Chapter C: P. HOWARD, M. AM. SOC. C. E. (by letter).—While there may be no (3)

In view of frequent suggestions, in the public press and elsewhere, which indicate that there is a widespread opinion that the securities of railways have generally been watered, Table 10 is given. It is an analysis of the consolidated balance sheet as given in the reports of the Interstate Commerce Commission for 1908 and 1890.

Table 11 shows the length, in miles, of main and other tracks in 1908 and 1890.

The Commission, in its annual report, shows the securities issued per mile of road (first main track), but does not show the results per mile of main track (_i. e._, 1st main track, 2d, 3d, 4th, and other main tracks), nor does it show the results per mile of all tracks (_i. e._, main tracks, yard tracks, passing tracks, and industrial tracks). From the consolidated balance sheet, it will be noted that the securities per mile of road have increased 29%, while per mile of main track they have increased only 24%, and per mile of all tracks they have increased but 14 per cent. However, deducting the investments in stocks and bonds of other corporations, and showing the results only for the securities issued on account of the cost of road and 12% equipment, we have an average per mile of road of $62,388, an increase of 12%; and an average per mile of all main tracks of $56,166, an increase of 8%; and an average per mile of all tracks of $42,864, or a decrease of 0.7 per cent. It will be noted that a considerable part of these increases is due to increased cost of equipment, and the advantageous results obtained from such investment have been clearly shown. Of the investment in the track itself (cost of road), it will be noted that the cost per mile of main track has increased only 5%, while the cost per mile of all tracks shows a slight decrease in 1908 as compared with 1890.

These comparisons are more significant and convincing in the light of the large expenditures since 1890 for the reduction of grades, revision of line, interlocking towers, automatic block signals, increased weight of rail, increased capacity of bridges, improved stations and terminals, elevation of tracks, and the many other items going to make up the additions and betterments, and increasing the book cost of the property. The figures plainly prove that there has been no general practice on the part of the railroads of the country, from 1890 to date, of issuing capital securities without securing full value for the vast amount referred to. Why, then, should any restriction be placed on the form or manner of their future appeal for the very large volume of capital necessary to keep abreast of American industrial development? Why should they be limited as to what form of security they may offer in return for the cash capital which they must obtain if they are to serve the public adequately and properly?

TABLE 10.—CONSOLIDATED BALANCE SHEET FOR RAILROADS OF THE
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.

One of the most important items to be considered is the "cost of progress," which is sometimes referred to as "abandoned property," or as "obsolescence." For illustration, in the revision of the grade and line of a road, whereby the capacity of existing track is doubled, the present instructions of the Interstate Commerce Commission require the charge to operating expenses of the cost of that portion of the old line no longer continued in use. If, however, the doubling of the capacity of the line be secured by the construction of a second main track, the entire cost of the new work can be charged to capital account and paid for from the proceeds of the sale of capital securities. The latter method becomes the easier to finance, but what of the comparative results? Say, for example, the original cost of material of existing property, including equipment, stations, yards, etc., was $10,000,000, that the first main track cost $1,000,000, and that to double the capacity of the main track would require a present expenditure of $1,000,000, either for (1) a reduction of the grades and curves of the first main track, or (2) for the construction of a second main track. The increase in capacity is identical, but in the first case the cost of train service to handle the tonnage is decreased 50%, and some reduction in maintenance is secured, while in the second case no economies of operation are effected, but the expenses may be increased. Undoubtedly, Road (1) would be much more favorable than Road (2), yet the Commission says a portion of the cost of perfecting Road (1) must be charged to operating expenses, and cannot be capitalized. What general manager will dare recommend such extensive improvements when the charging of a portion of the cost to operating expenses will show the dividend as unearned, and thus render the securities of the company no longer legal investments for savings banks, trustees of trust funds, etc.? As an alternative, he might permit the old line to remain, and by placing thereon a few cars occasionally, could consider it as still in use, and carry it in his capital account, thus avoiding the charge to operating expenses. Thus, again, is it the method and not the result that is controlled by these instructions. What should be done is to permit the cost to be charged against the surplus accumulated during the years in which the property to be abandoned was used. This would not affect adversely the operating income of the year, and would not impair the credit of the Company.

Plainly, the instructions of the Commission tend to compel a method that is contrary to the economic law.

Obviously, any requirement as to valuation which would impose on the carrier such a result as that shown would compel the continuance of the less efficient service and prevent the progress which such replacements express. The railway business is a continuing one, and an improvement ought to be made whenever it can earn income, not only on its own cost, but on that of the property abandoned, even though it cannot afford income sufficient to wipe out the whole capital charge for the latter in a single year. There is no reason for requiring each item of capital to earn its cost in addition to its interest during its individual life. Such a requirement would cry halt to progress. It is reasonable and proper that such charges to operation should be made as far as the rapid development of the art of transportation permits, and such is the practice of every well-managed railway; but, to make the practice uniform and compulsory, permitting no exceptions and allowing no scope for individual judgment, is quite another thing. When the conditions warrant such a course, the railway ought to be permitted to adjust its accounts in a manner of which the following is typical:

Replacing. Not
replacing.

Capital account $19,750 $5,000

Additional net operating income attributable to 1,000 250
this item

Charge to operation for abandoned property 250

______ _____

Operating gain $750 $250

A valuation adjusted in recognition of this developmental need would include, in addition to the item of $15,000 for the replacement cost of the new locomotive, an item representing "cost of progress" of $4,750 for the former locomotive. It is not to be overlooked that in actual practice it would be easy to obtain this allowance by cumbering the yards and round-houses with obsolete and superfluous equipment. The plan of Professor Adams places a premium on such a course, and there are many conditions under which it could and would be followed where it would be less obvious and more detrimental. For example, it might be that an additional track over a steep grade and a new alignment which would avoid it would cost the same. The new alignment would give greater operating efficiency, but it would require the charging off of the old line; the new track over the grade would be more costly to operate, but would leave the apparent capital unimpaired. It is such possibilities as this that are giving pause to the investors who would otherwise supply funds for the needed development of the American railway system. How far this development has so far required the abandonment of property capable of further use and having genuine capital value is indicated by available records. The aggregate capacity of all equipment has increased much faster than the increase in number of locomotives and cars. The reports of the Interstate Commerce Commission only show this information for the years 1902 to 1908, both inclusive. The average tractive power of locomotives in 1908 was 26,356 lb., as compared with 20,485 lb. in 1902, being an increase of 5,871 lb., or 28.7% per locomotive. The average capacity of freight cars in 1908 was 35 tons, as compared with 28 tons in 1902, an increase of 7 tons, or 25 per cent. Undoubtedly, the average capacity of locomotives and the average capacity of freight cars in 1908 was not less than 60% above the average capacity of 1890.