returns, the company's own returns, the company's condition is very healthy. (R., p. 132.) This may spell want, but not need.

STOCK SPECULATION.

The company has, at various times, issued convertible bonds which carry with them the privilege of converting them into stock at par. The effect of this was to give the bonds a speculative attractiveness, as Mr. Ripley said. (R., p. 108.)

If the purchasers of these bonds utilized their privilege at the top of the market, which was 125, these bond purchasers realized a profit of $25,758,000. If the company had chosen to issue stock to the public or on the open market, when it commanded this premium, it would have swelled its assets by that sum; instead, that sum went to the pockets of the favored bondholders. If this sum were added to the unappropriated surplus, it would amount to $45,989,803, and if there were also added the bond discount written off out of income, we would have a surplus of almost $54.000.000.

The lesson spelled by the foregoing is that the Santa Fe has not sold its stock so as to get the most money out of it. It sold its bonds below par, and insisted that others than the company should be beneficiaries of all premiums on stock.

Does not this brief showing of the Santa Fe's financial condition and its earning capacity under present rates, say No, to the rateadvance proposition?

CHICAGO, MILWAUKEE & ST. PAUL.

In the 10 years from 1901 to 1910 the mileage of this railroad increased from 8,757 to 10,462, or 1,073 miles, or 19 per cent. The capitalization in that time increased from $227,000,000 to $410,000,000, or $183,000,000, equal to 80.5 per cent. In that time the surplus of this road increased from $23,000,000 to $66,000,000, or $43,000,000, or 187 per cent. Thus it is seen that with a capital increase of 80.5 per cent we have a surplus increase of 187 per cent, and that with a mileage so nearly constant that its increase is only 19 per cent.

UNNECESSARY STOCK ISSUES.

In 1906 stockholders' rights were exercised to the extent of $125,000,000-$58,164,300 of common and $66,328,500 of preferred. The average market price of the common stock of this road in 1906 was 173. The amount of common stock that needed to have been issued, if sold at the market price, to equal in financial returns the amount resulting from the sale at par, was $33,600,000, which is demonstrated by the following simple formula:

173100 $58,164,300: $33,600.

The difference between this amount and the amount received is $24,564,300. So there was issued, of common stock, in the year 1906, $24,564,300 more than was necessary to have been issued to obtain the money that was obtained.

Now the amount of preferred stock that was issued was $66,328,500. The average market value of the preferred stock for that year was 189. Applying the same formula: 189: 100::$66.328,500: $35,099,735, and we see that instead of the $66,328,500 actually issued there need to have been issued only $35,099.735, so the preferred stock unnecessarily issued amounts to $31,228,765. Adding together the two unnecessary amounts, and we have $65,793,065; that is to say, $65,793.065 worth of stock, par value, was issued in excess of what needed to have been issued, if instead of permitting the exercise of stockholders' rights the stock had been sold at the market value thereof, and this unnecessary issue constitutes 28 per cent of the total capitalization of the road in 1906.

This unnecessary stock issue of $65.793.065 was paid for in seven installments, final payment to be made March 1, 1909. Since the privilege was given just before January 1, 1907, it is fair to assume that the first payment, or one-seventh of $65,793,000, amounting to $9,399,000, was paid January 1, 1907. The installments bore interest at the rate of 5 per cent per annum; the interval of time between January 1, 1907, and March 1, 1909, was 26 months. This, divided into six periods, made each period approximately 4.5 months. The first payment, $9,399,000, bore interest for 4.5 months; then the next installment was paid, and the total then resulting bore interest for the next period of 4 months, and so on until March 1, 1909, when the last payment was made, and the $65,793.000 of stock was issued. It, like the balance of the company's stock, received a dividend of 7 per cent for the years 1909 and 1910. These items of interest, together with the two dividends, aggregate $12.881.200, which sum represents the amount of unnecessary interest and dividends so far paid by the company, as a result of permitting its stockholders to exercise" stockholders' rights." This $12.881,200, if in the pocket of the company, would leave it very comfortably situated. as it would swell the surplus from $66,770.994 to $79.652.214-a surplus which would be even greater than the Burlington's, which road has 1,781 more miles of track and whose gross operating revenues in 1910 were $22,353,000 greater than that of the Milwaukee.

And if the capital stock had remained constant, as did the Burlington's, this $79,652,194 would have been 79 per cent of that capital stock.

And if the total capitalization had in that time been increased only in the same proportion that the Burlington's total capitalization was increased, to wit, 24 per cent, this sum, $79,652.194, would be 28 per cent of its total capitalization. And this is another way of saying that if the same methods had obtained with the Milwaukee that obtained with the Burlington, its present surplus would amount to 28 per cent of its total capitalization, and Mr. Gardner has said that 25 millions to be earned in 10 years is large enough. (R., 1914.) Can the commission be seriously impressed by the plea of poverty made by this road, in the light of the situation here presented? Can this road be permitted to play ducks and drakes with its property, make presents to its stockholders of its resources, and then come to the public crib and grab for more? Is the commission's duty performed when it permits a road so situated to advance its rates?

NET RETURN AND EXPENSE ACCOUNT.

But they say the net of 1910 is less than of 1909. Very well, let us examine the Milwaukee bookkeeping.

As has been said, it is the real and not the bookkeeping net that determines what the road produces; and so, to determine what the real result is, you should deduct from the expense account any abnormalities that there appear; that is to say, in order to make the 1910 results such a yearly average as would serve as a basis upon which to rest the claim for a rate calculation, you should take out of its expense account any excesses over what a normal and average increase would produce.

(A) Stock, material, and fuel.-This item shows an excess in 1910. over the normal quantity of material carried under this item, as shown by five years' average (1906-1910), of $3,859,000. This excess is dead capital, unnecessarily invested, and on which the company loses interest; the interest, at 6 per cent, the legal rate, would amount to $223,000 and this sum, at least, should be added to swell the surplus.

(B) Depreciation of equipment.-Now, under this head the amount is $716.952. This is properly named as an operating expense, because the rules of the commission require it; but the sums taken from operation and put into the depreciation account are in the hands of the road, and though not technically surplus, should be added to the surplus to ascertain the sum total of the road's available moneys; it is in their hands and is available for their uses; and when we are trying to find out what the net result in money of the year's operation is we should add this $716,952 to the so-called net. The justice of this conclusion is made manifest by the reflection that all that is needed to repair the equipment has been provided for by other funds, so that the depreciation account will not be drawn upon to repair an engine or patch a car; it is to replace what repairs can not restore, loss from obsolescence, etc.; so this fund, untouched at the end of the year, is a part of the available assets of the company, earned that year. This sum should also be added to the surplus.

(C) Insurance account.-There is carried in the books of this company, as shown on page 13 of the 1910 stockholders' report, under head of "Insurance investments." $1.729,400. The company insures itself. To that end it makes these appropriations from income in the same way that it would pay premiums to the insurance company. But until draft is made upon these they are assets in the hands of the company and must be added when one is determining what the company's assets are, or what has been earned by the road, since 1906, in which year that fund had in it but $10,000; and this amount is greater than it seems, greater than named, because a portion of this investment is in its own stocks, and they are very considerably above par. This should be added to surplus.

(D) Loss and damage to freight.-The loss and damage to freight is listed in the expense account of 1910 as $833.317. That is a very great increase over 1906, or over 1909; it exceeds the latter year by $207,656. The average increase in this item from 1906 to 1910, inclusive, was $87.757, and that average increase, added to the 1909 figure, show the recorded increase in 1910 over 1909 to be $121,000

in excess of the average, and this amount should be sent to swell the net, otherwise this item is not an average one, and only averages

can serve as bases.

(E) Loss and damage to baggage. The loss and damage for 1910 amounts to $7,194.36. The average increase in this item for the last five years is less than $1,000; adding that average to this item for 1909, which is $3,775, would make it, for 1910, $4,775, instead of $7,194.36, a saving of more than $3,000, to go to net.

(F) Damage to property.-These and some other items have been so kept in the past that we are unable to make averages except for two years, 1908-9.

This item in 1910 is abnormal, in the light of the average of those two years. That average is $47,000. The 1909 figure on this item was $84,263.89. If there were added to this sum the two-year average the result would be $131,263.89, while the item is $155,476.68, an excess of $24,213, which should go to swell the net.

(G) Damage to stock on right of way.-This item for 1910 is $31,044.28, which exceeds this item for the preceding year by $8,942.17. It would exceed the 1909 amount only by $4,000 if the average shown by the two years, 1908 and 1909, were added; that means an abnormal increase of $3,900, which should be sent to swell the net.

(H) Injury to persons.-Applying the same method of averages resting on five years' experience, and the abnormality amounts to $167,200, which should go to swell the net.

(I) Water for locomotives.-The same rule applied here would cause an increase of the net of $29,039.

Total. The total of these abnormal increases is $1,657,516; the Puget Sound car item, infra, page 83, is $604,510; and if these amounts were added to the net presented by the company's reports, which is $17,734,000, we would have a net of $20,219,681, which is $1,302,438 more than the net of 1909.

The propriety of the foregoing is manifest when you think that we are trying to arrive at an average year-an average annual transportation operating result-to the end of determining whether or not there should be an increase in rates.

ROAD'S PRESENT SITUATION.

The statistical sheet of the commission relating to this road would indicate that the net operating return, or operating income, was less in 1910 than in 1909, although the gross intake had been greater. We have already quoted this commission's aphorism, that the operating ratio means nothing, because of the tendency of the roads to invest huge sums taken from income in betterments and improvements. We must conclude that the commission's suggestion in this regard is the explanation of this decrease, because the road's prosperity has steadily increased, as shown by the steady increase of its surplus.

Let us bear in mind that this is a railroad company that gets all that it gets from the operation of railroads; it may get some from the road that it directly operates; some from railroad stocks and bonds that it owns; but it gets all this revenue from the public for the performance of a public duty. So really the best test that we can apply, with the limited information that the commission has, as to

the railroads' situation (for the commission has to rely on the railroads' returns), is to look at its surplus.

If, year by year, the result of its operations is that there is added to its accumulations hundreds of thousands and millions of dollars, then that road's situation is certainly not alarming, and if a shrinkage in net should transpire, it only becomes alarming when it makes serious inroads into surplus; for the surplus is there for the very purpose of providing for temporary shortages, and a temporary shortage does not mean that there shall be a rate advance, but rather that the surplus should be drawn on to supply the deficiency; and such deficiency should be supplied from that source until it be comes manifest that the deficiency is continuing, and then, and not until then, should the rates be advanced.

If it is suggested that this surplus is not in money and so could not be so used, the answer is that it is the basis for extraordinary credit, the invocation of which would soon make it money. Shorttime notes, to be paid when the normal is restored, would meet such an exigency when it arises, and that time is not yet.

REPORT TO STOCKHOLDERS V. REPORT TO COMMISSION.

The supposition is that it is all right, but it looks odd that the statistical sheet issued by the commission, which is, of course, based on returns sent to the commission by the company, gives the Milwaukee net corporate income as $16,871,321; while in the report to its stockholders for 1910, page 17, the Milwaukee officers say their net corporate income was $18,681,783.65, a difference of $1,810,462.65. And we have a right to accept the larger amount as correct-if so, that discrepancy swells the surplus.

THE STATISTICAL SHEET.

Now this same statistical sheet, under the head of profit and loss, shows that there has been a steady annual increase in surplus; in 1901, it was fourteen millions, increasing the next year to seventeen millions, then to twenty, then twenty-three, twenty-six, thirty-one, thirty-three, thirty-eight, forty-two, and now, in 1910, before is added the net results of this year's operations, that surplus is $47,960,895.

The unappropriated surplus in 1901 was $17,626,000; the same item in 1910 is $50,547,000, which is almost 300 per cent, three times as great as it was at the beginning of the decade.

As has been said, it is easy for the manager of a road to so adjust expenditures as to not only diminish his operating net, but to wipe it out as well, but if the result of all of the operations is that a road meets all of its expenses, maintenance charges, and also pays its interests and dividends, and adds millions every year to its unappropriated surplus, that road is surely not in need of an increase in

rates.

A witty Frenchman spoke of his distant brother, a cynical lady spoke of her dearest foe, one equally paradoxically inclined might denominate the Milwaukee as the mendicant of means, or the gilded gaberlunzie.