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Frank Albert Fetter.

Source book in economics, selected and ed. for the use of college classes online

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is that the railroad in one year make an exceedingly large
return and after paying a dividend issue stock to the stoek-
holders equivalent to the balance of the unappropriated
operating revenue available for dividends, and this money,
being invested in the i)r()perty, creates more value which the
shipper must care for. [Other examples here discussed.] . . .

The Supreme Court in the Tift ease {^upra) held that a



374 RAILROAD VALUES AND RATES

railroad could not increase lumber rates because it was buying
new equipment out of current earnings, although by so doing
it was adding to the value of its property, and doubtless in-
creasing the facility of movement of the lumber traffic. This
principle makes against the contention of the Burlington di-
rectly, and we see no reason why it may not be accepted as
settled law.

The record does not show nor does the Burlington contend
that its stockholders have not in the past been remunerated
adequately upon the basis of their then-owned property. Its
position is that the property having grown in value with the
growth of the West and the increase in traffic, it may advance
rates up to the point that the shipper can afford to pay and
under which the traffic will move.

We are not here dealing with the value of this property,
nor with the definition of value, whether value means in-
vestment, cost of reproduction, or something else. Our posi-
tion is that a railroad may not increase rates upon shippers
for the reason and as an outgrowth of the fact that it has ac-
cumulated out of rates a balance of profit which has been in-
vested in the property. This investment must take care of
itself. It must bring a return for itself either in increased
traffic or in the reduction of expenses of operation. There is
no justification for the investment of this surplus if it is to
have the effect of increasing the rates upon the shippers over
the original line. If the theory is to be recognized that by
increasing the value of their property, by putting back opera-
ting revenue into the property, a carrier may as a legal right
increase rates, then the shipper is worse off each time he
pays a rate which allows a revenue over and above a reasonable
return upon the original investment.

Herein we have outlined the full position of the railroad
and the opposing position. We do not regard the decision of
this question as vital to this proceeding, however, accepting as
we do for the purposes of this discussion the tenability of the
Burlington's theory.



RAILROAD VALUES AND RATES 875

We now turn Tor a nioiiK'nt to coiisick'r tlie added value of
railroad proi)erty by reason of the increase in the value of the
lauds held as terminals in cities and rights of way. Out of
the dilference between the original investment of $258,000,-
000 and the estimated present value of $5;]0,0()0,000 it has
been estimated that the increase in land values amounts to ap-
proximately $150,000,000. We may agree with the conten-
tion of the Burliuyton that it is no concern of ours as to
whether these lands were obtained by private or public dona-
tion in whole or in part, but a larger ([uestion of public con-
cern is involved — the legal right of a carrier to continuously
increase rates because of the growth of the community which
gives this added value to the land over which the railroad runs.
The States of Illinois, Iowa, South Dakota, Kansas, and
Nebraska have not reached their maximum development.
Their total population under the census of 1910 was but
32. G6 per square mile, whereas the population of the States im-
mediately to the east — Indiana, Ohio, New York and Pennsyl-
vania — was 143.23 per square mile. AVe have seen the popu-
lation of the city of Chicago alone grow in 20 years from
1,105,540 to 2,185,283. To-day a road is built upon a prairie
farm; next year it runs through a Kansas village; 20 years
hence this same village may be a city of half a million.

It is unquestionable that Kansas would not enjoy the popu-
lation that she has or the prosperity that is hers without the
presence of the railroads, and those men of prophetic vision
who projected those roads and invested their capital therein
are not to be denied a share in the wealth which they have so
largely helped to create. But as these lands increase in value
with the growth of the communities which they serve should
not this larger share coming to the railroad arise out of the
operation of that property and the increase in its traflfic rather
than by the imposition of a new burden of tolls upon those
wlio use their road? This question is not of paramount im-
portance in this case, but, it is urtxed, may become one of su-
preme moment if the carriers insist upon a right to increase



376 RArLROAD VALUES AND RATES

rates in proportion to increasing land values. In a very real
sense these added land values do not come to the railroad as a
railroad, but as an investor in land which has been dedicated
to a public use; and, being so dedicated, it may be strongly
urged that the increment added thereto from year to year by
communal growth should not necessitate an imposition of ad-
ditional rate burdens upon the public. Again, it is said that
the community increasingly taxes these lands upon their com-
mercial value as real estate, and that therefore the public is
stopped from denying their right to return upon such basis of
value. Without delaying to consider this matter it may be
said that in this case it has been discovered that the ratio
of taxes to operating revenues of the carriers remains ap-
proximately the same throughout the years. While the abso-
lute tax somewhat increases the relative tax does not increase.
Furthermore, such facts as we have been enabled to gather
tend to indicate that land used for railroad purposes does not
increase in value out of proportion to the increase in the value
of the property as a whole.

Whatever the true economic or legal view may be as to the
right of a carrier to consider the increase in value of its land
as a part of the value upon which it is entitled to a reasonable
return, such increase in value does not of itself establish the
right of a carrier to increase rates upon a given service. Cer-
tainly if the Supreme Court may decline to lay down the abso-
lute rule that "in every case failure to produce some profit to
those who have invested their money in the building of a
road is conclusive that the tariff is unjust and unreasonable"
(Reagan v. Farmer's Loan & Trust Co., 154 U. S. 412), it is
a conservative statement of the law to hold that a railroad
may not increase the rates upon a number of commodities
solely because its real estate has risen in value.

The Burlington has assumed that the true basis of a rail-
road value was the cost of reproduction, and it may not be
unworthy of our attention to consider the reproduction value
of this property as estimated by the officials of the Burling-



KAILKOAl) VAF-ri:S AM) KA'IIIS 877

ton aiRl i^rosiMit llie n-cord iii.ulc tlici-ciii ;i.s to the cost of
building a load in this section of our country. It is said, and
with no littK' supporting reason, that tliose who i)r()ph('sy or
fear tliat rates will constantly ascend from this time forward
because of the increasing value of lands are mistaken; that no
such results would take place because increasing earnings
would care for increasing land values. This certainly should
be so if the property is situated so that it can avail itself of
the greater volume of traffic produced by a richer and more
productive territory. At any rate it is fair to say that the
time has not yet come when values have so increased that they
menace existing rates, whatever may be the support they give
to the contention that rates should not be reduced. [Page
5389.] . . .

[Page 5391] The trend of the highest judicial opinion
would indicate that we should accept neither the cost of repro-
duction, upon which tlie Burlington's estimate of value is
made, nor the capitalization w^iich the Santa Fe accepts as ap-
proximate value, nor the price of stocks and bonds in the
market, nor yet the original investment alone, as the test of
present value for purposes of rate regulation. Perhaps the
nearest approximation to the fair standard is that of bona
fide investment — the sacrifice made by the owners of the prop-
erty — considering as part of the investment any shortage of
return that there may be in the early years of the enterprise.
Upon this, taking the life history of the road through a num-
ber of years, its promoters are entitled to a reasonable return.
This, however, manifestly is limited; for a return should not
be given upon wastefulness, mismanagement, or poor judg-
ment, and always there is present the restriction that no more
than a reasonable rate shall be charged.

(An interesting item in tliis connection is clipped from the financial
columns of tlie New York Times of July 10, 1912. — En.

Blrli.ngton's Fat TEEAStUY. — Xo one appreciates more than J. J.
Hill that one cannot eat his cake and have it. For several years
etockiiohlers of the Great Northern and Nortiiorn Pacilic have been



378 RAILROAD VALUES AND RATES

greedily watching the increasing profit and loss surplus of the
Chicago, Burlington & Quincy, jointly owned by the two roads. When
the Burlington was earning II per cent, they felt that the time had
come for it to pay something more than the interest on the cost of
its ownership. When it began to show from 13 to 14 per cent, they
saw the possibility of a "melon" in its surplus over the 8 per cent,
disbursed on its stock. In 1911 the road earned 15 per cent, and
still paid only 8 per cent. In the period closed with June 30, after
a very severe winter and other unfavorable conditions which left
some of the transcontinentals with a deficit after dividends, the
Burlington earned about 13% per cent, on its $110,000,000 of stock.
The reason this company is able to continue to earn a large balance
over dividends in spite of bad weather or business depression is that
the management did not embrace the first opportunity to increase
the payment on its shares. Instead, the surplus was plowed back
into the property, as railroad men say. It was used for improvements,
which are now earning a handsome return on the uncapitalized in-
vestment. In the Burlington the Northern Pacific and Great Northern
have a sheet anchor which would enable them to weather a bad year
without reducing their dividends. So far the Hill boards have shown
no disposition to cut into the Burlington's surplus.



RAILROADS AS NATIONAL ASSETS

[The Interstate Commerce Commission in its decision on "Advance
of rates by carriers, in ollicial classification territory" (Eastern roads),
Feb. 22, 1911, weighed somewhat tiie question as to tlie ultimate
equities in the growing railroad surpluses and increments of value
in the United States. After considering the case presented by sucli
improvements as the elevation of tracks, involving large expenditures
for the benefit of the public, the Commission says: "It is difficult to
see how it [the railroadj can, upon the theory of the Yellow Pine
case, charge the entire expense of the improvement to the public through
iiigher rates." It then continues (Senate Document, 725, Gist Con-
gress, 3d session, p. 5459): J

Where lies the difference between a reveniie-prodncing and
a uon-revenue-producing improvement? So long as the im-
provomeut is for the I'ature the present must not be entirely
taxed to provide it. The elevation of those tracks has added
to the cost of the railroad; the value of the property which
that company is using for the public benefit has been en-
hanced, and this justifies it in demanding from the public a
greater return than formerlj% but not in tlemanding the price
of the improvement itself.

While this would seem to be the law of the situation, there
is a suggestion of public policy which might under some condi-
tions lead to a different conclusion. It is a wise thing for
a nation as well as for an individual to lay up something for
the future. This Nation in time to come must engage in ac-
tive commercial competition with the rest of the world. We
must manufacture and sell against other nations. Railway
rates will enter as an important factor into that competition.
Not only the rate upon the raw material to the factory anil
upon everything which enters into the cost of living will be
of consequence, but also the rate from the factory to the jtort.

379



3S0 RAILROADS AS NATIONAL ASSETS

Germany and France to-day use their railroads to assist the
home manufacture as against his foreign competitor by al-
lowing a special rate upon articles for export.

In the past we have enjoyed cheap raw materials. Our food
has been cheap ; our coal and our ores have been near the sur-
face; our lumber has been plentiful. These resources are
being exhausted; the cost of food is increasing; our forests
are being depleted. We must go deeper for our coal. All
this will render the cost of production more expensive, and it
might be wise to lay up in our railroads a fund which should
be of assistance to future generations in offsetting this
tendency to increase the price, were there any assurance that
the fund when provided could be made available. There is
the gravest doubt upon this point, for the reason that what-
ever is invested in these properties from earnings may belong,
not to the public which has paid for it, but to the stock-
holders who have already received a full return upon their in-
vestment in the way of a dividend.

The president of the Pennsylvania Co. testified that since
1887 his company had put into the Pennsylvania lines east
of Pittsburgh $262,000,000 from earnings. During all that
time this company has also paid to its stockholders munificent
dividends. Now to whom belongs this $262,000,000, a sum
which, according to the statistical report of the Pennsylvania
Railroad Co. to this commission for the year ending June 30,
1910, equals nearly two-thirds of the total cost of construction
of the 2,123 miles owned by that company ?

Suppose this commission were required to fix a value upon
the Pennsylvania lines east of Pittsburg. Could any distinc-
tion be made between this sum which has accrued from the
operation of the property and what has been paid in other
sources ?

We are not required at this time to express an opinion upon
that point. What the claim of the railroads will be when
the matter finally comes to an issue is well shown by a ques-
tion which was asked upon the argument and answered by that



I{.\ILK(».\1>S AS NA'IMOXAI- ASSKTS 381

attorney who \v;is ur^Miii,' inosL slroii^ly tlir i-i^lil of the i-;iil-
road to lu'i'uinuhitt' a siii'{)Ius for this purpose:

Question. The popular idea seems to bp tliat tlicsp ])ropprtios ought
to be pliysicnlly valued, and that the rate should be determirud by
the value of the property so fixed. In that case, would the .^urplu.s
be entitled to be appraised as a part of the value?

Answer. As of the date that sueh a valuation takes place, the
property as it stands belongs to the stockholders. That has been in
niTordance with the policy of the Government, and it would take a
change in the policy of the Government to change that legal situation.
So I think the valuation would necessarily be on the property as it
stands.

In 9 I. C. C. Rep. 382, 417, the commission, in considering
the financial condition of tlie Lake Shore & Michigan South-
ern Railway said :

The Lake Shore & Michigan Southern, on June 30, 1901, owned a
majority of tlie capital stock of its competitor, the New York, Chicago
& St. Louis Railroad Co., a majority of the capital stock of its con-
nection, tiie Pittsburg & Lake Erie Railroad Co., almost one-half of
the capital stock of the Lake Erie &, Western Railroad Co., and
$11,224,000 of the capital stock of the Cleveland, Cincinnati, Chicago
& St. Louis Railway Co., besides smaller holdings in other companies.
These stocks had been acquired^ in addition to tiie payment of dividends
not less than 6 per cent, for many years, out of net earnings. During
the year 1002 it purciiased, apparently out of surplus, $4,728,200 of
the capital stock of tlie Indiana, Illinois and Iowa Railroad Co., the
entire capital being $5,000,000.

This company after paying 7 per cent, dividend to its stockholders
lias a surplus each year suflicient to buy the control of a very consider-
able railroad. Before holding that its revenues ought to be further in-
creased, or that the Government ought not to exercise any supervision
over those revenues, it may be well to consider what the bearing of
tliis process, continued for half a century, is to be upon two of the
great economical problems Wfore us, namely, the distribution of
wealth and the control of tiie avenues of transportation.

The carriers in the proceeding now before us have claimed
that they should be allowed to invest in improvcinciits and ad-
ditions to the property an aiiiouiit eijual to that paid by way



382 RAILROADS AS NATIONAL ASSETS

of dividends to stockholders. In the year 1910 railroad divi-
dends aggregated $405,131,650. If this sum were to be in-
vested in our railways annually for the next half century, it
would amount at the expiration of that period to $20,256,582-
500, not regarding the item of interest. This sum is far in
excess of the present total capitalization of our railroads. It
is not improbable that it may equal the total amount which
will be expended in railway development in the next half
century, and upon this vast amount which has been ac-
cumulated in addition to a fair return upon the investment
railway stockholders will claim a return. Every dollar which
has thus been added to the value of these properties justifies,
according to the claim of these defendants, an added net re-
turn, and it is further claimed that the Constitution of the
United States protects these defendants in the right to im-
pose such charges as will yield this return.

It is evident that until the status of this surplus is de-
termined by legislative action or judicial interpretation, this
commission can not properly permit an advance in rates with
the intent to produce an accumulation of surplus for this
purpose.



THE SHERMAN ANTI-TRUST LAW
[Actor July 2, 1890 (26 Stat. 209) J.

AN ACT TO PROTECT TRADE AND COMMERCE AGAINST UNLAWFUL
RESTRAINTS AND MONOPOLIES.

Be it enacted by the Senate and House of Representatives
of the United States of Ajnerica in Congress assembled.

Section 1. Every contract, combination in the form of trust
or otherwise, or conspiracy, in restraint ol" trade or commerce
amonir the several States, or with foreign nations, is hereby
declared illegal. Every person who shall make any such con-
tract or engage in any such combination or conspiracy, shall be
deemed guilty of a misdemeanor, and, on conviction thereof,
shall be punished by fine not exceeding five thousand dollars,
or by imprisonment not exceeding one year, or by both said
punishments, in the discretion of the court.

§ 2. Everj^ person who shall monopolize, or attempt to
monopolize, or combine or conspire with any other person
or persons, to monopolize any part of the trade or commerce
among the several States, or with foreign nations, shall be
deemed guilty of a misdemeanor, and, on conviction thereof,
shall be punished by fine not exceeding five thousand dollars,
or by imprisonment not exceeding one year, or by both said
punishments, in the discretion of the court.

§ 3. Every contract, combination in form of trust or
otherwise, or conspiracy, in restraint of trade or commerce in
any Territory of the United States or of the District of Co-
lumbia, or in restraint of trade or commerce between any such
Territory and another, or between any such Territory or Ter-
ritories and any State or Stales or the District of ColumI)ia,

888



384 THE SHERMAN ANTI-TRUST LAW

or with foreign nations, or between the District of Columbia,
and any State or States or foreign nations, is hereby declared
illegal. Every person who shall make any such contract or
engage in any such combination or conspiracy, shall be deemed
guilty of a misdemeanor, and, on conviction thereof, shall be
punished by fine not exceeding five thousand dollars, or by
imprisonment not exceeding one year, or by both said punish-
ments, in the discretion of the court.

§ 4. The several circuit courts of the United States are
hereby invested with jurisdiction to prevent and restrain
violations of this act ; and it shall be the duty of the several
district attorneys of the United States, in their respective dis-
tricts, under the direction of the Attorney General, to institute
proceedings in equity to prevent and restrain such violations.
Such proceedings may be by way of petition setting forth the
case and praying that such violation shall be enjoined or
otherwise prohibited. When the parties complained of shall
have been duly notified of such petition the court shall proceed,
as soon as may be, to the hearing and determination of the
case; and pending such p'etition and before final decree, the
court may at any time make such temporary restraining order
or prohibition as shall be deemed just in the premises.

§ 5. Whenever it shall appear to the court before which
any proceeding under section four of this act. may be pending,
that the ends of justice require that other parties should be
brought before the court, the court may cause them to be sum-
moned, whether they reside in the district in which the court
is held or not ; and subpoenas to that end may be served in any
district by the marshal thereof.

§ 6. Any property ovsmed under any contract or by any
combination, or pursuant to any conspiracy (and being the
subject thereof) mentioned in section one of this act, and
being in the course of transportation from one State to an-
other, or to a foreign country, shall be forfeited to the United
States, and may be seized and condemned by like proceedings
as those provided by law for the forfeiture, seizure, and con-



Till': siiKK.MA.N AN ri-'iurs'i" I>A\V 385

ilcMiuiation of pi-opcrty impdiicd iiilo llic I'nilcd Stairs coii-
trary to law.

§ 7. Any person who shall \)v. injured in husinoss or
property by any other person or corporation by reason of
anything forbidden or declared to be unlawful by this act,
may sue therefor in any circuit court of the United States
in the district in which the defendant resides or is found,
without respect to the amount in controversy, and shall re-
cover threefold the damages by him sustained, and the costs
of suit, including a reasonable attorney's fee.

§ 8. That the Mord "person," or "persons," where-
ever used in this act shall be deemed to include corporations
and associations existing under or authorized by the laws of
either the United States, or the laws of any of the Territories,
the laws of any State, or the laws of any foreign countiy.

[The following are expressly or in effect amendments of "the Sherman
Anti-trust Law" by addition, though the terms of the original act
never have been changed. — Ed.]

1894, Aug. 27. In the tariff act (Wilson Act), sections 73-77 (which
were expressly preserved in the Dinglcy Act of 1897 when most of
the Wilson Act was repealed) directed prohibitions and penalties very
similar to those of the Sherman Act against cases in restraint of trade
in connection with the importation of goods.

1903, Feb. 11. "An act to expedite the hearing and determination of
suits" under the Anti-trust act, and the Interstate Commerce Act,
by giving precedence to such cases.

1903, Feb. 25. An appropriation of $500,000 made to be expended
\inder the direction of the Attorney-General in the employment of
Bpecial counsel to prosecute suits under the acts of 1890 and 1894
above mentioned; proviso that immunity is granted to persons for any
matter concerning which he shall testify in such suits.

1903, Feb. 14, In an act to establish the Department of Commerce
and Labor was provided a Bureau of Corporations to gather, compile,
publish and supply useful information concerning corporations engaged
in interstate commerce, and with powers of investigation similar to
those of the Interstate Commerce Commission.

1906, June 30. An act defining the immunity of witnesses under the
several acts before mentioned; immunity shall extend only (o a nat-
ural person testifying under oath.

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Online LibraryFrank Albert FetterSource book in economics, selected and ed. for the use of college classes → online text (page 30 of 30)