of public interest in corporations, viz. : that which looks to the enforcement of charter contracts repre- senting ideals of public policy and welfare, and that which would enforce social order as expressed in rules of business integrity, in performance of private legal obligations, in the execution of private trusts, etc. Proceeding from the assumption that the government should by proper legislation provide for the orderly conduct of a business, and for enforcing the performance of private duty, it may be held that in addition to the powers of inspection by the govern- ment as a means of determining whether charter provisions have been complied with, there should be a bureau of corporation audits which should inquire into the question of the working relations of the corporation. This argument, however, would seem to be vicious for two reasons : Firsts because there is no greater or stronger reason for the government inquiring into the private relations of corpora- tions as a means of protecting parties interested against the infidelity of others, than there is for the government questioning the private relations of partners ; in fact, under the legal form of organization, a corporation which has installed a proper system of private control would have less reason for the government inquiring into its work- ing relations since there is every legal method provided for holding officers, agents and employees to the strictest account ; there is no part of our law which is so jealously guarded and enforced, as is that which pertains to trustees — any infraction coming to the atten- tion of a court finds remedy in civil damages and exemplary punish- ment under the criminal code. Second, for the reason that the cor- poration and those interested in the corporation are in a much better position administratively to protect themselves through a system of current account and regular audit than could possibly be done by a bureau or branch of the government. As a means of providing for the orderly conduct of the business of its corporate creature, the only question that the government is in- terested in is to know whether or not the corporation has installed a method of record, inspection and account which will hold its officers and agents to a strict account, as contemplated in the form of corpo- rate organization prescribed, and whether or not an independent or disinterested audit has been provided as a means of giving assurance [677] 66 The Annals of the American Academy as to the correctness of financial or operative statements made. Such is the Enghsh law pertaining to corporations. The argument in sup- port of this is that the corporation, being dependent on its agents for the exercise of its powers and for the use of its properties (its funds and other resources being entrusted to them), these same agents by reason of their position having in their hands the records and accounts through which proprietary control is to be obtained, there should be an independent or disinterested auditor over the system who is not responsible to, or controlled by these corporate agents. When it is reflected that the welfare of the nation is so largely involved in the integrity of corporate agents, much force is given to the argument. Independoit Audit of Corporatio)ts as a Means of Control. Proceeding from the assumption that the government should provide for the means whereby corporate integrity may be estab- lished, two systems of independent audit have been evolved: (i) what may be styled the Continental system, and (2) the English sys- tem. These two systems have grown out of two distinct forms of political organization — the one arbitrary and bureaucratic, the other representative and democratic. Under the German, French or Rus- sian system the government exercises a rigid inspection, and con- ducts the audit of corporations through which the public looks for protection. The success of such a method depends for its honesty and efficiency, in the first place, on the government itself being free from political or private influence, and, in the second place, on having within it the highest and best of professional intelligence. Thus, in Germany, for example, it is in the service of the government that are found the best engineers, the best financiers, the best lawyers, the best accountants. Again in Russia, the government being highly bureaucratic undertakes the paternalistic responsibility for the pro- tection of private interests represented in the corporation; it does this through inspection and audit as a means of determining whether or not the officers and agents of the corporation have performed their responsibilities with fidelity and efficiency. In England, the governing ideal is one of determining by public inspection and control w^hether or not the corporation has complied with the charter provisions, making it a condition precedent that the [678] The Relation of Auditing to Public Control 67 corporation shall provide for itself an independent auditor, holding him (as the appointee of the stockholders or, in default of election at a regular meeting, as the appointee of the government for the stockholders) responsible for the accuracy of statements made which would reflect the fidelity or efficiency of corporate agents. To quote from "The Companies Act": » "Every company shall, at each annual meeting, appoint an auditor or auditors to hold office until the next annual general meeting. "If an appointment of auditors is not made at an annual general meeting, the Board of Trade may, on the application of any member of the company, appoint an auditor of the company for the current year, fix the remuneration to be paid to him by the company' for his service. "A director or officer of the company shall not be capable of being ap- pointed auditor of the company. . . . "Every auditor of the company shall have a right of access, at all times, to the books, accounts and vouchers of the company, and shall be entitled to require from directors and officers of the company such information and explanation as may be necessary for the performance of the duties of the auditors, and the auditors shall sign a certificate at the foot of the Ijalance sheet, stating whether or not all of their requirements as auditors have been complied with, and shall make a report to the stockholders on the accounts examined by them, and on every balance sheet laid before the company in general meeting their tenure of office ; and in every such report shall state whether or not, in their opinion, the balance sheet referred to in the report is properly drawn up so as to exhibit a true and correct view of the state of the company's affairs, as shown by the books of the company; and such report shall be read before the company in general meeting. "If any person, in any return, report certificate, balance sheet, or other document required by or for the purpose of this act, wilfully makes a state- ment false in any material particular, knowing it to be false, he shall be guilty of a misdemeanor, and shall be liable, on conviction, and on indictment, to imprisonment for a term not exceeding two years, with or without hard labor, and on summary conviction to imprisonment for a term not exceeding four months, with or without hard labor; and in either case to a fine in lieu of, or in addition to such imprisonment aforesaid." When we reflect on the efiforts at corporate regulation through public examination and on the failure of attempts made in this coun- try to regulate the affairs of corporations through public examina- tion, we may well question the propriety, as has England, of relying on bureaucratic methods for the protection of private interests, espe- cially when these private interests are in a much stronger position to bring evidences of irregularity before the courts and enforce their [679] 68 The Annals of the American Academy rights. The English system is one which places on the stockholders themselves (the proprietors of the corporation) the duty of provid- ing the means of effective control — one which places on the joint proprietors of the corporation (the stockholders) the duty of ap- pointing an independent auditor for the critical inspection or exami- nation of the system installed and operated by the officers of the company. It is as necessary as is the appointment of any other officer in default of which a department of the government may assign an independent auditor to duty. That the officer may know whether the report of the employee is to be relied on, that the direc- tor may have a true record of results from the officer in charge, and that the stockholder may have before him a proper basis for estimate of integrity and ability of the several forms of corporate trustees and agents, the law requires that a corporation before it shall begin business shall choose, among other officers, an inde- pendent auditor who shall be in no way interested in the business, who shall certify to the correctness of reports, and who shall become responsible, both civilly and criminally, for the truth of the state- ments made over his certificate. This is not only a legal recognition of the importance of the audit to effective administrative control, but it is also a recognition of the duty of government to provide the conditions most favorable to success in the administration of an institution created in the interest of public welfare and dependent on trustees for its operation. It is a provision which requires the establishment of conditions necessary to an intelligent knowledge of affairs. It protects the corporation by permitting it to choose its own auditor. It protects the public and insures to it the highest social return by putting into the hands of the corporate authorities the means whereby the institution may attain the best corporate result. In the English system is found the best method for the administrative control of corporations that has been devised. True to the purposes of its enactment "The Companies Act" of England has most effectively regulated the corporations coming under its jurisdiction without submitting the companies themselves to pry- ing inquisition and to the blackmailing possibilities of corrupt and inefficient officials. FEDERAL SUPER VISI(3N AND REGULATION OF INSURANCE Bv S. HuEBNER, Pit. D., Instructor in Insurance and Commerce, University' of Pennsylvania. The agitation for the federal supervision and regulation of the insurance business must be viewed as marking a step in that gradual extension of federal control over industry and commerce which is asserting itself more and more with the increasing intimacy of com- mercial relations irrespective of state lines, and which is bound to continue until ultimately every important commercial interest whose practice is national in scope shall have been brought within the reach of federal law. Beginning as a local business, insurance has devel- oped into a colossal institution, national and international in scope, and involving, as the President stated in his annual message to Congress, "a multitude of transactic^is among the people of the different states and between American companies and foreign gov- ernments." Into this important field of business, always regarded heretofore as within the control of the several states alone, it is now proposed to extend the power of the national government, and to such an extent that the authority of the states, although not com- pletely eliminated, will become merely incidental. Certainly this is a most radical change in view of the vastness of the interests involved. According to recent estimates,^ it appears that, even excluding the business of the large number of fraternal beneficiary associations and local nuttual fire companies, the amount of insurance in force in the United States aggregates $50,000,000,- 000, while the assets of the companies have accumulated to the gigan- tic sum of $3,000,000,000. Each year, it is estimated, that the i)eople of the United States, approximately 20,000,000 of whom are directly interested in insurance as policyholders, pay $1,000,000,000 in pre- ' Majority Report of the Ccniimittce on Insurance Law presented at the meeting of the American Bar Association, August 24, 190s. [6S1] 70 The Annals of the American Academy miums to insurance companies, and receive approximately $800,000,- 000 in return. The magnitude and importance of the business as indicated by these figures can scarcely be comprehended, and, being in the main a business of trust, the necessity for strict government supervision must be apparent. Indeed, the supervision of insurance by the government is to-'day regarded as an absolute necessity by every authority on the subject, and is considered even more essential than in the case of banks. Insurance contracts, especially in life insurance, may run for years before maturing, the possibility always presenting itself of a company promptly paying its current claims, and yet being hopelessly insolvent as regards its future obligations. Moreover, it is practically impossible for the individual to determine lor'himself the financial standing of the company into whose care he has entrusted the protection of himself and family, into whose coffers he has paid his premiums for years, and upon whose ability to pay when the time comes he implicitly relies. The only way to determine the solvenc)^ of an insurance company is to calcu- late the present worth of its future obligations, and to compare this and the accrued liabilities with the available assets. This is a task be)''ond the power of individuals, many of whom have little information about insurance except the name of the company whose policy they hold. It is a task which can be adequately under- taken only by the government; but, while there is a consensus of opinion regarding the necessity of government supervision, the ques- tion as-to whether the supervising authority ought to be the nation or the several states has been a disputed one for over forty years, and ,as we shall see, is still far from settlement. Historical Reviezv of the Subjects The question of national versus state regulation of insurance may be said to have had its origin in the passage of the National Banking Act of 1864. Although applying only to banks this act sug- gested the possibility of extending federal control to the insurance business. In the very next year Congress was memorialized by certain companies to free them from many of the vexatious bur- dens connected with state supervision. It was proposed in the ^ For a detailed account of the history of this subject see John F. Dryden's "An Address on the Regulation of Insurance by Congress," delivered ai a meeting of the Boston Life Underwriters' Association, November 22, 1904. [682] Federal Supervision mid Regulation of Insurance 7 1 memorial that Congress should pass a national incorporation act which would enable insurance companies, like national banks, to become federal institutions. A bill to this effect was introduced in the Senate in 1868, but met with the fate that awaits any meas- ure which attempts to take away the constitutional right of the sev- eral states to create corporations engaged in interstate commerce. But while this bill received little support, it is important to note that at this early date, when insurance was much more in the nature of a local institution than now, national supervision, nevertheless, claimed among its supporters some of the. most influential men con- nected with the insurance business. Mr. Elizur Wright, for ex- ample, often called the father of state insurance supervision, upheld federal control most vigorously upon the ground that it would greatly simplify matters and be much more economical than state regulation ; that it would protect the policyholders equally well, if not better ; and that insurance was, by its very nature, a national interest and better adapted to federal than local control. In the same year that the bill providing for the national incor- poration of insurance companies was introduced, there occurred another event which completely changed the status of the problem of national supervision, and which has been inseparably connected with the discussion of the subject from that date to this. This new factor was the famous case of Paul vs. Virginia, decided by the United States Supreme Court in 1868, and confirmed in later de- cisions, according to which the issuance of a policy of insurance was declared not a transaction of commerce and therefore not subject to federal control. Although this case, as w^ell as those that followed, did not bear directly on the point at issue, the opponents of national supervision have always assumed that in view of these decisions, the Supreme Court w^ould declare unconstitutional any act seek- ing to deprive the states of their present right to supervise that part of the insurance business which is interstate in character. The unfavorable decision of Paul vs. Virginia and the defeat of the bill of t868 did not, however, crush the movement for federal regulation. For the next twenty-five years its advocates waged an educational campaign which resulted, at least, in the development of a most extensive literature on the subject. Finally, in 1892, things seemed ready for another attempt at congressional legislation. In that year Mr. John N. Pattison, president of the Union Central Life [683] 72 TJic A)inals of the American Academy Insurance Company, introduced a bill providing for a system of national regulation of insurance companies engaged in interstate business. Such companies were to report to a National Bureau of Insurance, and were thereafter to be exempt from all other require- ments except those which Congress or the states from which they had secured their charters might see fit to impose. Owing, how- ever, to its being weighted down with too many provisions of detail, the bill invoked sufficient opposition to prevent its becoming a law. In 1897 the matter once more came before Congress in the form of the 'Tlatt Bill," modelled closely after the "Pattison'Bill" of 1892, but again, owing largely to the pressure of other business connected with the Spanish-American War, the bill failed to secure favorable action. The next important step in the movement for federal supervision was the establishment of the new Department of Commerce and Labor on February 14, 1903. This department was authorized, through the Bureau of Corporations, "to gather, compile, publish and supply useful information concerning such corporations doing busi- ness within the limits of the United States, as shall engage in inter- state commerce or in commerce between the United States ancl any foreign country, including corporations engaged in insurance." While not of far-reaching importance, this act, nevertheless, meant an advance, since it marks the first successful attempt on the part of the federal government to recognize insurance as a busi- ness which demands national and not merely local attention. Then on December 8, 1904, followed President Roosevelt's message to Congress in which he declared insurance to be a business which "vitally affects the great mass of the people of the United States and is national and not local in application," and in which he urged that "Congress carefully consider whether the power of the Bureau of Corporations cannot constitutionally be extended to cover interstate transactions in insurance." Following this ex- pression of Executive approval came the bill of December 12, 1904, introduced in the House by Mr. Edward Morrell, but which was referred to the Committee on Interstate and Foreign Commerce. Lastly, we have the bill introduced in the Senate by Mr. John F. Dryden, president of the Prudential Insurance Company of America. This bill marks the latest attempt to secure national supervision through congressional action, and represents better than all former bills the present-day requirements of such legislation. [684] Federal Supervision and Regulation of Insurance 73 Briefly summarized, the bill introduced by Senator Dryden pro- vided for an official in the Bureau of Corporations called the Superin- tendent of Insurance. This official was to be appointed by the Presi- dent and placed in charge of a bureau called the Division of Insur- ance, and was to be assisted by an official known as the National Actuary. Policies of insurance were deemed by the bill to be "ar- ticles of commerce and instrumentalities thereof," and the delivery of contracts of insurance or the transmisson of premiums or other sums between the several states or between this nation and other nations were declared transactions in interstate or foreign commerce. Express provision was made, however, that "the provisions of this act shall not apply to any corporation transacting the business of insurance exclusively within one state, district or territory : and provided further, that this act shall have no application to any relig- ious, charitable, benevolent or purely fraternal society or associa- tion." The superintendent of insurance was authorized to require reports in any form he might choose to prescribe from the various companies transacting an interstate or foreign insurance business, and might also examine the business of such companies whenever he saw fit. Every company was to file with the superintendent a certified copy of its charter and by-laws together with its last state- ment, and was also to make a deposit with the Treasurer of the United States, as a guarantee for the faithful performance of its contracts. United States bonds or other securities satisfactory to the superintendent to the amount of $100,000, unless the superintendent would accept as satisfactory a similar deposit in the state where the company had secured its charter. After all these requirements had been complied with, the superintendent was to grant a license to the company authorizing it to transact such interstate or foreign business in any or all parts of the Union. Provision was also made that if a foreign nation should refuse American companies such a license or should subject them to rules and regulations different from those applying to companies having their origin in the said foreign country, then the superintendent was to refuse such a license to the companies of that country transacting or seeking to transact business here, and was to subject them to the same rules and regulations applied by the foreign country against American companies. Although containing many admirable provisions, the bill, as out- lined, was introduced too late in the session to secure proper consid- . [685] 74 The Annals of the American Academy eration. There is every reason to believe, however, in view of the President's attitude on the question, and the increasing demand for such legislation, that the same or a similar bill will be introduced in the coming Congress. All previous attempts to secure federal con- trol of interstate insurance, it is true, have come to naught. But at the same time it cannot b"e denied that public sentiment is steadily . growing in favor of federal supervision. To quote the Committee on Insurance Law of the American Bar Assoociation : "No one has of- fered any substantial reason against federal supervision and it is advocated by the President of the United States, and many state insurance commissioners, and favored by leading insurance officials and numerous insurance journals. Besides these, the general press is in favor of any movement in the direction of greater corporate pub- licity, and the patrons of insurance — the people — favor federal su- pervision of the business as the national banks are supervised."^ Arguments in Favor of National Supervision. But what are the reasons, it will be asked, which are thus mould- ing public sentiment in favor of national supervision ? A full answer to this question is quite impossible for the present, since the argu- ments which have been advanced from time to time are exceedingly numerous. Briefly stated, the principal arguments are: 1. That national supervision will greatly lessen the unnecessarily large cost of supervising insurance companies by fifty-two separate state and territorial departments, and that by thus lessening the ex])ense it will decrease the cost of insurance. 2. That it will obviate much of the burdensome and discrimi- natory taxation now imposed by the several states upon insurance companies of other states. 3. That it is the only means of remedying the present lack of uniformity in our state insurance laws ; that it will be a step toward uniform regulation and supervision of insurance companies ; and that it will afiford relief from the many petty exactions imposed by the different state departments, as well as from the evils resulting from variations in the rulings of the several insurance commissioners. 4. That it will afford better protection to policyholders, and will result in the elimination of fraudulent insurance enterprises. ' Page s of the Report of the Committee on Insurance Law, presented at the meeting of the American Bar Association at Narragansett Pier, R. I., August 24, igos. [686] Federal Supervision and Regulation of Insurance 7 5 5. That it will entitle any insurance company reporting to the national government to transact business in all parts of the Union, at the same time protecting that company against the retaliatory legislation of other states. 6. That foreign countries would regard with much more weight the certificates issued by a national department, and that the federal authorities would be in a much better position both to protect Amer- ican companies transacting business abroad and to supervise the large number of foreign companies transacting business in the United States. 7. That centralized supervision by trained experts would enable the national government at small expense to provide for a much greater degree of publicity as regards this most important busi- ness than is possible at the present time. Information regard- ing the principles, operation and condition of the business could be disseminated throughout the country in clear and concise form as contrasted with the confusing, voluminous and often meaningless mass of statistics issued from time to time by many of the state in- surance departments. 8. That insurance is both in theory and in practice a national and international business, and not a fit subject for state or local control. Directing our attention to a more detailed examination of the above contentions, it would seem to require but little argument to show that state supervision and regulation has proved need- lessly burdensome and expensive. Although an institution which does not create wealth, but merely equalizes misfortune and aims to protect the individual and the family against loss, insur- ance has, nevertheless, been subjected to a multitude of taxes and fees, until to-day it is estimated that the business contributes the enormous sum of between $20,000,000 and $25,000,000 annually to the treasuries of the various states. Nor does this enormous charge bear any direct relation to the service rendered by the states in the way of supervision. Instead, it appears from a recent compilation of data furnished by twenty-eight states, that, exclusive of all taxation, over $5,000,000 more was collected by these states than was needed to defray the cost of supervision. In England for example, efforts are made to encourage a business so essential to the family and the state and so promotive of the community's interests as insur- [687] 76 The Ajuials of the Atnerican Academy ance, by exempting- a portion of every income if expended for that purpose. In the United States, however, despite the fact that insur- ance is itself a tax which in the end must fall upon the community, and that by protecting the family, encouraging thrift and supporting industry, it relieves the state from large expenditures which would otherwise have to be incurred, the various state legislatures have nevertheless vied with one another in reaching the funds of insur- ance companies through taxes and fees of every sort and descrip- tion. In fact, the insurance departments of many states, since they accept without question the examinations made by a few of the more important states, have become nothing more than salary- earning and tax-collecting agencies. There can be no doubt that if federal control over interstate insurance can be constitution- ally established, the large and unequal tax burden upon insurance companies can be largely removed, and existing taxes properly applied. Similarly the expenses of supervising the business through fifty-two separate departments can probably, as has been estimated, be reduced to one-tenth its present amount. But quite as flagrant as the tax abuse and the large cost of supervising the business is the absolute lack of uniformity in our state insurance laws. If a compilation of these laws were attempted a most curious spectacle would be the result. It would be found that the fifty-two states and territories are all acting along independent lines and that each, as has been correctly said, possesses "its own schedule of taxes, fees, fines, penalties, obligations and prohibitions, and a retaliatory or reciprocal provision enabling it to meet the highest charges any other state may require of companies of other states." In the field of taxation, for example, there is neither method nor uniformity of rate. Some states will tax premiums after allowing for losses and expenditures within the state, while others will tax gross premiums without any deduction, thus presenting the interest- ing anomaly of companies being taxed upon their losses and ex- penses. Again, in addition to the usual property tax, there is the large variety of fees imposed for the right to enter a state to trans- act business, for municipal licenses, for filing documents, or for licensing agents. Nothing perhaps more forcibly illustrates the unequal and unscientific character of state taxation with reference to the insurance business than the experience of the New York Life [68S] Federal Supervision and Regulation of Insurance 77 Insurance Company some years ago. As regards twenty-five states where the insurance in force aggregated $317,000,000 the taxes amounted to only $23,000, while in the twenty-four other states and territories representing $313,000,000 of insurance the company paid $207,000 in taxes.'* In addition to the evils of unscientific and unequal taxation of insurance companies it is also important to remember that the state legislatures at each session enact a multitude of new laws, many of them detrimental to the interests of the public, certainly annoying to the companies, and frequently in direct conflict with the laws of other states. Especially in fire insurance have the evils of state legislation become clearly apparent. Despite the general introduc- tion of a uniform fire policy in the United States, its provisions have given rise to a great diversity of judicial opinion in the several states, so that its provisions mean one thing in one state, another thing in a second state, and are prohibited in a third. At present nearly one-third of the states have anti-compact laws, nearly one-fourth prohibit the use of the co-insurance clause, nearly one-half have enacted valued policy laws, while nearly three-fourths possess re- taliatory enactments — all of which legislation can only be charac- terized as opposed to the underlying principles of insurance, and detrimental to the best interests of the public. Other states, again, seek to prohibit the company from applying for the removal of an action from a state to a federal court on pain of having its license revoked. Then there are the evils resulting from the different rulings and demands of the insurance commissioners of the same state and of the various states. Finally, there is the right, frequently exercised and leading to duplicate and uncalled for examinations, of the various insurance commissioners to examine all companies trans- acting business in their state whenever they see fit and at the com- pany's expense. Examples like these might be greatly multiplied, if space per- mitted, to show the evils of the present system. Suffice it to say that many insurance commissioners are fully aware of these evils, and have not hesitated to declare their views in favor of a change. Even a supporter of state supervision like Mr. S. H. Wolfe, re- cently expressed his dissatisfaction with the existing system of insurance laws in the following words : "Each state has an insur- * Fricke's text book on Insurance, page 14. [689] 78 The AiDials of the American Academy ance code of its own, and the difficulties and annoyances which insurance companies experience in trying to comply with fifty differ- ent sets of laws may well be imagined. There is a crying need for uniformity in this matter, and for a radical change in the laws of all the states. I know of no one state which possesses a code of insurance laws which may even be termed reasonably satisfactory. The insurance business has attained such proportions, and con- tributes so liberally through taxation to the income of the state, that it is entitled to more equitable and reasonable treatment than it is receiving at present."^ Whether this state of affairs can be changed under the present system may well be doubted. Certainly the difficulties of unifying and controlling the action of fifty or more legislatures and the same number of insurance departments with reference to the much mis- understood subject of insurance, may well be questioned in view of our past and present experience. It seems to be beyond reasonable doubt that if Congress could constitutionally create a national insur- ance department, possessed of the same powers now exercised by the fifty-two state and territorial departments, and place it in charge of competent men holding their positions by reason of special fitness rather than political affiliations, much of the heavy and discrimina- tory taxation, unnecessary expense, and lack of uniformity in legis- lation and supervision could be eliminated. There can be little doubt also that centralized supervision could be made much more effective than state supervision in extending publicity ; in protecting American companies abi'oad, and supervising foreign companies transacting business in this country ; in granting protection to the insurance companies of one state against the retaliatory acts of other states ; and in affording additional protection to policyholders by using the strong arm of the federal government in stamping out fraudulent enterprises. Insurance in Theory and in Practice is an Interstate Business. Aside from the arguments just advanced in favor of national regulation, it is important to note that insurance is both in theory and in practice an interstate business. To derive the benefit of the * See S. H. Wolfe's lecture on State Supervision of Insurance Companies in The Annals of the American Academy of Political and Social Science, September, 1905, page 141. [690] Federal Supervision and Regulation of Insurance 79 law of average which fundamentally underlies the successful opera- tion of all forms of insurance, it is essential that the business should be spread over as wide a field as possible. Hence it is that the development of the business has naturally and necessarily been national and international rather than local. In fact, the proportion of insurance written by American companies in the states where they were organized is exceedingly small, while the interstate busi- ness and the business transacted by American companies abroad and by foreign companies on American soil is suprisingly large. In life insurance, for example, it appears that in the case of twenty leading companies, transacting nearly nine-tenths of the total ordinary life insurance of the country, only 15.5 per cent, of the total amount of their outstanding policies is held in the home state, only 14.5 per cent, of the new policies are issued in the home state, and only 12.6 per cent, of the total premium income is collected there. Even in the case of the four largest com- panies in America, domiciled in the wealthy and thickly populated State of New York, considerably less than one-fifth of the total business is intrastate, while over four-fifths is interstate and inter- national. In the case of fire and marine insurance the situation is equally striking. The seventeen largest fire insurance companies of New York, with risks exceeding $50,000,000 each and with a combined total of risks aggregating $5,740,000,000, wrote only 25 per cent, of their business during 1903 in the home state, and received only 16.7 per cent, of their premium income from the intrastate business. In Pennsylvania the respective percentages for the same class of com- panies (with risks of $1,636,000,000) were only 10.5 per cent, and 10 per cent. ; ^-hile in the case of eighteen American companies be- longing to the same class, but domiciled outside of New York and Pennsylvania, and carrying risks of $5,520,000,000, the proportion of the new business written and the premiums received in the home state amounted to only 5.3 per cent, and 4.9 per cent, of the total. Likewise in the list of marine, casualty, surety and other forms of insurance, similar ratios will be found as regards the intrastate and interstate business. To this may be added the important fact that the large American life insurance companies transact a considerable portion of their business abroad, and that, on the other hand, a very large proportion of the fire and marine insurance of the country is [691] So The Annals of the American Academy written by foreign companies. At the close of 1903 two companies alone (the Equitable and Mutual Life of New York) held 366,725 policies abroad, aggregating $980,055,792 of insurance and represent- ing for that year a premium income of $42,027,980." During the same year foreign fire insurance companies reporting to the State of New York received $55,935,772 in premiums from their American business, or about 28 per cent, of the total premiums collected by all stock companies in the United States, and carried $7,306,000,000 of risks, or 27 per cent, of the total. Likewise in marine insurance the American branches of the twenty leading foreign companies wrote $3,723,000,000 of risks in 1903, or 54 per cent, of the total, and received nearly one-half of the total premiums collected. Indeed, in some sections like the Gulf States and the Pacific coast, approxi- mately four-fifths of the total marine insurance written is controlled by foreign capital. The following tables will show in greater detail the interstate and international character of the insurance business. Arguments Advanced Against National Supervision. Without attempting to disprove, but generally admitting the criticisms directed against the present system of state supervision, the opponents of federal control question the wisdom of enacting legislation to this effect, on one or more of the following grounds : 1. That national supervision would be an undue infringement upon state rights. 2. That the National Convention of Insurance Commissioners is composed of members who are educated to the work, and that it would be better policy to let these commissioners in general assem- bly continue to provide rules for the regulation and supervision of insurance, as they have been doing for over a quarter of a century. 3. That national supervision will increase the chances for fraud by placing too much power in the hands of a few individuals. The constantly changing character of the heads of the many state insur- ance departments is one of the most desirable features of the pres- ent system, since it renders collusion easy of detection. 4. That the supervision of all insurance companies in the United States, involving such enormous financial interests and embracing 'James M. Beck, North American Review. August, 1905, page 194. [692] Federal Stipervision and Regulatio}i of Insurance 8i o c a 4) ONioroiOH ■<^vO lOrO'^N ion n tJ-Q »00 OOO mOmi-iihOOOOOmOmn«t1-Omc(0 w o ^ < c^ p C/2 Z t— 1 fe o * p^ w w o H A o < n (i:; !/) < K ^— ^ o o o HH w w H-1 H <1 < C/J ^ It; W o Q o 'i^ 1 1— 1 1. W ffi , 1 H m <; O H 2 HH ^ o X m m W ►J m <1 H r- a; " - E c Ih -< '■O MIOOCO ro mCO Ci CSSO rO*^tOM C^ roror^^O "^cotoc/DO CSMMMOOOOi-iOi-iwOwtsroOi-i'-iO « M lo o ■^O rO O w rO ro M ro M c< ro •* N O 00 Tt O M 00 C^ O W 00 O O OO M vO O lO f-^ lO M O ro in C> O (NCSmmoOOO^O^>-''-'CSN^OmcnO ■I l-'l' I- O-M >ovoiOrOO O-CO ror--rooOC<0 CO voi-' (N O 0 O O iJ"jN '^O'-O TJ-(N^t^h-tCtMCOCO>-IMMMMrO>^MI-IMO < 0, S o o o o o ^^ o 8 8^ -^ K^ c " op, o^ -IhS rvw ' ° w (u , OOO r M ^ (U r 1 -O O rt ^j ri CJ o s^ t/i i-J ffi ^ >,5 £ rt c g P^. fiH (1, p^ 2; 2; M c +-> O H OJ j3 c 4) > o > X! H c 6 "o o — — > 05 0) t- •" s w c &:s * t ■5 -o . c 4) >— I i^^ a o c o o o [693] The Annals of tJie American Academy Table II. — Fire Insurance.* New York Joint Stock Companies. Agricultural Insurance Co Continental Insurance Co Dutchess Insurance Co German Alliance Insurance Co German- American Insurance Co Germania Fire Insurance Co Glens Falls Fire Insurance Co Globe and Rutgers Fire Insurance Co. Greenwich Fire Insurance Co Hanover Fire Insurance Co Home Insurance Co Niagara Fire Insurance Co Phoenix Insurance Co Queen Insurance Co. of America . . . . Rochester-German Insurance Co. . . . Westchester Fire Insurance Co Williamsburg City Fire Insurance Co Totals fl.T. S: u} c *f v. S oj C H ^ cB.S Pennsylvania Joint Stock Companies. American Fire Insurance Co Fire Association of Philadelphia . . , Insurance Co. of North America . . , National Union Fire Insurance Co. , Penn Fire Insurance Co , Spring Garden Insurance Co Totals 163 661 S3 SO 7S7 280 135 131 269 435 ,169 277 571 308 no 241 126 5. 740 161 403 550 105 301 114 1,636 Stock Companies of Other States. ^tna-Hartford, Conn American Central Ins. Co. (Mo.) . . . American Insurance Co. (N. J.) ... Citizens' Insurance Co. of Missouri . Connecticut Fire Insurance Co Firemen's Fund (California) German Insurance Co. (111.) Hartford Fire Insurance Co. (Conn.) Milwaukee Mechanics Insurance Co. National Fire Ins. Co. of Hartford. . . New Hampshire Fire Insurance Co. . Northwestern Nat'l Insurance Co. of Milwaukee Orient Insurance Co. (Conn.) Phoenix Insurance Co. (Conn.) Providence-Washington Ins. Co St. Paul Fire and Marine Springfield Fire and Marine Ins. Co. (Mass.) Traders' Insurance Co. (111.) Totals S,22o 521 200 207 143 261 304 261 907 137 486 155 iSS 117 484 202 163 361 iSi o c/i .; up ^ o c M o _ * r 346 . 229 , 362 334 .240 •251 .214 .179 • 44 •331 .266 .223 .203 •139 .103 .278 •377 252 151 ,094 .096 •132 .108 .086 105 ,030 ,076 ■093 055 ,020 .088 •159 . 012 •095 . 020 . 104 .089 .042 .020 •033 •123 • 052 ■133 « Qj c: 1,788 6,818 694 S4I 7.649 2,717 1,679 2,015 2,457 4,253 11,911 3.353 6,440 3.983 1.477 2,667 I.3SI ■OS3 CO rt C-o *> 197 158 .30a 25* IS .165 . 140 ,164 . 327 •331 .167 .161 .108 •075 .070 . 192 234 61,803 20 7 3 3 2 3 4 3 13 I 5 I I I 4 3 3 4 3 65 167 135 .085 .010 .138 . 096 .087 10 .03I .084 OSS .049 , 016 .119 •143 .010 . 093 •015 .011 .088 .024 .030 .038 .097 .044 .130 .049 To economize space, the figures beyond millions are omitted in the columns. They have, however been included in the " totals." Federal Supervision and Regulation of Insurance 83 over a dozen kinds of insurance differing radically from one another in many respects, is well-nigh beyond the power of a single depart- ment. 5. That Congress is without constitutional power to establish a system of federal control. To understand the real force of these contentions a few words of explanation are necessary. In the first place federal supervision does not contemplate the elimination of state supervision. It seeks only to regulate insurance transactions between the states, and pro- poses not to interfere with a state's constitutional right to supervise its own home companies. In other words, there is to be federal con- trol over interstate insurance supplemented by state control over domestic companies. Secondly, it should be noted that the National Convention of Insurance Commissioners is only a voluntary body without legal existence. Despite its long career and the great amount of good which it has accomplished, the evils of state supervision are still so numerous and apparent as to preclude any hope for permanent and far-reaching reform so long as this reform must emanate from half a hundred independent sovereignties. The next two objections to national supervision, namely, the increased opportunity for fraud and the difficulty of supervising such vast interests through a single department — if valid at all — should only serve to caution Congress to exercise the greatest care in providing for the proper organization and administration of a national system. Probably no factor is more largely responsible for present evils than the political character of the state insurance departments. In nearly every state of the Union this department, which above all others, owing to the character of the institution which it represents, should be kept out of politics, is regarded as a part of the state's political machinery to be filled every few years by men who have rendered political services, irrespective of what their qualifications for the office may be. If federal supervision is con- stitutionally possible, a splendid opportunity presents itself to lift this most beneficient of institutions out of the realm of politics and bring it under the salutary influence of trained officials who might continue to serve through administration after administration. The last objection is by far the most important, and for years has proved the stumbling block in the way of federal regulation. To bring insurance within the reach of the federal government, [695] 84 The A II 11 ills of the American Academy like the railway industry, it is necessary to show that insurance com- panies, like railroad companies, are transacting an interstate com- merce business. And here we are told that the United States Supreme Court has repeatedly declared insurance not to be com- merce. In fact, this objection was the only one offered against national supervision in the minority report submitted by Mr. W. R. Vance to the Committee on Insurance Law before the American Bar Association.'^ This minority report presents the whole contention in a nut-shell. "I feel myself compelled," writes Mr. Vance in this re- port, "to dissent from the conclusions reached by my associates of the committee on the single proposition that 'there is no constitutional obstacle in the way of federal regulation' of the business of insur- ance. If insurance is not interstate commerce, it is clear that the regulation and control of the business is beyond the power of the federal government. I am of opinion that the existing methods of regulating insurance business bv the several states is most defective, since it is both inefficient in preventing wild-cat companies from en- gaging in the business and also nedlessly expensive to those who in the last analysis bear the expenses incident to the business, — the policy-holders. I am also of opinion that federal supervision, if it were possible under our constitution, would probably remedy many of the evils existing under the present system of regulation, but I do not see that such supervision by the federal government is possible with- out a constitutional amendment expressly giving it the required power. . . . The proper conclusion seems to be that, however much we may desire to believe that insurance is interstate commerce and therefore susceptible of federal supervision, the matter is con- cluded by the carefully considered judgment of the Supreme Court of the United States against which, despite frequent assaults by its ablest opponents during a period of nearly forty years, not a single dissenting voice has been raised from the bench. Any act of Con- gress, with a view to such supervision, would necessarily be unconsti- tutional and void, and the time and money that would be required to secure its passage could much more profitably be expended in en- deavoring to secure some uniform action on the part of the states based upon a more intelligent understanding of the business and of the real interests of the insuring public." '' Mteting'at Narraga'nsett Pier, R. I., August 24, 1905. [696] Federal Supervision and Regulation of Insurance 85 The Constitutionality of National Supervision. The constitutional objection in the way of federal regulation consists of the right of the several states to exercise all those super- visory powers not delegated to the United States by the Federal Con- stitution. Under the Ninth and Tenth amendments, it is provided respectively that: "The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people" ; and "The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people." In view of these reserva- tions, federal supervision of insurance is clearly impossible unless it is one of the powers delegated to the United States by the Constitu- tion, and the clause which has been generally agreed upon as dele- gating such power — if it is delegated at all by the Constitution — is Section 8 of Article I, namely: "The Congress shall have the power to regulate commerce with foreign nations, and among the several states, and with the Indian tribes." To utilize this "commerce clause" for the desired purpose, it is necessary to show that insurance is inter- state commerce. Unfortunately, however, for the advocates of national supervision the United States Supreme Court has handed down a long series of decisions denying that insurance is commerce.^ In the famous case of Paul vs. Virginia, decided in 1868, the court held that fire insurance was not commerce ; then in the case of Hooper vs. California, decided in 1894, marine insurance was de- clared not to be commerce ; finally in the case of the New York Life Insurance Company vs. Cravens, decided in 1899, life insurance was also held not to be commerce. In the case of Paul vs. Virginia, where fire insurance was the subject involved, Justice Field delivered the opinion to the effect that, "Issuing a policy of insurance is not a transaction of commerce. The policies are simple contracts of indemnity against loss by fire, entered into between the corporations and the insured, for a con- sideration, paid by the latter. These contracts are not articles of commerce in any proper meaning of the word. They are not sub- jects of trade and barter offered in the market as something having * Among the principal cases are Paul fi. Virginia, 8 Wall. i68 (1868); Liverpool Insu- rance Co. vs. Mass., 10 Wall. 566 (1870); Hooper vs. California, 155 U. S. 648 (1894); New York Life Insurance Co. vs. Cravens, 178 U. S. 389 (1899); Nutting vs. Mass. 183 U. S. 553 (1901). [697] 86 The Annals of the American Academy an existence and value independent of the parties to them. They are not commodities to be shipped or forwarded from one state to another, and then put up for sale. They are like other personal contracts between parties which are completed by their signature and the transfer of the consideration. Such contracts are not inter- state transactions, though the parties may be domiciled in different states. The policies do not" take effect — are not executed contracts — until delivered by the agent in Virginia. They are, then, local transactions and are governed by the local law. They do not con- stitute a part of the commerce between the states any more than a contract for the purchase and sale of goods in A^irginia by a citizen of New York, whilst in Mrginia would constitute a portion of such commerce." In the case of Hooper vs. California, in 1894, the court reiterated its opinion in the following words : "The business of insurance is not commerce. The contract of insurance is not an instrumentality of commerce. The making of such a contract is a mere incident of commercial intercourse, and in this respect there is no difference whatever between insurance against fire and insur- ance against the perils of the sea." Even as late as 1901, in the case of Nutting vs. Massachusetts, the Supreme Court again confirmed its former decisions, with the words: "A state has the undoubted power to prohibit foreign insurance companies from making con- tracts of insurance, marine or other, within its limits, except upon such conditions as the state may prescribe, not interfering with interstate commerce. A contract of marine insurance is not an instrumentality of commerce, but a mere incident of commercial intercourse." Contending Viezvs as to the Applicability of the "Insurance Cases" to the Question at Issue. Notwithstanding the numerous decisions in which the Supreme Court has denied to insurance the character of commerce, and which many regard as a final expression of the Court's opinion, there are those who maintain that these cases must not be considered as con- clusive against national supervision. In the first place, they contend that none of the insurance cases involved the constitutionality of a federal law. In nearly all the cases the principal question at issue was the validity of state statutes prescribing certain terms, compli- [698] Federal Supervision and Regulation of Insurance 87 ance with which was necessary on the part of foreign corporations before being permitted to transact business in those states ; and the statutes were upheld as a legitimate exercise of the police powers. The decision in Paul vs. Virginia that insurance is not commerce, they regard as mere dictum and as not having been essential for the judgment rendered in that case. At the time the accepted doctrine was that the states, in the absence of congressional legislation, had the power to regulate the business of foreign corporations within their borders. Since Congress had not acted, the states were enti- tled to do so, and even if the court had declared insurance to be commerce, the judgment in Paul vs. Virginia must have been the same. In other words, this case, and those which followed, were based upon state and not federal statutes. Until Congress enacts a law providing for the regulation of insurance com- panies, the constitutionality of federal supervision must necessarily be viewed as an unsettled question, and no more weight can be given to the opinions expressed in the insurance cases on the nature of the insurance business than is usually attached to judicial opinions on matters that do not necessarily enter into the case under con- sideration. Furthermore, the advocates of national supervision point out that the Constitution must be regarded as a growth, and as having under- gone a constant evolution. Of no clause in the Constitution is this so true as the so-called commerce clause. From time to time the powers delegated to the federal government under this clause have been expanded so as to meet the new requirements of industrial and com- mercial progress. While the wording of the clause has not been changed, its operation has been extended to a vastly larger field than formerly, until to-day national control over interstate commerce means an entirely different thing than it meant to our forefathers, and, in view of its gradual extension to. new modes of commerce, will mean something entirely different in the future than it does to-day. There are reasons, the advocates of national supervision assert, which may lead us to believe that the Supreme Court has already in large measure retracted from the position taken in the case of Paul vs. Virginia. It is pointed out'' that as early as 1877, in the case • Report of the Committee on Insurance Law before the American Bar Association August 24, 190S. Page 8. [699] 88 Tlie Annals of the Amertcan Academy of the Pensacola Telegraph Company vs. Western Union Tele- graph Company (96 U. S. i), the Supreme Court decided that a New York corporation had the right to construct and operate a line in certain parts of Florida, despite the fact that the Pensacola Tele- graph Company had received from the legislature of Florida the sole right to erect and operate a line within said parts of Florida's terri- tory. The court said: "We are aware that in Paul vs. Virginia this court decided that a state might exclude a corporation of another state from its jurisdiction, and that corporations are not within the clause of .the Constitution which declares that 'the citizens of each state shall be entitled to all privileges and immunities of citizens in the several states.' . . . Upon principles of comity, corporations of one state are permitted to do business in another unless it con- flicts with the law or unjustly interferes with the rights of the citizens of the state into which they come. Under such circumstances, no citizen of a state can enjoin a foreign corporation from pursuing its business."^*' More recently we have the decision, in February, 1903, in the so-called "lottery cases," which involved the constitutionality of a federal statute forbidding interstate carriers to transfer lottery tickets between states. It was argued that since an insurance policy had been declared not an article of commerce, a lottery ticket would likewise not come within this category. The Supreme Court, how- ever, by a vote of five to four, upheld the statute and declared a lot- tery ticket to be an article of commerce. The force of this decision as weakening the authority of Paul vs. Virginia has been clearly ex- pressed by Mr. James M. Beck in the following statement: "Appar- ently, there was no logical distinction between the two ; for, if the lottery ticket, forbidden by the police laws of nearly evry state, which only promises to pay upon the remote contingency of a successful drawing, can be an article of commerce, then a contract of insurance, which promises to pay upon a contingency which must surely happen, must a fortiori be a subject of commerce. . . . It is significant, although the opinion of the minority justices referred at length to Paul vs. Virginia, and subsequent cases as inconsistent with the de- '" This decision was dissented from by Mr. Justice Field, who upheld the decision of Paul vs. Virgi'.ia, and urged the necessity of leaving with the states the power to control corp' ra- tions transacting business, within their borders. He argued that " By the decision now ren- dered, congressional legislation can take this control from the state, and even thrust within its borders corporations from other states in no way responsible to it." [700] Federal Supervision and Regulation of Insurance 89 cision of the court, the opinion of the majority made no attempt to suggest a logical distinction between a policy of .insurance and a lot- tery ticket; and it may be fairly contended, therefore, until the Supreme Court declares otherwise, that the lottery cases have over- ruled Paul z's. Virginia, at least to the extent that the former case held that a policy of insurance could not be a subject of commerce. "^^ The supporters of national supervision, however, do not confine themselves to showing that the authority of Paul vs. Virginia has been impaired by subsequent decisions, but also contend that in neither this nor in any of the other cases is there any record to show that there was any thorough consideration of the facts regarding the character and uses of insurance or the operation of the business. Such a consideration, they say, will show that instead of being a mere incident of commerce as the court has decided, insurance is vmquestionably commerce itself or an insep- arable element of commerce, as that term is commonly used ; more- over, that the court in deciding Paul z's. Virginia and subsequent cases, labored under a misconception of the facts governing the operation of the insurance business. A closer examination will show that this contention is well sub- stantiated by facts. It requires little argument to prove that insurance fundamentally underlies all business, and that it is insep- arably interwoven with our whole commercial life. Marine insur- ance, for example, is considered an indispensable necessity by all oversea merchants, and in one form or another has become an integ- ral part of nearly every maritime transaction. It ranks in importance with any other active force in influencing and controlling the employ- ment of shipping. It serves a most useful purpose in promoting commercial transactions by vastly extending the use of credit. It is just as much an instrumentality of commerce and almost as essential to international and coastwise trade as the vessel itself. Similarly in the case of fire insurance, the usefulness of the busi- ness to trade and industry can scarcely be comprehended. Without it the business man could obtain no credit, and would be compelled to limit his commercial transactions to the extent of his capital. With fire insurance as collateral, however, he may secure credit from the wholesale merchant or the banker to four or five times the extent of his capital, and do so at cash prices. An American cargo, for exam- " North American Review. August, 1905, page 199. [701] Qo The Annals of the American Academy pie, shipped to Europe may be balanced by a European cargo shipped to the Orient, which in turn is balanced by an Oriental cargo shipped to America — a series of transactions based solely on credit, and made possible only because this credit is guaranteed by fire and marine insurance. Illustrations of this nature might be indefinitely multi- plied to show how intimately commerce and the various forms of property insurance are related. Suffice it to say that the two can- not be separated. As collateral security, the value of insurance to commerce is beyond all calculation, as may be judged from the fact that 97 per cent, of the world's commerce is estimated to be trans- acted on credit, and only 3 per cent, on a cash basis. As Mr. A. C. Campbell has so admirably stated •}- "No statistics would be possible to show the extent of the fire insurance business as now practised, for those figures would need to be as large as those of all trade. There is practically no combustible property that is not insured against fire ; every car of grain, every scow-load of lumber, every bale of cotton, every package of manufactured goods, from the time it assumes merchantable shape until it is entirely consumed, is thus conditionally the property of insurers. Without such a sys- tem, modern commerce would be impossible. The fire insurance policy, or the assignment of certain interest in it, is attached to the mortgage given by the farmer for money to build his new barn ; the fire insurance policy is as necessary to the banker as is the warehouse or shipping receipt on the strength of which he advances funds for thac magic of commerce, 'moving the crop' ; fire insurance is as important to the manufacturer as is the foundation under his fac- tory ; fire insurance is, in fact, the very backbone of that part of our social life which has to do with making, moving and keeping material things." Quite as important as fire and marine insurance is the third great branch of indemnity, namely, life insurance. Reaching out among the millions of citizens it accumulates their small savings into gigan- tic funds aggregating hundreds of millions of dollars to be loaned in turn or" used as productive capital. In many respects life insurance ranks with the banking business as a financial institution. Being large dealers in mortgages and securities, life insurance companies exert a powerful influence upon the money market ; and while not issuing notes for circulation like banks, they issue bonds and ■^ A. C. Campbell in "Insurance and Crime," page 131. [702] Federal Supervision and Regulation of Insurance 91 policies which partake of the same nature. Besides serving as a means of protection to the family or to business enterprises, life insurance policies may be used as collateral, because through their possession the holder can secure credit from his banker, his mer- chant or the insurance company. In general, then, insurance in its various forms turns out to be the foundation of credit, and the protector of all commerce, rather than the mere incident of commerce that the Supreme Court has declared it to be. But in view of some of the other transactions which have been declared subjects of commerce by the Supreme Court, it would seem that insurance policies must likewise belong to this category. If telegraph messages, which are neither "subjects of trade offered in the market as something having an existence or value independent of the parties to them" or "commodities to be shipped or forwarded from one state to another and then put up for sale," are articles of commerce, it is difficult to see why insurance policies should not belong to the same class. If a lottery ticket, depending on a doubtful contingency and failing to meet with Justice Field's definition of an article of commerce, as laid down in Paul vs. Virginia, is commerce, then it seems that a life insur- ance contract w^hose fulfillment depends upon a contingency which is certain to happen, must also be a subject of commerce. But even leaving such analogies out of account, Justice Field's opinion that contracts of insurance "do not take effect — are not exe- cuted contracts — until delivered by the agent" and are there- fore local transactions, does not accord Avith actual facts, and un- duly emphasizes the importance of the delivery of the contract in an insurance transaction. As a matter of fact, in thousands of cases, insurance policies take effect the day the application is made or when the policy is signed by the policy writer at the home office, that is to say, before the policy is delivered. But it is not so much the delivery of the paper which represents the contract as the purpose contemplated in the contract which should claim our special attention. Insurance must be regarded not as the mere delivery of a policy, but as the exchange of an economic good, intangible, it is true, yet real, for a definite consideration ; and here perhaps lies the difficulty in seeing that insurance at bottom is an economic good, resembling tangible commodities which are bought and sold. Insur- ance companies send their agents from state to state and from coun- [703] 92 The Annals of the American Academy try to country to sell to the public for a stipulated price a certain utility, a right to be indemnified upon the happening of a contin- gency, or in other words, an economic good. If insurance were not a utility of actual value, there would not be so many millions paying their hard cash in order to obtain it. As has been aptly said :^^ "A contract to exchange a ton of coal for money may not be commerce, but the actual exchange is ; and, by parity of reasoning, a contract to pay a sum of money for indemnity, in consideration of an ulti- mate return, whether certain or contingent, of another sum of money, may not be commerce, but the actual exchange of reciprocal pecuniary benefits would seem to be as much commerce as the ex- change of any other commodity." From whatever point of view we may consider the nature of insurance, it appears, therefore, to be not only an integral and indis- pensable element of commerce but a subject of commerce itself, as ^^■e use that term in everyday language. It is just as much a part of modern commerce as the telegraph, the telephone or transporta- tion itself. Indeed, it is regarded as a part of commerce by nearly all the great nations, for in England the supervision of insurance is entrusted to the Board of Trade ; in Austria to the Tribunal of Com- merce ; and in France to the Minister of Commerce. Even the Con- gress of the United States has declared insurance corporations as coming under the term "commerce" by legislating that the Depart- ment of Commerce and Labor should gather and distribute informa- tion regarding corporations engaged in interstate commerce, includ- ing corporations engaged in insurance. Conclusion. From the foregoing review it must appear that the mass of evidence warrants a change from a decentralized to a centralized system of supervision. Indeed, the only important obstacle in the way of such a change is legal and not economic. By its very nature insurance is a national interest, and nearly all students of the subject are agreed as to the advantages of having the busi- ness controlled by one central supervising authority. There can be little doubt that a national insurance department, if properly con- stituted and wisely administered, can greatly reduce the present "James M. Beck in the North American Review, August, 190s, page 201. [704]. Federal Supervision and Regtdatioi of Insurance 93 expense of supervision, and can do much towards equalizing and lessening the present burden of taxation. There can be little doubt, too, that it is the only practicable means of creating uniformity in our insurance law and in the methods of supervising the companies. It can be made to afford better protection to policyholders than the present system, at the same time protecting the companies from arbitrary, restrictive and retaliatory legislation on the part of the several states. Moreover, as is generally admitted, it could greatly extend the principle of publicity, and could certainly be made to render more effective than the present system the supervision of that large part of the insurance business which is international. With the single exception of the United States every nation of any importance has recognized the necessity of centralizing control over insurance. The German Imperial Statute of May 12, 1901, placed the supervision of private insurance companies, heretofore regu- lated by the several states, in charge of an imperial supervising office. The constitution of 1898 of the Commonwealth of Australia likewise vests the control over interstate insurance in the central government ; while in France, after a thorough consideration of the subject in 1903, the insurance business was placed under the control of the Ministry of Commerce. Only in the United States is there a decen- tralized system of fifty-two separate departments regulating and supervising a business which might just as well be taken care of by a single department. And the only important argument which has been advanced against a change ever since 1868 and which is being used as effectively now as ever, is the doubtful con- stitutionality of any measure which seeks to nationalize insurance with reference to its control. But, as stated, the question of the constitutionality of such a measure has never yet been squarely pre- sented to the United States Supreme Court for decision, because Congress has never yet legislated to that effect. In all the so-called "insurance cases" upon which the argument of unconstitutionality is based, some other immediate issue was involved. The constitution- ality of a law providing for national supervision of insurance is, therefore, an untried and unsettled question, though numerous facts would seem to justify a hope that the Supreme Court would pass favorably upon such a measure. Public policy would seem, there- fore, to require that Congress should at the earliest possible moment take the initiative by enacting some measure, like the Dryden Bill, [705] 94 The Annals of the American Academy thus giving occasion for a test case. Then, if the Supreme Court refuses to reverse its former decisions and Congress is left without constitutional power to establish a law providing for national super- vison, the question arises whether the evils of the present system and the advantages of the proposed system, in view of the import- ance and magnitude of the interests involved, would not justify the adoption of a constitutional amendment. But in case national supervision of insurance should ever be- come a reality, it cannot be too strongly emphasized that the nature of the business and the interests of both insured and insurers demand that such supervision should be taken enl^ely out of politics, and should be entrusted to men who are chosen for their special fitness rather than party allegiance. Few departments of government in- volve greater responsibility and come into closer contact with the interests of so many millions of people as the insurance departments. Insurance is a technical business which requires that those who look after its financial condition, prescribe its investments, recommend legislation and otherwise regulate the business, should be men with special training and with long experience. Yet under the present system of state supervision this all-important requirement has been largely disregarded and insurance departments have in most cases assum.ed a distinctly political character. "It will be seen," writes Mr. S. H. Wolfe in a recent article,^* "that the supervising officer is part of the political machinery of the state, and the besetting sin of American civic government — the political pull — is responsible for whatever lack of efficiency there may be in this important branch of the state government. It is an unfortunate fact that this office, which comes into such close and vital relationship with the interests of so large a number of citizens should be handed out as a reward for political services. It must not be understood that this is a sweep- ing condemnation of all insurance departments or a denunciation of every insurance commissioner, for some have appreciated the im- portance of their duties, have cast off all political yokes and affilia- tions, and have succeeded in reforming serious evils which existe.d in the business. It is merely a criticism of a system which takes men with no technical education, places them in charge of one of the most important bureaus, and then, without regard to their honesty, efficiency or record, sweeps them out of office and hands their posi- '* North American Revie , July, 1905. [706] Federal Supervision and Regulation of Insurance 95 tions to some new, inexperienced man as a reward for political serv- ices rendered at the last election. This condition of affairs is to be found in nearly every state in this country. . . . To expect a man trained in other walks of life to develop suddenly into a com- petent supervisor, is to assume the impossible. Life insurance is a huge structure and its erection must be watched by competent eyes." Simply to substitute a national department for a large number of state departments without eliminating the present political char- acter of the office, may only be laying the basis for a repetition of many evils which it is now sought to overcome. Centralrzed super- vision, if properly organized and applied, makes possible certain re- forms which cannot be realized by attempting to unify the action of half a hundred independent and often hostile legislatures and insur- ance departments. Quite as important as centralization in supervision is the necessity of making certain that the supervising officers are strong, efficient and politically independent. Only by combining centralization of supervision with these other factors can real and lasting reform be accomplished. THE DISTRIBUTIOX OF SURPLUS IX LIFE LXSURAXCE A PROBLEM IX SUPERVISIOX By L. a. Anderson. Madison, Wisconsin. The scandals that have been brought to Hght recently in the insurance field, have drawn especial attention to the question of government supervision. What are the duties of a state in matters of insurance, and how can those duties be most efficiently exercised ? How far should the government, state or national, go in the matter of restricting or regulating the right of contract on the part of the public, and how far should the government go in regulating or restricting the operations of the companies? These are questions that both policyholders and those charged with the duties of super- vision may well ponder over. We cannot in a brief paper of this kind, discuss the entire ques- tion of supervision in its manifold dvities and forms, but will direct our attention to the question of distribution of surplus, and the solu- tion that seems feasible and efficient. In a discussion of this ques- tion, we naturally turn to the controversy between Zeno ISl. Host, the Wisconsin commissioner, and the Equitable Life Assurance Society of Xew York. The Eqxiitable was organized in 1859 by Mr. Henry B. Hyde, then a young man twenty-five years of age and employed as a clerk in the office of the Mutual Life. He made his plans known to the president of that company and asked for his opinion as to its feasibility. This aroused the ire of the venerable president, for it was rank treason in his mind for a subordinate in that office to even think of starting a competing company. Mr. Hyde was threatened with immediate dismissal if he persisted in his plans. But, without going further into details, the Equitable was organized and located in the same building one story above the office of the Alutual Life. The new company was to be "mutual with capital stock." This is, strictly speaking, a contradiction of [708] The Distribution of Surplus i\i Life Insurance g; terms, for there can be no stock in a purely mutual company. The plan was to have $100,000 capital stock on which the stockholders were to receive 7 per cent, dividends ; the remainder of the earnings was to be divided among the policyholders. This is known as the "mixed" company plan. The stockholders elected the directors and had virtually complete management of the company's affairs. A majority of the stock of the Equitable was until recently held by the Henry B. Hyde estate, which was thus given absolute power to choose the directors of the company and indirectly to manage the investment of the company's funds now exceeding four hun- dred millions. The shares owned by Mr. Hyde were left by his will in the hands of trustees until his son, James H. Hyde, should become thirty years of age. The trustees were James W. Alexander, the president of the Equitable; James H. Hyde, first vice-president anS heir, and William H. Mclntyre, a trusted friend of the elder Hyde. These trustees had the power to vote a majority of the shares in the election of directors, but Mr. Hyde had a veto on the action of the other two, so that, although he could not compel absolutely the election of his choice he could compel the election of directors that were acceptable to him and would do his bidding> This is one of the bones of contention. Many leading authorities hold that the stock should be retired and the management of the company turned over to the policyholders, as has been done in sev- eral instances, notably the Phoenix Mutual and the Germania Life. The former retired the stock absolutely, while the latter retained the stock, but gave the policyholders the right to vote at the annual meetings. This is one of the things contended for by Mr. Host, and it is certainly in accord with good business principles. But it concerns only indirectly the question at hand, for deferred dividend policies have been issued by purely mutual companies as well as by stock and mixed companies. In its competition with other companies for business the Equi- table began early to specialize in deferred dividend contracts, about 85 per cent, of its business being of this class, i. e., with distribution periods exceeding five years, most of them being fifteen or twenty vears. The legality of this kind of policy was never questioned until Dr. William A. Fricke became insurance _ commissioner of Wisconsin and he did nothing to test its legality during his term of [709] pS The A finals of the American Academy office. Not only did he, but every commissioner before him, and Commissioner Giljohann for four years after the expiration of Dr. Fricke's term of office, issued certificates declaring that the Equitable had complied with the Wisconsin law relating to compan- ies operating on the legal reserve plan. In 1902, however, Dr. Fricke issued a book in which he severely attacked the deferred dividend contract and cited the Wisconsin law of 1871 as forbidding the deferring of dividends for more than five years. The law reads as follows : "Every life insurance corporation doing business in this state, upon the principle of mutual insurance, or the members of which are entitled to a share in the surplus funds thereof, may make distribution of such surplus annually or once in two. three, four or five years, as the directors thereof may determine. In determining the amount of the surplus to be distributed there shall be reserved an amount not less than the aggregate net value of all outstanding policies, said value to be computed by the American experience table of mortality, with interest not exceeding 4^4 per cent." (Section 1952, Statutes of 1898.) Dr. Fricke cited a large number of cases in support of his contention that this law was mandatory, that the word "may" should mean must, etc. In December, 1902, only a few months after the appearance of Dr. Fricke's book, a policyholder of the Equitable filed a petition in the department of insurance, setting forth that the company had not complied with this law, in that it had not distributed the sur- plus within five year periods. ]\Ir. Giljohann, who was then com- missioner of insurance, declined to take action, on the ground that his term of office had almost expired, and that the matter had better be left entirely to his successor. •When INIr. Host became commissioner, in January, 1903, he granted a hearing to the petitioner, at which both parties were represented by able counsel. On July 31st following, Mr. Host ruled that the company had not complied with the law and gave notice that he would revoke its license unless it filed with him a statement within thirty days declaring that it would comply with his construction of the law. The company did not file such state- ment, but on the contrary applied to the court for, and obtained, a temporary injunction restraining the commissioner from revoking the license of the company. The case was then heard on its merits [710] The Distrihiition of Surplus in Life Insurance 99 in the Circuit Court for Dane County, and Judge Dunwiddie held tliat section 1952 was mandatory and that the company must dis- tribute the surphis at least once in five years, or in other words, that the deferring of dividends for a longer period than five years was illegal. The company appealed the case to the supreme court, where it was reversed by unanimous decision, directing the lower court to issue a permanent injunction to restrain the commissioner from revoking the license of the company to do business in Wisconsin. Attempts were made by the attorney-general and the insurance commissioner to get a new trial, but this was denied by the court. A bill was then introduced in the legislature and passed, amending the law, so as to require distribution within five year periods, so that there can now be no dispute as to the meaning of this section. The query is naturally suggested, what are the arguments for and against the deferred dividend contract? In favor of such con- tracts, and against short period distribution, it is argued, first, that surplus is necessary as a safeguard for the solvency of the com- pany. The reserve is of course the standard of solvency, and in theory the reserve will make good every contract issued, but a work- ing company must also have a surplus, otherwise the reserve would become impaired immediately ; hence this resolved itself into a ques- tion of hozv much surplus shall be kept on hand to make an adequate safeguard in addition to the reserve. Second, it is argued that de- ferred policies have been profitable to their holders. The argument that money will double, treble, quadruple, etc., by compound interest has been used with all possible force. In addition to this increase by compound interest, it is argued, that the persistent policyholder will also receive the gain from the forfeitures of lapsed policies. Third, it is argued, that the deferring of dividends will in a large measure prevent lapses, by making the policyholder feel that if he stays to the end of the period he gains, but if he drops out before maturity he loses. Fourth, it is argued that it is a matter of right of contract, that any one has a right to take such a contract if he chooses. This argument is advanced by many of the best authorities on insurance in the United States. In this connec- tion the opinions of the insurance commissioners of the various states are of especial interest. Mr. Hadley, the deputy commissioner of Michigan, writes : "I do not believe in a law compelling companies to distribute their [711] loo The Annals of the American Academy surplus at least once in five years. I think that that is a matter to be regulated by the terms of the contract." Mr. Cole, of Mississippi, writes: "The only thing that the law should undertake to do, in my opinion, is to see that the companies fulfill their contracts rather than undertake to prescribe contracts for the companies." Commissioner Drake, of the District of Columbia, who was for two years deputy superintendent of insurance of Ohio, and the tech- nical official of that department, writes : "\\'hile I have favored and radically advocated for the past thirty-five years^after policies be- come non-forfeitable — the annual distribution only of surplus, yet I do not approve of Commissioner Host's course toward the Equitable, . . . for the reason that it seems to me that inaction along that line for so many years by his predecessors had established a precedent that time and usage had caused to become law within itself." Says ]\Ir. ^Monroe, of Arkansas : "I think people taking insur- ance should be allowed by law to make contracts to suit them. A state makes a mistake when it undertakes to say to her citizens that they must not make any kind of a contract unless the making of such contract injures some other citizen." Says Commissioner Young, of North Carolina : "It occurs to me that where a proper and reasonable contract is made between an insurance company and its patrons that the law should allow the complete carrying out of the contract, and should not, in my opinion, unnecessarily interfere with or 'cramp' them in their dealings." Commissioner Upson, of Connecticut, writes: 'Tn this state the law does not require such a distribution, and I do not believe that such a law should be enacted." From the Illinois department Ave have this reply: "The law of this state provides that a life insurance company may make dis- tribution of such surplus once in two, three, four or five years, as the directors may from time to time determine. The appellate court of this state has held, 97 App. Rep. 555, that this provision is not mandatory, but permissive." Commissioner Durham, of Pennsylvania, says : "I do not believe that the matter needs any legal regulation, but should be left to be regulated by the terms of the contract between the company and its members." Commissioner Gray, of Rhode Island, says: "I am inclined to [712] The Distribution of Surplus in Life Insurance loi the belief that such a law, if it should impair the obligation of their contracts to the extent of requiring them to change any of the terms of that contract would be unconstitutional." Commissioner Dearth, of Minnesota, writes: "I can see no good reason why an applicant for a policy of insurance in any company should not have the legal right at least to accept any form of con- tract from the company as might be deemed desirable, or to his mutual interest, so long as such contract is not against good public policy or does not interfere with the rights or interests of any other party." In Oregon, Tennessee, Iowa, Vermont, New Hampshire, Vir- ginia, Colorado, Ohio, Arizona and Canada: "There is no such law." "The question has never been raised ;" and the commissioners de- cline to venture an opinion. Since the above replies were received, however. Commissioners Folk, of Tennessee, and Cutting, of Massachusetts, have expressed themselves in favor of short term distribution in their reports. From Nevada alone comes an answer in favor of Commissioner Host's contention for short period distribution of surplus, and the only reason given for the answer by the commissioner of that state is that he has read Mr. Host's brief on that subject. Thus it appears that nearly all the commissioners of insurance in the United States are opposed to the stand taken by Dr. Fricke and Mr. Host. Even those who have declined to venture an opinion on the subject say this much, that there is no such law in their states, and that the question has never been raised. Some of the commissioners have expressed themselves as being in favor of com- pelling the companies to "render an account of their business" at short intervals, but there is a vast difference between such account- ing and mere distribution of surplus at short intervals, for, while the law prescribes a minimum amount to be kept as reserve, it does not prescribe a maximvmi, nor does it forbid the setting aside of a part of the surplus as a so-called "special reserve" which is merely a subterfuge to evade the law. It should also be remembered that an account is rendered every year in the annual statements required to be filed with the commissioner of insurance, and if the data con- tained in such statements are insufficient to show the results to policyholders, then the commissioners should call for and publish such additional information as is necessary to show the financial [713] I02 The Anuals of the American Academy strength of the companies, their methods of conducting the business, and the actual results to policyholders, for the surplus is a part of the savings bank feature of life insurance, and if it is carefully invested and handled by honest and efficient financiers at an expense com- mensurate with the service rendered, then it matters not whether it is distributed once in five years, once in ten years, or once in twenty years. The arguments against deferred dividend contracts and for distribution at short intervals are as follows: first, if a person dies or lapses his policy before the end of the period, he loses the sur- plus accumulated up to the time of death or lapse! That is, if the policyholder had taken an annual dividend policy he would not forfeit so much as on the deferred dividend policy. This argument is perfectly good as far as it goes, but carried to its logical conclu- sion, it would forbid the issuance of all limited payment life policies and all kinds of endowment policies, for in the event of death the pure term policies would be the best, because the policyholder would have paid in less money on that plan than on any other, and the amount of indemnity would be the same. In case of death the policyholder loses the reserve on limited payment life and endowment policies, and this amounts in most cases, to much more than the surplus on any kind of policy. Second, it is argued that the accumulation of a large surplus leads to extravagance in expenses. In this connection we need only mention the high salaries, the ornamentation of buildings, the prizes, bonvises and extra commissions given to increase the volume of new business. But, to ascribe all this to the accumulation of sur- plus is not warranted by the facts. It is perhaps true in part that a large surplus serves as an inducement to extravagant expenditures, but the same extravagance is found in companies that do not accu- mulate a large surplus. This was clearly shown by the investigation of the Washington Life. In that company, the surplus had been very low for many years, ranging from 3 to 5 per cent, of the assets, while the surplus in other companies ran from 10 to 25 or 30 per cent. The extravagance revealed by the investigation of the Wash- ington Life was a surprise even to those who were well informed. It has been stated, somewhat humorously, that under the old man- agement the surplus was squandered so fast that it did not have time to accumulate. If the statement is true that "the deferred [714] The Distribution of Surplus in Life Insurance 103 dividend contract is the root of all the evils in life insurance," then a company which distributes its surplus annually should be free from those evils. What are the facts ? One company which claims to be a purely annual dividend company, shows an increase in salaries far greater than that of the business of the company. The per cent, increase in the various items from 1893 to 1904 was as follows: 1. Insurance in force 59-35 per cent. 2. Gross income 5975 per cent. 3. Surplus 18.21 per cent. 4. Assets 63.63 per cent. 5. Commissions to agents 60.37 per cent. 6. Salaries 74-23 per cent. The increase in salaries in this case is entirely out of propor- tion to the other items, and yet it is claimed to be a purely annual dividend company. The same extravagance is also found in some of the assessment companies that have neither reserve nor surplus accumulated. The expenditures of some assessment companies has risen to such an extent that the legislature of the State of New York, in 1905, found it necessary to pass a law limiting their ex- penses. How the accumulation of surplus can be responsible for the lavish expenditures of such associations has not been explained. Third, it is argued that the accumulation of surplus leads to the misuse of trust funds in speculation and investment for the personal profit of the officers. This is also true in part, but in part only, for. the entire reserve may l)e thus misused, provided it is made to earn sufficient interest to comply with the law. For example, if money will earn in the market, say 5^ per cent., and only 4 per cent, is required by law to maintain the reserve, there is a margin of ij.4 per cent. Thus, the financiers may, if they desire, so use the money as to earn 4 per cent, or 45^ per cent, for the company while they pocket the balance. This may be done by direct personal loans, by deposits in banks and trust companies, and borrowing from them, or by the renting of buildings to favored tenants, or in a variety of ways that we need not dwell on here. Fourth, it is argued that the charters of the companies and the laws of some states forbid the deferring of dividends for more than five years. It will be observed that the language of the Wisconsin law, before the recent amendment, was permissive only, unless it [7.15] 104 The Annals of the American Academy could be clearly shown that the word "may" would have to be con- strued to be mandatory in order to give effect to the law. The supreme court held that it was permissive only and the same con- struction was put upon a similar law in the State of Illinois. But in the Wisconsin case it was argued that the context of the law made it mandatory on the -theory that a corporation can do only that which is specified. The law specified that distribution might be made within five years, but said nothing about longer periods, hence it is claimed that the word "may" applied only within the five-year period. The court, however, did not admit the force of that argu- ment. The company also relied on a section (87) of the laws of New York passed in 1868, which reads as follows : "Any domestic life insurance corporation \rhich by its charter or articles of association, is restricted to making a dividend once in two or more years may hereafter, notwithstanding anything to the contrary in such charter or articles, make and pay over dividends annually, or at longer intervals, in the manner and proportions and among the parties provided for in such charter or articles." The commissioner denied that this law had any effect in Wis- consin, but if it modifies or alters the charter or articles of associa- tion in any way, and the Wisconsin law provides that the companies shall conduct their business according to their charters, then it must have some force even in Wisconsin, and it is difficult to see how the supreme court could hold otherwise than it did. Another case which is of special interest at this time, is one brought against The Independent Order of Foresters, decided re- cently by the supreme court of Missouri. In that case it was held that the policy, after three payments had been made, had an equity in the surplus of the association that gave it a surrender value, which carried the policy beyond the date of lapse. In this case, it may be said, the court decided according to what ought to be the rule. In the Wisconsin case, the court decided according to what is the rule in law and practice, but did not necessarily aim to set up an ideal. But the controversy is by no means limited to Wisconsin. It is of national and international importance, for the three largest companies are doing business in all parts of the world. The con- [716] The Distribution of Surplus in Life Insurance 105 troversy now going on in New York offers a great deal of food for reflection. Dut that has been sufficiently aired in the press to make a review of it in this connection unnecessary. Suffice it to say that the exposures that have been made show clearly that there are numerous defects in the state laws and that there has been a great deal of the sin of omission on the part of state officials, but it also shows with equal clearness that the policyholder has been grossly negligent with respect to his own interests. Seldom if ever does he read his o\\'n policy, or scan the annual statements of his company, but what is worse he never attends the annual meeting, even if he has an opportunit}' to do so. At the annual meeting of one of the large companies, only eleven members were present, though about eight hundred thousand had the right to vote. The great distance between the policyholder's residence and the company's home office makes attendance at the annual meetings impracticable, besides it would be impracticable to conduct business if such large numbers could be present. The result of this condition of things is that a few men have gained control, and the policyholder, the one who above all others has an interest in the company, has lost hold of the purse strings. From these facts, and from statistics that are easily obtainable, to show the trend of dividends, expenses, earnings, etc., it appears that the deferred dividend policy is not the source of all evils in life insurance, although that assertion has been made repeatedly by men who ought to be well informed.' Nor is the deferred dividend policy an unmixed evil in itself, for, in well managed companies, such policies have been even more profitable than annual dividend poli- cies, and as far as the gambling element is concerned it is not even as bad as the forfeiture of the reserve in high priced endowment policies in case of death. The root of the evil lies much deeper than the mere question of distribution of surplus. Comparing expenses of companies issu- ing nothing but annual dividend policies, with the expenses of de- ferred dividend companies, we find no material difference. It is argued with a great deal of force that deferred dividend policies have been disappointing to their holders, but the same is true of annual dividend policies. The dividends on an annual dividend policy should increase from year to year, with the increase in the amount invested, as they do in conservative and well managed com- [717] io6 The Annals of the American Academy panics. But numerous cases can be cited where the dividends on such poHcies have been stationary or even decreasing from year to year. What, then, is the remedy? First of all, there must be pub- licity. Publicity has indeed been coming during the last few months. The trouble is that it smacks so much of yellow journalism and that the statistics publislred have been so poorly digested. Rumors have been stated as facts, and figures have been cast together to make a showing — anything to make an article under a "scare head" to sell the paper. Comparisons have been made almost entirely on the basis of premium receipts and growth of business. This is both illogical and unfair. In one of the magazines, which is publishing a series of articles on insurance, there appears a table showing the percent- age of dividends to premium receipts in the three large New York companies and the percentage on the same basis of the Phoenix ^Mutual of Connecticut. The percentages are as follows : Equitable 9.39 per cent. Mutual Life 1 1.60 per cent. New York Life 9.54 per cent. Phoenix iVlutual 1904 per cent. The difference between the Phoenix Mutual and the New York companies is indeed striking. But does it mean anything? Per- centages corresponding with those given above for the Connecticut Mutual and the Michigan JNIutual are 25.50 per cent, and 20.90 per cent, respectively, while in another company, which is in good standing, the percentage on the same basis was about one-third of I per cent. But such comparisons are not worth the making except for the express purpose of misleading. They are dishonest and should be suppressed. They are not a true index of a company's efficiency, because one company may be rapidly expanding, while another company has a large amount of paid up policies on its books that call for large dividends, while the premiums are low, and vice I'crsa. There is no single basis on which comparisons may be made with justice to all companies. The items must be separated, so as to show the investment expense per imit invested, and the insurance expense per unit, say $1,000, of insurance written or in force ; the high priced endownient business and the single premium life business must be separated from the low priced life and term [718] The Distribution of Surplus in Life Insurance 107 business, because each class of business has expense items and ratios pecuHar to itself. Among these may be mentioned the relatively high commission paid on life policies compared with the commis- sions on endowment policies ; the high commissions on new business as compared with renewals, and the high investment expenses con- nected with endowment insurance as compared with ordinary life and term insurance. The importance of these points will be seen when it is considered that in one company the percentage of endow- ment insurance to the total in force is several times as high as in other companies ; that in one company the new premiums exceed the renewals, while in another company the new premiums are only about one-tenth as large as the renewals, and so on. These are dis- tinctions of vital importance to an intelligent understanding of the insurance business as it exists to-day, and it is high time that the correspondents of the daily press take pains to analyze their statis- tics, if they desire to be of real service to the public. If the statistics published were cast into intelligible form, and presented so as to show the true and tinal results to policyholders, much of the present abuse in life insurance management would disappear. But publicity alone is not sufficient. There must also be effect- ive control by the policyholders, and this can be brought about in either of two ways, viz., by a representative system of government similar to that now in vogue in most of the fraternal associations, or by the Australian system of voting through the mails. It is not intended here to uphold fraternal insurance as it exists in the United States, for the system of raising funds by post mortem assessments has proven a failure. But the representative system has much to commend it. It is at the very foundation of the American govern- mental system, and has worked well in thousands of associations of various kinds. The only drawbacks are the expense of attending meetings, and the danger of representation being lost on the way, as has been the case, only too often, in political conventions. The Australian system of voting is as follows : Every candidate for an office in the company must announce his candidacy before a specified date. A list of such candidates is then sent to each mem- ber qualified to vote ; he marks the names he desires to vote for, and returns the list in a scaled envelope to the home office, where they are all opened and counted on a certain day fixed for election. This method is economical and gives all members a voice in [719] io8 The Annals of the American Academy the election, but it does not afford opportunities for discussion, and this is no small advantage in the representative system. The Austra- lian system may still offer opportunity for corruption in elections, but the counting of the votes could undoubtedly be so safeguarded as to reduce this danger to a minimum. With a system of company management that would make the officers directly responsible to the policyholders, much of the abuse in insurance management would disappear and the necessity for government supervision of any kind would be greatly lessened. But government supervision has come to stay, and there is need for its strengthening and expanding. The great lack of uniformity in the state laws, the duplication of work by many departments where one is sufficient, as well as the laxity and incompetency on the part of some state officials, point more strongly than ever to the necessity for national supervision of all companies doing an interstate business. BRITISH AND AMERICAN TRADE UNIONISM By William English Walling, New York City. Friends and enemies of trade unionism in this country have ahke assumed that the unions of Great Britain are a more highly developed form of labor organization than the unions of the United States. Undoubtedly any scientific or historical view of the labor movement in the United States must be based on a study of the British unions. There is no question that the union idea came to us not from the Continent of Europe which is furnishing us a large majofity of our working people to-day, but from Great Britain which gave us our people and our institutions over a hundred years ago. Nor is there any doubt that the labor movement reached a very highly developed form in Great Britain some years ago before it had attained any considerable strength here or even before it had spread to any considerable proportion of our trades and industries. But is it not true that the American unions are developing toward the British type, but quite the reverse. Just as America leads Great Britain in industrial development, in the enterprise and aggressiveness of her employers, so she is beginning to lead Great Britain in the intelligence and thoroughness of her organization of labor. What is most important in the study of the labor movement of the United States to-day is not the similarity, but the contrast between the British and the American unions. The failure to see that the British form of trade union has not only ceased to advance in the United States, but is decaying both relatively when compared with the newer types of unions and also absolutely furnishes the only adequate explanation of a series of the most radical misinter- pretations of the American labor movement that seems to have no end. What are the features of the trade unions of Great Britain most vented in public discussions of the labor question to-day? [721] no The Annah of the Americmi Academy Large accumulated funds and insurance benefits. The effort to preserve the proportion of intelHgent and skilled workers in the industry against raw and inexperienced recruits. The general absence of closed shop agreements. These features are paraded by the friends of labor in this country as evidence of the merits of trade unionism where it Jias reached its most developed form. On the other hand, the equally British policies of restriction of appren- tices, opposition to the subdivision of labor, restriction of output (to afford work for all the members of the union), indirect restric- tions of machinery (through the demand that wages paid for the workers on new machines be so much increased that the introduc- tion of the machines is automatically limited), are held up by the enemies of the unions here as the horrible example of what is in certain store in the future for the United States. Both enemies and friends have failed to see that the two movements having the same name and the same country of origin have come to rest on principles as widely divergent as the political and economic institu- tions of Great Britain and the United States. Both movements are to be sure primarily economic rather than political in their character, both are built on an organization of labor by trade or industry rather than an organization by locality, both are seeking first of all more wages and shorter hours, and both rely largely on the strike. But here the similarit}' in essentials seems to cease. The two movements differ in the origin of their power, in the form of their organization, in their tactics and in their ultimate aim. In claiming that American unions are developing toward the British type, the friends of unionism in this country in so far as they have any influence at all on a movement that is so deeply eco- nomic and unconscious in its character, pledge it to the narrow sectional or "trade" policy of its British prototype. The funda- mental principle that underlies every one of the policies that char- acterize these unions, whether good or bad, is the effort to gain and maintain a monopoly of the skilled workers in a given industry or trade. The unions of Great Britain are, with relatively few exceptions, "trade" unions in a distinct narrow sense. They arc founded not so much on the principles of the organisation of employees against eniploxers as on that of the organization of a certain grade of labor against all other grades. The principle is one of monopoly. Hon. [722] British and American Trade Unioiiistn m Carroll D. Wright defends this monopoly as "the vested interest" of the worker in that trade in which he has put so many years of his life. And from this point of view alone can the monopoly be defended. But it must be remembered that the consumer, that is to say the community, rather than the employer must usually pay the bill, and it will be conceded that if any other method can be arrived at by which the worker's condition can be protected without caus- ing any monopoly, without raising prices to the consumer, and with- out excluding the unskilled laborers who are constantly clamoring for work and to whom the community certainly owes an equal debt, it would be better for the skilled worker, the unskilled worker, the consumer and the whole community alike. The attempted monopoly of skill fostered by the British unions has been the essence of their being. By the direct restriction of apprentices in the trade, by refusing to allow them to enter the union and benefit from its advantages and by the opposition to the division and speciahzation of labor, involved in their insistence that the apprentice shall learn "all the trade," the British unions attempt to maintain a monopoly of the skilled men. This policy militates against all improvements in industry that are based on the attempt to save the labor of skilled and exceptionally intelligent and trained men by substituting men of less training and skill where this can be economically accomplished. The British unions widely encourage the restriction of output. By restriction of output we mean an unwritten law of the working people that limits the amount of work a man should do. The fact that the unions did not invent this law, but the individual workers themselves, does not relieve them from the responsibility for its enforcement. The unwritten law can be made effective only when the employer's discipline is broken down by the counter-discipline of the union. The British unions find it a most convenient means of securing a monopoly of labor. Having secured control over the amount of work done, they attempt by doing less work to secure jobs either (i) for union men out of employment through no fault of their own, or (2) for relatively inferior union workmen. This system has also been further developed into a conscious attempt not only to secure the employment for all the union's unemployed, but (3) even for the far more momentous purpose of bringing about a scarcity of labor. As soon as this point of scarcity approaches, [723] 112 The Annals of the American Academy the wages of labor tend to rise by the natural economic law of sup- ply and demand, the union enforces the recognition of the conditions of the labor market and has the employer and the industry at its command. Not only do the greater number of the British unions commonly seek a monopoly of skilled men and a monopolistic control of the amount of work to be done by these men, but they also seek to obtain a partial monopoly of the benefits of industrial progress. Those unions where machinery is being most rapidly introduced always deny that they have restricted the machine, and their denial is true if taken in a narrow sense. But they do claim that because certain industrial processes which are due to the scientific or tech- nical advances of society at large have happened to strike their industry, they and no others should obtain a large share of the benefit of these processes. On this ground they demand, when their men are put to work on new or better machines that they should secure considerably better wages even if the work to be done is simpler in its character than what was done before. Or they restrict the number of machines at which a man is allowed to work on the ground not that the machines ought to be prohibited, but that they should not be introduced so rapidly as to throw a large number of men out of employment. To these grounds for restriction of output, a fourth, the most dangerous of all, has recently assumed a new and threatening importance. In recent years since the complete failure of the great engineers' strike which cost the British unions such an immense sum and since the epidemic of adverse decisions in the courts have tied up union treasuries, strikes have grown more and more infrequent and unsuccessful. Notwithstanding the large accumulated funds of the unions, it has been found that the even greater financial resources of the well-organized employers' associations, backed^ as they have been recently by the financial community and the courts, have enabled them to hold out either until the working people were starved into submission or until new hands were trained into the industry. But the strike is not the last resource of a laboring popu- lation that cannot be physically coerced to labor. Since the strike as the chief weapon of unionism has begun to fail, the Ca Canny system has come to take its place. This term is simply the British expression for the restriction of output when socially enforced by the [724] British and American Trade Unioyiisni 113 working people who call out the Scotch word "canny" to their fellow workers when they are of the opinion that these latter are working harder or faster than necessity or good policy dictates. But the term has become more specialized recently than this definition would indicate. It has come to stand not so much for the restrictions above mentioned made for the hopeful purposes of increasing em- ployment or creating a scarcity of labor as to those desperate reprisals of men who have been beaten in a strike and who say, "if we cannot increase the amount of our pay no power on earth can prevent us from decreasing the amount of our work." It is not an ordinary businesslik-e attempt to secure a monopoly, but a new form of revolt far more dangerous to industry and the employer than the strike itself. Now, the development of the American industry and the flood- ing of the American labor market with cheap foreign labor has proceeded at such a pace that any and all of these restrictive poli- icies are forever impossible in this country upon any such scale as they have been practised on the other side. The relative suc- cess of the British unions in securing these various monopolistic charges, as against other unorganized workmen and society at large, is due fundamentally to one fact alone, the greater importance of manual skill in British industry. The unions of Great Britain were founded at a time when manual skill was of much greater importance than it is in Great Britain to-day. In America the demand for this sort of skill has to an even greater extent been replaced by a demand for men with- out any special manual skill, but with an intelligent grasp of the rudimentary principles of machinery, a ready adaptability to the ever-changing tasks of a machine age or to that great mass of unskilled work, handling of raw materials and products and other simple tasks that have also been created by the machine development. In a former article^ on the importance of unskilled labor in the United States, we have shown the underlying economic causes of this development. It is only necessary now to point out that this economic development has been followed by corresponding changes in the form and organization of the labor unions themselves. The conclusions of the previous article were briefly that new machinery and the subdivision of labor were increasing the proportion of 'The Annals, Vol. xxiv, page 296. [725] 114 ^^i^ Annals of the American Academy relatively unskilled labor in all the leading industries, that the new skilled trades demand intelligence and responsibility rather than manual skill, while the new unskilled trades demand speed and nervous intensity rather than mere physical power and endurance as before. It was seen that the division of an industry into a hundred instead of half a dozen Ijranches had forced the unions of the many trades of each industry into one new type of organization, the industrial union. It was also seen that the difficulty of bring- ing machinery into certain kinds of work common to all industry such as teaming and driving, machine repairing, steam engineering, firing, etc., had increased the numerical ratio of the workmen in these relatively unskilled trades and caused the formation of new trade unions extending not through one or two industries as for- merly, but covering practically the whole industrial field. All of these tendencies have had their effect on the form of labor organiza- tion that has developed in the United States until it has grown into such a different thing from the unionism of Great Britain that the economics and historv of trade unionism in that countrv have become comparatively useless for ours. The British unions have practically failed to organize unskilled labor on any considerable scale. With a few exceptions the only methods by which the British labor movement has been able to organize the unskilled has been through the large "common labor" associations, the so-called new unionism, a form of labor organiza- tion practically unknown in the United States. Here, a better policy has brought much better results. The inter-trade "industrial unions," after organizing the skilled, have succeeded in organizing many of the unskilled trades of several industries, while the inter- industrial "trade unions" have organized in some localities nearly all the workers of some trades even in industries where no unions of skilled workers have secured a foothold. Common laborers, women and newly arrived immigrants, have in this way been brought together with older and more skilled men into one organization instead of being left alone as in Great Britain to struggle along in a weak or temporary union of their own. Of the "industrial" unions of America, that of the coal miners with more than a quarter million members is by far the most im- portant. But if we add to this membership that of other purely industrial unions, such as the butchers with 34,000 members, the [726] British and American Trade Unionsm 1.15 iron and steel workers with 13,000, the carworkers and piano workers with about 10,000 each, the paper makers with 8,800 and the potters and carriage and wagon workers with about 5,200 each, we have 87,000 in addition from seven unions alone. Other indus- trial unions that owe their success partly to the label are included in another reckoning below. If added to the above, we would have a total of 500,000 unionists in the industrial form of organization. Nor is this all. Those federations which are not purely local are industrial in their nature. If we were to add the industrially fed- erated building trades of more than half a million members, our total of industrial organization would considerably exceed 1,000,000 members. And the work of a considerable majority of the member- ship of most of these unions is to be classed as relatively unskilled. The membership of the corresponding unions in Great Britain is less in some cases and in all it is more or less along trade rather than industrial lines. There are no special unions of any importance among the butchers, brewers, car workers, piano workers or car- riasfe workers, while that amono- the iron and steel workers is con- fined largely to the smelters. Their membership is a fraction of that of the corresponding unions in the United States. The building trades, without any national central organization, are split up into numerous local groups, of which the thirty largest do not contain half of the whole. The largest of several federations of coal miners' unions still leaves a third of the unions outside, while the principal power is in the hands of at least ten different unions, besides a large number of small ones. Finally, the less skilled workers about the mines are either separately organized, even if admitted to the feder- ation, or ignored entirely, while the miners are all relatively skilled men, since neither the machine work of our bituminous fields nor the subdivision of labor which has brought unskilled labor into the anthracite regions has yet come into use. If half a million coal miners are organized in Great Britain against half that number in the United States, the coal mining industries being about the same in both countries, it is partly because the work of each miner goes so much further here on account of the better methods of work, and because there are several hundred thousand less miners in the United States. Another means b\' which American unions have organized the unskilled is through the new type of "trade" union that flourishes in [727] ii6 TJie A}inals of the American Academy several or all industries where workers of the trade are found. In a few years the teamsters have increased to 84,000 members, of which half are enrolled in the Chicago unions alone. At the Chicago ratio 500,000 of the 600,000 teamsters in the United States may be considered as possible future members. In 1901 the six principal unions in this trade in Great Britain aggregated less than 25,000 members. Similarly the Stationary Engineers and Firemen's Unions, which numbered less than 5,000 in the United States a few years ago, have grown to 35,000 to-day. The five leading British organizations, though much older, had in 1901 only 13,000 members and the federation embraced scarcely more than 20,000. American unions have also organized the workers in another capacity entirely — as consumers. In Great Britain the power of the working people as consumers to assist the working people as producers has been almost ignored. The only form of organization of consumers that has succeeded among the laboring masses there, has been the great co-operative societies. The relation, however, between these and the unions is not only very weak, but has at times even been strained. In America, on the other hand, we have the boy- cott in all its forms, often most effective, and above all the union label. Depending as it does on the number of "union" consumers, the American policy of organizing the great masses of unskilled labor is the foundation of its success. On the other hand, it is largely due to this union label or union button that about 400,000 American working people, largely unskilled, have been able to organ- ize. The numerical strength of the more important of this class of organizations in 1904 is shown in the following table. A large pro- portion of the workers in most of these industries is relatively unskilled. Unions Which Depend on the Label. (The total strength of the unions in these same trades and industries in Great Britain is considerably less than 100,000, some of them having no existence there at all.) Clerks 50,000 Hotel and restaurant employees 49,000 Garment workers 4S.ooo Cigarmakers 40,500 Boot and shoe workers 32,000 Brewery workers 30,500 [728] British and American Trade Unionism 117 Barbers 23,600 Musicians 22,000 Bakers 16,200 Printing pressmen 16,000 Shirt, waist and laundry workers 16,000 Hatters 8,500 Leather workers 7,ioo Upholsterers 3,ooo Capmakers 2,500 Ladies garment workers 2,200 364.100 In this country we also have the federation principle developed to an extent unknown in Great Britain. Federation helps more than anything else perhaps in the organization of the unskilled. The motto of the American Federation of Labor is "educate, agitate, organize." Practically all the education in unionism, the agitation of unionism and the organization of unions accomplished in Great Britain, has been done not by any federation, but by the separate trade unions. It has therefore necessarily been along narrow lines in its principles and restricted in its application to those least in need of it. In America, speakers, organizers and financial assistance are never lacking for the new and struggling organization that has shown itself worthy of support. The organizers of the American Federation of Labor are numbered by the hundred and each year several million dollars are distributed to the weaker unions in one way or another through the national and local organizations that compose it. The federation has proven invaluable to the weaker unions in times of strikes. Not only has it made possible a far more effective financial assistance to the unions of the unskilled, but it has even brought about a good many sympathetic and even some more or less general strikes, such as those in Chicago, Kansas City, Den- ver and San Francisco, some of them by no means without some success. Federation in Great Britain is, comparatively speaking, in a rudimentary stage. Hardly a fourth of the two million unionists are members through their organization of the new federation of trade unions. Only in the engineering trades, called by our workmen the iron trades, has Britain led. Here the federation includes over two hundred thousand union members. The strongest of the British I729I ii8 The Annals of the American Academy federations are not federations in the American sense at all. They are composed not of an allied group of trades, but of man}^ unions operating either in the same trade or the same industry and ought to be a single union. So in the place of the United Mine Workers, a typical union, Great Britain has a loose federation that includes nearly all of the unions in the mining industry. The largest federa- tion in the textile industry is not even so much centralized. It includes only about three-quarters of the unionists in the industry. The high degree of decentralization in the British union world appears in nearly every trade and industry. The ten largest unions among the miners, for instance, embrace scarcely half the total membership, while the twelve principal unions in the textile indus- try include less than half of the total membership. So it is with all the leading trades. In America two unions, one far more important than the other, include practically all of what are called the engin- eering trades in Great Britain, while the five largest unions there include only a minority of all the union members. In America there is one teamsters' organization. In Great Britain there are five important organizations in this field and twenty small ones. There is one organization of carpenters in the United States which has more than nine-tenths of all the union carpenters in the country, while there are three important organizations in Great Britain. In America there is one important organization of seamen, in Great Britain six. In America there is one important organization of garment workers, in Great Britain six. With the wood workers the proportion is again one to six ; with the longshoremen, one to seven ; with the compositors, one to five ; with the boot and shoe workers, one to two ; with the stationary engineers, one to five ; with the plumbers, one to two ; with the bakers, one to three ; with the textile workers, one to twelve, etc. In fact there seems to be only one important trade or industry in Great Britain in which the forces of labor are completely unified, while there are very few cases indeed in America where they are divided. The British instance is that of the very powerful union of boilermakers. The only American trades or industries where there is a division of any consequence are the machinists, the carpenters and the painters. In each of these cases the larger organization is many-fold more important than the smaller and will undoubtedly swallow it up in the near future. In each case negotiations to this end are now in progress. [730] British aiid American Trade Uniontsrn 119 The degree of division and subdivision of unions in British industry at times reaches a point that is most amazing. Especially is this the case in the metal trades where a great deal of hand work survives. So we find among the "principal divisions" of the metal trades in the report of the British Board of Trade some dozen classes of trade unions with more than one hundred sub-divisions. The classes are cutlery, file makers, silver bloaters, lock and hinge makers, wire workers, lock and bolt makers, bedstead workmen and anvil makers, to name only the more important. In the first class alone there are in Sheffield half a dozen large unions and twice as many small ones. So we have the table plate forgers, the saw makers, the spring knife grinders, the spring knife cutters, the Amalgamated Edge Ti ol Trade Society, and the table and butcher knife hafters, only to mention the more important. In all these trades in America only three unions are of importance — the ma- chinists, the metal workers and the metal polishers, all on a na- tional scale. There is a somewhat similar situation in the leather industry. In America there are only two unions of any consequence, the Leather Workers and the Leather Workers on Horses' Hoofs. In Great Britain there are a large number of organizations divided in half a dozen classes as tanning, currying, dressing and finishing, saddlery and harness, whips, etc. As a consequence of the more narrow policy of the British unions towards unskilled labor, the total numerical strength in pro- portion to the number of persons employed in British industry is hardly as great as that of the American unions, although the former have the advantage of at least a generation in their age. The total number of unionists in America is probably not much short of 2,500,- 000; those of Great Britain are a little more than 2,000,000. But this does not tell half the story. The unions of the United States were estimated by the Industrial Commission to have had approxi- mately 500,000 members in 1892. In 190 1 they had already grown to 1,400,000. The unions of Great Britain, on the other hand, were three times as strong numerically at the former date, having a mem- bership of 1,500,000. In 1901 this figure had risen to nearly 2,000,- 000. While the membership of American unions increased nearly threefold in ten years, that of Great Britain increased less than one- third. During the last year the tax paying membership of the American Federation of Labor rose by more than 200,000 members, r73i] 120 The Annals of the American Academy while that of other organizations outside of the American Federa- tion of Labor increased even more rapidly, so that the total increase during this rather bad year was perhaps something like a quarter of a million, according to the union showing. On the other hand, the membership of the British unions has for several years almost stood still. In fact the official reports of the Board of Trade show a slight decrease from 1901 to 1902. Moreover, besides an increase of the membership of American unions in the most important indus- tries up to or beyond the British level, with a few important excep- tions this increase of membership has meant the organization of trades neglected almost entirely on the other side. While there are 45,000 clothing workers on men's garments organized in the United States, there were in the last report scarcely one-tenth as many in Great Britain. While in the hotels and restaurants, in the breweries and on the street railways, where American unions have secured from 30,000 to 50,000 members in each case respectively, there are in Great Britain only a few hundred union men. Perhaps the attitude of the two movements towards unskilled labor is nowhere more clearly shown than in their relative success in organizing women. There are no accurate figures concerning the movement in the United States. But it can safely be estimated that more than 100,000 women are organized in this country. The fig- ures for Great Britain are somewhat similar. There, in 1901, there were 120,000 women in the unions. But of these nearly 108,000 were in the textile industry alone which employs considerably less than half of the million women at work in factories. In this indus- try men and women both are very much better organized than in the United States, though it may be said in passing that the women are practically forced into the organization, as is also the case in many American unions. Outside of the textile industry a most interesting situation devel- ops. The total number of women organized in this field was, in 1901, 12,151. The total number employed in the same field even two or three years before this was shown by the factory reports to be 619.- 014, that is to say, the organization of women outside of the textile industry is almost insignificant. It is of interest to enter a little more closely into the classification of the 12,000 women who are organized. Of these, some 2,500 are in the hat and cap industry, which is pretty well unionized. Two thousand two hundred are in [732] British and American Trade Unionism 121 tobacco and 1,100 in potteries, which is a fair showing for these relatively small industries ; that is to say, half of this small number of 12,000 employees are engaged in three industries, leaving a little more than 6,000 union women for industries and trades employing half a million. In Chicago alone, persons familiar with the union situation, estimate there are 15,000 union women at the present moment after considerable losses caused by the reaction in industry last summer and fall. To sum up the relative numerical strength of the British union movement and its failure with a few exceptions to organize the unskilled, the following table will be useful. If in this connection it is remembered that the growth of the British unions has almost come to a standstill in recent years, the table will speak for itself. Union Membership in British Industry. Industry. Total No. Employed Total No. in (1898) Unions (1901) Mining 824,791 (1901) 505,023 Metals, etc i,325>975 334,913 Textiles 763.384 219,256 Clothing 351,622 66,291 (In the textile industry young persons and children under eighteen have been deducted from the total. In the metal and clothing trades, they are included.) It is impossible to prepare a similar table with any pretence of accuracy for the United States, but the situation can be summed up in a general way in each of the same industrial divisions. In mining the proportion organized in the United States is very similar to that in Great Britain, or if anything, slightly better, the total number in our unions reaching more than 300,000 out of a total of some 500,000 in the industry. In the metal trades the degree of organiza- tion in Great Britain is slightly better than in the United States. The Union Membership in the Metal Tr.^des of the United St.\tes. Machinists 72,300 Iron moulders 30,000 Boiler makers, ship builders, etc 22,400 Sheet metal workers 16,300 Iron, sheet and tin workers 13,500 Blacksmiths 10,500 Metal workers 12,800 177,800 ^733] 122 The Annals of the American Academy In 1900 the total number of persons in these industries was more than 900,000. The organization in the metal trades is therefore somewhat better in Great Britain than in the United States. In the ' textiles, of course, the difference in favor of the British organiza- tions is striking. Out of five or six hundred thousand persons em- ployed (the Census of Occupations does not indicate the exact fig- ures), the textile workers union here had last year a little over 10,000 members. In the clothing industry the situation is reversed. The American organizations, of which the principal are the garment workers, the boot and shoe workers, the shirt makers and the hatters, have nearly 100,000 members of the several hundred thousand in this industry. As indicated by the above figures, the proportion organ- ized is scarcely half as great in Great Britain. The only important field besides those above mentioned, where Great Britain has an advantage, is in unclassified general labor. Here the gas workers' union had in 1901 some 45,000 members and other unions brought the total to 115,000. In all other industries a comparison is with- out exception in favor of the United States. To sum up in a word, the British unions are on the whole as important a factor in British industry as the American unions are in the United States, but in Great Britain, with the exception of the textile industry and the general laborers, it is almost exclusively the skilled that are organized, whereas in the United States a very large majority of the total number of unionists are engaged at relatively unskilled work. In Great Britain the movement is divided both in the country at large and within the trades. In America the unity within the trades and industries is almost complete and a national unity seems to be not far distant, while already three-fourths of the unions are affiliated with the great national organization, the Ameri- can Federation of Labor. Finally, the unions of the United States are growing with a startling rapidity and the growth does not seem to be a mushroom growth. But if the American labor organizations are more democratic in their membership and more united in their organization than those of Great Britain, are not the latter richer and therefore better able to hold themselves together in adversity or better provided with the sinews of war? Are they not more solid, more practical, more successful — as measured by financial gains made for themselves or their members? [734] British and American Trade Unioiiism 12^ The linancial resources of the British unions are considerably greater than those of the United States and moreover are increasing rapidly. The total funds of the one hundred principal British unions in 1892 were £1,573,944, in 1902 they were £4,372,178, a total increase of nearly threefold, and a per capita increase of more than 100 per cent. The income during the same period increased from £1,462,386 to £2,067,666, remaining near 35s. or alxuit v$8.5o per capita. But what are these vast funds of the British unions? Do they constitute a war-chest, like Russia's famous hoard of gold? Can they all be used as a fund for obtaining more wages and shorter hours? By no means. As far as the union rules and legal regula- tions are concerned, yes, but from the standpoint of dollars and cents, no. The trade unions of Great Britain, and to a lesser extent those of America, lead a double life. They are labor organizations in the first instance, but they are also insurance companies in their prin- cipal functions, very similar to many mutual benefit societies and the industrial insurance companies of the United States. The funds though convertible to trade union uses, both by the union rule and legal right, are for the most part morally and practically pledged to be paid out in benefits. For the ten years from 1892 to 1901 inclusive, the amounts paid by the British unions in death, sickness, unemployed and other benefits averaged 60.8 per cent, of the total expenditures, while the proportion expended on "disputes" or strikes averaged less than one-third as much or 19.4 per cent., the remainder going to work- ing and miscellaneous expenses. The proportion varied greatly, of course. In 1893 the coal strike brought the "dispute pay" to nearly one-third the total expended and in the great "engineering dispute" it even reached 33.5 per cent. On the other hand, only 12.3 per cent. was expended on dispute pay in 1901, 10.2 in 1900 and 9.4 in 1899. In recent years while about one-tenth of the union income was going directly into the labor conflict, nearly two-thirds (64.8, 65.4 and 65.2 per cent.) was going for insurance features. And this was not too much, for the risks carried by the British unions steadily grow worse as their average membership grows older and their liabilities steadily increase. The contrast with the American unions is striking. While death benefits are as prevalent here as there, all other forms of benefits are [735] 124 The Annals of the American Academy less general. Three-fourths of the British unions have sick, accident and out of work benefits. Only one-third of the unions of the American Federation of Labor have sick or accident benefits on a national scale and only one-fourth have out-of-work or travelling benefits. Over a fourth of the British unions have old age benefits, practically none in the United States. The amounts paid by the unions of the American Federation of Labor are shown in the fol- lowing table. The important unions outside the federation are those of the railways and the metalliferous mines, the bricklayers, the masons, the stonecutters and the plasterers, with a total member- ship of less than half a million men. Benefits. Labor Unions of the American Trade Unions of Federation of Labor. Great Britain. Funeral $825,687 $494,075 Sickness and accidents 756,762 1,724,170 Unemployed, etc I5i,5i5 1,629,330 Superannuation 1,014,760 $1733,964 $4,862,335 If the unions outside the federation are added, the result would be materially changed. The Order of Railway Conductors, perhaps the smallest of the four big railway unions, paid last year $835,500 more than all the unions of the federation expended on death bene- fits. The four big railway unions alone have expended about twice the total amount recorded by the American Federation of Labor unions. But they are in every way exceptional and more like the British organizations. Not only are the railway unions exceptional as to their benefit policy, but so also are several unions within the Federation — espe- cially the cigarmakers and the iron moulders. If we subtract the amounts they paid, $379,000 and $260,093, respectively, from the total above mentioned for the American Federation of Labor, it is reduced by fully one-third — from. $1,733,964 to $1,093,871. But the member- ship of the Cigarmakers Union was only 40,500, that of the Mould- ers 30,000, both of them together less than one-twentieth of that of the federation. The membership of the four largest railway unions, trainmen, firemen, engineers and conductors is about 200,000. If we add to the unions just mentioned all others that have import- [736] British and American Trade Unionism 125 ant benefit features, the plumbers, the barbers, the glass workers, the boot and shoe workers, and all those that are expending more than $2.00 per capita on benefits, we find that probably less than half a million of the two and a half million members of the trade unions in the United States are members of organizations that have estab- lished such a benefit on a national scale. In Great Britain all the great classes of the unions are paying $2.00 or more per capita. All the unions except those of general labor and transport and those of the mining and textile industries are paying benefits of from $4.00 to nearly $8.00 per capita. The prevailing custom of the American unions toward benefits is then to leave them to the local unions or to ignore them entirely. In either case the absence of a large national treasury does not necessarily indicate that the workmen do not secure benefits. They may secure them from the industrial insurance companies, so rapidly developing in the United States, or from their local unions. What it does indicate is that the workingmen's insurance and their organiza- tion for the economic power and advancement have become two fairly separate and distinct functions in the United States. The benefit feature is better adapted to British "trade" union- ism than to the labor unionism of the United States. In the form of payment and character of the benefit, each "trade" union of course varies, adapting itself to the needs of its members. Once instituted, the benefit therefore becomes a retarding force. But the changing conditions of industry require new classes of members to enforce a successful industrial policy. The specialized benefits check the accession of these new members and so keep the trades apart. The large benefit funds being convertible to immediate use in the form of employment or dispute pay, form a vested interest of the older members that urges them to keep out the new. Many members are not unionists at all at heart, but mere policy holders of "trade" insurance. But above all, the benefits do not compose a defense (or aggres- sion) fund. Instead of aiding in the conduct of strikes they hinder their declaration except in those extreme cases where a man is will- ing not only to sacrifice himself and his family in the present for the cause, but also to give up his long hoarded protection against sick- ness, accident, unemployment and old age in the future, and finally to sacrifice to a certain degree his wife and children after he is dead. [737] 126 The Annals of the American Academy As a consequence the American unions are spending twice as much per capita on strikes, to say nothing of the much greater sums drawn by individual workmen in this country from their savings in times of strikes. The sum lost in wages in strikes averaged sixteen times as much as that spent by the unions during the same conflicts during the last census decade. " For the decade from 1892 to 1901 the British unions spent an average of £919,901 per annum on benefits and only £293,552 on strikes. For the decade from 1891 to 1900 inclusive, the Ameri- can unions expended an average of $831,833 per annum on strikes, while their average membership in this period was less than half as great. Lately this expenditure has increased rapidly. In 1900 it w-as $1,434,452, while for Great Britain it was for the one hundred principal unions £150,283. But in 1902 the unions of the American Federation of Labor alone spent $2,729,604 on strikes, in 1903, $2,932,417, and in 1904, $2,864,642. If we add to these sums those expended by the bricklayers, the plasterers, the stonecutters and the Western Federation of Miners, we may have half a million or a million more for each of these years. The sum expended by the hundred principal unions of Great Britain in 1893, the year of the coal strike, was £588,373 ; in 1897, the year of the engineering strike, £633,379. The American unions are then expending steadily on strikes a larger amount than that paid out in Great Britain in the largest strike of its history. Eight years have elapsed since the great engineering dispute in 1897, and since that time there has been no great national contest in the United Kingdom. The amount expended by the unions on attack or defense has fallen to a bare million dollars a year, less than a third of that expended in the United States. The funds have gone on accumulating. The amount per capita doubled from 1892 to 1 90 1, but it is still the trifling sum of 71s. 8d. per capita, scarcely $18.00, a sum hardly sufficient to cover the liabilities of the unions as insurance institutions, to say nothing of their availability to carry on great labor conflicts. During the decade for which we have figures (1891-1900), the one hundred principal unions of Great Britain expended an average annual amount on dispute pay of £293,475. As the average member- ship was over a million, the amount paid for strike was hardly 6s. or $1.50 per member per year. For three years the unions of the [738]. British and American Trade Unionism 127 Federation of Labor, composed in considerable part of unskilled and women workers, have averaged half as much again. As organizations for collective bargaining the British unions are not expending more, but less for each member than those of the United States. And while the years 1893 and 1897 saw the high water mark of the expenditure of British unions on strikes, the years 1902, 1903 and 1904, during which the membership of the Britsh unions has stood still and their strike expenditure fallen as measured by the previous decade, have witnessed not only a rapidly growing mem- bership of the unions of the United States, but an increasing expend- iture for each member of the industrial conflict. As measured either by membership or by financial power, the trade unions of Great Britain, as organizations bettering the eco- nomic condition of the working class or increasing its power in the industrial world, seem already inferior to those of the United States. Manifestly under these conditions the American unions are not going to follow in the footsteps of their predecessors, but will de- velop as they are developing a form of organization, a method of fighting employers, a policy toward the public and an ultimate goal of their own. They have passed out of the stage where they must look to the rest of the world for precedents and the time is coming when the rest of the world must rather look to them. COMMUNICATIONS A SUGGESTION FOR THE PREVENTION OF STRIKES By a. Maurice Low, Washington, D. C. Is an employer justified in locking out his men? Is an employee justi- fied in striking? To these questions there can be only one answ/er. In this enlightened age, in this age when the relations of the individual to society and of society to the individual are so interwoven that they cannot be dissociated, the resort to brute force is as much an anachronism as would be the resort to a trial by combat. Society can only justify a strike as it justifies a revolution. It is the last resource when all other means fail. It is the last resource when conditions are so intolerable that the only relief is the remedy of the sword. History has put the stamp of iti approval on a few, a very few, revolutions. I advance the following as the rough outline for the prevention of dis- putes between capital and labor. Every employer of labor employing more than say ten employees must, before engaging in business, obtain from the state a license, the terms of which are : That he will not reduce the prevailing rate of wages or increase the hours of labor until after he has served notice of his intention upon his employees and a majority have accepted the change. In case a majority refuse to accept, the question is reported to the licensing authority, matters in the meantime remaining in statu quo. It shall be the duty of the licensing authority to ascertain all the facts touching the nature of the employment, the conduct of the business, its profits, the cost of living, and all other pertinent facts, and if the employer is sustained he may make the change as proposed. If the decision of the licensing authority is adverse no change may be made, nor may another proposition of the same character be made within a period of three months. A violation of this clause is punished by fine and imprison- ment. An employer may at any time retire from business, but in that case, and to prevent his making the law a dead letter, he may not after retiring from business engage in the same business, either as principal or agent, within a period of six* months. An employee may not refuse to continue to work for an employer in whose employment he then is, and whose salary is regularly paid to him, and whose hours of labor and conditions of employment are not in contra- vention of any federal, state or municipal law, for any or all of the follow- ing reasons : Because an increase of pay is denied him, or because a reduc- tion of hours is not granted to him, or because of the employment of some other person, or because of a regulation made by his employer. If an [740] Commu n icatio ns 129 employee desires to leave his employment because of any or all of the fore- going reasons he must serve notice upon his employer, and if the employer refuses to accept his demand he notifies the licensing authority, matters be- tween them in the meantime remaining in statu quo. It is the duty of the licensing authority to investigate all the matters touching the dispute and to render his decision on just and equitable grounds, due regard being had by him as to the prevailing rates of wages and hours in employment of like character in the vicinity, the cost of living, the profits accruing to the manu- facturer, the customs of the trade or craft and all other circumstances. If the decision is adverse to the men they shall remain at work under the con- ditions then prevailing and may not make another similar application for a period of three months. If at the end of that period they shall renew their application, which shall again be rejected, they may leave their employment without further liability. Failure to obey the decision of the licensing author- ity subjects the men to fine and punishment. If the application of the men is sustained by- the licensing authority, either in whole or in part, he shall serve notice to that effect on the employer, who shall at once comply with the award. Failure on his part subjects him to fine and imprisonment. The advantages which this system would have I shall suggest later. T prefer in the first place to meet the objections which I see will be raised. It wull be doubtless urged that it is proposed to abolish the right of free- dom of contract, which is a thing held sacred by all liberty loving people. That is precisely what I do propose. I would abolish the so-called right which enables a man to oppress his employees, or an employer to be at the mercy of an undisciplined set of men, in the same way that society long years ago abolished the right that a man once possessed to kill the man whose gibe had ofifended him. For brutality and anarchy and oppression we sub- stitute the simple and beautiful process of the law. It is of course a radical departure. Not more radical, however, than the laAv of Valerius which gave to the Roman plebeian the right to appeal from the magistrate to the people. Still less radical than the edict of Constantine abolishing crucifixion as a punishment. Whatever is new is always radical, while it is new. It will perhaps be urged that the employee instead of being benefitted by the proposed law would in the last analysis find himself worse off than before, inasmuch as if he attempted to secure an advance of wages and the decision was adverse he would be compelled to labor at the prevailing rate for the next three months ; and if the licensing authority was incompetent or corrupt the decision would always be against him. If his demand is unjust, if the employee asks for higher wages than the employer is justified in paying, it is perfectly proper that the demand should not be granted. Employers as well as employees must for their own protection be very sure that the licens- ing authority is neither corrupt nor inefficient. It lies in their own hands to secure the appointment of honest and competent servants. If they prefer to be badly served rather than well served, they must not complain if the results are unsatisfactory. Admitting, for the sake of argument, that the method proposed is sound, it will be urged that it is impracticable because it would entail more work [741] 130 The Annals of the American Academy than could be properly performed by one man, who would find it impossible to keep himself informed as to the prevailing rates of wages paid in all the industries in a state, or to be able to ascertain whether a demand for a change of wages was justified by the circumstances. This objection is not so formidable, when carefully examined, as appears on its face. A properly constituted bureau would have a compilation of the wages and other conditions -governing employment in every branch of labor, those compilations being revised from time to time as might be found neces- sary by improvements in machinery and any other circumstances affecting that particular industry. The bureau would also, and without much difficulty, be able to keep itself informed as to the cost of raw materials, the wholesale and retail prices of the finished product, the general state of the market and the cost of living. Such investigations are now periodically made by the United States Bureau of Labor and many of the Bureaus of Labor of the various states. As a matter of fact, the bureaus that would be created by the passage of a law such as I propose would be able quickly, scientifically, accu- rately and impartially, to arrive at all the facts affecting a labor dispute, facts which state boards of arbitration and conciliation as now constituted, arbitra- tors in general, newspapers and the public cannot reach because they have not the machinery with which to conduct their investigation, nor the oppor- tunity to pursue an investigation which ramifies so extensively, and in which so many elements must be weighed with such exactness if a definite result is to be reached, and not a mere hasty generalization pronounced. It will also be urged that the law would work great injustice to the small employer, as he might be forced to pay an increase of wages or else be driven out of business. This would be an injury to the individual, but not to society. The man who because of his lack of capital, or his lack of ability, or his lack of thrift, who, in short, is unfitted to be an employer, has no right to degrade other men, and thereby degrade society, by making those men compensate for his deficiencies by a forced levy on their brains or their muscles. That is what an emploj'er does whose only way to keep his head above water is to pay his men less than a prevailing wage, or by exacting of them a greater stint, or by making them work in dangerous or unsanitary surroundings. The world has no use for the inefficient, the incompetent, the unfit. Doubtless it will be said that conceding the proposed law to be a solution for admitted evils it is merely a theoretical solution because incapable of being put into practical operation. It might be easy, it will be argued, to arrest a single employer or a handful of employees who chose to disregard the mandate of the proper authority, but what would happen in the case of a hundred thousand miners determined to strike; in the event that the em- ployees of a great railroad system ignored the decision of the licensing author- ity? The answer to that is what the answer of society has always been to every objection to a law: a law is valuable or worthless precisely as it is the concrete expression of a moral sense of the community. Any law, no matter how benign and beneficial, will fail of its purpose and fall into disrepute that [742] Communications 131 voices the sentiments of a faction merely and not the great majority of a community. Any law, no matter how harsh or injurious, will be observed if the majority believe that its observance is for the good of society as a whole. Law never precedes the evil that it is designed to cure, nor is law ever enacted in advance of that evil. First a thing is done, a thing that society regards as injurious. Then society proceeds to correct the evil by its prohibition, the disregard of which meets with punishment. In a word, all law in this enlightened age rests on the consent of the governed. If the world twenty-five centuries after the writing of the twelve tables, "which next to the Christian religion is the most plentiful source of the rules governing actual conduct throughout Western Europe." in the words of Sir Henry Maine, is content to countenance the same rules of brute force and the same appeal to passion that governed the relations of men before there was even an attempt to form a rudimentary code and recognize the principles of law, nothing more can be said on the subject. The last word has been spoken. No one need fear that the majority of the male inhabitants of a state will be placed in jail because they have elected to defy the law. No one need fear that additional jails will have to be built in every state. Men will obey the law because it represents public sentiment. A great rhetorician once said that you cannot indict a nation, and because there was a certain ring to the words they have been admiringly repeated by the unthinking, which is what the unthinking always do when words tickle their ears. Truth is, not only that you can indict a nation but more than once in the history of the world nations have been brought to plead at the great bar of public opinion. An entire community cannot be put in jail, nor will anyone attempt it, because there will be no necessity for it. One thing that distinguishes the Anglo-Saxon from any other race is its submission to the law. The law will be respected. And, finally, we shall be told that the proposed law is unconstitutional, a word to terrify the timorous. Constitutionality, like patriotism, is frequently the refuge of the base and the cowardly. Entrenched behind the bulwark of constitutionality, designing men frighten the pusillanimous by declaring the constitution a thing too sacred to be touched, and by perverting the spirit of the constitution to their own selfish ends. If the suggestion herein made is unconstitutional then nearly every state in the Union has violated the constitution. If a law such as is proposed is unconstitutional, then the law of Massachusetts limiting the hours of labor in cotton mills is uncon- stitutional ; then the law of Congress limiting the hours of labor on gov- ernment work is unconstitutional, and examples can be multiplied a hun- dredfold. If it is unconstitutional to regulate conditions of labor, which is for the welfare of society, how much greater must be the unconstitu- tionality of the law which prohibits a man from working more than a certain number of hours a week, no matter how anxious he may be to exceed that limit. Clearly, in view of a long line of court decisions and the trend of modern society, the plea of imconstitutionality cannot be seriously entertained. [743] 132 The Annals of the American Academy If a constitution stands in the waj- of progress, the constitution must be modified to suit the new conditions. Society does not exist for the benefit of constitutions. Constitutions are created for the benefit of society. A con- stitution, like any other law, v/ill endure so long as it proves valuable and performs the functions for which it is provided. When it becomes obsolete or unsatisfactory because society has outgrown it — and societj' outgrows its laws exactly as a community outgrows its buildings and its transportation facilities — or it can be superseded by something better, that something better, in a progressive society, is found. No society, unless it has reached the limit of its intellectual, physical, material and moral development, is ever satisfied to regard any work of man as a finality. Progress is constant and continued evolution ; constant and continued dissatisfaction with existing conditions because of a desire to better them; constant and continued change. Neither constitution, nor law, nor custom, nor convention is sacred. When- ever man makes of his works a fetich ; whenever he creates an idol of the child of his brain ; whenever out of his own conceit he sets up a graven image and proclaims it as a thing sacrosanct, as a thing consecrated and therefore not to be desecrated by profane hands, he is either uncivilized or only semi-civilized, or else he is lapsing into barbarism. The advantages in favor of substituting law for brute force in dealing with labor disputes are so obvious that they can be briefly stated. The main argument, the sole argument, in fact, on which the proposi- tion rests, is that law is to do what violence cannot do, that reason is to take the place of passion, that justice is to rob anarchy of its terrors, that equity is to banish chicanery. The sacred duty of the law, the agent of society and civilization, is to guard the weak from the oppression of the strong, to pro- tect the ignorant from their own nescience. In a labor dispute sometimes it is the men who are weaker, at other times it is the masters. Always the innocent are the greatest sufferers. I can see no reason, either in ethics or expediency, why the simple and exact science of the law should not be applied to provide the remedy. We have tried other remedies and they have all proved failures. Yet the simple remedy of compelling obedience to the mandate of society, the remedy for every other injury to the body politic, has been neglected. I suppose it will be said that the workingmen have almost universally rejected the principle of "compulsory arbitration" and therefore it is hopeless to try to induce them to accept a much more drastic scheme for the set- tlement of labor disputes. I protest most strongly against the use of that meaningless phrase, "compulsory arbitration," which is not only meaningless, but an utter perversion of words. There is no such thing as "compulsory" arbitration. Arbitration implies mutuality, an agreement to refer a matter in dispute to the judgment of a third party. When A. and B. differ as to a matter in dispute but are desirious of reaching a settlement and agree to abide by the decision of C, there is no necessity for A. B. and C. calling D. E. and F. to ask G. H. and I. to ascertain the merits of the controvers}'. \\nien A. and B. are determined to reach an amicable agreement there is no opportunity for the outsider to interfere. No one need "compel" them [744] Communications 133 to arbitrate. "Compulsory arbitration" is as senseless a phrase as the pseudo medical term "heart failure." Both mean nothing. But when A. and B. dispute a certain matter and A. finds that B. will concede nothing, that he will not submit the claim to arbitration, and being in possession of the disputed property and physically stronger is able to retain its possession, A. has two remedies. He may, if he is foolish, and undis- ciplined, and passionate, and revengeful, attempt to take what he considers his own by force iiiajeure, or he may, if he is sensible, well balanced and calm, invoke the law and rest assured that justice will be done. If A. should attempt to be his own judge and executioner, if he should destroy B.'s property, and not only the property of B. but that of C. D. and E., innocent persons who have no interest in the quarrel, but who may be caused great inconvenience and suffering by it, the law will quickly punish A., and society will applaud the righteousness of the verdict. Multiply A. and B. a thousand- fold, as in the case of a great labor dispute, let A. and B. cause untold misery and suffering not only to themselves but to the community at large, and the law, so prompt and efficacious in revenging the wrongs of society when an individual is the wrongdoer or the sufferer, is veritably stricken with blindness and sits with folded hands impotent, incapable, inefficient. What a travesty on law and all that law means ! MARRIAGE AND DIVORCE PROVISIONS IN THE STATE CON- STITUTIONS OF THE UNITED STATES By Frederick Charles Hicks, Ph. B., LL. B., Librarian U. S. Naval War College, Newport, R. I. In connection with the agitation both in church and political circles during recent years, and especially in view of the message recently sent to Congress by President Roosevelt, it is pertinent to inquire to what extent the subjects of marriage and divorce have been dealt with in the state consti- tutions of the United States. These being among the subjects concerning which the federal consti- tution is silent, the power of regulating these institutions lies wholly with the states. It might have been expected that subjects so important would have been treated by the states in their most dignified and lasting enacted laws. This, however, is not the case. Their constitutions touch only lightly on these subjects. Generally, when mentioned at all, the burden of regulating marriage and divorce by general laws is delegated to the legislatures. There is, however, in the constitutions themselves, sufficient to give interest to an examination of these provisions. Marriage being the institution at the basis of our social existence, and the bond from which release is sought in divorce, it first demands our atten- tion. Out of the forty-five state constitutions, only eleven treat the subject of marriage at all. A group of southern states, including Alabama, Florida, Mississippi, North Carolina, South Carolina and Tennessee has practical [745] 134 The Annals of the American Academy uniformity in a provision prohibiting miscegenation, with special reference to marriage between whites and negroes or persons of negro descent. In Alabama, any degree of negro blood is prohibitive. In Florida, persons of "negro descent to the fourth generation, inclusive," may not marry whites. In Mississippi, the prohibition is for persons having "one-eighth or more of negro blood." In North Carolina, for persons "of negro descent to the third generation, inclusive." South Carolina, like Mississippi, specifies persons having "one-eighth or more negro blood." Tennessee designates "persons of mixed blood, descended from a negro to the third generation, inclusive," and prohibits such persons living with whites as husband or wife without marriage. The subject of plural marriages receives attention in the constitutions of Idaho, Utah and South Carolina. In Idaho, in addition to a general pro- hibition of bigamy and polygamy, the ordinary rights of citizenship are denied to those upholding such practices. These provisions constitute the most extensive notice of the subject of marriage in any of the constitutions. "Art. I, Sec. 4. . . . Bigamy and polygamy are forever prohibited in the state, and the legislature shall provide by law for the punishment of such crimes." "Art. 6, Sec. 3. No person is permitted to vote, serve as a juror, or hold any civil office . . . who is a bigamist or polygamist, or is living in what is known as a patriarchal, plural or celestial marriage, or in violation of any law of this state, or of the United States, forbidding any such crime; or who, in any manner, teaches, advises, counsels, aids, or encourages any person to enter into bigamy, polygamj^ or such patriarchal, plural, or celes- tial marriage, or to live in violation of any such law, or to commit any such crime; or who is a member of or contributes to the support, aid, or encour- agement of any order, organization, association, corporation or society, which teaches, advises, counsels, encourages or aids any person to enter into bigamy, polygamy, or such patriarchal or plural marriage, or which teaches or advises that the laws of this state prescribing rules of civil conduct, are not the supreme law of the state. . . ." In South Carolina, "Persons convicted of . . . bigamy" are disqualified from being registered or voting. In Utah, where we might expect the sub- ject to be treated at length, there is only the terse statement, ". . . polyg- amous or plural marriages are forever prohibited," supported by the pro- vision that "An act to punish polygamy and other kindred offenses," ap- proved February 4, 1892, is to remain in force. In the constitution of California, it is provided that "No contract of marriage, if otherwise duly made, shall be invalidated for want of conformity to the requirements of any religious sect." In Massachusetts and New Hampshire, all causes of marriage until such time as the legislature shall have made other provision are to be heard and tried by the "governor and council," and by the "superior court" respectively. [Sections in state constitutions relating to marriage: Alabama, Art. 4, Sec. 102; California, Art. 20, Sec. 7; Florida, Art. 16, Sec. 24; Idaho, Art. i, Sec. 4, Art. 6, Sec. 3 ; Massachusetts, Chap. 3, Art. 5 ; Mississippi, Art. 14, [746] Comnnmications 135 Sec. 263; New Hampshire, Art. 75; North Carolina, Art. 14, Sec. 8; South Carolina, Art. 2, Sec. 6, Art. 3, Sec. 33; Tennessee, Art. 11, Sec. 14; Utah, Art. 3, Sec. I, Art. 24, Sec. 2.] The subject of divorce has been more generally dealt with than marriage in the constitutions of the states, but with less diversity of treatment. Forty- one of the state constitutions have some mention of divorce. Of these, twenty- five in almost identical terms have the following provision : "The legislature shall not pass local or special laws in any of the following cases ; . . . granting divorces . . ." These states are Alabama, Arkansas, California, Colorado, Florida, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, North Carolina, North Dakota, Oregon, Pennsylvania, South Dakota, Texas, Utah, West Virginia and Wyoming. A provision similar in effect is found in the constitutions of eleven states, namely, Delaware, Iowa, Kansas, Michigan, Minnesota, New Jersey, New York, Ohio, Tennessee, Washington and Wisconsin. The fol- lowing are samples of these provisions : "No divorce shall be granted, nor alimony allowed, except by the judgment of a court, as shall be prescribed by general and uniform law" (Del.) ; "No divorce shall be granted by the General Assembly" (Iowa) ; "All power to grant divorces is vested in the district courts, subject to regulation by law" (Kans.) ; "The general assembly shall grant no divorce, nor exercise any judicial power not herein expressly conferred" (Ohio). In Massachusetts and New Hampshire, it is provided that all causes of divorce and alimony shall be heard and tried by the "governor and council," and by the "superior court," respectively, until such time as the legislature shall make other provision. Connecticut, Maine, Rhode Island and Vermont do not mention the subject of divorce. The only instances of originality in the treatment of this subject in state constitutions are to be found in two southern states. Georgia, while not pro- hibiting divorces, evidently frowns on them. The provisions in her constitu- tion are the following: "Art. 6, Sec. 15, Pt. i. No total divorce shall be granted, except on the concurrent verdicts of two juries at different terms of court. Pt. 2. When a divorce is granted, the jury rendering the final verdict shall determine the rights and disabilities of the parties." "Art. 6, Sec. 16, Pt. i. Divorce cases shall be brought in the county where the defendant resides, if a resident of this state ; if the defendant be not a resident of this state, then in the county in which the plaintiff resides." South Carolina, however, comes out flat-footed with the prohibition, "Divorces from the bonds of matrimony shall not be allowed in this state." It should be noted that except in the case of Georgia no distinction is made between divorces a vinculo and divorces a mensa et thoro. It is plain, however, that the legislatures have no power to grant divorces of either character, except by general law enforceable in the courts. What these legis- latures have seen fit to enact on the subject of absolute divorce with right to remarry has been summarized by Bishop William C. Doane in an article in [747] 136 The Annals of the American Acadetny Public Opinion, March 4, 1905. His statistics include the territories as well as the states. "South Carolina has no divorce law. New York grants a divorce only for adultery. Out of 51 states, adultery is a ground in 50; but, in 24 of these 51, wilful neglect to provide and gross neglect of duty is a cause; in 40, habitual drunkenness; in 43 out of the 51, imprisonment for felonj^ or infamous crime; and in 48 out of the 51, desertion or abandonment." Since it is now coming to be conceded that a national divorce law, obtainable only through an amendment to the federal constitution, and action by Congress, if not impracticable, is of doubtful desirability, would it not be well to attack this problem through more extensive and uniform provisions in state constitutions concerning marriage and divorce, which shall be obtained through direct appeal to the people of the several states? [Sections in state constitutions relating to divorce: Alabama, Art. 4, Sec. 104; Arkansas, Art. 5, Sec. 24; California, Art. 4, Sec. 25; Colorado, Art. 5, Sec. 25; Delaware, Art. 2, Sec. 18; Florida, Art. 3, Sec. 20; Georgia, Art. 6, Sec. 15, pts. i, 2, Art. 6, Sec. 16, pt. i ; Idaho, Art. 3, Sec. 19; Illinois, Art. 4, Sec. 22 ; Indiana, Art. 4, Sec. 22 ; Iowa, Art. 3, Sec. 27 ; Kansas, Art. 2, Sec. 18; Kentucky, Sec. 59; Louisiana, Sec. 48; Maryland, Art. 3, Sec. 33; Massachusetts, Chap. 3, Art. 5 ; Michigan, Art. 4, Sec. 26 ; Minnesota, Art. 4. Sec. 28; Mississippi, Art. 4, Sec. 90, Art. 6, Sec. 159; Missouri, Art. 4, Sec. 53; Montana, Art. 5, Sec. 26; Nebraska, Art. 3, Sec. 15; Nevada, Art. 4, Sec. 20; New Hampshire, Art. 75 ; New Jersey, Art. 4, Sec. 7, No. i ; New York, Art. I, Sec. 9; North Carolina, Art. 2, Sec. 10; North Dakota, Art. 2, Sec 69; Ohio, Art. 2, Sec. 32 ; Oregon, Art. 4, Sec. 23 ; Pennsylvania, Art. 3, Sec. 7 ; South Carolina, Art. 17, Sec. 3; South Dakota, Art. 3, Sec 23; Tennessee, Art. II, Sec. 4; Texas, Art. 3, Sec. 56; Utah, Art. 6, Sec. 26; Virginia, Art. 4, Sec. 63; Washington, Art. 2, Sec. 24, Art. 4, Sec. 6; West Virginia, Art. 6, Sec. 39; Wisconsin, Art. 4, Sec. 24; Wyoming, Art. 2, Sec. 27.] BOOK DEPARTMENT NOTES. Andrews, Charles M. Colonial Self-Govcrnmcntj 1652-1689. (The American Nation Series, ed. by A. B. Hart, Vol. V.) Pp. xviii, 369. New York: Harper & Bros., 1904. See "Book Reviews." A New York Working Girl. The Long Day. Pp. 303. Price, $1.20. New York : The Century Company, 1905. Far more valuable as a real portrayal of actual conditions than most of the attempts of students to live the life of other groups is this simply told story of an anonymous writer. The struggle, the suffering, the hardship, the sham of much pretended charity, the final success ring true. The author entering New York with practically no funds plunges at once into the struggle for a place. Miss Kellor's book, "Out of Work," takes on stronger meaning when this bit of autobiography is read. The author pleads that many existing abuses be corrected; that self-supporting homes for working girls free from taint of almsgiving or sanctified cant be established. She believes that immorality and other vices are more prevalent amongst working girls than many writers would have us believe. Much of this is due in her opinion to the conditions of labor and housing which might be remedied. The book deserves a reading. Bourne, Edward G. Spain in America, 1450- 1580. (The American Nation Series, ed. by A. B. Hart, Vol. HI.) Pp. xx, 350. New York: Harper & Bros., 1904. See "Book Reviews." Cheyney, Edward P. European Background of American History, 1300-1600. (The American Nation Series, ed. by A. B. Hart, Vol. I.) Pp. xxv, 343. New York : Harper & Bros., 1904. See "Book Reviews." Committee of Fifty, The. The Liquor Problem. Pp. ix, 182. Price, $1.00. Boston and New York : Houghton, Mifflin & Co., 1905. A genuine service has been rendered by the committee by this digest of its studies under the editorship of Professor Francis G. Peabody. Many who are deeply interested in the subject, but without time for the reading of the separate reports, will here find their essence in brief compass and entertaining form. The work of the committee forms the best source of accurate in- formation upon the various phases of the liquor problem, for the studies are rightly named and are not discussions from preconceived standpoints. Mr. John S. Billings writes the summary of the investigations concerning the Physiological Aspects of the Liquor Problem; Mr. Charles W. Eliot regard- [749I 138 The Annals of the American Academy ing Legislative Aspects ; Mr. Henry W. Farnam on Economic Aspects ; Mr. Jacob L. Greene on Ethical Aspects, and Mr. Raymond Calkins on Substitutes for the Saloon. For the general reader this little book is the most import- ant treatise upon the subject. It should receive wide attention. Davenport, Frederick Morgan. Primitive Traits in Religious Revivals. Pp. xii, 323. Price, $1.50. New York: The Macmillan Company, 1905. The author, who is a professor of sociology at Hamilton College, fittingly calls his book "a study in mental and social evolution." It is a valuable con- tribution to our knowledge. Every minister should read it carefully and take its lessons to heart. The social student will find it helpful in explaining phenomena which have not received the attention they deserve. Beginning with the thesis that revivals are forms of impulsive social action and that the mind of the primitive man is less stable and less con- trolled by the higher brain centers than civilized man, the author reviews the religion of the Indian and Negro. Then the Scotch-Irish revival in Ken- tucky in 1800; in Ulster, 1859, and the revivals of Edwards, Wesley, Finney and Moody are carefully outlined. Much that is thoroughly bad in methods and results is revealed and the elements of fear, hypnotic influence, etc., con- demned. On the other hand, the author believes in a newer and saner evan- gelism and in the development of a higher spirituality. "The days of religious effervescence and passional unrestraint are dying. The days of intelligent, undemonstrative and self-sacrificing piety are dawning." Dunning, William A. A History of Political Theories from Luther to Mon- tesquieu. Pp. xii, 459. Price, $2.50. New York: The Macmillan Com- pam', 1905. Reserved for later notice. Fagnot, Millerand et Strohl. La durce legale du travail. Des modiiications a apporfcr a la hi de 1900. Pp. 300. Price, 2.50 fr. Paris: Felix Alcan. Farrand, Livingston. Basis of American History, 1500-1900. (The American Nation Series, ed. by A. B. Hart, Vol. II.) Pp. xviii, 303. New York: Harper & Bros., 1904. See "Book Reviews." Hibbard, Benjamin H. The History of Agriculture in Dane County, Wis- consin. (Economics and Political Science Series, No. 2, Vol. I.) Pp. 127. Madison : University of Wisconsin. Jenks, Albert Ernest. The Bontoc Igorot. Pp. 266 and plates. Manila : Bureau of Public Printing, 1905. This monograph is the first volume of the reports of the ethnological survey of which the author is the chief. The material was gathered during a five months' residence in 1903 in the Bontoc pueblo of north central Luzon. The volume is profusely illustrated. It is a matter of congratulation that the study of the native races of the Philippines is being systematically undertaken. This excellent study reflects great credit upon the author. [750] Notes 139 Macedo, Pablc. La Evolucion Mercantile Comunicaciones y Obras Ptiblicas, La Hacienda Publica. Pp. 617. Mexico : J. Ballesca y Ca., 1905. In a volume entitled "La Evolucion Mercantil, Comunicaciones y Obras Pub- licas, La Hacienda Publica," Mr. Macedo has published three monographs which constitute an important contribution to the economic history of Mexico. In reading this volume one is impressed with the far-reaching changes that have taken place during the administration of President Diaz. The devel- opment of the means of communication, the improvement of the ports and the reorganization of the finances of the country were tasks which might well have appalled a less resolute and patriotic statesman. In this work, espe- cially in the financial reorganization of the country, the author has played an important part. As a member of the Commission on Monetary Reform he exerted considerable influence in laying the basis for the introduction of the gold standard and the establishment of a stable monetary system. It is to be hoped that Mr. Macedo will supplement this series with a monograph on the mining and agricultural development of the country. Milyoukov, PauL Russia and its Crisis. Pp. xv, 589. Price, $3.00. Chicago : University Press. London : T. Fisher Unwin, 1905. Reserved for later notice. Moimier, Auguste. Les Accidents du Travail dans I' Agriculture et la Legisla- tion Anglaise. Pp. 204. Paris : L. Larose. New York. Public Papers of George Clinton, First Governor of New York, 1777-1795; 1801-1804. Vols. VII and VIII. Published by the State of New York. Pigafetta, Antonio. Magellan's Voyage Around the World. Two Vols. Price, $7.50. Cleveland : The Arthur H. Clark Company, 1905. Pigafetta's "Account of Magellan's Voyage Around the World" has just come from the press. The original and complete Italian text with page-for- page English translation and annotated by James A. Robertson, with facsimiles of the original plates and maps. Pigafetta is the best and fullest authority for Magellan's voyage which is here completely presented in English for the first time. Redlich, Josef. Local Government in England. Edited by F. W. Hirst. Two Vols. Pp. xxvi, 427, and x, 435. Price, 21s. each. London: The Mac- millan Company. See "Book Reviews." Reeves, Jessie S. The Napoleonic Exiles in America. (Johns Hopkins Uni- versity Studies in Historical and Political Science, Series XXIII, Nos. 9, 10.) Reinsch, Paul S. Colonial Administration. (Citizen's Library of Economics, Politics and Sociology, edited by R. T. Ely.) Pp. viii, 422. Price, $1.50. "New York: The Macmillan Company, 1905. Reserved for later notice. [751] I40 The Annals of the American Academy Salz, Arthur. Beitr'dgc zur Geschichtc und Kritik der Lohnfondstheorie. (Miinchener Volkswirtschaftliche Studien, No. 70.) Pp. 200. Price, 4.50 M. Stuttgart : J. G. Cotta, 1905. Sherman, Waldo H. Civics. Pp. x, 328. New York : The Macmillan Com- pany, 1905. A book "for students who have at least reached high school age." The pur- pose is worthy indeed, and some of the methods of presentation show that the author is concrete and understands how to instruct. But he should not have undertaken to write this book before thinking himself out clearly and fully. It can hardly be a mere mistake in the choice of language which per- mits him to say (page 76), "The United States, as we have seen, is given power by the Constitution (sic) to regulate commerce," etc. The sins against good English are numerous, and seriously affect the educational purpose of the book. The volume is divided into two parts, "Studies in American Citizenship" and "Collegeville." In the first, Land and Government, Civil Organizations, Banks, Civic and Municipal Institutions, Justice, etc., are treated. In the second, "Collegeville" represents a township and the various problems of American citizenship are solved in an ideal fashion. The Declaration of Independence and the Constitution are appended. Sinclair, William A. The Aftermath of Slavery. Pp. xiii, 358. Price, $1.50. Boston : Small, Maynard & Co., 1905. The author, born in slavery, has been the financial secretary of Howard University for the past sixteen years. In this volume he seeks to study "the condition and environment of the American negro." It seems a bit curious then to find the first seven of the ten chapters devoted to a discussion of the legal and political status of the negro, while the last two chapters largely deal with the same topics. But one chapter (No. 7) of thirty-two pages is needed to tell of "The Rise and Achievements of the Colored Race." The author finds in slavery the roots of whatever is bad among negroes to-day. He has nothing but praise for all the reconstruction measures of the Repub- lican party. The South to-day would re-enslave the black if possible. The moral sentiment of the rest of the country together with the power of the negroes will compel a readjustment until the negroes get their rights. There is a fearful condemnation of southern conditions backed up by much evidence which, however, almost totally ignores the thousands of instances of good treatment which must surely offset some of the bad. The author is critical, not to say vindictive. The style is clean and forceful. Of its kind it is the best any negro has written. The trouble is that the kind is bad. It is the thesis of a special pleader making strong his case by ignor- ing the other side. It is in no sense a study of the American negro for it makes no contribution to our knowledge, nor does it suggest any new methods of improving conditions. It is worth while to read the book to see what an intelligent negro thinks of the situation, but one closes it with a deep sense of regret that the author sees so little that is good. [752] The American Nation 141 Thwaites, Reuben Gold, Ed. Early Western Journals, 1748-1765. Price, $4.00. Cleveland : The Arthur H. Clark Company, 1905. This important volume on early Pennsylvania history has recently been issued. The volume presents the best and rarest contemporary accounts of the most interesting period of early Pennsylvania history, giving the journals of Con- rad Weiser and George Croghan, Indian agents from 1748-1765, and of Post, the Moravian missionary. These journals form the very best contemporary material for the history of the last French War and Pontiac's conspiracy. Tyler, Lyon G. England in America, 1580-1652. (The American Nation Series, edited by A. B. Hart. Vol. IV. Pp. xx, 355. New York : Harper & Bros., 1904. See "Book Reviews." Whelpley, J. D. The Problem of the Immigrant. Pp. viii, 294. Price, $3.00. New York: E. P. Dutton & Co., 1905. In this study the author presents, after a brief discussion of the general ques- tion, "a summary of conditions, laws and regulations concerning the move- ment of population to and from the British Empire. United States, France, Belgium, Switzerland, Germany, Italy, Austria-Hungarj', Spain, Portugal, Netherlands, Denmark, Scandinavia and Prussia." Such data is not easily accessible to the average student or legislator and the volume will be of great service. The information was collected on the ground. The author does not pretend to discuss the many vexing problems. It is to be hoped that he will do this in a later monograph. Williams, Ralph D. The Honorable Peter White: A Biographical Sketch of the Lake Superior Iron Country. Pp. xvi, 205. Cleveland : Penton Publishing Company, 1905. Willis, Henry P. Our Philippine Problem. Pp. xiii, 479. Price, $1.50. New York: Henry Holt & Co., 1905. See "Book Reviews." REVIEWS. Hart, Albert Bushnell (Ed.). The American X'ation. Five Volumes. First Series. Price, $9.00. New York : Harper & Bros., 1904-05. Vol. I. European Background of American History. E. P. Cheyney. Pp. XXV, 343. Vol. II. Basis of American History. Livingston Farrand. Pp. xviii, 303. Vol. III. Spain in America. Edward Gaylord Bourne. Pp. xx, 350. Vol. IV. England in America. Lyon Gardiner Tyler. Pp. xvii, 355. Vol. V. Colonial Self-Government. Charles McLean Andrews. Pp. xviii, 369. Among the numerous recent histories of the United States this one, to be completed in twenty-eight volumes, bids fair to surpass not only its imme- diate associates, but to be considered as the best of all. Every method has its defects. In the present case it is obviously impossible to expect with twenty- six authors the unity of style with its accompanying charms to be found in [753] 142 The Annals of the American Academy Prescott or McMaster. The effort of the editor to keep the volumes uniform in size must also have some bad effects. On the other hand, the reader has the great advantage of getting the ripe judgment of a specialist in each field. Suffice it in general to say that the volumes are clearly written, with rare good taste as to perspective and proportion. They are untechnical, but are provided with ample foot-notes and critical bibliographies. The reader may be sure that all crass errors are eliminated. The attempt is constantly made to portray the life of the people and to explain events in the light of economic opportunity and social conditions so that the political side is not over- emphasized. Judging by the first series, the history will be, when complete, a monumental work fitted to stand comparison with similar productions of the English and German students. The series begins fittingly with the volume on "The European Back- ground of American History," by Professor E. P. Cheyney, of the University of Pennsylvania. The significance of the disturbance of ancient trade routes by the Turkish invasion is set forth, as is also the story of the great com- mercial companies. The European governments of the sixteenth century are described and the effect of the Reformation traced. Thus the reader comes to understand the conditions which led to the discovery of America and the migration of the early settlers. Volume II, "Basis of American History," by Professor Livingston Far- rand, is a most important contribution to our literature. It fills a place hitherto almost vacant. For the general reader it furnishes the best account of the life and civilization of the Indians, telling in addition something of the physiography, the flora and fauna of the country. It seems a bit inhar- monious to find statistics of recent mineral production and yield of corn, but these were evidently considered necessary in view of the history as a whole. One only wishes that Professor Farrand could have told a little more about the Indians and the degree to which they utilized natural oppor- tunities. In the third volume, "Spain in America," Professor Edward Gaylord Bourne, of Yale, tells of the great discoverers, Magellan being given highest rank; of the beginnings of the Spanish colonial policy and the race condi- tions in Spanish-America down to 1821. Professor Bourne gives Spain greater credit than the layman usually thinks her due and shows the existence of a culture in the colonies little mentioned by most writers. Yet, in the foolish restrictions put upon trade and in the lack of initiative and self-gov- ernment lay the seeds of final decay. Even to-day Latin civilization has a firm hold upon American soil and the author has done well to emphasize the many good things in earlier Spanish customs. President Tyler, of Williams and Mary College, traces the English set- tlements, in Volume IV, "England in America." The contrasts between North and South in soil and climate with their results upon social and commercial life are indicated, together with the final conquest of the wilderness and the victory over other nations, tracing the history down to 1652. The last volume of the "first series" is from the pen of Professor Charles M. Andrews, of Bryn Mawr College, and is entitled "Colonial Self-Gpvern- [754] The Far Eastern Tropics 143 ment." The new colonial system after 1652 is the author's starting point, and the editor claims that some of the vexed problems regarding the charters of Connecticut and Rhode Island have been settled by Professor Andrews' researches. Much new material is presented relative to the other colonies and the beginnings of Pennsylvania. The volume closes with a description of the social and economic conditions about 1689. Carl Kelsey. University of Pennsylvania. Ireland, AUeyne. The Far Eastern Tropics. Pp. vii, 339. Price, $2.00. Bos- ton and New York: Houghton, Mifflin & Co., 1905. Mr. Ireland's book presents a number of strong points ; it is based on first-hand knowledge, gathered during a two years' stay in the Far East, it is for the most part clearly written in an interesting style, it gives just the facts which an American might wish to know, and its conclusions are given with an impartiality, honesty and forcefulness which must carry the greatest weight in the minds of the unprejudiced. The work consists of a number of descrip- tive and critical essays, published at irregular intervals, but all of uniform plan, dealing with the most important British, Dutch, French and American dependencies in the Far East. They have been brought up to date and care- fully fitted together so that they constitute a harmonious whole, far superior in value to the author's previous work. Starting out from the influence of environment upon civilization, the author agrees with Mr. Kidd that the tropical countries are devoid of all ability to produce and maintain an advanced civilization. India, Egypt, Peru and Mexico were at one time highly civilized, owing to the remarkable fertility of their en- vironment, but since this civilization was based purely upon the exceptional fer- tility of nature rather than the ability of man, it could not endure. The vigor of mind and body which can only come from conflict with nature gives rise to the highest and most permanent forms of progress, which are now realized in what we term western civilization. The peoples of the heated area having come under the tutelage of the northern nations the question arises — how can efficient government and a reasonably advanced state of development be maintained? Shall our chief aim be to develop the native population for complete self-government? The author answers, "if native ideals are to pre- vail, the substantial control of affairs must remain in the hands of natives, . . . if the administration is to be conducted on western lines the control must rest with white men." The chapters on Hong Kong, British North Borneo, Sarawak, Burma, the Malaccan colonies, Java and French Indo-China all show how Great Britain, Holland and France have maintained a strong control over those dependencies in which the natives outnumber the white population. This control may often be disguised with the object of sparing aboriginal susceptibilities ; it may be moderated so as to enlist large numbers of natives in the civil service, but always there exists the undoubted legisla- tive, administrative and judicial control which initiates measures, carries them through the legislative bod}^ executes and interprets them. The Far [755] 144 ^^^ Annals of the Anwrican Academy Eastern Tropics are governed, and in the main well-governed, by the white man. Next follow four chapters on American rule in the Philippines, in the course of which Mr. Ireland unsparingly points out the weaknesses of the existing government. The more important of these are, the futile attempt to prepare the natives in a decade for a political system which it took white men centuries to develop; "the insistence upon the curious fallacy that educa- tion is the first need of the islands, when the great natural resources of the archipelago, whose development is absolutely essential to the maintenance of prosperity, remain practically untouched ; the establishment of one of the most costly colonial governments in the whole tropics, which nevertheless returns a minimum of permanent public works to the taxpayer in compensation for exorbitant taxes ; the failure to establish peace and order and to protect those natives who are loyal to the government ; the maintenance of a pro- hibitive tariff against Philippine exports to the United States ; the failure to give a full and detailed statement of government expenditures, and the absence of any effort to insure an adequate labor supply for the islands. Two of these points deserve special consideration, viz., the tariff and the labor supply. The governor and commission have repeatedly urged with unanswerable logic the necessitj' of allowing the Filipino to market his products in the United States, and it is reported that the recent tour of the islands by members of Congress in company with the Secretary of War, has already had a marked effect in showing the need for an immediate change. Hitherto Congress has refused to remove this insurmountable barrier to Philippine progress. In the matter of the labor supply Mr. Ireland shows that throughout the country districts it is practically impossible to obtain either skilled or unskilled labor because of the indolent nature of the inhabi- tants and the fact that the few who will work, go to the cities. But the author goes much farther; he demonstrates that in almost all the tropical countries of the world where industrial development is taking place, this development rests upon coolie labor from China or East India. It is not to be denied that the disadvantages of the coolie labor system should be weighed in the balance, but neither is it possible to escape the inexorable conclusion that if the native will not work, either the country must be abandoned to industrial stagnation or a supply of willing laborers must be brought in from abroad. The weight of evidence is in favor of the admission of the Chinaman to the Philippines. James T. Young. University of Pennsylvania. Judson, Frederick N. The Lazv of Interstate Commerce and its Federal Regulation. Pp. xix. 509. Price, $5.00. Chicago: T. H. Flood & Co., 1905- Mr. Judson has written his volume for the purpose of presenting in a "compact form the law of interstate commerce as declared by the courts since the adoption of the Constitution, and also enacted by Congress and [756] Local Government in England 145 applied by the Interstate Commerce Commission in the direct exercise of the power of federal regulation." "It is the aim of this book to state without needless amplificatirm or iteration the existing law, as its rules have been judicially formulated, and the interesting questions of public policy connected with this subject have therefore not been discussed." The volume is divided into two parts, the first part, comprising about one- fourth of the book, deals briefly with the power of the federal government Qver interstate commerce and with the statutes that have been enacted in the exercise of that power. Part two discusses in more detail the interstate, com- merce act of 1887, the anti-trust law of 1890, the safety appliance legislation of 1893 and 1896, and various other minor acts of legislation regarding inter- state commerce. The latter part of the book is devoted to the presentation of information regarding "procedure before the Interstate Commerce Com- mission." The rules of practice and the forms in proceedings before the commission are given, and a lengthy table is included analj^zing the com- mission's rulings. The volume is systematically arranged, it is well proportioned and care- fully written. It is both a good treatise and a valuable book of reference. Mr. Judson has done an especially useful service by preparing this careful treatise covering not only the constitutional and statute law of interstate commerce, but also the large and highly important body of administrative law that has been developed by the Interstate Commerce Commission since 1887. As he states, "every phase of the complex adjustment of railway rates has been considered by the commission, and their rulings in this infinite variety of cases have a permanent value in the solution of the transportation problems of the future." Neither tlie lawyer nor the economist interested in trans- portation can afford to neglect part two of J\Ir. Judson's book. Emory R. Johnson'. University of Pennsylvania. Redlich, Josef. Local Government in England. Edited with additions by Francis W. Hir.ii5-23 Credit by waste soap returned 33-o6 $3,082.17 $500.00 400.00 480.00 1,200.00 2,050.03 567.52 275-52 119.31 $5,592.38 32.58 $5,559.80 The popularity of these aids to sanitation is very evident from the tables of baths given. In fact, so popular are they, that they are inadequate to fill the demands made upon them, and provision should be made, in the very near future, for at least one additonal bath house." The facilites for out-door bathing in summer in Buffalo are not good. Owing to shortsightedness in the past the lake shore is now accessible in but 1 Estimated steam furnished No. i by Municipal Building. [770] Parks and Public Playgrounds 159 very few spots, and these can be reached only after crossing railroad tracks. At two of them, however, the city maintains cheap wooden dressing-rooms under the charge of a caretaker, who rents soap, towels and bathing trunks for a small fee. The contemplated changes in the water supply system, how- ever, include plans for an outdoor swimming pool similar to that now in use at Erie, Pa. But it is probable that this will not be constructed for several years. WASHINGTON, D. C. By George S. Wilson, Esq., Secretary Board of Charities of the District of Columbia. There is no material change in the park system proper in the District of Columbia since my notes of last year. Considerable progress has been made, however, in the effort to develop public playgrounds in the small parks and in the yards of the public school buildings. For three years the effort to conduct public playgrounds was carried on by a volunteer committee without aid from the public treasury. Last year official endorse- ment was given to the movement to the extent of an appropriation of $3,500 — $1,500 for the equipment of public playgrounds in school yards and $2,000 for playgrounds not connected with public schools. The major portion of the burden, however, was still borne by private contributions. The playground movement was first started in Washington in the sum- mer of 1903, and during that summer six playgrounds were maintained; in 1904 eleven were in operation, and in 1905 nineteen were maintained. Of the nineteen maintained during the past year eleven were in public school yards and eight on public reservations and vacant lots. A trained supervisor, Dr. Henry S. Curtis, of New York City, was employed for six months to direct the work. His time was occupied largely in selecting and training kinder- gartners and athletic directors, whom the committee found it necessary to provide for the proper supervision of the work. The committee seems now to be convinced that public playgrounds cannot be made successful without competent directors. They look upon a playground without a director as being almost as bad as a school without a teacher. Much greater interest was shown in the movement during the past summer than during the preceding years. Athletic contests we^e held throughout the summer at the various grounds and between representatives from the different grounds, and at the end of the season, on September 8 and 9, field days were held. The successful contestants in these final events received medals, — gold medals for first prizes, silver medals for second, and bronze medals for third. A banner was given to each winning team, and a special prize banner, the gift of one of the local newspapers, w-as presented to the team winning the largest total number of points. Separate play- grounds were conducted for white and for colored children, and separate field days were held. The local committee now feels that the importance of the play- ground movement has been sufficiently demonstrated to warrant generous appro- [771] i6o The Annals of the American Academy priation of public funds for its maintenance, and an effort will be made this winter to secure from Congress a larger appropriation for the maintenance of the work. An effort will also be made to secure funds to purchase and equip one small park playground. It is the policy of the committee to urge upon the city the acquisition of small parks to be used as playgrounds in the various crowded sections, and thej' are urging an appropriation this winter for the first of such playgrounds, which they hope to make a model and use as an argument for the acquirement of others. SEATTLE By Prof. J. Allen Smith, University of Washington, Seattle. The first step looking toward the acquisition of land for park purposes was taken by the municipal authorities of Seattle in 1884. Little was done, however, during the following decade, and not until about 1897 did the need for public parks begin to receive serious consideration. Since this date the city has purchased three tracts of land — Woodland Park, containing 196 acres; Washington Park, with an area of 128 acres, and City Park, of 125 acres. Woodland Park, situated in the northern part of the city, is a beautiful piece of propert}-, having a frontage of over half a mile on Green Lake. Washington Park, which is situated in the east central part of the city, extends for more than a mile along the shore of Lake Washington. City Park is just outside of the city limits, and is at present unimproved. The municipal authorities have also acquired through gift or purchase several smaller pieces of property in various parts of the city. A plan for the improvement and extension of the present park system, prepared by a well-known landscape architect of ]\Iassachusetts, is now being carried out under the direction of the municipal board of park commissioners. The plan adopted contemplates the preservation of some remnants of the original forest which fortunately have not been destroyed. It will also utilize the unusual advantages which Seattle possesses in the abundance, variety and magnificence of its views of lake, sound and snow-capped mountains. The campus of the University of Washington should also be mentioned in connection with the Seattle park system. It contains 355 acres, a large portion of which is in the original forest state. It lies between Lake Wash- ington and Lake Union, having a water frontage of more than a mile on the former and about a quarter of a mile on the latter. It is within the city limits, and. though belonging to the state, is \irtually a part of the municipal park system. During the last two or three 3'ears there has been a marked growth of sentiment in favor of providing suitable means of recreation for the pupils of the public schools. Several of the schools now have teeters, swings, hori- zontal bars, basket ball and tennis courts, etc. The scheme of recreation and amusement also includes a garden on or near the school grounds, which is cared for by the children. [772] Parks and Public Playgrounds i6i DULUTH By W. G. JoERNS, Esq., Duluth, Minn. In the earlier days Duluth was provided with only such public parks as had been reserved and dedicated to public use in the several plats of the city's subdivisions. These were mostly in the nature of public squares, except a few larger dedications in suburban plats, and had remained almost wholly unimproved. It was in the latter eighties that a broader scope and systematic development of Duluth's park system was agitated and inaugu- rated. The prime figure in this movement was Mr. \V. K. Rogers, who was better known to the general public as the one-time private secretary of Presi- dent Hayes. Mr. Rogers had come to Duluth and took a deep interest in its development. He recognized its wonderful natural beauties and the unusual possibilities for the development of a substantial and beautiful park system. He was the leader and the hardest worker in the movement for the creation of this park system, and to his enthusiasm and great effort was largely due the fact that the system, as it exists to-day, was finally established. Mr. Rogers became the first president of the first park board of Duluth. Six hundred feet above the level of Lake Superior, along the brow of the hills surrounding Duluth, the remains of an ancient beach form a natural roadway which connects numerous small water courses and deep gorges and ravines, and all, extending over a distance of some seven miles or more, have been acquired by the city and are now a part of the park system of Duluth, and form one of the most beautiful natural drives in the world. The city expended in the purchase and improvement of this particular part of its park system approximately three hundred thousand dollars, and this sum forms a part of its present bonded indebtedness. The control of the parks and parkways of the city is vested in a Board of Park Commissioners of five members, who are appointed b}- the Mayor, subject to confirmation by the District Court. The president of the park board is ex-officio a member of the City Conference Committee. The mem- bers serve without pay. The park fund is provided by annual tax levy and has been running at about $10,000 a year. An increase of approximately $5,000 was made for the coming year to provide means for the acquirement of additional park property. The public parks of Duluth are well distributed throughout the different sections of the city, are well taken care of and are extensively used by the public. In the improvement of the same the aim has been observed to retain, as much as possible, the natural scenic beauties. Some of the smaller squares have been made into beautiful flower gardens. The park board has also taken charge of the planting of trees in public streets, under direction of the Common Council, and in the course of the past ten years the general beauty of the city has been thereby much improved. Some of the public squares have been devoted to recreation purposes as plaj'grounds, and in winter as skating rinks ; but Duluth has as yet neither public baths nor gymnasia. [773] II. DEPARTMENT OF PHILANTHROPY, CHARITIES AND SOCIAL PROBLEMS The New York Society for the Prevention of Cruelty to Children was organized in 1874, and at once found itself alone in a field of immense oppor- tunity. It became necessary for it to frame laws to cover existing conditions and with a view to the future ; to get the good will and approval of legislators and of public authorities, a matter not always easily brought about, as those connected with struggling institutions doing a public work well know; and to assert itself in a manner intended to bring about not only confidence in it, but encouragement in the organization of similar institutions elsewhere. These things it did, with the result that opinions and decisions of the highest courts to-day lend sanction and approval to its efforts on behalf of suffering childhood. The trials through which it passed in its early years, hard to bear as they were, only tended to fit it for the greater work yet to come, and of which not the least indication was then to be had. There are to-day, in the United States alone, nearly four hundred societies linked together for the prevention of cruelty to children, every one of them organized since the work was begun in New York and all working under laws based upon those of this state. Every important city in Europe has its society and India and Australia are not without representation. It was the privilege of the New York Society to be sponsor to the first laws of the empire state regulating the hours of child labor; and, that "child labor" represents but 2 per cent, of the working population of the Metropolis is perhaps due more to that early foresight than to any other one thing. It also drafted the legislative enactments separating children under sixteen years of age from adults charged with crime. The parole or probation system now so generally in vogue had its birth in the old method of suspending sentence upon a child convicted of crime and placing him in the legal custody of a clergyman, a school teacher or other responsible citizen, during good behavior. In a single year hundreds of chil- dren were so released, and many of them upon my personal application. The number returned to court for violating the provisions of the terms of their release was proportionate with the number of returns for what is now called "violation of parole." The present method, however, is systematized to an extent that makes it one of the most important branches of the society's work. The writer is the chief probation officer for the boroughs of Manhattan and The Bronx and, as such, has personal direction of the probation work author- ized by the justices of the criminal courts within that jurisdiction. The aver- age number of boys and girls on probation is two hundred. These are regu- larly visited by trained special officers, deputized to act as probation officers, who acquaint themselves with the child, its characteristics, surroundings and [774] Philanthropy, Charities and Social Problems 163 general conditions. The findings in all cases are presented in detail to the courts, with such recommendations or suggestions as each requires. The recent, though quite natural, spread of probation all over the country and to foreign lands has given rise to the impression that it is an entirely new departure, whereas magistrates and justices of the criminal courts of New York have been releasing girls and boys, convicted of crime, on probation, always explaining that it was during their good behavior, for a period of over twenty years. The New York Children's Court, technically known as "The Court of Special Sessions of the First Division, Children's Part," was opened Sep- tember 2, 1902, by the authority of Chapter 590 of the Laws of 1902, and is authorized to try, and dispose of, all cases involving charges against children under sixteen years of age, except those in which the charge is a capital offense, or where the child is taken into custody jointly charged with crime with a person over that age. That law was drafted by one of the most eminent authorities on the bench, the Hon. Joseph M. Deuel, who for many years had studied and written upon the subject of juvenile crime, its causes and effects. Our Juvenile Court has from the beginning been presided over by a suc- cession of able men, who have lent dignity and distinction to its deliberations. It is the first Children's Court in the country whose hearings are held in a detached building, separate and apart from any other criminal court, and where cases of children under sixteen years of age exclusively are heard. There are many reasons why it would be impracticable to install such a court in a separate building in small communities, the chief one being that most of the children's courts outside of New York City hold but one session a week, and that in a court-room used for the hearing of all cases, adult and minor, even on the day set for the "children's court," the latter being held after the others are disposed of. There have been such "children's courts" in New York since 1892, when the legislature of this state passed laws separating children from adults charged with crime, and provided for their examination in criminal courts of inferior jurisdiction only after all persons not directly involved in the case being heard were ordered out of the room. There were seven such courts, one in every court district, and every one had its daily quota of children's cases. Most of the juvenile courts throughout the coun- try to-day are following that erstwhile admirable plan. The necessary atmos- phere of an exclusive children's court is thus preserved in exactly the same manner as intended by its incorporation. The New York Society for the Prevention of Cruelty to Children is repre- sented by officers at every session of the court for the boroughs of Manhattan and The Bron.x. Its records are at once accessible to the presiding justice and, in numerous instances, suggest dispositions which, without them, would of necessity have to be deferred several days, pending lengthy investigations. Every child arrested in old New York for any offense whatever is at once, as required by law, taken to the rooms of the society, if after court hours, and there detained until the next session of the Children's Court, for a hearing. To prevent overcrowding of the society's dormitories, where a [775] 164 The Ai Dials of the American Academy thousand children arc sheltered every month, and to provide for the release of children arrested for minor offenses, such as violating corporation ordi- nances, or the newsboy or child labor law or for disorderly conduct, a law was passed two years ago by which a parent or guardian may sign a "personal recognizance," without giving bail security, for the child's production at the next session of the court. This also prevents the unnecessary and humiliating separation of petty offenders from their homes while judgment is pending. Our court is fortunate in having in daily attendance volunteer workers of the three great religions, who render a moral suport of too high a degree to permit of estimate. Their work is one of personal service, and it produces results far more satisfactory, both to the court and to the child, than any mere official decision ever could. These workers form the long-lost link between impartial justice, however merciful it may be, and the offending child. Their work is often done in assisting the chief probation ofificer, whose volunteer deputies they become on request. Societies for the prevention of cruelty to children, as such, should not be mere alms-giving organizations. Such charity as they dispense should be given in connection with their work as agents of the law, in the enforcement of the criminal laws under which they operate. The opinion was long held by certain charitable societies that societies for the prevention of cruelty to children were charitable institutions, although authorized to appoint special officers with police powers, and to enforce special laws. The New York Society has had that much mooted question settled, on appeal, by the highest court in the state. The Court of Appeals has decided (The People of the State of New York ex rel. the Stale Board of Charities, Respondent, vs. The New York Society for the Prevention of Cruelty to Children, i6i N. Y. R. 233 ; 162 N. Y. R. 429) that societies for the prevention of cruelty to children are sub-goventjuenta! agencies, and in reality branches of the courts, the district attorney's office and the police department; that they are "quasi public cor- porations, authorized for the greater convenience and certainty of accom- plishing governmental work." Their value as aids to the local government is at once apparent, in that they are branches of those various departments, and responsible to each for the work they perform. Such societies in New York State are now incorporated under Article V of the Membership Cor- poration Law (Laws of 1895, Chapter 559, Sections 70, 71 and 72), which amended Chapter 130, Laws of 1875, under which the first society was incor- porated. Should a society whose investigation of cases involving the social and moral welfare of half a million of children do anything more than state the facts to justify its existence? Some two hundred thousand case records are on file in the vaults of the parent society, and its books show seventy thousand convictions for offenses against children. The society collects the evidence and prepares the '"Brief for the People" in every criminal prosecution instituted by it, and has yet to be questioned by the chief prosecuting attorney of the count3s whose deputies prosecute offenders against children on the society's Brief, relying entirely upon its investigations by expert officers. The nimibcr of convictions is the [776] Philanthropy, Charities and Social Problems 165 justification of such a course. And in addition to prosecuting hundreds of criminals, its rooms shelter and it feeds and clothes ten thousand children a year. One hundred thousand children have been rescued and placed in homes away from improper influences. INIen and women of standing not in- frequently acknowledge that their respectability is due entirely to their early removal by the society from degrading environment. The sub-joined table shows something of the growth of the work: 1 ' c4 ca cij j3 ' g ° w c 5 •d 1 '■+J 10 •d c to .2 rimin natur nd a c -4-> 1 c > > > ■3 a m 1 indlev. W.. 778 Linds.nV. S. M.. 56 Lindsev. B. B.. 778 Linpincott. H. C. 192-208 Llovd. F.. 425 Lodee. H. C. 608 London. J.. 592. b. Loomis. F. B.. 19-24. pan.. Lord. Eliot. 592. 609-610. Lott. E. S.. 483-408. pap. Louis XIV. 591 Low. A. M.. 740-745. cnm. Low, Seth, 1-15, pap., 178 pap. 174 b. [788] Index of Names Luther, Martin, 750 Lyndhurst, Lord, 378 Macedo, P., 592, 751, &. Mack, J. W., 778 Mackay, T., 295 Magellan, F., 751, 754 Magill, H. M., 348 Magill, R. H., 352 Mahan, A. T., 140, 163, 167 Maine. Sir Ilenrv. 743 Maltbie, M. R., 757-759, r. Mansfield, Lord, 424 Mariejol, J. U., 591 Marshall, J., 42, 658, 664 Martel, C, 102 Martin, R, 209 Martin, W. H., 351 Maude, Col., 107, 108, 109 McCalla, Admiral, 164, 165 Mclntyre, W. H., 709 McKeag, E. C, 597 McLain, J. S., 592, 5. McMaster, J. B., 754 Meacham, F. R., 593 Meade. Emily F., 609-610, r. Meeker, Edna G., 779 Melville, G. W., 121-136, pap.. 179 Mencius, 131 Merriam. C. E., 593 Mever, H., 636 Miller, B. J.. 277 Millerand, A., 750 iSIilvoukov. 1*., 751 Mitchell, W.. 341 von Moltke. Count, 123 Monnier, A., 751 Monroe, J., 130 Monroe, T. C. 712 Montesquieu. Baron. 750 Montgomerv. H. E.. 642-655, pap. Moody, D. L. R.. 750 Moody, Attornev-General, 626 Moore, F. C. 3.55. 398 Moore. W. P.. 490-519. pap. Morales. President. 23 Morgan, .Tohn. 339 Morgan, .loseph. 342 Morrell, E. de V.. 331. 684 Miirata, General. SI Mussey, II. R.. ."07 Napoleon I. 77. 119 Napoleon III, 9. 37 Napoleon, Louis. 64 Nogi. General. 120 Oppenheim. L.. 593. 610. h. Ostrander. D.. 359. et seq. Oviatt, F. C. 181-191, pap., 335- pap., 359-390, pap. Owen. D.. 477 Oyama, 124 Patten. Mrs. S. N.. 599 Pattison. .1. N.. 6S3 Paul. S.. 327 Peabodv, P. G.. 749 Perkins. T. C. 348 Perry. Commodore M. C. 62 Phillips. W.. 462 Pierson. W. W.. 606-607. r. Pigafetta. A., 751. b. Plehve. 95 Plimsoll, S.. 430 Pontiac. 753 Post, 753 358, Povey, C, 335 Prescott, W. H., 754 Pryor, J. H., 769 Raven, A. A., 478 Rawle, F., 433 Raymond, Lord, 500 Reches, 595 Redlich, J., 751, 757-759, &. Reed, W. A., 594, 6. Reeves, J. S., 751 Reinsch, P. S., 594. 751 Renninger, W. D., 603, r. Richardson, A. C, 767 Richelieu, 591 Riley, F. L., 593 Riley, T. J., 594, b. Ringwalt, R. C, 594, b. Ripley, E. G., 343 Robertson, J. A., 751 Robins, E.. 348 Robinson, M. H., 610-611. r. Rodgers, F., 137-145, pap., 179 Rogers, W. K., 772 Roosevelt, T., 48, 49, 50, 317, 663, 684, 745 Root, E.. 608 Rosengarten, J. G.. 179 Ross, E. A.. 594, 759-761, i. Rowe, C. 594 Rowe, L. S., 174. 610, r. Russia, Czar of. 68, 94, 95, 103 Salter, W., 594, 6. Salz, A., 752 Sanborn. A. F., 595, b. Sanborn, D. A., 351 Sanford, 339 Sawyer, 371 . Schmoller. G., 595 Schiiller, R., 595. b. Sellers, Edith. 596, b. Seyfert, A., 436 Shambaugh. B. F.. 596 Sherman, W. H., 752. b. Shimose, Major, 81 Shipman, E.. 339 Sigsbee, C. D., 50 Simpson, T., 305 Sinclair, W. A.. 752. 6. Smith, C. E., 89-95. pap., 179 Smith. .L A., 771 Stang, W., 596. b. Stanwood, E.. 598 Stoddart. A., 350 Strohl. 7.50 Strong, J.. 597. b. Sumner, C, 48 Taber, M., 311 Taussig, F. W., 598 Templeman. F., 462, 463, 464 Thaw. A. B.. 597 Thomas. D. Y.. 601-602, r. Thompson. A. W.. 780 Thwaites. R. G., 753, b. Tower, C. 69 Trautwine, .T. C. 132 Trenor. .T. .7. D.. 592. 609-610, 5. Tripoli. Bev of. 6. 140 Troussel. R., 782 Trowbridge, V.. 595 Turner, 608 lYittle, A. H., 593 Tyler, L. G., 753-755. h. '. Unwin, G., 610-611, 6. [789] Index of Subjects Upchurch, Father, 304, 305 Upson, T., 712 Upton, General, 150 Urbye, A., 782 Valerius, 741 Vance, W. R., 696 Van Tyne, C. H., 602-603, r. Veillier, J., 784 Wade, B. F., 48 Wadsworth, 339 Walford, 294 Wallace, H. B., 378, 697 Walling, W. B., 721-739, pap. Washburn, E. B., 590 Washington, G., 123, 140, 141, 150 Weiser, C, 753 Wellington, Duke of, 119 Wells, D. A., 287 Wesley, C, 750 Wharton, J., 174 Wheaton, H., 657, et seq. Whelpley, J. D., 753, b. 1 White, A. D., 48 White, P., 753 ! Wilkinson, F., 294 i Williams, R. D., 753 ' Williams, T., 33-44, pap., 174 i Willis, H. P., 753, 761-763, 5. Wilson, G. S., 773 Wilson, J. H., 59-74, pap., 178 1 Winfrey, R.. 780 Witte, S., 91, 94 de Wlassic, 782 i Wolfe, S. H., 317-332, pap., 689, 690, 706 I Wotherspoon, W. W., 147-160, pap., 179 Wright, C. D., 723 Wright, E., 278, 683 j Wyman, W. H., 348 Young, J. R., 712 Young, J. T., 755-756, r. INDEX OF SUBJECTS [Titles of articles are printed in small capitals.] Accident Insurance, 483-498 (For index of article see pp. 577- 578^ Africa. "East Africa Protectorate," by Sir. Charles Eliot, note. 589 "Alaska and the Klondike," by J. S. McLain, note, 592 Anthropology. "Latins et Anglo-Sax- ons," by N. Colajanni, note, 588 Auditing. Relation of, to Puelic Control. 66.5-680. Public control and public welfare, 666 : factors of public control, 667 : legislative inquiry as means of public control, 669 ; execu- tive inspection and examination of corporate records, 669 ; courts as in- struments of public control, 672 ; sig- nificance of private or institutional control of corporations, 672 ; legal provisions for private corporate con- trol, 673 : factors in effective private control, 675 ; relation of audit to cor- porate control, 676 ; to public welfare, 677 ; independent audit of corpora- tions as means of control, 678 Buffalo. Parks and Public Playgrounds, 767 Charities. "The Danish Poor Relief System." by Edith Sellers, note, 596 National Conference of Charities and Corrections, 777 Notes on Philanthropy. Charities and Social Problems, 774-783 Chicago. Parks and Public Playsrounds, 764 "Civics." by W. H. Sherman, note, 752 "Civil Service and Patronage," by C. R. Fish, review, 606 Coal Supplies. "Royal Commission's Re- nort on the Coal Supplies of Great Britain." review, 605 Colonial Nationalism. "Studies In," by R. Jebb, review, 6O7 Commerce. American Commercial In- terests IN THE Far Ea.st, 8-5-88 Federal Control of Interstate Co.MMERCE, 642-655. Powers of Congress over interstate corpora- tions, 643 : Bureau of Corpora- tions should be empowered to charter interstate corporations, 643 ; tax of one-tenth of one per cent, should be imposed upon capi- tal stock, 644 ; liabilities of stock- holders, 645 : local taxation. 645 ; publicity concerning fin:incial man- agement, 646 ; natural reports, 647 : inspection of books, 649 ; progressive tax on profits. 652 ; rule for determining net profits. 654 : corporations to pay costs of national regulation, 654 : federal regulation of railroads, 655 "The Law of Interstate Commerce and Its Federal Regulation," by F. N. Judson. review. 756 Criminology. "La Sociologie Criminelle." by E. Ferri, note, 589 Divorce. Marriage and Divorce Pro- visions in the State Constitutions of the United States, 745-748 Dulnth. Parks and Public Plavgrounds, 773 Economics. "Briefs on Public Ques- tions," by R. C. Ringwalt. note, 594 "Econoraie Sociale. Les Institutions du Progres Sociale au debut du XX Siecle." by C. Gide, note, 590. "Schutzzoll und Freihandel die Vo- raussetzungen und Grenzen Ihrer Berechtigung," by R. Schiiller, note, 595 Education. Training op the Efficient Soldier, The, 149-160. Physical training. 151 : mental, 154 ; garrison schools. 155 : special service schools. [790] Index of Subjects 15R ; stafif college, 157 ; post school, 158 Ethnology. "The Bontoc Igorot," by A. B. Jenks, note, 750 "Negritos of Zambales," by W. A. Reed, note, 594 Far Bast. American Commercial In- terests IN THE, S5-S8 Japan's Position in the Far East, 77-82. I'he Chino-Japanese war, 1894-95, 77 ; trouble with Russia, 78 ; conduct of war by Japan, 79 ; Japanese as imitators of other countries, 81 Settlement of Political Affairs in the Far East, 61-74. Past policy of the United States in ! Orient, 61 ; "open door," 62 ; at- j tempts to divide China, 63 ; Boxer outbreak, 66 ; trouble between Japan and Russia, 68 ; "yellow peril" a myth, 71 "The Far Eastern Tropics," by A. Ireland, review, 755 Finance. "The Bank and the Treasury," by F. A. Cleveland, review, 603 Fire Insurance. Fire Insurance : Rates AND Schedule Rating^ 391-403 Fire Prevention, 404-418 Historical Study of Fire In- surance IN the United States, 335-358 Standard Fire Insorancb Policy, 359-390 (For index of articles see pp. 578- 580) Government. "Local Government In England," by J. Redlich, review, 757 "The National Administration of the United States of America," by J. A. Fairlie, note. 589 Municipal Government, Notes on, 764-773- History. "America's Aid to Germany In 1870-71," by A. Hepner. note, 590 "The American Nation," 5 vols.. (1st Series), A. B. Hart, Ed., re- view, 753 "Early Western .Tournals." R. G. Thwaites. Ed., note. 753 "Histoire de France," Vol. vi. Part 11, E. Lavisse, Ed., note, 591 "Iowa : The First Free State in the Louisiana Purchase," bv W. Sal- ter, note. 594 "Magellan's Voyage Around the World," by A. Pigafetta. note. 751 "Publications of Mississippi Histori- cal Society." Vol. viii, F. L. Rilev, Ed., note, 593 "The United States. 1607-1904." Vol. 1, by W. E. Chancellor and F. W. Hewes, review, 601 "A History of the United States." Vol. i, by E. Channing, review, 602 Immigration. "The Problem of the Ira- migrant," by J. D. Whelpley, note, 753 "The Italian in America." by E. Lord. J. J. D. Trenor, S. J. "Bar- rows, review, 609 Index to Insurance Articles In Vol. xxvi. No. 2. pp. 577-584 Industry. "Industrial Organization in the Sixteenth and Seventeenth Cen- turies," by G. Unwin, review, 610 "The Lanca.^hire Cotton Industry," by S, J. Chapman, review, 603 Insurance. Federal Supervision and Regul.\tion of Insurance, 6S1-707 Historical review of federal super- vision, 682 ; arguments in favor of na- tional supervision, 680 ; insurance in theory and in practice an interstate business, 690 : arguments against na- tional supervision, 692 ; constitution- ality of national supervision, 697 : contending views as to applicability of "insurance cases" to question at is- sue, 698 ; conclusion, 704. Accident Insurance. See Accident Insurance. Fire. See Fire Insurance. Life. See I;ife Insurance. Liability. See Liability Insurance. Marine. See Marine Insurance. Policy forms, 523-574 Intern.^tional Le.\dership, Responsi- bilities of. 27-31. Economic leader- ship of LTnited States, 27 : political leadership, 29 ; educational leadership. 30. .Tapan's Position in the Far Evst See Far East. Jew. ".Jews in Many Lands," by E. N Adler. note, 587 "The Russian .Tew in the United States," C. S. Bernheimer, Ed., review, 598 Labor. "The Labor Movement In Amer- ica," by R. T. Ely, note, 589 London's Unemployed. 779 A Suggestion for the Prevention of Strikes, 740-745 "Work and Wages." by Lord Bras- sey and S. .7. Chapman, review, 599 Law. "International Law." Vol. 1, bv L. Oppenheim. review, 610 Liability Insurance, 499-519 (For index of article see p. 580^ Life Insurance. The Distr;rution of Surplus in Life IxsuRANrE: A Prob- lem IN Supervision, 70S-720. Contro- versy between Wisconsin Commis- sioner of Insurance and Equitable Life Assurance Society. 708; opinions of state insurance commissioners regard ing distribution of surplus. 711 : argu- ments aeainst deferred dividend con- tracts. 714: such contracts not main source of evils in life insurance. 717 : ratios of dividends to premium re- ceipts. 718: nc'essitv for control bv policyholders. 710 Assessment Life Insurance, 300- 307 CalcuL/VTion of TjIfe Office Pre- Jiir-Ms, 229-242 Economic Place of Life Insurance and Its Relation to Society, 181-191 EssEXTi.\Ls OF Life Insurance Ad- ministration, 192-208 Fraternal Life Insur.^nce, 308-310 Industrial Insurance, 283-299 Lapse and Reinstatement, 269-282 Life Insurance Invest.ments, 256- 268 Organization and Management oF" the Agency Sv^tem. 243-255 [791] Index of Subjects Policy Contracts in Life In- surance, 209-228 State Supervision op Insukancb Co.MPANiKs. 317-332 . (For index of articles see pp. 580- 582) "Liquor Problem," note, 749 "Lynch Law," by J. E. Cutler, review, 606 Marine Insurance. Develop.ment and Present Status of Marine In- surance IN THE United States. 421-452 Policy Contracts in Marine In- surance, 453-479 (For index of articles see pp. 582- 584) Marriage and Divorce Provisions in the State Constitutions of the United States, 745-748 Mexico. "La Evolucion Mercantil, Co- municaciones y Obras Publicas, La Hacienda Publica," by P. Macedo, note,. 751 National Regulation of Railroads, 613-628. Basis of regulation. 614: changes required in present law, 616 ; tribun.ils of regulation, 622 ; courts not adequate, 626 ; administrative authority, 627 Limitations Upon National Regu- lation OF Railroads. 629-641. Extent of federal power over rail- roads, 629 ; limitations imposed bv , economic laws. 632 ; limitations | by common laws, 638 ' Navy of the United States, Extent | to Which the. Should be Increased. 139-145. Resume of history of United States navy. 139 : necessity for navy, 141 ; naval program of England, Ger- many and France. 143: what United States should do. 144 The Needs of the Navy. 163-169. Results of training and drill. 163 ; time required to complete modern battleship, 164 : Panama Canal will increase work of navy, 165 ; fifty battleships required. 166 ; American and European navies compared. 167. Negro. "The Aftermath of Slavery." by W. A. Sinclair, note. 752 New York Society for the Prevention of Truelty to Children, 774 Parks and Public Playgrounds, 764-77.^ Philanthropy. Charities and Social Prob- lems. Notes on. 774-785 Crippled Children's Driving Fund, 778 Philipnines. "Our Philippine Problem," by H. P. Willis, review. 761 Policy Forms. Appendix of. 523-574 Political Economy. "Elements of Politi- cal Economy," bv B. Levasseur, note. 592 Politics. "Primary Reform," note. 593 Porto Rico. CoxniTinxs tn, 55-56 Prison Conference, International, at Buda-Pesth. 781 Railroads. Limitations Upon Na- tional Regulation of. See National Regulation. National Regulation of Rail- roads. 613-628. See National Regulation Religion. "Primitive Traits in Religious Revivals," by F. M. Davenport, note, 750 Russia, The Internal Situation in, 91-95. Industrial and agricultural development, 91 ; Zemstvo Institutions, 92 Santo Domingo, The Situation in, 47- 52. Political condition, 47 : Grant's attempt to annex. 48 ; indebtedness, 49 ; resource^i. 40 : difference between Haiti and Santo Domingo, 50 ; Inter- ference of L'Uited States necessary, 51 Seattle. Parks and Public Playgrounds, 772 Siberia. "Sixteen Years in Siberia," by L. Deutsch. note. 588 Socialism. "Fourier : Contribution a I'etude du Soeialisme fran?ais," by H. Bourgin. note, 587 "Paris and the Social Revolution," by A. F. Sanborn, note, 595 "Socialism and Christianity," by W. Stang, note, 596 "War of the Classes." by J. Lon- don, note, 592 Social Problems. Notes on Philanthropy, Charities and Social Problems. 774-785 "Social Progress," J. Strong, Ed., note, 597 Sociology. "Foundations of Sociology," by E. A. Ross, review, 759 "Grundriss des Sociologie" C2d ed.), by L. Gumplowicz, note. 590 "The Higher Life of Chicaso." bv T. .1. Riley, note. 594 "The Long Day," by A New York Working Girl, note, 749 Tariff. "Modern Tariff History." by P. Ashlev. review. 598 Tibet. "The Opening of Tibet," by P. Landon. note. 591 Trade Unionism. British and Amer- ican, 721-739. Contrast between Brit- ish and American trades unions. 721 : British unions based upon skill in trade. 723 : ideal of British union to monopolize its particular trade. 723 : unskilled labor not organized in Great Britain, 726 : unskilled labor in Amer- ican unions. 727 : unions depending on the label. 728 : federation of unions in Great Britain and United States, 729 ; growth of unions in the two coun- tries, 731 : organization of women. 732 ; financial policy of British and American unions. 735 ; payments to carry on strikes. 736. Trust Regulation. Constitutional Difficulties of. 656-664. Power of Congress to grant chnrter an implied, not direct, power. 656 : conflict be- tween state and national authority. 660 ; economic necessity for trust regu- lation not urgent. 663^ United States. Attitude of the. To- ward Other Powers, 21-24 The Position of the United States Among Nations, 1-15. Russia as a world power. 1 : China. 2 : England. 2 ; France. 3 : Germany, 4 : .lapan. 5 ; United States. 6 : immigration into United States, fi : education. 7 : natural resources. 8 : imperialism. 8 : Monroe Doctrine. 9 : Panama Canal. 10; Chinese immigration. [792] Index of Subjects 11 ; commerce and the tariff, 12 ; international influence of United States, 14. War. Land Conflicts, The Important Elements in Modern, 101-120. Criti- cism of Professor Bloch's "Ttie Future of War," 103 ; percentage of deaths in important battles of Europe and Amer- ica, 107 ; conclusions to he drawn from figures of losses — (l) tendency to decrease, 112 ; (2) due to concentra- tion of energy, 115 (3) decrease of death losses from wounds, 118; (Ji) explanation found in perfection of weapon, 118 ; (5) at present few deaths after defeat, 119 ; (6) adapta- tion of scientific principles, 119 Naval Conflicts, The Imi'Ortant Elements in, 123-136. Marching of mediaeval and modern armies, 123 ; cost of modern armies and navies, 124 ; war as a business, 125 ; modern warship cannot oper- ate far from repair base, 126 ; ten- dency of nation to inquire more rigidly into naval administration, 127 ; vacillating opinions of naval experts, 127 ; navy must be prin- cipal arm of national defense, 128 ; responsibilities of industrial wealth and resources, 129 ; for- eign estimate of our naval sti-ength, 129 ; assumption of re- sponsibilities beyond natural boun- daries a serious weakness, 130 ; Philippines a naval burden, 130 ; inter-oceanic canal, 132 ; relation to minor American republics, 133 ; magnitude of responsibilities be- yond borders, 133 ; important ele- ments of naval strength applica- ble to present condition, 134 Washington, D. C. Parks and Public playgrounds. 771 West Indies. Europe and the United States in the^ 35-44. Population of Caribbean countries, 35 ; failure of European colonial system in Latin America, 36 ; economic interests of United States in Latin America. 37 ; influence of Panama Canal, 38 ; devel- opment of American constitutional sys- tem, 39 ; application of system to West Indies, 40 ; Monroe Doctrine, 42 THE ANNALS OF THE AMERICAN ACADEMY OF POLITICAL AND SOCIAL SCIENCE ISSUED BI-MONTHLY VOL. XXVI JULY— DECEMBER 1905 Editor: EMORY R. JOHNSON ASSOCIATE editors: SAMUEL McCUNE LINDSAY, JAMES T. YOUNG PHILADELPHIA Amkricax Academy of Political and Social Science 1905 Cvpyriijht, iy:5, by the American Academy of Political and Social Science All rights reserved CONTENTS PRINCirAL PAPERS PAGE Anderson, L. A. The Distribution of Surplus in Life Insur- ance : A Problem in Supervision 708 Beehler, William H. The Needs of the Navy 161 BiGELOW, Warren. Constitutional Difficulties of Trust Regu- lation 656 Bliss, Tasker H. The Important Elements in Modern Land Conflicts 99 BuTTERriELD. O. E. Limitations Upon National Regulation of ^ Railroads 629 Cleveland, Frederick A. The Relation of Auditing to Public Control 665 Crosby, Everett U. Fire Prevention 404 Dawson, Miles M. Assessment Life Insurance 300 Dawson, Miles M. Fraternal Life Insurance 308 FousE, L. G. Policy Contracts in Life Insurance 209 FouSE, L. G. The Organization and Management of the Agency System 243 GiBB, J. Burnett. The Calculation of Life Office Premiums . . 229 Hamer, J. W. Life Insurance Investments 256 Hammond, John Hays. American Commercial Interests in the Far East 83 Hancock, Henry J. The Situation in Santo Domingo 45 Hexamer, Charles A. Fire Insurance — Rates and Schedule Ratmg : 391 Hoffman, Frederick L. Industrial Insurance 283 ITuerner, Solomon. The Development and Present Status of Marine Insurance in the Lmited States 421 HuEBNER, Solomon. Policy Contracts in Marine Insurance. . . 453 HuEBNER, Solomon. Federal Supervision and Regulation of Insurance 681 Jf.ffertks, J. H. Lapse and Reinstatement 269 (iii) iv Contents PAOB Johnson, Emory R. Responsibilities of International Leader- ship 25 Kaneko, Kentaro. Japan's Position in the Far East 75 Knapp, Martin A. National Regulation of Railroads 613 Larrinaga, Tulio. Conditions in Porto Rico 53 LiPPiNcoTT, Henry C. The Essentials of Life Insurance Ad- ministration 192 LooMis, Francis B. Attitude of the United States Toward Other American Powers 19 LoTT, Edson S. Accident Insurance 483 Low, Seth. The Position of the United States Among the Nations i Melville, George W. The Important Elements in Naval Con- flicts 121 Montgomery, Harry Earl. Federal Control of Interstate Commerce 642 Moore, W. F. Liability Insurance 499 OviATT, F. C. Economic Place of Life Insurance and Its Re- lation to Society 181 OviATT, F. C. Historical Study of Fire Insurance in the United States 335 OviATT, F. C. Standard Fire Insurance Policy . 359 Rodgers, Frederick. The Extent to Which the Navy of the United States Should Be Increased 137 Smith, Charles Emory. The Internal Situation in Russia. . . 89 Walling, William English. British and American Trade Unionism 7^'^ Williams^ Talcott. Europe and the United States in the West Indies 33 Wilson, James H. The Settlement of Political Affairs in the Far East 59 Wolfe, S. H. State Supervision of Insurance Companies .... 317 WoTHERSPOON, WiLLiAM WALLACE. The Training of the Effi- cient Soldier 147 Appendix to "The United .States as a World Power" 171 Appendix to "Insurance' .521 Contents v COMMUNICATIONS PAQH Hicks, Frederick Charles. Marriage and Divorce Provisions in the State Constitutions of the United States 745 Low, A. Maurice. A Suggestion for the Prevention of Strikes 740 BOOK DEPARTMENT Conducted by Carl Kelsev reviews Ashley, Percy. Modern Tariff History — /. E. Conner 598 Bernheimer, C. S., Ed. The Russian Jew in the United States. — W. E. Kreusi 598 Brassey, Lord, and Chapman, S. J. Work and Wages. — T. Conzijay, Jr. . 599 Chanxellor, W. E., and Hewes, F. W. The United States: A History of Three Centuries, 1607-1904, Vol. l.—D. Y. Thomas 601 Chaxning, Edward. A History of the United States, Vol. I. — C. H. Van Tyne 602 Chapman, S. J. The Lancashire Cotton Industry : A Study in Economic Development. — W. D. Renninger 603 Clen^eland, F. a. The Bank and the Treasury. — /. E. Conner 603 Coal Supplies. Royal Commission's Report on the Coal Supplies of Great Britain. — /. F. CrozvcU 605 Cutler,. J. E. Lynch Law. — Carl Kelsey 606 Fish, C. R. The Civil Service and Patronage (Harvard Historical Studies, Vol. XI.).— JV. W. Pierson 606 Hart, A. B., Ed. The American Nation. Five Volumes. First Series. — Carl Kelsey 753 Ireland, Alleyne. The Far Eastern Tropics. — /. T. Young 755 Jebb, Richard. Studies in Colonial Nationalism. — W. E. Hofchkiss .... 607 JuDSON. F. N. The Law of Interstate Commerce and its Federal Regu- lation. — E. R. Johnson • 756 Lord, Eliot, Trenor. J. D., and Barrows. S. J. The Italian in America. Emily Fogg Meade 609 Oppenheim, L. International Law : A Treatise, Vol. I. — L. S. Rozve .... 610 Redlich, Josef. Local Government in England. — M. R. Maltbie 757 Ross, E. A. Foundations of Sociology. — Carl Kelsey 75Q Unwin. George. Industrial Organization in the Sixteenth and Seven- teenth Centuries. — M. H. Robinson 610 Willis. H. P. Our Philippine Problem. — /. E. Conner 761 vi Contents NOTES PAGE Adler, E. N. Jews in Many Lands 587 A New York Working Girl. The Long Day 749 BouRGiN, H. Fourier (Contribution a I'Etude du Socialisme Frangais) . 587 CoLAjANNi, N. Latins et A.nglo-Saxons 588 Columbia University Studies in History, Economics and Public Law, Vol. XIX, No. 3, Vol. XXIIT, Nos. 2 and 3 597 Committee of Fifty. The. The Liquor Problem 749 Davenport, F. M. Primitive Traits in Religious Revivals 750 Deutsch, L. Sixteen Years in Siberia 588 Eliot, Sir Charles. The East Africa Protectorate 589 Ely, R. T. The Labor Movement in America. New Edition 589 Fairlie, J. A. The National Administration of the United States of America 589 Ferri, E. La Sociologie Criminelle 589 GiDE, C. Economic Sociale, Les Institutions du Progres Sociale au debut du XX Siecle ^go GuMPLOwicz, L. Grundriss des Sociologie. Second Edition 590 Hepner, a. America's Aid to Germany in 1870-71 .• . 590 Illinois University Studies, A'^ol. I, Nos. 9-10 597 Jenks, a. E. The Bontoc Igorot 750 Johns Hopkins University Studies, Series XXIII, Nos. 3-4, 5-6, 7-8 .... 597 Landon, P. The Opening of Tibet 591 Lavisse, E. Histoire de France. Tome Sixieme. II 591 Levasseur. E. Elements of Political Economy 1^92 London, J. War of the Classes c^go McLain, J. S. Alaska and the Klondike 592 Macedo, p. La Evolucion Mercantil, Comunicaciones y Obras Publicas, La Hacienda Publica 7c; r Mississippi Historical Society, Publications of. Edited by F. L. Rilev. Vol. VIII :. 593 Pigafetta, a. Magellan's Voyage Around the World 751 Primary Reform. Publications of the Michigan Political Science Asso- ciation. Vol. VI, No. I t^93 Reed, W. A. Negritos of Zambales 594 Riley, T. J. The Higher Life of Chicago 594 Ringwalt, R. C. Briefs on Public Questions 594 Salter, W. Iowa: the First Free State in the Louisiana Purchase 594 Sanborn, A. F. Paris and the Social Revolution 595 ScHULLER, R. Schutzzoll uud Freihandel die Voraussetzungen und Gren- zen Ihrer Berechtigung c,gs, Sellers, Edith. The Danish Poor Relief System 596 Sherman, W. H. Civics 752 Sinclair, W. A. The Aftermath of Slavery 752 Staxg, W. Socialism and Christianity 596 Coiiicnis vii rAGB Strong, Josiah, Ed. Social Progress 597 'rnwAiTES, R. G., Ed. Earl}- Western Journals, 1748-1765 7^:-, WiiKLPi.EY, J. D. The Problem of the Immigrant 753 NOTES I. MUNICIPAL GOVERNMENT Conducted by L. S. Rowe Parks and Public Playgrounds: The Record of a Year's Advance. — A Symposium 764 Chicago, Buffalo, ^^'ashington, D. C. Seattle. Duluth. II. PHILANTHROPY, CHARITIES AND SOCIAL PROBLEMS Conducted by Mrs. Emily E. Wi;.li.\mson' Crippled Children's Driving Fund 778 Housing Problem, English 779 London's Unemployed 779 National Conference of Charities and Corrections yyy New York Society for the Prevention of Cruelty to Children 774 Prison Conference, International, at Buda-Pesth, Hungary 781