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XIV. THE TELEPHONE BUSINESS-Continued.

C. Comparison of American and European telephone rates and
conditions...

XVI. RAILWAY LABOR.

D. Labor conditions.

XV. MUNICIPAL PUBLIC UTILITIES.

A. General discussion of regulation and public ownership...... CCXXXIX
B. Experience with municipal ownership in the United States.... CCXLI
C. Capitalization. Charges under private and public ownership.. CCXLV
D. Municipal ownership in England.

CCXLVII
CCXLVIII

E. Regulation of private ownership.

F. Uniform and public accounting-municipalities and public-
service corporations

G. Street-railway development and problems

A. Employment and discharge.

B. Blacklisting.

LABOR QUESTIONS GENERALLY.

C. Wages of railway employees..

D. Relations of employers and organizations of employees

E. Accidents. Employers' liability

F. Railroad relief associations

G. Use of intoxicants by railway employees.

H. Labor organizations..

I. Arbitration and conciliation in general
J. Chinese and Japanese in California..

A. Reciprocity with Canada...

B. Grain elevators and inspection-speculation .

C. Industrial and agricultural conditions of the Pacific coast

CCXXXII CCXXXVIII

XVIII. CORPORATIONS AND COMBINATIONS GENERALLY.

A. Capitalization and promotion of corporations

B. Exploitation of patents

C. Publicity of corporations..

D. Rights of minority stockholders and of stockholders gener-
ally...

E. Corporation laws..

F. Trusts and combinations.
G. Export prices...

H. Concentration of wealth

XIX. MISCELLANEOUS
TRANSPORTATION.

I. Discriminating tariff on goods carried in bond.

J. Southern Pacific Company in politics

K. San Francisco Board of Trade.

Page.

CCXLIX
CCLI

L. Michigan Alkali Company

M. American money.

XVII. LABOR CONNECTED WITH WATER TRANSPORTATION.

A. Ocean and coastwise transportation

B. Labor on vessels on the Great Lakes.
C. Longshore work-Great Lakes.

D. Labor in Mississippi River traffic.

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EVIDENCE NOT RELATING TO

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CCLXV CCLXVII CCLXIX

CCLXXII

CCLXXII CCLXXIV

CCLXXV

CCLXXIX

CCLXXXII CCLXXXIV

D. Manufactures and agriculture in Colorado

E. Export and domestic trade in coal

CCLXXXV
CCLXXXV

F. Commission and jobbing business. Elimination of jobber.. CCLXXXV
G. Alleged discrimination in Government contracts

CCLXXXVI

H. Panics..

CCLXXXVI

CCLXXXVI

CCLXXXVI

CCLXXXVI

CCLXXXVI

CCLXXXVII

CCLXXVII

CCLXXVIII

CCLXXVIII

CCLXXIX
CCLXXIX

TOPICAL DIGEST OF EVIDENCE.

I. RAILWAY FINANCES GENERALLY.

(See also Inspection of accounts, p. CLXX.)

A. Capitalization of railroads (see also Capitalization of corporations, p. CCLXXII).-1. Are American railways overcapitalized?-Professor RIPLEY says that in some roads the capitalization is greatly swollen and in some roads it does not represent more than actual investment. In some roads capitalization covers not only the first cost, but all improvements in the road. In others it does not. The old Chicago and Alton, for instance, was so conservatively financed that the capitalization represented only 60 per cent of the value of the property. The relation between the capitalization of a road and the value of its property should lie at the basis of the determination of what rates are reasonable. A road is not always entitled to earn a living interest in dividends upon its capitalization, because a part of that capitalization may be fictitious. (291, 292, 306.)

Professor Ripley says that while the selling of bonds at a low figure to persons who carry through a deal and the reselling of these bonds at a high figure is not technically stock watering, yet it has the same effect. He cites the case of the Chicago and Alton. Its volume of securities was increased from about $42,000,000 to something like $120,000,000, a large part of the increase going in profits to the persons who had the deal in charge. (304.)

Professor PARSONS asserts that the tendency of the great railway corporations is to build up capitalization all the time, adding together the cost of the original plant and the cost of all improvements, reconstructions, etc., until, even with honest bookkeeping and without any stock watering, the capitalization comes to be 2 or 3 times the worth of the plant, and the face value of the stock and bonds of these corporations is very much more than the cost of the plant or what it could be duplicated for. In all the corporations there is more or less watered stock.

The system of watering railway stocks originated with Vanderbilt when he consolidated the various railway properties now constituting the New York Central system and increased the capitalization from $54,000,000, which was a little more than the actual cost of the roads, up to $103,000,000.

The total capitalization of the railways of the country is a little over $60,000 a mile, while the cost of reproduction would be under $30,000 a mile. The cost of reproduction of a plant is a fair test of what it should be capitalized at. There is a total difference of policy under governmental ownership, where there is no water or inflation, but exactly the opposite policy of reducing the capitalization from year to year. One of the reasons given by the Swiss Federal Council for going over to public ownership was that they were surrounded by countries that were aiming to reduce rates to the least possible figures, and that the Swiss roads would pile up the capitalization so high that they would not be able to compete. (154–155.)

Mr. TEISBERG, secretary of the State railroad and warehouse commission of Minnesota, states that a district court in his State found that the cost of reproducing the Great Northern road, some 1,385 miles, in Minnesota would be an average of $32,000 per mile. About one-third of this amount was the cost of the terminals. The supreme court found this to be exorbitant. (365.)

Mr. SCHIFF, of Kuhn, Loeb & Co., bankers, does not believe there is such a thing as excessive capitalization. The market value of the stocks and bonds of one transportation company adapts itself to that of another company which may have an entirely different capitalization. The market value of competing lines adapts itself to a relative level, whatever the capitalization. In the case of the acquisition of the securities of one road by another there is not necessarily any danger that the purchase may be made at a high figure, which may afterwards be carried in the capitalization of the two roads. That would depend upon the good judgment of the railroad managers. During the past year or two acquisitions of this sort have been made

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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 often 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 3 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

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