EFFICIENCY-REBATES.

Though the interdependence between this and the eastern case is such as to make it not improper for us to have looked at the record in that case, we have not attempted a consideration of the saving that might result from increased efficiency, though much might be said upon that point.

And we have not dwelt upon the increase to the available revenues of the railroads by the abolition of rebates, but that it is large, is conceded. Mr. Crosby, of the Burlington, whose testimony in the Burnham, Hanna, Munger case has been read into this record (R., 4035), stated that it amounted to 10 per cent of the class rates. Whatever the amount was, that saving was just so much of a discounting of any subsequent increased needs of the company.

We have not considered these two matters, not because they are not important, but because, first, we feel that we have no new thought to present in connection therewith, and second, because the length of this brief is now too great.

THE POOR ROADS.

What about the poor roads? The answer is: The people can not be penalized for investors' folly. When the Government has the supervision of the issuance of railroad securities, it will be time enough to talk about the Government's guaranteeing a return there

To say that a road, wherever built, however capitalized, and however managed, must be permitted to tax the people enough to pay return on its bonds and stocks is the promulgation of an economic and legal impossibility.

The pace of an army is the pace of the slowest; but the standard for rate making must be the experience of, if not the best, at least a well conceived and properly managed property. The slow soldier is in the army by order of his sovereign, whose duty it is not to leave him; the bad road is so by the folly of its promoters or managers; our Government has not yet reached that degree of paternalism that compels it to insure folly against its own consequences.

This idea finds exposition in the evidence of Mr. May, the expert valuer called by the carriers.

Record (pp. 2970-2971):

Commissioner CLARK. Now, I want to ask you, if there are three railroads directly competitive with each other, having different physical valuations, having different sums of money actually invested in them, managed by three different managements, each with his own ideas, and the commission or proper representatives of the regulating Government should fix rates on a basis which would afford a fair return to the railroad having the largest honest and bona fide investment, could it be said to have done any injustice to whatever capital may have been invested in those other railroads?

Mr. MAY. No.

Record (p. 2972):

Commissioner CLARK. There is one road that has $100,000,000 actually invested, another road has got $80,000,000, and another road has got $60,000,000, and they are directly competitive with each other. If the Government fixes the rates so that the road with $100,000.000 invested can earn a fair return upon that $100,000.000, is there any obligation, moral or otherwise, resting on the public or the Government to give any further consideration to

to

the railroads that have investments of $80,000,000 and $60,000,000, respectively? In other words, should the Government take it upon itself to guarantee a return upon a poor investment or upon a poorly managed property?

Mr. MAY. No; I don't think they should undertake-that is the whole theory of my testimony.

Commissioner CLARK. Would not that necessarily follow if the Government undertook to fix rates so it would guarantee a return on the weakest property? Mr. MAY. Yes; but I do not think they should guarantee a return on the weakest property.

MATTERS PROPER TO BE CONSIDERED.

Though we agree with Mr. McCrea, of the Pennsylvania, that the act of June 18, 1910, was a Congressional proclamation that the rates obtaining January 1, 1910, were for the carriers reasonable and that only changes, transpiring since then, can justify an advance, we shall not urge such a narrowing of the question, because when the whole field is viewed, not enough is seen to make proper such

action.

CHICAGO, BURLINGTON & QUINCY.

Let us now consider one of the four representative roads-the Burlington. The Burlington is a railroad anomaly. The footprint of a dinosaur or the bones of a mammoth have been preserved to us, so that the comparative anatomist is able to present to our twentieth century eye a correct portraiture of those denizens of the geologic forests, so has Mr. Hill, by his joint-bond deal with the Burlington's stock as security, prevented those changes and transmogrifications that have marked all the other roads in the country. He has so preserved conditions for us that we are able to know what would happen by what has happened to a good road reasonably well managed, but which was not permitted any extensive stock or bond exploitations. That deal, as the commission knows, took place in 1901, and thereby $200.000,000 of 4 per cent bonds were issued, guaranteed by the Great Northern and Northern Pacific, having for their debenture security or primal basis of credit substantially all of the one hundred and ten millions of capital stock of the Burlington. The consequences of that transaction could have been readily guessed. No more Burlington stock could be issued without diminishing the value of the primal credit basis of this bond issue, hence no more stock has been issued. The issuance of other bonds than those existing at the time of the deal meant a diminution of the value represented by the stock; consequently only about sixty-three millions of additional bonds have been issued. The result of it all is that we are able to see what the Burlington was able to do with no more outside capital added than a little. less than sixty-three millions in a period of nearly 10 years. Bear in mind that this road is neither much better nor worse than any of the four typical roads; and it is fair to argue that what it has done without any considerable outside money could have been done by any of these four roads.

Now, one of the favorite ways of favoring stockholders and exploiting a railroad as purely private enterprise is to permit the exercise of stockholders' rights or by the declaration of stock dividends. Either of these methods meant that more dividends must be paid. Neither stock dividends nor stockholders' rights were permitted with the Burlington. Hence the Burlington has been required to earn

dividends only upon its stock, which we assume represents honest, full-value investment. The only outside money that has come to it in 10 years is the sixty-three millions mentioned, which is an increase of its total capitalization in 10 years of about 24 per cent. The Burlington situation has been such that unnecessary interest and dividends were not paid. That the road is in a high state of efficiency we have from the lips of its general manager, Mr. Ward, who undoubtedly knows. (R. 2448.) Hence we have a schedule of rates that for 10 years has paid the interest on the Burlington bonds, 8 per cent interest on its stock, expended upon permanent improvements within the last three years $8,752,496, and presumably proportionate sums during the earlier part of the decade, and sent to its sinking fund large sums. Let us examine the sinking fund account: It grew from five to eight hundred thousand in 1902, to $1,480,000 in 1903, and in the following year shrunk to $721,000; again swelled in 1904 to $939,000; increased a little the next year; the road again. drew from it in 1907, shrinking it to $700,000; again raised it the following year to $926,000, and in 1908 dropped it to $675,000, where it approximately is now. Now, it must be born in mind that these deductions from sinking fund meant the payment of bonds and so an increase of value with a diminution of bills payable. And while doing all in this paragraph enumerated, the road has raised its surplus from $33.547,391 to $72,592,760, or to 65.49 per cent of its capital stock outstanding.

Do you not think that the Burlington in the light of such a showing when asked the question, "How are you doing?" would be obligated, in truth, to answer, "Very well, I thank you."

INCREASES.

A consideration of the statistical sheet issued by the commission in connection with the Burlington may be profitable.

It discloses the mileage increase between 1901 and 1910 to be 21 per cent, and in that time the total capital increase was 24.5 per cent. The gross revenue increase was 80 per cent, while the operating income or net operating revenue has increased in that time 35.6 per cent.

The claim of the Burlington that its net operating revenue has shrunk very materially within the last year or two, and that this shrinkage is in line with its general tendency, as disclosed by its history, is not borne out by an examination of the yearly net returns during the last decade.

Their claim, in substance, has been that on account of the large wage increase within the last year or so there has been a marked diminution of the net returns and that in this they can foresee, ultimately, an annihilation of their net.

In 1901 the net was $16,000,000 plus, the next year $18,000,000 plus, the next year $22,700,000, but the next year it shrunk to $21,500,000, rose again in 1905 to $22,700,000, but shrunk the succeeding year to $21,700,000, shrunk still more in 1907 to $21,466,000; and it must be borne in mind that 1907 was the banner year, up to 1910, of the transportation experiences of this country. The gross revenues of that year were $8,000,000 more than the preceding year, yet its net revenue shrunk, and is less than the preceding year by $267,066. Does this not spell an absolute refutation of the Burlington's claim that the expense experience of the last couple of years has

been so at variance with prior experiences as to upset calculations and create the belief that an era of diminishing nets began two years ago which will continue until no net remains?

It simply demonstrates what the commission said in other advancerate cases that the ratio of operating expense under the present railroad methods of bookkeeping means absolutely nothing except that with the growth of revenues has come a policy of rebuilding and reequipping under the guise of operating expenses.

In that same year, 1907, the Santa Fe increased its net over 1906, $1,962,000. Is it not strange that in that wondrous year of transportation prosperity the big Burlington should seem to be the only road that lost out in the matter of net increase? But it is only seeming: The fact is that with greater audacity than its competitors, an audacity only approached in any wise by that of the Northwestern, it spent of the floods of money that poured into the treasury that year proportionately more for betterment and addition than any of the others.

But to return to the annual net returns of the Burlington, as we have stated, in 1907 it was $21,467,000. In the succeeding year it shrunk still more and was only $20,144,000, but it rose in 1909 to $21,376,000, and again rose in 1910 to $21,724,000.

It is seen that the history of the road for the last three years completely spoils the argument of diminuating nets and the gradual closing of the gap between gross revenue and expenditure. If the Burlington had made that plea in 1908, they would have had, under their system of bookkeeping, three years of shrinkage or diminishing nets to rest their argument upon. Of course to those as familiar with railroad matters as this commission the presence of that bookkeeping shrinkage does not mean very much, but still they would have had at least the bookkeeping showing on which to rest their argument of narrowing margins; but at the time this matter is being heard by the commission, with the three years last past to go upon, even with the railroad's own bookkeeping, their contention of diminution of net revenues falls to the ground."

The increase in this year, 1910, is in the face of an increased wage scale that raises to 40.65 per cent, the ratio of labor expense to total of operating revenues. I say raises it because that makes the ratio higher than it has been in 10 years, but in 1901 it was even higher, being then 40.94 per cent of the total operating revenue.

In the light of all this, what becomes of the theory that there has been such a vast wage increase in the last year or two as to necessitate a rate increase? The ratio of wage to revenue in 1910 was less than in 1901, and while 2.13 higher in 1910 than the average ratio for the decade there is still left an increase in its net revenue for the year 1910 of $348,000.

What does this mean? It means that with all the claims of additional expense the present scale of rates enables them to meet all their increased expenses, to pay all their fixed charges and dividends, and, even according to their own books, to show an increase in net profits of $348,000.

The rates that have obtained during this test decade have caused the Burlington to be at least reasonably prosperous. In that time its surplus, as shown by the commission's statistical sheet, has risen from $33,547,000 to $72,593,000, an increase of surplus ratio to capital stock of 30.34 to 65.49 per cent.

In this connection I want to direct the commission's attention to what to my mind is inexplicable, if the report to the commission that caused the commission to announce that the Burlington's surplus in 1910 was $72,592,760 is correct. The annual report of the Burlington directors to its stockholders for 1910, on page 15, is as follows:

Perhaps the concentrated ownership of the Burlington stock causes its directors to feel that they need not be so particular in their reports to stockholders, but if the last quoted report is correct then is our position much strengthened.

CAPITAL.

I have spoken of this increase of Burlington capitalization of 24 per cent, but this increase has not been steady nor has the company had the use of its maximum capital for any length of time. Between 1901 and 1904 it rose from $258,000,000 to $282,000,000. The next year it rose to $285,000,000. The next year it shrunk to $279,000,000. Rose again to $293,000,000, and was over $300,000,000 only during the years of 1909 and 1910; so while the increase of capital was, as we have stated, about 24 per cent between the years 1901 and 1910, the average capital with which the company has wrought these wonders of acquisition has been only about $284,000,000.

THE REAL SURPLUS.

Mr. Ward testified that the total value of the Burlington road was $530,000,000. (R., 2715.) The total capitalization is to-day only $320,695,000. The capitalization represents at least all the dollars that have been put into it by stockholder or bondholder. It may represent something more. If there is any water, then this capitalization does represent more; but at least it represents all that has been put in. Then what deduction follows? The deduction follows that the difference between $320,000,000 and $530,000,000 must have come from the increased values resulting from the growth of the communities or from the purchase of property out of the income; and whatever the source, it is surplus; so that in reality, instead of the surplus being $72,592,760, it should be set down at the difference between the capitalization and value, or $210,000,000.

Can this road really be in need? Is a pauper with a bursting purse a pauper still?

DEPRECIATION.

Elsewhere in this brief we have shown how the Santa Fe's report makes impossible the conclusion that the operating result of the year 1910, or even 1909, as shown by that report, is so far representative as to make it a proper basis for rate computation. The Burlington's showing compels the same conclusion. The matter of depreciation alone is enough to throw the figures out of line. The equipment of