the same error of fact which entrapped the Wisconsin Commission. The deduction for depreciation cannot be justified by appealing to the necessity of providing for replacements.1 The present paper has been concerned only with the fundamental principles of depreciation as related to the problems of valuation for purposes of rate control. For simplicity's sake the only sort of depreciation that has been considered is that common and universal sort which is measured by the approach of the time when, in the normal course of events, replacements will have to be made. And the public service properties which we have had in mind are sufficiently large and varied to give the necessary validity to the assumption that depreciation accruals and replacements come in fairly regular amounts in successive years. There are many cases which these general assumptions do not fit and for which our conclusions have to be correspondingly modified. In a small railroad the cost of a certain bridge may be a disproportionately large item, and it may be impossible to replace it from earnings except by the gradual accumulation of a depreciation reserve. In the valuation of such a railroad an allowance should be made for the depreciation of the bridge. So with small public utilities for which the power plant or some other wasting asset may be of dominating importance. But the principle of such exceptions is simple. Nothing has been said about " depreciation for obsolescence." Obsolescence is unlike depreciation by reason of age because it cannot be foretold in advance 1 In The Minnesota Rate Cases (230 U. S. 352), decided in 1913, the Court again ruled that allowance for depreciation should be made in a valuation based on cost of reproduction. In support of the ruling it merely cited the opinion in the Knoxville case. even as an average for a group of items. Obsolescence, then, is a matter of fact, not of formula. Any reserve established to cover losses on account of obsolescence is really a special contingency reserve, more closely analogous to an insurance fund than to an ordinary depreciation reserve. Whether allowance should be made for obsolescence in valuation procedure is quite a different question from that which we have been considering and its answer involves considerations that lie outside the scope of the present paper.1 Summarized, our conclusions then are: 1. If depreciation charges have not been required by public authority, it cannot be assumed that the proprietors of a large public service undertaking should have accumulated a reserve for accrued depreciation. 2. The absence of such a reserve does not necessarily mean that part of the principal of the investment has been returned to the proprietors. 3. In valuation for purposes of rate control no deduction should be made on account of the depreciation of large and varied properties, except for depreciation allocated to a period in which depreciation accruals were regularly charged to operating expenses. ALLYN A. YOUNG. CORNELL UNIVERSITY. 1 The relative merits of different methods of apportioning depreciation among the years of life of an item of equipment have also been passed over. For convenience it has been assumed that depreciation charges, if imposed at all, are to be apportioned by the "straight-line method" (equal annual increments). But the argument is quite independent of this assumption. THE TRUST PROBLEM SUMMARY III. Difficulty of limiting the number and scope of trusts under a policy of regulation, 665. Regulation implies fixing of prices or profits, or both, 668. - Difficulties of cost accounting, 670; of fluctuations in demand, 671. — Railroad regulation by the Interstate Commerce Commission proves nothing for trust regulation, 672. — The policy a stepping stone to socialism, 675. IV. The alleged advantages of combinations, 677.- Desire to secure monopoly and promoter's profits in fact the cause of combinations, 678. A monopolistic combination not necessarily more efficient than a limited one, 679.- Inductive evidence inconclusive, 680.General reasoning, on advantages from magnitude of operations, 685; from combination as such, 686; from elimination of competition, 689. - Monopoly tends to stagnation, 695. - Summary of conclusions, 696. III. ULTIMATE RESULTS OF PERMITTING AND In the preceding lectures (printed in this Journal for May, 1914) we have undertaken to show that it is necessary either to prohibit and destroy the trusts and pools or to regulate their prices and profits. Merely to prohibit unfair competitive methods and to deprive combinations of special privileges would not, in all probability, remove their power to extort monopoly prices. We further sought to show that it is possible to prevent the formation of combinations having effective monopoly power, and possible also in large measure to break up such combinations as already exist. The American people, therefore, are in a position to choose between the policy of regulating permitted trusts and pools, and the policy of prohibiting and destroying them. In making this choice they must first consider what would be the difficulties and what the probable results of a policy of regulation. They must then consider whether the advantages of combinations from the standpoint of efficiency and economy are great enough to justify permitting them to exist despite the difficulties of regulating them. Few of those who have advocated the policy of permitting combinations to exist subject to regulation by the government seem to have given much thought to the magnitude of such a task, its difficulties, or its ultimate outcome. They have had in mind the comparatively few closely knit trusts of the present time, or possibly only a part of those trusts. They have had in mind particularly the so-called " good" trusts with their alleged superior efficiency and their more or less reasonable policy toward the public. In the first place, it would be difficult to limit the number of trusts under such a policy. It is, of course, conceivable that the government should undertake to suppress combinations in general, while permitting a few particular trusts to exist. A limited number of trusts might be tolerated, not because of the good motives or exceptional ability of their managers, but because of special economic characteristics of the industries concerned which tended to make combination particularly economical or to make the maintenance of competition peculiarly difficult. Such a plan would not necessarily lead to unreasonable discrimination between individuals and classes, tho to determine what were the extraordinary conditions justifying the existence of a trust would be extremely hard. If, however, the people once concede the right of a monopolistic combination to exist, independently of extraordinary conditions, a sense of justice should apparently compel What is Under no them to permit combinations ad libitum. sauce for the goose is sauce for the gander. theory of justice could all the trusts heretofore organized be permitted to continue without granting permission to organize trusts in every other field. Moreover, if the government permitted trusts freely to organize, it would have to permit pools also, at least until it was demonstrated that the trusts had material economies and other advantages and that the pools had no such advantages. In the second place, it would seem that if combinations having power to restrain trade are to be permitted at all, they must be permitted to become as comprehensive as they desire. Why should a combination not be allowed to take over 100 per cent of the business in its field quite as readily as 90 or 80 or 70 per cent ? Very few persons desire to prohibit combinations which control only a small proportion of a given industry and which possess no possible monopoly power; but if we permit that limit to be overstepped at all, there is no limit. One can only speculate how numerous and how comprehensive the trusts and pools would become if the policy were adopted of permitting them freely but subjecting them to regulation. Presumably the disinclination to submit themselves to government regulation would prevent business men from forming combinations as universally as they would if combinations were permitted without regulation. It is quite possible that the field of combination would become immensely great. In all probability it would become far greater than at present. Beyond question, moreover, every combination, unless prevented by the government, would take in just as large a proportion of the trade as could be persuaded to enter it. In many cases this would mean the entire trade. |