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From the above statement it appears that out of a total of $54,4:65,437
paid as taxes during the year ending June 30, 1902, $37,336,673 were
paid on the value of real and personal property. To this should be
added the amount paid on property owned by railways not used in the
operations of the road, which, for the most part, is taxed locally and
on the basis of valuation. It should also be observed, in order to
obtain the full measure of the extent to which ad valorem taxation of
railway property is followed in this country, that the State of Michi-
gan appears for the last time in the report of 1902 as paying taxes on
the basis of gross earnings, and, further, that the State of Wisconsin
is at present considering the question of making some use of the val-
uation of railway properties for the purpose of assessment.

The result of railway taxation fails to show that degree of uniform-
ity which one might reasonably expect in view of the general uni-
formity of method. So striking is the divergence in these results that
it may not be inappropriate to insert a table giving the amount of
taxes paid by railways in each State, reduced to a mileage basis.



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VALUATION OF RAILWAYS.



29



Summary showing taxes and assessments of the railways in the United SUdeSj by States and
Territories^ for the year ending June SO, 1902.



State or Territory.



Alabama

Arkansas

California

Ck>lorado

Connecticut

Delaware ,

Florida

Georgia

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky ,

Louisiana

Maine

Maryland . .*

Massachusetts....

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire.



Amount.


Per mile
of line.


9780,968


$187


630,683


171


1,367,011


247


1,263,928


268


1,031,308


1,006


101,125


301


408,056


132


661,896


120


325,008


244


4,686,422


411


2,661,222


477


1,610,251


171


2,196,626


261


897,688


296


673,166


247


370,366


198


382,966


284


2,925,598


1,401


1,509,444


190


1,752,493


247


504,167


130


1,402,107


203


406,164


129


1,168,622


204


180,921


193


392,918


324



State or Territory.



Amount.



New Jersey

New Yojk

North Carolina

North Dakota

Ohio

Oregon :

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virginia

Wisconsin...

Wyoming

Arizona

District of Columbia .

Indian Territory

New Mexico

Oklahoma



690,688
904,688
635,411
621,020
120,630
249,377
327,160
188,266
450,792
284,546
742,984
117,764
310,118
160,944
759,719
629,083
493,882
710,276
174,112
140,700
17,694
14,582
288,958
198,664



Per mile
of lin«.



1770
606
149
210
364
166
426
888
162

96
240
110
206
146
204
216
218
269
141

92
657
9
148
139



Total.



153,192,928



274



1 Excludes $1,234,939 taxes, internal revenue, United States Government, not localized by States
and Territories, and $37,670 taxes, reported by carriers as paid in the Dominion of Canada.

It would be wholly outside the purpose of this report to consider the
general question of railway taxation. That subject lies within the
jurisdiction of the States. When, however, it is recognized that rail-
way taxes amount to between 4 and 5 per cent of the aggregate of
operating expenses, and that on this account a reasonable charge upon
interstate traffic may be aflfected by the maimer in which the States
administer their taxing laws, it may well be claimed that the valuation
of railway properties becomes a matter of Federal concern.

It may be proper to add a word relative to the plans that may be
pursued. Of the various methods of valuing railway property the
one which seems the most reliable involves a complete and detailed in-
ventory of both physical and nonphysical values. The other methods
which come into competition with the inventory method are, first, the
acceptance of the book items ' ' Cost of road " and * ' Cost of equipment,"
and such other items as appear on the assets side of the balance sheet,
as standing for the value of I'ailway property; or, second, the accept-
ance of the market price of railway obligations as a measure of that
value.



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80 REPORT OF THE INTERSTATE COMMERCE COMMISSION.

No one acquainted with the practice of American i-ailway accounting,
so far as the balance sheet is concerned, can maintain for a moment
that the bookkeeping statement of cost is a correct indication of pres-
ent values. There is no guarantee that the amounts entered as "Cost
of road" and " Cost of equipment" represent the capital originally put
into the enterprise, and in* the few cases where the cost originally
charged on the balance sheet is a measure of the capital invested, the
radical fluctuations in the price of material and labor during the past
thirty or forty years would render such a statement useless for deter-
mining present values. The aggregate of the assets of railways on
June 30, 1902, as reported to this Commission, was $14,270,301,564.
No one can for a moment say, even after making allowance for dupli-
cation of items on account of intercorporate relations, that the railways
of the United States should be valued at this figure. The balance
sheet on its asset side is practically useless for the purpose of valuation.

The only plan which has thus far received the qualified approval of
the courts is what is known as the "stock and bond plan" — that is to
say, the valuation of coi-porate properties on the basis of the market
quotation of their securities. Much may be said in favor of this
method of valuation and much also against it. Passing over minor
considerations, two considerations suggest themselves which point to
the inadvisability of placing exclusive reliance upon the stock and
bond plan of valuation.

In the first place, what is sometimes called the rule of the Supreme
Court for the valuation of railway property — that is to say, the
acceptance of the judgment of the market in the price it pays for
stocks and bonds as a measure of value — is a rule of nearly thirty
years' standing, and much of the pertinency which it may have had
between 1870 and 1880 is largely set aside by the conditions under
which the great properties are now organized and operated. The
purchase of individuals for permanent investment is of small account
compared with the purchase by syndicates for consolidation and con-
trol, and when it is recognized that the considerations which influence
syndicates of capital in purchasing stocks and bonds diflfer widely
from the considerations which influence an individual in determining
the price he can afford to pay for an investment, it must be conceded
that the market price of railway stocks and railway bonds is by no
means a correct measure of the cash value of railways, as that phrase
is commonly used and as it is defined in statutory law.

The second reason why this rule fails to satisfy the requirements of
a just valuation is that the great majority of railway stocks and i*ail
way bonds are not bought and sold upon the market. Two years ago
this Commission, in response to a resolution of the Senate, undertook
to make a valuation of i^ailway securities on the basis of the market



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VALUATION OF BAIL WAYS. 31

price of stocks and bonds. The following is quoted from the report
made in response to this resolution:

It may not be inappropriate, aa bearing upon the extent to which reliance can be
placed upon the figures submitted, to state the diflBculties encountered in this com-
putation. * * * The chief difficulty was found in the fact that by far the larger
proportion of railway securities are not subject to extensive purchase and sale, and
on this account fail to disclose the market price. This report deals with over two
thousand corporations, while the number whose securities were quoted on the stock
market in such a manner as to enable a satisfactory computation of the value of
the property which they represent, in conformity with the rule embodied in the
resolution, did not exceed two hundred and twenty-five.

While market valuations of such securities as show a wide market may
be of great use in checking values arrived at by other methods, or in
enabling a correct interpretation of commercial conditions, the Com-
mission does not hesitate to say, as a result of this experience, that
the rule fails to justify a very great degree of confidence in the results
to which it leads. If an authoritative and trustworthy valuation of
railway properties is to be arrived at, the balance sheet, whether on
the side of assets or of liabilities, can not be accepted as the starting
point for investigation.

The third method of valuation is what may be termed the inventory
method. This method recognizes that the value of railway property
exists in two forms, namely, its physical plant and its ability to earn
profits. Each of these forms of value is capable of extended analysis,
and when analyzed each element is capable of separate appraisal.
This Commission has already authorized a classification of construction
accounts and requires that all betterments and improvements to the
property be annually reported according to the classification.

The firat step in the application of the inventory method would be
an investigation and an appraisal by competent engineers of every
physical element that goes to make up a railway property; the second
step would be an analysis of operating accounts and a study of the
history of the property, so far as this may be necessary to a just esti-
mate of its commercial condition and business prospects. An inventory
and an appraisal of the elements that make a business profitable are as
necessary as an inventory of the physical elements of its plant and
equipment. Should it be urged that the valuation of railway property
by the inventory method would be attended with considerable expense,
and that the inventory would, within a very short period, fail to rep-
resent the existing condition of the property, a partial answer at least
is that the annual reports of railways to this Commission and to the
State railroad commissioners if made in conformity with the estab-
lished classification of "Operating expenses" and of "Construction
expenses," and with the established form for the ciassification and
report of earnings, would practically permit an annual correction of
the inventory and consequently an annual declaration of values.



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82 EEPORT OF THE INTEBSTATE COMMERCE COMMISSION.

A large number of questions incident to the valuation of railway
properties suggest themselves in addition to those which have here been
mentioned. This report can not, however, enter into further detail.
Sufficient has been said to indicate the importance of an auftioritative
determination of railway values. It is respectfully recommended that
Congress take this matter under advisement with the view to such legis-
lative action as may be deemed appropriate.

EMPLOYMENT OF SPECIAL ATTOBNETS IN CASES BEFOBE COM-
MISSION.

Within the last year the Commission has prosecuted, upon its own
motion and at its own expense, a much larger number of inquiries and
investigations than formerly. It has also, in some instances, assigned
its attorney to appear for the complainant in cases where formal com-
plaint has been made by private shippers or public associations, such
attorney acting either alone or in connection with counsel furnished by
the complainant. This practice has, we understand, been the subject
of some criticism, and it seems proper to state the theory upon which
we have proceeded in this respect.

The act to regulate commerce was enacted for the purpose of cor-
recting unreasonable rates and discriminating practices in the inter-
state transportation of freight and passengers by rail. In the very
nature of things the wrongs aimed at are of trifling consequence to the
individual, while of tremendous importance to the public as a whole.
If a rate be extortionate the amount paid by a single shipper is usually
small, but the total may amount to millions of dollars annually. Per-
haps in most instances the freight rate is so small a part of the total
cost of a commodity that the consumer is unconscious of the increase
in rate. The middleman who pays the freight is not immediately
interested in the absolute amount of that rate, provided he enjoys as
favorable terms as his competitors. It results, therefore, that no one
individual can ordinarily aflford to sustain the burden of litigating the
reasonableness of a freight rate; and this is equally true, in most
instances, of discrimination between commodities or localities. To
create merely a right of action in such instances and establish a court
to which the aggrieved parties may apply would afford no substantial
relief. The business of transportation by rail has been often desig-
nated as a quasi-public function. In many countries the public itself
discharges that duty. In our country it has been left to private
enterprise. If the public delegates to others this duty, it should at
least provide some means whereby the reasonableness of the charges
imposed and the fairness of the practices involved may be determined
at the public expense.

In our view of the matter this was the leading notion in enacting
the interstate commerce law and creating this Commission. The Com-



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EMPLOYMENT OF SPECIAL ATTORNEYS. 33

mission is not a court. It is a Commission in the nature of an admin-
istrative body, invested with certain specified powers by the act which
created it. In the exercise of those powers it is required at times to
hear and pass upon complaints of individual shippers a^inst interstate
carriers. This, however, is but a small part of its duties, as an exam-
ination of the act itself conclusively shows. This in terms declares
that ''the Commission is hereby authorized and required to execute
and enforce the provisions of this act," and the fullest power of inquiry
into the methods and practices of interstate carriers is accorded. The
13th section, after stating who may make complaint, how such com-
plaint shall be sei*ved upon the carrier, in what manner the complaint
may be satisfied by the carrier, continues:

If such carrier shall not satisfy the complaint within the time specified, or there
shall appear to be any reasonable ground for investigating said complaint, it shall be
the duty of the Commission to investigate the matters complained of in such manner
and by such means as it shall deem proper.

In Interstate Commerce Conmiission v. Brimson (154 U. S., 447),
the Supreme Court of the United States examined at great length
the scope and purposes of this act, saying, among other things (at
p. 474):

All must recognize the ^t that the full inforination necessary as a basis of intelli-
gent legislation by Congress from time to time upon the subject of interstate com-
merce can not be obtained, nor can the rules established for the regulation of such
commerce be efficiently enforced otherwise than through the instrumentality of an
administrative body, representing the whole coimtry, always watchful of the general
interest, and charged with the duty not only of obtaining the required information,
but of compelling by all lawful methods obedience to such rules.

In this view of the law we can not, when a complaint involving a
question of general public interest is brought to our attention, merely
say to the complainant: " Employ your attorney, file your complaint,
produce your proofs, state your claims, and we will decide the issue."
Shippers could not and will not be to the expense of prosecuting com-
plaints before the Commission ordinarily under those conditions, as
appears both from the nature of the case and from the experience of
the Commission; nor, in our view, should they be required to do so.
The investigation is for the public benefit and should be conducted at
the public expense. Whenever complaint is made which involves a
question of general application, either as to the unreasonableness of a
rate or the existence of some discriminating practice, we deem it our
duty to investigate that matter without undue expense to the com-
plainant. This investigation may be prosecuted in two ways. The
Commission may begin a proceeding upon its own motion, or it may,
in the language of the thirteenth section, "investigate the matters
complained of in such manner and by such means as it shall deem
proper." It often happens that the most inexpensive, most eflfective,
and the most expeditious method is to proceed in the pending case by
H. Doc. 253 3

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34 REPORT OF THE INTERSTATE COMMERCE COMMISSION.

appointing some one to appear at the expense of the Government in
the public interest.

There is a further reason for this. The ordinary practitioner has no
experience in conducting proceedings of this nature before the Com-
mission. He does not understand the character of the questions
involved, which are usually traffic propositions. The result is that,
even where the ablest counsel has been employed by the complainant,
the Conunission finds, when it comes to a consideration of the case,
that those facts which should have been brought out to warrant an
intelligent disposition of the matter do not appear in the record. If
our decision concerned the complainant alone it might with great pro-
priety be said that he should take the consequences of his own laches;
but where the decision is to become a precedent in numberless other
instances, where its effect upon the complainant is utterly insignificant
in comparison with its effect upon the general public, it will be seen
that the rule can not properly be enforced. Broadly speaking, it may
be said that whenever this Commission has notice by formal complaint,
or otherwise, of an apparent infraction of the act to regulate com-
merce which ought in its opinion to be examined, and in the nature
of things will not be or can not be without the assistance of the Gov-
ernment, we deem it our duty to proceed with as full an investigation
of the matter as the time and means at our disposal will permit. After
the facts have been fully developed such decision will be made or
further proceedings had as seem to be warranted.

OPEBATINa DIVISION OF THE COMMISSIOK.

The administrative and supervisory work of the Commission is per-
formed by the operating division. The duties of this division are
necessarily diversified and miscellaneous in character. Reference is
here made only to the more important of these duties, among which
are the keeping of the formal complaint docket, which is a record of
all proceedings of a formal nature that come before the Conmiission,
including the filing and service of all papers in connection therewith.
This branch of the work has shown a material increase in the past
three years. In 1901 the number of such cases was 19, in which 19
hearings were had in 12 different cities; in 1902, 38 complaints were
filed, in which 29 hearings were had in 17 different cities, while the
year ending December 1 shows a still greater increase, 84 complaints
having been filed during that period, in which 48 hearings were con-
ducted in 20 cities.

The general correspondence of the Commission, which is also con-
ducted in this division, has increased coiTCspondingly with the com-
plaints filed. Seven thousand two hundred and eighty-six letters
were received, answered, indexed, and filed in 1901; 10,161 in 1902;
and 18,167 in 1903. The number of letters sent out is considerably



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OPERATING DIVISION OF THE COMMISSION. 35

greater than that of the letters received, and shows an mcrease of
more than 100 per cent in the last three years.

The act of March 3, 1901, better known as the accident law, requires
all common carriers engaging in interstate commerce to make monthly
reports of their train accidents, and of all accidents to their passengers
or to employees while in their service and actually on duty. These
monthly reports are examined, corrected, and checked as soon as they
are received by the Commission, and memoranda of all errors and
omissions are at once made and forwarded to the respective officers.

The reports are then separated into 33 different classes for the pur-
pose of tabulation, and 24 of these classes are at present used in the
compilation of statistics for the accident bulletin which is issued quar-
terly. This bulletin is distributed each quarter to more than 6,000
interested persons. Out of the total number of reports received each
month an average of 125 are found to be incorrect, and in each case
the attention of the officer responsible for the correctness of the report
is called to the error or omission. On reports of one railway alone
for one month as many as 89 corrections were necessary to make them
conform to the instructions furnished by the Commission. To insure
uniformity, the accident blanks for the use of the carriers are fur-
nished by the Commission to the extent of 200,000 annually.

Another branch of the Commission's work, which has grown to a
noticeable extent, is that performed in connection with the enforce-
ment of the safety appliance law. On August 1, 1900, this law became
effective and the number of men employed by the Commission in con-
nection therewith has increased from 1 inspector of safety appliances
at that date until at the present time 16 men are engaged in this serv-
ice. Of this number 14 are continuously employed in examining the
equipment of the various railroads, and reports are made by them to
the Commission of all the cars examined and all defects found. Copies
of these inspectors' reports are sent to the presidents of the railroads
whose cars have been inspected, and correspondence is carried on with
these officials for the purpose of calling their attention to the condition
of their equipment. The proper arrangement and distribution of the
field work of the inspectors and their operations are directed by this
division.

For the year ending June 30, 1903, approximately 220,000 freight
cars were examined, and of that number 60,000 were found to be
defective. The proper tabulating of these defects for the use of the
Commission's report requires great care and consumes considerable
time. From the foregoing it will be seen that the execution of the
safety appliance law increases materially the work of the operating
division.

In addition to the duties previously enumerated is the keeping of
the account of disbursements, which have more than doubled in the



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36 REPORT OF THE INTERSTATE COMMERCE COMMISSION.

past two years, owing chiefly to the greater number of hearings and
investigations that have been conducted by the Commission, and the
employment of additional inspectors of safety appliances.

Among the various other duties performed at times by this division
is the preparation of the list of National, State, and local commercial
and agricultural organizations of the United States, copies of inspec-
tors' reports, market value of railroad securities, and other documents
published or distributed by the Commission. More than 100,000 cir-
cular letters were sent out to postmasters and others in order that the
list of commercial and agricultural organizations might be made as
complete as possible.

The stenographic and typewriting force of this division is employed
to take and transcribe the testimony at public hearings of the Com-
mission, as well as to handle all of the other work involved in the per-
formance of the official duties of the Commission. During the past
year approximately 30,900 folios of testimony have been taken by
these stenographers and transcribed. In all cases three copies of this
testimony are made and in many of the proceedings several additional
copies are called for by interested parties.

STATISTICAL DIVISIOK.

The regular work of the division of statistics is connected chiefly
with the annual reports that carriers subject to the act are required to
make to the Commission. This work embraces, among other things,
the careful examination of the railway reports that are filed and the
necessary correspondence relating to them. It also includes the com-
pilation of data from the railway returns as described and the prep-
aration of statistical reports based thereon. One of these reports, a



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