holders under penalty of having their former holdings cancelled. The Public Service Commission upon this showing declined to permit the new company to be capitalized for an amount equal to the outstanding securities of the old road, alleging properly enough that the reorganization was an opportune time for bringing capitalization and assets more nearly into equivalence.

After this first rebuff, a somewhat improved plan of reorganization was in due time presented for approval. The stockholders, instead of being required, as before, to subscribe heavily to new stock equally valueless with the old, were now given a certain proportion of bonds in return for their assessment. But even under this second plan, the outstanding securities aggregated $73,600,000, whereas the physical assets were avowedly worth only $44,000,000. This excess of liabilities was, of course, the fruitage of the stock-watering and fraud of past years. Even on the basis of reproduction cost entirely new, plus necessary working capital, current assets amounted to only $68,000,000. This figure made no allowance for depreciation, obsolescence or inadequacy, and it included $11,625,000 for "development expenses," such as brokers' commissions and discount on bonds. The Public Service Commission thereupon in 1910 disallowed the second application. The case then went to the Supreme court and a decision was finally handed down,' purely on law points, which upheld the appeal of the reorganization committee. An ancient section of the Stock Corporation law was unearthed, which by oversight was not repealed when the Public Service Commission Act was passed. This gave free rein in the matter of recapitalization to reorganiza

1 N. Y. 145 App. Div. 318; 203 N. Y. 299; 96 N. E. Rep. 1012. Precedent followed by Nebraska; 5th Ann. Rep. Railroad Commission, 177.

tion managers.

The next legislature promptly revised the statute. But in the meantime, the Commission was obliged to approve this second plan despite the utter discrepancy between capitalization and assets. But, of course, under such circumstances the new securities could not be marketed at anything like par. It was estimated that $55,000,000 par value would produce only about $33,000,000 in cash. At this point, the Commission in 1912 once more intervened.1 The policy imposed was the only sound one for dealing with matters of this sort. It was directed that an amortization fund be set aside annually out of earnings, sufficient to cancel all the excess of liabilities over assets by 1960, when the bonds matured. Heavy depreciation charges were also required. A similar wholesome plan has since been adopted in the case of steam railroad issues by the New York up-state commission, notably in approving of the New York Central bond issue of $70,000,000 in 1914. Such may be said in fact to have become the established practice. It is obviously the only prudent one.

The foregoing review of experience is broadly significant. It emphasizes the need of governmental supervision in matters of finance, certainly so far as standardization of accounts is concerned, and probably also as indicating the further need of downright control by administrative order.1 But such supervision cannot be exercised by divided and conflicting state authority. The Federal government must certainly take hold. The need of so doing is still further emphasized by the proven inter-relation of rates, service and finance. Everything seems to point to the assumption of such control by the

13 P. S. C., 1st D., 51.

⚫ Cases before state commissions will be analyzed by the author in the Economic Review, September, 1914.

Interstate Commerce Commission. It is no light matter to lay so heavy an additional burden upon this already over-worked body. The necessity of a separate departmental organization for this set of financial functions is clearly foreshadowed.

HARVARD UNIVERSITY.

W. Z. RIPLEY.

DEPRECIATION AND RATE CONTROL

SUMMARY

Importance of depreciation for valuation, 630. — A well maintained property is yet normally in a state of depreciation, 632. - How to allow for this circumstance depends on the purpose for which accounts are made up, 635. - Mode of reckoning depreciation required by Interstate Commerce Commission, 637.-"Replacement account," "Reserve for accrued Depreciation," 639. — A possible alternative, 644. The general procedure justified for purposes of regulation, 648. — Criticism possible as regards earlier charges made, 654. — A different principle and a different rule by other regulating bodies, 656. - Wisconsin Commission, 657.- The United States Supreme Court, 660. - Conclusion, 662.

Two questions outrank in practical consequence all other problems of procedure in the valuation of the properties of public service companies for purposes of rate control. First, what is a proper rate of return upon the investment? Second, shall the property

taken as evidence of the investment be valued for that purpose as tho it were new, or shall an allowance be made for the fact that it is in various stages of age, wear, and obsolescence? Under American conditions the difference between original cost and replacement cost as a standard of valuation is not apt to be large,1 except for real estate holdings, and in the aggregate the difference between the results got by the use of these two methods will usually be less important in its bearing upon the determination of reasonable rates than is the margin of uncertainty with respect to either the proper rate of return or the matter of depreciation. Nor do

1 The common practice of averaging prices over a period of five or ten years in determining replacement cost contributes to this end.

the minor problems suggested by such phrases as “interest during construction," " going value," "donated property," and the like, usually compare in importance, even in the aggregate, with the two that have been named. The present paper deals with the second of these two major issues of valuation.

In a valuation made for the dual purposes of rate regulation and taxation in Wisconsin the present (depreciated) value of the physical properties of twentysix electric railways was found to be $7,826,000 or 82 per cent of the "cost of reproduction new" of $9,596,000.1 For individual companies the corresponding proportion was as low as 57 per cent, and was below 79 per cent in as many cases as above it. And these figures include the value assigned to land and grading, from which no deduction for depreciation was made. The depreciated value of the properties of fifty-four steam railroads was estimated as $196,239,000, or 80 per cent of the cost of reproduction new, which was given as $244,129,000. This percentage varied for individual railroads from 61 to 96, the median being 77.2 Leaving out of account the items of land and grading, on which no depreciation was reckoned, the depreciated value of the remaining assets of the fiftyfour railroads was only 73 per cent of the value new.

The Michigan valuation of the properties of steam railroads in 1900 gave a depreciated value that was 81 per cent of the cost of reproduction. In the Minnesota appraisal of 1907 the corresponding percentage was 88. But when the unusually large list of items in

1 Fifth Biennial Report of the Wisconsin Tax Commission (1910), Appendix D.

• Computed from a table in the Fourth Biennial Report of the Wisconsin Tax Commission (1909), p. 128.

Bulletin 21 of the Bureau of the Census (1905), p. 78.

• Twenty-fourth Annual Report of the Minnesota Railroad and Warehouse Commission (1908), p. 52.