on much lower figures than now exist. The worth of a stock is its earning power. Every other value given is speculative. If a road overissues stock on presumptive earnings or extensions or by vote of the board of directors the water in the issue is nearly always practically eliminated by the rating which the market puts on the stock itself. Very few companies or boards of directors can increase their capital stock without a vote of the stockholders, and any unjust increase would necessarily be done by the owners of the property themselves. Every intelligent shareholder nowadays acts independently, and if anything is proposed by the larger shareholders that is not approved by the smaller ones they make themselves very readily and very forcibly heard.

As a general proposition it would be impossible to say offhand whether it would be a proper proceeding for two roads, each of which had a fair capitalization, to combine and double the total capitalization of the two roads in the new line. (772–776.) Mr. THOMAS, president of the Erie Railroad, asserts that the capitalization of American railroads is low as compared with that of English roads. Some of the English roads have a capital of $350,000 per mile. There is a cry against the Erie Railroad because it has a bonded debt of $70,000 per mile, but the property could not be reproduced for the amount of that debt with a very large sum in addition. The witness doubts much the correctness of estimates as to the cost of building railroads, while the value of terminals is a very important factor. Besides its bonds, the Erie Railroad, according to Mr. Thomas, has $43,000,000 of first preferred stock, $16,000,000 of second preferred stock, and $100,000,000 of common stock. The Erie has been through several bankruptcies, which have reduced the rates of interest and fixed charges. The witness does not assert that the stock has been reduced by reorganizations, but says that the amount of stock makes no difference if no dividends are paid upon it.

Mr. Thomas does not think either that heavy capitalization of a railroad tends to increase the speculation in its securities. The contrary is probably the case. (551, 559.)

Mr. WOODLOCK, railroad editor of the Wall Street Journal, does not believe that American railroads generally are overcapitalized. The stocks and bonds of American railroads combined average only $61,000 per mile of road. This is an increase of about $8,000 above the figure 15 years ago. In some instances, however, recent reorganizations of railroads have increased securities unduly. This was the case, for example, with the Richmond Terminal, the Erie, the Reading, and the Chicago and Alton. Various junior securities have been issued which could not be expected to get any dividends. Thus Mr. J. P. Morgan, in most of his reorganizations, estimated the minimum earning capacity and based the fixed charges, going to bonds and preferred stocks, on that, but as regards securities dependent upon future prospects people could pretty much help themselves. (456.)

Mr. Woodlock says that the capitalization of British railroads is between $220,000 and $240,000, per mile, as compared with $61,000 per mile for American roads. When British roads were being built, from 1840 to 1850, land was worth a great deal more than it is here, and more than it is worth in England now. Moreover, the English roads have capitalized every amount, however small, which has gone into improving the lines. Mr. Woodlock seems to imply that the policy was intentionally to increase capitalization as much as possible. The best English roads pay from 5 to 7 per cent dividends on this high capitalization. (461.)

2. Proper basis of capitalization (see also under Taxation, p. CLXXXIX).—Mr. TALCOTT, assistant to the president of the Seaboard Air Line, says that the question of the proper basis for capitalizing a railroad is the hardest problem that was ever propounded to him. He does not see how the physical value of the property can properly be disregarded, and yet the public and the financiers appreciate a property only for what it will earn. The value of a property and the value of a franchise are two different things; but Mr. Talcott thinks, apparently, that both should be considered in fixing a value or in fixing a capitalization. (635.)

Mr. Woodlock does not believe that overcapitalization has any effect on earnings or rates. Earning capacity is the final test of capitalization itself. All other influences tend to favor overcapitalization, but earning capacity tends to keep it down. Rates of transportation are governed by conditions into which capitalization does not enter at all.

Mr. Woodlock does not agree with the position of the Interstate Commerce Commission that in estimating a reasonable rate the original cost of the road should be considered. It is fairer to consider as a basis the cost of duplication, including not merely the physical plant, but the terminals, the acquisition of business, and everything which makes an operating railroad. The cost of duplication is a very different thing from the original cost. Railroads have naturally become very valuable because

of the growth of population, which in many cases has been the result of the presence of the railroad, and which has increased especially the value of land for right of way and for terminals. Moreover, large amounts of money have been diverted from earnings for the improvement of the railroads, and ofteň no account has been made of this fact in the capital investment.

Mr. Woodlock believes, in fact, that the existing capitalization of railroads in general represents no more than the actual cost of the roads. The cost of a road includes many matters not strictly of construction. For example, there is the discount on bonds in many cases, which must be considered a part of the cost. It is true that sometimes contracts for construction are given to construction companies, often composed of officers of the road, at very high figures. But after the whole road is laid it is not finished. Money must be spent on it for years.

Mr. Woodlock concludes with the statement that the capitalization of the railroads as compared with modern industrial combinations is, in general, exceedingly conservative. In some instances railroads have been capitalized at an absurdly low rate. (456-458.)

3. Stock dividends.-Mr. SCHIFF testified that as a general proposition he does not believe stock dividends are advisable, but there may be exceptions if the stock dividend represents cash value or earnings actually retained in the course of years from the shareholders. He says:

"For instance, if I own to-day a line of road from New York to Albany, and want to build a branch, say, from Albany to Saratoga, and if, instead of issuing new capital, I take my earnings, or the earnings of the shareholders of the company, to build that new road with, I should be justified, after that road is completed, in returning to the shareholders their money which has been used for new capital in the form of new shares." (774.)

4. Depreciation in value of property.-Professor RIPLEY says that, in computing the value of the tangible property of railroads in Michigan, consideration is taken of depreciation in value over first cost. In addition to figuring out the cost of duplication, the worth of the road for scrap is also estimated. For instance, the cost of the steel rails used by the railroads is estimated, how much those rails are worth as scrap, and how long is their normal life. If the normal life of the rail would be twenty-five years, the assumption is made that one twenty-fifth of the difference between the cost of the rails and the scrap disappears in each year. Then if the road has been built for three years, three twenty-fifths of this difference in value should rightly be deducted in order to determine how much the road is worth at the present time. (306.)

5. Betterments of railroads.—Mr. TALCOTT, assistant to the president of the Seaboard Air Line, says that the cost of additional facilities for handling business is charged by some Southern roads to operating expenses, generally with a note that the amount has gone for betterment, and by other roads, if the improvement is of any magnitude, to the construction account. New equipment is generally paid for out of earnings, because the usual way to buy it is on the car-trust plan, making payments monthly or quarterly. (635.)

6. Capitalization of the Chicago and Alton Railroad.-Mr. WOODLOCK speaks especially of the Chicago and Alton Railroad as an illustration of modern methods of railroad financing. For eighteen or nineteen years, until very recently, the road did not increase its capitalization nor extend its lines. It paid dividends of 7 or 8 per cent on its common stock regularly. Its net earnings were about $2,900,000 per year. The road had $22,000,000 of stock and $8,000,000 of bonds. The interest on the bonds and rentals required $1,100,000 yearly, leaving $1,800,000 for dividends. Mr. Harriman finally bought out the road, paying $175 per share for common stock and $200 per share for preferred stock, the entire stock costing him more than $40,000,000. He knew that a first charge on the net earning capacity of $1,800,000 could be floated at 34 per cent interest or less. Accordingly he issued more stock and bonds, so that the present capitalization is $54,000,000 of bonds, partly 3 per cent and partly 34 per cent, and $40,000,000 of stock. Mr. Woodlock contends that the road is perfectly able to pay interest on the bonds and dividends on preferred stock. Mr. Harriman made, of course, a very considerable profit. He bought it on practically a 5 per cent basis. It is believed that the syndicate which bought up the road made a profit of 16 or 18 per cent, but there were other profits not going directly to the syndicate. The railroad has meanwhile increased its length by buying up a short line, increasing the mileage from 847 miles to 900.

Mr. Woodlock contends that the capitalization of the Chicago and Alton is scarcely excessive, as regards its effect on rates, for the reason that, though there is plenty of money available for profitable enterprises, no one proposes to build another road from Chicago to St. Louis. Another road could not make lower rates than those existing. There was a project to build a short line, known as the St. Louis and

Northern, up to Chicago. The other railroads did not want another Chicago line; there was no need for it. They simply bought it up, and the Alton now owns this line. Nevertheless the witness thinks that those who buy Alton common stock at 40 are likely to get left. (458-460.)

Mr. SCHIFF declares that the recent financing of the Chicago and Alton road by his firm was simply a readjustment and not a reorganization. The old organization had become so heavy that it was impossible to expand the possibilities of the road, and the stockholders decided they would readjust the finances of the company. His firm were large stockholders. The charges for dividends and interest in the new corporation do not vary 5 per cent from the charges and dividends of the old corporation. He is not aware that the capitalization was increased from about $30,000,000 to something over $100,000,000, including stock and bonds. He remembers very clearly that under the old financing the charges for dividends and interest were something like $2,600,000 and under the new scheme they were only something like $2,700,000, notwithstanding the fact that about $10,000,000 new money had gone into the road. The amounts of stock and bonds were increased, but the dividends, which for 30 years had been 7 per cent, were reduced to 4 per cent. There is no more temptation to increase dividends from 4 to 6 per cent than would have existed before if it had increased the old dividend from 7 to 10 per cent and it would not necessarily excite public comment any more to do so. (775, 776.)

7. Financing of the Kansas City, Pittsburg and Gulf Railroad.-Mr. WOODLOCK speaks especially of the financing of this road. It was started by Mr. Stilwell, who aimed to build a line directly from Kansas City to the Gulf of Mexico, establishing a deep-water port on Sabine Lake, with a ship canal from the Gulf to the lake. He raised the money for the road mainly in Amsterdam. The terms of the mortgage permitted the issue of bonds at the rate of $25,000 per mile, both for main track and for yard and terminal tracks. Whenever the road found itself in need of money it would lay five or six tracks alongside the main track, call it a yard and get $25,000 per mile of bonds. Ninety or 100 miles of such unnecessary yard track were laid. These bonds were mostly sold at from 65 to 70 cents on the dollar, and an equal amount of common stock was thrown in as a bonus. It was obvious that the property could not bear such heavy capitalization and it finally went into bankruptcy and has been reorganized. (461, 462.)

8. Effect of high capitalization on price of stocks.—Mr. WOODLOCK points out that stock bearing a low interest sells at a relatively higher price than one bearing high interest. If a 6 per cent income is divided between a 4 per cent stock and a 2 per cent stock, the two can be sold for much more than a 6 per cent stock, because there are always "prospects." (400.)

B. Regulation of capitalization.—1. Generally.-While Mr. WOODLOCK does not believe that overcapitalization is likely to have any special effect upon the public as regards rates, he does believe that it may injuriously affect speculators and investors. At the same time it would be very difficult to protect them. The investor refuses to be protected; "He wants to gamble." Mr. Woodlock seems to hold that it would be a good thing to have Federal legislation, effectively enforced, restricting capitalization of railroads closely to actual investment. The Massachusetts legislation on this subject and the English legislation are both good and should be either enacted in a general way by Congress or woven into the interstate-commerce law. (460-462.)

Notwithstanding his statements that American railways are not usually greatly overcapitalized, Mr. THOMAS thinks that legislation should restrict excessive issues of securities by railroads. This would be advantageous both to the railroads and to the public, certainly much more advantageous than regulation of charges and other interference. Corporations should be controlled chiefly through their financial machinery. The witness would approve the extension of the powers of the Interstate Commerce Commission in this direction. (551, 559, 560.)

2. Massachusetts law.-Professor RIPLEY says that the corporation laws of Massachusetts are so strict that no railroad in Massachusetts can issue a dollar's worth of stocks or bonds, can lease another road, can build another spur of side track or do anything of that kind without getting the prior approval of the railroad commission. The result is that the roads feel that unless they accede to the recommendations of the railroad commissioners in matters of rates it will happen that, when they wish to carry through some financial operation, the railroad commission may withhold its consent. The railroad commission is not empowered to determine rates, though some years ago, when the Housatonic Railroad refused or neglected to comply with a recommendation of the commission for the reduction of rates at certain points, the commission reported the facts to the general court, which was then in session, and the general court immediately authorized the railroad commission to fix rates on that road.

Under ordinary conditions the power possessed by the railroad commission which enables it to pass upon all financial operations is sufficient for making the railroads acquiesce in such suggestions as are made. Such power in the hands of the Interstate Commerce Commission over interstate roads would give to it the hold over those roads which the Massachusetts railroad commission now has over Massachusetts roads. The Massachusetts corporation laws also operate to prevent stock watering and to hold down capitalization. The law specifically says that no corporation shall issue stock except to the amount of actual investment in tangible, physical plant, and Massachusetts corporations do not incorporate for anywhere near the aggregate amount of par value of stock and bonds per mile which is customary in other parts of the country. (292, 293.)

Mr. F. JACKSON, a member of the Massachusetts State Board of Railroad Commissioners, says that the policy of the board in respect to capitalization is one of restriction. Its theory is that it is right that the people who furnish the income to the stockholders in the way of rates should pay profits only upon actual expenditure. The statute describes the purposes, in a general way, for which stock and bonds may be issued. Then the board has to decide whether the particular purposes of the company fairly fall within the general purposes as described by the statute. Next it decides the amount of capital which is fairly required for that purpose. If a street railway desires to equip its road the board has a skilled expert to determine what the fair cost of such equipment would be; if a road is to be built, the board has an expert engineer examine into the cost of construction; if real estate is to be bought, the board determines the fair amount to be paid for the property.

There is a statutory distinction and there are distinctions in practice between bonds and stock in fixing the amount of capitalization. The bonds must not be in excess of the capital stock, and, in practice, the board never allows bonds to be issued until the enterprise has reached the stage of completion. Before approving an issue of mortgage bonds the board examines the assets and liabilities of the railway or railroad, determines the value of the property, and sees that it is at least equal to the amount of the outstanding capital and indebtedness. In determining the value of the property the board does not take into account the value of the terminals. (843, 844.) Mr. Jackson says also that stock and scrip dividends are prohibited by statute in Massachusetts. (844.)

3. Minnesota law.-Mr. TEISBERG, secretary of the State Railroad and Warehouse Commission of Minnesota, says that an act was passed in his State in 1887, requiring that all stock issued by new railroad companies should be fully paid, and that no increase of stock should be made without the consent of the Railroad and Warehouse Commission. Since that time the witness believes that 3 applications for permission to increase capital stock have been made. All have been granted, after full hearing. The regulation of stock issues does not apply to the Great Northern Company, which holds a charter dating from 1856, nor to the Northern Pacific. It applies only to a few roads incorporated under the general incorporation law. (365.)

4. Sinking funds.-Mr. RIPLEY says that the only difficulty he sees in the proposal to require roads to set aside a sinking fund to liquidate their bonds is that the status of those sinking funds would be highly complicated if the roads went into the hands of a receiver before the final burden of the securities was paid off. (306.)

C. Bankruptcy and reorganization of railroads.—1. Effect on capitalization. -Mr. GREENE, of the Audit Company of New York, says that the same causes which make hard times in manufacturing business make hard times for the railroads, so that bankruptcy and reorganizations are more or less periodical, depending on the fluctuations in business.

It is not always true that railroads with heavy capitalization are most subject to bankruptcy. It depends on the situation of the corporation and the nature of its business. It can not be said that the reorganizations of recent years have usually resulted in cutting down the aggregate volume of the securities of the railroad companies. They have generally reduced the bonded indebtedness, or in any case, on account of the lower rate of interest, reduced the fixed charges upon bonded debt. In not a few instances the stocks have been increased. Often preferred stocks have been created, sometimes in place of a part of the former bonds. It is one of the objects of recent railway consolidations to enable the companies to earn some interest on these preferred stocks, which, while they have no legal claim upon the earnings, have a moral claim. Nevertheless an increase of securities of this kind is a less serious burden upon the corporation than an increase of bonds. The bonds must be within a reasonable limit or bankruptcy will some time occur.

The usual way in which reorganization is effected is by a meeting of persons who either own or control a large portion of the bonds. They often act in connection with a friendly receiver of the railroad. They study the situation to find out what the road

can do, and how its earning capacity can be increased, and ascertain where money can be obtained. They have to decide what bonds can be scaled down and what exchanged for preferred stocks. The witness does not think that these committees, while apparently self-constituted, are able to endanger the interests of minority stockholders. The courts are more and more inclined to protect the minority. They have felt that the first consideration was to preserve the public service of the railroad. For this reason they have tried to keep the various railroad systems together in the case of reorganization, instead of allowing them to become broken up into separate roads, with varying classes of obligations and securities. This is the policy of the courts during the receivership and in connection with reorganization movements. The managers of railroads often take pains to have receivers appointed who are not hostile to their interests. There may be abuses by receivers, but to the honor of the courts there has been little complaint on that score. It is true that in deciding, in connection with reorganization, whether some lines shall be dropped or others retained, the interests of members of the reorganization committee in the separate lines may be a factor, but generally the real interests of the entire system are considered. Some branches are merely suckers instead of feeders, and these are generally cut off. If the minority feel themselves injured by these processes, they have recourse readily to the courts. (487, 488.)

Professor RIPLEY says that most of the reorganizations which have been had, although intended to cut down capitalization, have had exactly the reverse effect. While the road comes out of the reorganization with a lessening of its fixed charges, the aggregate par value of stock and bonds is, however, almost always greater than it was before. The Atchison road, which has been reorganized three times since 1889, has, after each reorganization, had a greater capitalization. The reason for this increase in capitalization seems to be that persons who are represented by all of the eight or ten different securities resting on a given line are not willing to accept in place of their securities others of a lower par value than those which they formerly possessed. The result is that many people are satisfied to get a large amount of stock in par value which does not sell for much on the exchange, rather than get a few shares of something which perhaps will sell higher. They all wish to be remembered in the organization by a certain amount of stock which they hope will go up toward par later.

Reorganization is generally intended to wipe out the complexity which results from a large number of different classes of securities. In the case of the Union Pacific reorganization, perhaps two or a single class of securities applied over the whole line. By the reduction of the number of classes of securities, the problem of determining how much capitalization a road has and what the relation of its capitalization is to its earnings is greatly simplified. In most cases reorganization has resulted in a considerable cutting down of fixed charges. Financiers are enabled to issue new classes of bonds at lower rates of interest, etc. The roads can refund practically for 3 per cent or even 34 per cent where formerly they had to pay on those fixed charges 6 or even 7 per cent. (291, 297, 298.)

Mr. Ripley says also that a great many of the roads in this country are reducing their bond issues and substituting stock, for the reason that dividends on stock need not of necessity be paid in times of depression, while bond charges must be met regularly or else there is bankruptcy or receivership. The difficulty in such substitution is that it is only an exceedingly strong road that can issue stock. (304.)

Mr. GREENE, of the Audit Company of New York, says that there has been a great reduction in the rates of interest on the bonded debts. The general basis has been reduced from about 7 per cent in 1890 to 4 per cent in 1901. The bonds of the New York Central now bear 7 per cent, but could be refunded at 33 per cent. (486.)

2. Effect of recent reorganizations on physical character of roads. Mr. RICE, banker, believes that the financial condition of American railroads is very much better now than it was in 1893. Through the various reorganizations which followed the bankruptcies of that and the following years an enormous amount of cash has been put into the railroads. Thus the Southern Railroad is made up of a number of small lines, which were very poorly constructed. Large assessments were levied on the stockholders, and the combined road has improved greatly in physical conditions. The same is true of roads in other sections. While 15 years ago the English railroads were superior to ours in their physical conditions, the opposite is true at present. (740.)

3. Receiverships.-Mr. RICE says that he secured the introduction of a bill into Congress several years ago on the subject of receiverships. It has been the practice whenever the president of a railroad had bad luck to put it into bankruptcy and appoint him receiver, on the ground that he was most familiar with the road. The witness thinks that if the familiarity of the president brought on the ruin of the road it would be better to have some one else act as receiver. (741.)