UNITED STATES. EXCLUSIVE OF TERMINAL AND SWITCHING ROADS.
╒══════════════╤══════════════════════════════════════════════════════╕
│ │ ASSETS. │
├──────────────┼──────────────────────────────┬───────────────────────┤
│ │ Total. │ Per mile of road. │
├──────────────┼───────────────┬──────────────┼───────────┬───────────┤
│ │ 1908. │ 1890. │ 1908. │ 1890. │
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│RAILROAD: │ │ │ │ │
│Cost of road │$12,035,195,403│$7,333,096,430│ $56,268│ $51,400│
│Cost of │ 1,178,571,137│ 422,290,951│ 5,510│ 2,960│
│ equipment │ │ │ │ │
│Material and │ 226,250,462│ 63,785,950│ 1,058│ 447│
│ supplies │ │ │ │ │
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Total │$13,440,017,002│$7,819,173,331│ $62,836│ $54,807│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│INVESTMENTS: │ │ │ │ │
│Stocks owned │ $2,115,313,379│ $489,049,859│ $9,890│ $3,428│
│Bonds owned │ 1,271,311,512│ 241,115,665│ 5,944│ 1,690│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Total │ $3,386,624,891│ $730,165,524│ $15,834│ $5,118│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│CURRENT │ │ │ │ │
│ ASSETS: │ │ │ │ │
│Cash and │ $1,213,575,272│ $307,871,188│ $5,674│ $2,158│
│ current │ │ │ │ │
│ assets │ │ │ │ │
│Sinking, │ 154,975,409│ 125,095,987│ 724│ 877│
│ Insurance, │ │ │ │ │
│ and other │ │ │ │ │
│ funds │ │ │ │ │
│Total │ $1,368,550,681│ $432,970,175│ $6,398│ $3,035│
│Miscellaneous │ $1,277,458,795│ $710,300,536│ $5,973│ $4,979│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Grand │$19,472,651,369│$9,692,609,566│ $91,041│ $67,939│
│ total—All │ │ │ │ │
│ assets │ │ │ │ │
├──────────────┼───────────────┴──────────────┴───────────┴───────────┤
│ │ LIABILITIES. │
├──────────────┼───────────────┬──────────────┬───────────┬───────────┤
│SECURITIES │ │ │ │ │
│ ISSUED: │ │ │ │ │
│Capital stock │ $7,289,597,964│$4,179,156,990│ $34,081│ $29,293│
│Bonds │ 9,441,200,261│ 4,462,577,079│ 44,141│ 31,280│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Total │$16,730,798,225│$8,641,734,069│ $78,222│ $60,573│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│CURRENT │ │ │ │ │
│ LIABILITIES:│ │ │ │ │
│Accrued │ │ $25,341,994│ │ $177│
│ interest │ │ │ │ │
│Other current │ $1,151,233,255│ 440,513,629│ $5,382│ 3,088│
│ liabilities │ │ │ │ │
│Total │ $1,151,233,255│ $465,855,623│ $5,382│ $3,265│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Miscellaneous │ $845,115,552│ $394,918,201│ $3,952│ $2,768│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Grand │$18,727,147,032│$9,502,507,893│ $87,556│ $66,606│
│ total—All │ │ │ │ │
│ liabilities │ │ │ │ │
│Profit and │ 745,504,337│ 190,101,673│ 3,485│ 1,333│
│ loss balance│ │ │ │ │
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Grand │$19,472,651,369│$9,692,609,566│ $91,041│ $67,939│
│ total—All │ │ │ │ │
│ assets │ │ │ │ │
╘══════════════╧═══════════════╧══════════════╧═══════════╧═══════════╛
╒══════════════╤══════════════════════════════════════════════════════╕
│ │ ASSETS. │
├──────────────┼──────────────────────────────┬───────────────────────┤
│ │ Per Mile of main tracks. │Per mile of all tracks.│
├──────────────┼───────────────┬──────────────┼───────────┬───────────┤
│ │ 1908. │ 1890. │ 1908. │ 1890. │
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│RAILROAD: │ │ │ │ │
│Cost of road │ $50,656│ $48,109│ $38,659│ $40,033│
│Cost of │ 4,961│ 2,770│ 3,786│ 2,305│
│ equipment │ │ │ │ │
│Material and │ 952│ 419│ 727│ 348│
│ supplies │ │ │ │ │
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Total │ $56,569│ $51,298│ $43,172│ $42,686│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│INVESTMENTS: │ │ │ │ │
│Stocks owned │ $8,903│ $3,208│ $6,795│ $2,670│
│Bonds owned │ 5,351│ 1,582│ 4,083│ 1,316│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Total │ $14,254│ $4,790│ $10,878│ $3,986│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│CURRENT │ │ │ │ │
│ ASSETS: │ │ │ │ │
│Cash and │ $5,108│ $2,020│ $3,898│ $1,681│
│ current │ │ │ │ │
│ assets │ │ │ │ │
│Sinking, │ 652│ 820│ 498│ 683│
│ Insurance, │ │ │ │ │
│ and other │ │ │ │ │
│ funds │ │ │ │ │
│Total │ $5,760│ 2,840│ $4,396│ $2,364│
│Miscellaneous │ $5,377│ $4,660│ $4,103│ $3,878│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Grand │ $81,960│ $63,588│ $62,549│ $52,914│
│ total—All │ │ │ │ │
│ assets │ │ │ │ │
├──────────────┼───────────────┴──────────────┴───────────┴───────────┤
│ │ LIABILITIES. │
├──────────────┼───────────────┬──────────────┬───────────┬───────────┤
│SECURITIES │ │ │ │ │
│ ISSUED: │ │ │ │ │
│Capital stock │ $30,682│ $27,417│ $23,415│ $22,815│
│Bonds │ 39,738│ 29,277│ 30,327│ 24,362│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Total │ $70,420│ $56,694│ $53,742│ $47,177│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│CURRENT │ │ │ │ │
│ LIABILITIES:│ │ │ │ │
│Accrued │ │ $166│ │ $188│
│ interest │ │ │ │ │
│Other current │ $4,845│ 2,890│ $3,698│ 2,405│
│ liabilities │ │ │ │ │
│Total │ $4,845│ $3,056│ $3,698│ $2,543│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Miscellaneous │ $3,557│ 2,591│ $2,715│ $2,156│
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Grand │ $78,822│ $62,341│ $60,155│ $51,876│
│ total—All │ │ │ │ │
│ liabilities │ │ │ │ │
│Profit and │ 3,138│ 1,257│ 2,394│ 1,038│
│ loss balance│ │ │ │ │
├──────────────┼───────────────┼──────────────┼───────────┼───────────┤
│Grand │ $81,960│ $63,588│ $62,549│ $52,914│
│ total—All │ │ │ │ │
│ assets │ │ │ │ │
╘══════════════╧═══════════════╧══════════════╧═══════════╧═══════════╛
It ought also to be borne in mind, in this connection, that, while there
could be no lawful mode for the revision of existing capitalization,
should it in any instance be found to be too small or too great when
measured by the results of such a valuation, the future issue of
securities must be controlled by the necessities of the carriers and the
state of the market, and is also practically restricted by the
Interstate Commerce Commission's accounting system, which declares what
expenditures may and what may not be carried into the capital account.
The law cannot compel any company to repudiate any existing security,
and if it could it is not to be supposed that Congress would compel such
an impairment of contract rights; public policy will not permit in
practice restrictions that would prevent the issue of securities to meet
the actual needs of the public and the carriers; the accounting system
prevents issues of any other sort. Further restrictions would be
cumulative and superfluous.
TABLE 11.
═══════════════════════════╤══════════╤══════════╤══════════╤══════════
Track. │ 1908. │ 1890. │Increase. │Percentage
│ │ │ │ of
│ │ │ │increase.
───────────────────────────┼──────────┼──────────┼──────────┼──────────
Single track │213,888.36│142,665.89│ 71,222.47│ 49.9
Second track │ 20,209.05│ 8,437.65│ 11,771.40│ 139.5
Third track │ 2,081.16│ 760.88│ 1,320.28│ 173.5
Fourth track │ 1,408.99│ 561.81│ 847.18│ 150.8
───────────────────────────┼──────────┼──────────┼──────────┼──────────
Total, all main tracks │237,587.56│152,426.23│ 85,161.33│ 55.9
Yard track and sidings │ 73,728.57│ 30,750.17│ 42,978.40│ 139.8
───────────────────────────┼──────────┼──────────┼──────────┼──────────
Total mileage operated │311,316.13│183,176.40│128,139.73│ 69.9
(all tracks) │ │ │ │
═══════════════════════════╧══════════╧══════════╧══════════╧══════════
"The Interstate Commerce Commission in 1908 report that their
Balance Sheet covers 'miles of road' aggregating 213,888.36 miles,
whereas their statement of mileage represents all roads reporting to
the Commission whether or not they furnished a Balance Sheet.
"To analyze the Consolidated Balance Sheet, we have revised the
statement of mileage to cover same roads as are included in the
General Balance Sheet. The 'miles of road,' _i. e._, miles of first
main track, are actual. The Commission's report not showing
separately for each line the miles of other main tracks or yard
tracks and sidings, the figures shown in the statement of mileage
are _approximate_. It includes mileage of all second, third and
fourth tracks. Undoubtedly, practically all of the second tracks,
third tracks and fourth tracks are owned, or operated by, roads
furnishing the Commission with a Balance Sheet. Mileage of Yard
Tracks and Sidings is based on the proportion which the single-track
mileage of roads represented in the Balance Sheet bears to the total
single-track mileage of roads reporting to the Commission."
Mr. Riggs considers _seriatim_ nine objections to the ordinary methods
of estimating cost of replacement which were mentioned specifically by
the writer, as among the most important commonly omitted items, in an
address before the New York Traffic Club, delivered during January,
1909. He concedes that the writer is correct in urging that allowances
for "working capital with which to carry on the business" and for
"impact and adaptation" ought to be included, and were omitted in
Michigan and have been usually omitted. These are two of the nine
objections specifically raised. As to five others, Mr. Riggs seems to be
in considerable doubt. Concerning the objection that an allowance of 3%
for interest during construction is too low, he contends that it was
justified in Michigan by the "assumption," that the whole work of
replacement would be accomplished in one year, and also "that on long
roads partial operation would commence as various sections of the line
were completed." He admits that these assumptions "clearly would not be
proper" under different conditions, but appears to hold that they were
warranted as to the Michigan work.
Another of the writer's objections was the absence of an allowance for
"wear and tear of materials during the period of construction." As to
this, Mr. Riggs says:
"This deterioration is a necessary incident to any construction
work. It has not been customary or usual to take account of it. To
add to the amount capitalized on account of this item would be
manifestly improper. The only way in which this could be cared for
would be in an adjustment of the depreciation reserve when raised to
cover that which takes place during the construction period."
Of course, the depreciation account, when there is one, is a charge to
operation. Therefore, Mr. Riggs' anxiety to disagree with the writer has
led him into a frame of mind in which he is prepared to find that it is
"manifestly improper" to charge to capital the real cost of
construction, but is quite proper to charge to operation a part of the
cost of construction, even though this results in carrying into the
operating account items of expense incurred long before operation began
or could have begun.
Mr. Riggs thinks that the writer was incorrect in objecting that "a
uniform price for earthwork was used, thus ignoring the varying
character of soil and length of haul," but he admits that there was
"practically no classification in the Southern Peninsula of Michigan,
or, in fact, on 90% of the mileage of the State," and his defense goes
no further than to assert that "the price * * * was not much out of the
way when considered as a fair average for the territory."
His criticism of the objection to the use of a uniform price list for
materials, and ignoring the source of supply and the cost of delivery at
the point of use, is equally forced, for it admits that "no effort was
made to use different unit prices as between counties," and only
contends that "in a number of cases" differences in prices were made.
The absence of an allowance for interference by labor troubles, weather
conditions (which he admits are "a frequent source of annoyance, delay,
and sometimes of expense"), Mr. Riggs defends on the ground that it is
"an expense difficult to separate and set up," and therefore ought to be
covered by an allowance for contingencies. On the same ground, he could
easily carry every item of cost of replacement into the contingent
account.
The two remaining objections specifically raised by the writer are
squarely attacked by Mr. Riggs. As to one of them, the propriety of an
allowance for carrying charges up to the time of attaining a revenue
basis, has been admitted by the Railroad Commission of Wisconsin, but it
is a broader question than ought here to be discussed. The writer will
only suggest, at present, that in some form or other, these charges must
be on the whole and in the long run met out of net operating income, and
that the cheapest way, for the user of the services supplied, is to
carry them into the capital account—otherwise there must be an early
amortization of this item, which cannot do otherwise than to throw a
heavy burden on the early schedules of charges. The language of the
Wisconsin Railroad Commission on this subject merits quotation, and is
as follows:[40]
"But new plants are seldom paying at the start. Several years are
usually required before they obtain a sufficient amount of business
or earnings to cover operating expenses, including depreciation and
a reasonable rate of interest upon the investment. The amount by
which the earnings fail to meet these requirements may thus be
regarded as deficits from the operation. These deficits constitute
the cost of building up the business of the plant. They are as much
a part of the cost of building up the business as loss of interest
during the construction of the plant is a part of the cost of its
construction. They are taken into account by those who enter upon
such undertakings, and if they cannot be recovered in some way, the
plant fails by that much to yield reasonable returns upon the amount
that has been expended upon it and its business. Such deficits may
be covered either by being regarded as a part of the investment and
included in the capital upon which interest is allowed, or they may
be carried until they can be written off when the earnings have so
grown as to leave a surplus above a reasonable return on the
investment that is large enough to permit it. When capitalized, they
become a permanent charge on the consumers. When charged off from
the surplus, they are gradually extinguished. (These facts alone,
however, do not always furnish the best or most equitable basis for
the disposal of such deficits.) Whether they should go into the
capital account, or whether they should be written off, as
indicated, are questions that largely depend on the circumstances in
each particular case."
The other objection that is squarely opposed by Mr. Riggs is the refusal
to allow for unavoidable discounts on the securities sold. Here he
quotes with complete approval an unnamed writer, who contends that the
impropriety of such an allowance is proven because, as between an issue
of $10,000,000 in bonds (par value) at 4% and at 4½%, the 4% bonds
bringing 90 and the 4½% selling at par, there is an annual saving, in
issuing the 4% of $50,000 in interest, and that, if the issue is to be
for fifty years, this saving is $2,500,000, or $1,500,000 in excess of
the discount. Of course, these figures are correct, but both Mr. Riggs
and his unnamed authority seem strangely to have overlooked the fact
that if a railway construction requires $10,000,000, it cannot be
obtained by issuing $10,000,000 in par value at 90. The comparison, of
course, ought to be based on the issue of enough bonds at each rate to
obtain equal sums of money. As $10,000,000 in par value of bonds sold at
90 would produce $9,000,000, the following comparison is based on the
issue of enough bonds at each rate payable in fifty years to secure that
sum.
Fifty-Year Bonds,
4½% sold at par. 4% sold at 90.
Amount of capital required $9,000,000 $9,000,000
Par value of bonds necessary 9,000,000 10,000,000
Annual interest charge 405,000 400,000
If 4% bonds are used:
Annual saving in interest $5,000
Fifty years saving in interest 250,000
Loss, original discount 1,000,000
_________
Net loss $750,000
Of course, the foregoing figures are not absolutely accurate, for the
real net loss in the issue of the 4% rather than the 4½% bonds at these
prices would be the difference between the $5,000 annual saving in
interest and the amounts which would have to be set aside annually for
fifty years to produce $1,000,000, the amount of the discount, at the
end of that period. But the table is sufficiently accurate to expose the
curious error into which Mr. Riggs has fallen. Perhaps it will convince
him that it would be better, hereafter, not to stray so far outside the
field of civil engineering.
Mr. Riggs has little sympathy with those railway men who venture to
express the opinion that regulation ought not to extend so far as to
render it impossible to conduct the railway business in a business-like
way. His animadversions on railway men in general have already been
illustrated herein. He finds nothing worse with which to characterize a
previous utterance of the writer's than to say of it:
"The manifest impatience with all forms of governmental interference
with corporations, which so often characterizes the utterances of
prominent railway officials, appears in this paper to a marked
degree."
At the risk of incurring further displeasure, the writer will not omit
now to observe that, in his judgment, the whole question whether
railways shall be generally and officially valued, and how and by whom
the task shall be performed, is primarily conditioned by the country's
need of managing its legislative control of railway methods so as not to
restrict unduly the flow of capital into that industry. The steady
pressure for legislation during the last five years has so extended
legislative regulation that, for the first time, the sturdy, frugal,
conservative, "small investor" stands in the forefront of the problem.
His views of the stability and future prosperity of the American railway
industry now dominate the situation. What they are may be read in the
facts attending recent efforts to finance necessary improvements of old
and prosperous railways. It developed before the Interstate Commerce
Commission during the recent hearings in connection with the proposed
partial adjustment of rates to the diminished purchasing power of the
money in which they are paid, that one of the greatest of Eastern
railway systems, paying 8% annual dividends on its stock, which is very
widely distributed, had offered new shares to its stockholders at a
premium of 25%, and had found them unsalable at that figure, so that it
was obliged to recall the offer and put them out at par. Other testimony
disclosed the failure of one great company to obtain an offer of more
than 85 for its 4% bonds, while another had been forced to go to France
to raise $10,000,000, and many others have been forced to the expedient
of issuing short-term notes at relatively high rates of interest. It
also appeared that extensive proposals for new branch lines had been
abandoned or postponed, in view of the impossibility of obtaining funds
on reasonable terms.
Other testimony shows that locomotive shops and car builders are putting
out not more than half of their capacity; that the supply trade is
receiving no new orders. Never, since the beginnings of the American
railway industry, has the American and foreign investor been so
reluctant to supply necessary capital, or so doubtful of the future of
railway enterprises. This fact is not due to absence of confidence in
the industrial future of the American people, but is directly
attributable to the unanswered inquiry as to how far the policy of
legislative control is to extend. Either this question must be answered
in a manner satisfactory to the investor, or the credit of the
Government must be made available for the extension and improvement of
railway facilities, either through Governmental guaranties of adequate
returns to capital, or through Government ownership; for adequate and
properly constructed and equipped railways the public must and will
have. Thus far, the American public is ready neither for Federal
guaranties nor for Federal ownership; it is to be hoped that it will
never be ready for either. In this situation, if a Federal valuation is
to be undertaken, it is primarily important that it should be under such
auspices and by such methods that the investor will not be alarmed as to
its consequences. This is not a suitable occasion to attempt to lay down
all the considerations applicable to such a valuation, but it ought to
be perfectly clear that it must relate to value in use, not to some
concept of value limited to replacement cost which excludes some of the
most important elements of value (which are also those most worthy of a
return, because they represent the highest and most difficult social and
industrial services), in order to obtain a means of excluding these same
elements from possibilities of adequate reward.