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Finally, the plan was adopted of securing ation the expectation of income arising the services of four of the best railway men from the use of the property and its to be found in the country. It is now a strategic significance; the growth of the fact well known to the investing world that country; restrictive legislation; potential the Santa Fé system, under the leadership competition by rail and waterways, and of Mr. E. P. Ripley and his associates, has investment demand. Since net earnings so increased its permanent earning power are directly dependent on rates, and the that the valuation of the property has in- valuation depends on net earnings, obcreased by hundreds of millions of dollars. viously such a valuation could not be used Nor can this be ascribed either to franchises as a means of deciding upon the rates or to the unaided growth of the country; charged. The new proposals reject comthose causes were at work when the road mercial valuation because it includes was paying little income. The real cause sources of earnings from franchises, and not of the change was the policy of the manage- merely from the capital invested in transment in first putting the line in good portation. That is, this method of valuaphysical condition, so that low rates were tion is rejected because it does not conform possible; the activity of the officials in to the assumption that a railway should building up industries, and developing the not retain earnings derived from so-called country through which the railway passed; franchises, the growth of the country, and and this aided, reflexively, in settling up the like. new territory. Then, when a part of the On the other hand, a physical valuation country became well occupied—as in Kan- is declared to be a means of governing the sas—for the very reason that the railway rates charged. Omitting franchises, the was rendering prompt and efficient service value of each form of railway property is at reasonable rates, all kinds of industries estimated according to its cost and its ancillary to a civilized population sprang length of life, and an inventory is made of up and increased the density of the traffic. the tangible railway investment in real esIf transportation had been confined to tate, cuts, fills, bridges, ferryboats, wharves, prairie schooners, such growth would have terminals, stations, rails, ties, poles, rollingbeen impossible. The railway is as much stock, and the like. Hence, the new polthe cause of the growth of the country as the icy which seems to have been supported growth of the country is the cause of the by President Roosevelt proposes, if we growth of traffic.

understand it rightly, to exclude all factors

in creating earnings except capital. In the IV

first place, such a method excludes from

railway property the gains from the growth In the proposal to make a valuation of of the country. It is the theory of Henry railways for the purposes of preventing George applied to railways only, although over-capitalization, and also of controlling not applied to other owners of property. rates so that dividends can be paid only on In the second place, it excludes the earninvested capital, two kinds of valuation, as ings due to managerial skill. In the third already mentioned, have been discussed: place, such a valuation in fact seems to (1) a commercial valuation, based on earn- have no direct relation to rates, for the ings; and (2) a physical valuation based very good reason that the capital is not the on an inventory of tangible property. sole source of earnings. Finally, the at

In respect to the commercial valuation, tempt to trace the value of an article, like made in 1904 by the Bureau of the Census,* a railway, solely to one factor in producnet earnings (gross earnings minus operat- tion, separate from others, is an example ing expenses) were used as a basis of of questionable economic reasoning. It capitalization. The rate of capitalization is impossible to separate the results in a was obtained by dividing the corporate net finished product due to distinct factors, like income by the aggregate value of corporate labor or capital, which are both necessary securities. The commercial valuation is a to the output. In a coat made jointly by market estimate which takes into consider- a man and a sewing-machine, it is impossithe capital invested in the machine. The low; and yet the former might not begin value of a finished article is due to the to earn as much as the latter. In fact, both operation of all the factors necessary to roads would probably charge the same production working together. This gives rates, if in a competitive territory. The the ground for claiming that a car, a loco- one may be a more valuable road than the motive, or a piece of track has in and for other because of the density of traffic and itself little or no value in isolation, and obtain larger earnings quite irrespective of that their value arises from joint use in a its lower physical valuation. Certainly, complicated carrying instrument.

*Bulletin 21, Department i Commerce and Labor, ble to draw a line across it and say that so “Commercial Valuation of Railway Operating Property in much was due to the man and so much to

the United States: 1904.

there are so many instances in which the These objections make clear the reason physical valuation can have no relation to why the opponents of a physical valuation rates that it can hardly be seriously used as are able to show in ordinary railway prac- a means of regulating such rates. tice such evident independence of rates The conditions which work upon rates from such a valuation. For instance, it is are many and diverse, such as activity or well known that the rate on wheat from depression of trade; the competition of Dakota must be low enough to cause it to goods with goods; the competition in intermove to the central market; in other national markets; the probability of obwords, the price of wheat in Liverpool has taining future traffic by opening up new more influence upon the rate than the districts; the rivalry of different cities and amount of the capitalization. Moreover, interests. In many cases the rate is fixed wherever there is competition of goods for the railway by conditions beyond its with goods, or competition of carrying com- control and it has no option but to accept. panies by rail or water with each other, the For example, lumber from the Pacific physical valuation has no effect on rates. States must be given a rate to Chicago low Quite irrespective of capitalization, the rail- enough to enable it to compete with lumways eagerly compete for traffic. Indeed, ber from nearby states; otherwise the it is the insolvent roads which offer to carry traffic would not be moved. This is one freight at the lowest rates; and the well- case in which the railway can charge only managed road must meet this cut-throat what the traffic will bear. competition without regard to its invested The railway opponents of a physical valuacapital. Without doubt, all the recent ex- tion are able to point out* that a small railasperation against discriminations arises road in Pennsylvania earned $25,000 in 1905, from the bitterness of the struggle to get but in 1906, because of the building of a partraffic, wholly without any connection be- allel road, it showed a loss of $10,000. In tween the physical valuations of the rival another instance, the Cincinnati, Lebanon roads. Consequently, it is clear why Hon. and Northern Railway in the suburbs of Martin A. Knapp, Chairman of the Inter- Cincinnati earned nothing; but after being state Commerce Commission, testified be- sold to the Pennsylvania Company, it was fore the Industrial Commission that he had placed on a dividend-paying basis. not known an instance in which rates As regards over-capitalization, the case seemed much to depend upon the capital- is closely connected with that of rates alization of a road.

ready discussed. Sometimes, as in the The physical valuation is an outcome of plundering of the Chicago and Alton, it is many elements which are wholly uncon- believed that a higher capitalization will be nected with high or low rates. The actual a reason for high rates: but this is seldom capital invested to accomplish a possible the case in practice. The over-capitalizahaul of 100 miles varies with the conditions tion of railways is chiefly a matter concernof nature, or with the soil and climate of ing the railway and the investor, and has the environment. The existence of snow, little to do with rates. Since to the investor ice, mountains, deep rivers, and the like, -and in the case of bankruptcy, to the might cause an expense of $100,000 a customer of the railway-it is a danger to mile, as compared with an expense to pro- have his securities reduced in value by duce the same haul in a level and temperate over-capitalization, the wrong should be region of only $15,000 a mile. In the avoided by more direct and efficient means former case, the physical valuation would be high, while in the latter case it would be

*1. L. Lee, “Railroad Valuation," Bankers' Magazine, July, 1007.

than by a resort to a dubious remedy like a valuation based upon earnings, railways physical valuation. If this latter be the should not be. Equality of treatment is policy of the President, it stands out in the only rule. bold contrast with the policy of Governor In conclusion, we may recall that a freely Hughes, who has met the evil of over- reproducible article, like a hammer or a capitalization by requiring the issue of new plane, would have its value limited by its securities to be approved by a Board of expense of reproduction. Obviously, a Public Utilities. This is a more rational railway in a certain place is not freely and practicable method than forbidding reproducible by other persons than the the issue of securities on the ground of a owners, and hence its value could not physical valuation.

properly be based on its mere cost of reproThe relation of the question of valuation duction. But, we also saw that a monopoof railways to taxation is a separate ques- lized plant, practically incapable of reprotion into which we need not enter here. duction as it stands, would have its value Everything depends upon the laws of the determined by its earnings. To the extent separate states. If they tax all property that a railway is a monopoly, its comupon the basis of the value of its tangible mercial valuation will be based on its earnforms, then railways should be taxed upon ings. But a physical valuation overlooks the same appraisal. On the other hand, sources of earnings properly belonging to unless other going concerns are taxed upon a transportation company.


By Charles Belmont Davis


ZER hands resting on her mirror at the smiling, pretty face and the

narrow hips, Eleanor blonde curls, and drew the kimona more
Blythe stood before the closely about her.
bureau and, with levelled “I am,” she said.
brows, looked at the “Where?
pretty face in the mirror. “To the bath. Do I look as if I were

Her yellow hair was gath- going to a tea or for a ride?—or perhaps ered loosely in a great mass over small, you thought I was going to play tennis.” delicate features, and her flat, boyish figure Mrs. Blythe sighed. was draped in a pink kimona of almost The daughter ran her long, tapering findiaphanous texture, and apparently little gers through the golden curls, and opening else. Mrs. Blythe, dressed in the almost a vanity-box that lay on the bureau, dabbed equally unconventional attire of a black her nose several times with a miniature silk underskirt and an all too short dress- powder-puff. ing-sack, sat in a rocking-chair across the “I think, muzzy," she said, slowly drawroom and stared dully at her daughter. ing back from the mirror, “I look rather The bulky figure of the older woman filled pretty this way, don't you-running across the chair to overflowing; her hands lay the lawn and in and out among the trees? idly in her ample lap, and she rocked I really think I look quite like a sprite or a slowly but incessantly.

fairy-or something." “Are you going out like that?" the Mrs. Blythe glanced at the nickel alarm mother asked.

clock over the fireless hearth. The girl glanced down at the clinging silk “There are not many folks about just kimona, at the inch of bare ankles and now. The Springs are always dead at four the tips of gold-embroidered Turkish slip- o'clock. I don't suppose many people will pers. Then she looked back again in the see you."

Eleanor turned and fairly laughed aloud. the older woman was seated the girl slipped “You dear old muzzy,” she said. “But to her knees at her mother's feet. you never can tell who is peeping out from “I didn't know, mother," she whispered. the cottage windows."

“I didn't know we were so near the end. Mrs. Blythe slowly pulled herself from Of course I understood it wasn't far off, the chair and started to move cumber- but—but you mustn't say there will be somely across the room. “You'll want a nothing left. There will be you and me." bath ticket, too, I suppose?”

With closed eyes the mother put out her “I never heard that the baths were free arms and drew her daughter toward her. on Thursdays, did you?”

“Yes, little girl,” she said, “there will be The older woman knelt down before a you and me." trunk, slowly unlocked it, and after groping And then with a low sob the daughter about the tray, eventually discovered the buried her face on the broad, soft bosom of tickets hidden under a confused mass of her mother, just as she used to do when she stockings and handkerchiefs. She handed was really a little girl. her daughter one of the printed cards, and then counting those that remained, care- It was on the same day, and almost at fully put them back in their hiding-place. exactly the same hour, when Eleanor Blythe “Only four more," she said, and with the learned just how desperate was her financial aid of the trunk slowly pulled herself to her condition, that the new dancing man first feet again. “And when they're gone, that's made his appearance at the Madison the end.”

Springs. The girl threw back her head and laughed Janet Hone and Arthur Wayne were on until the tears filled her eyes. “Oh, muzzy," their way to the little village at the foot of she said, "you are so funny sometimes. the hill where the guests go to register their Can't we ever bathe again, really?"

letters or to buy cheesecloth and red paper The older woman looked dully into the muslin for occasional fancy-dress balls and smiling face of her daughter, and then, as if private theatricals. The stranger was standa little dazed, turned, waddled across the ing at the edge of the path, looking on at a room, and stood with her great broad back tennis match, and as they passed he drew silhouetted against the window. Through back and, raising his black felt hat, bowed glazed eyes she looked out on the orange to them with a show of old-time courtesy. sunlight as it filtered through the trees and “He's very handsome, too,” Janet said threw long shadows on the great stretches as they passed out of hearing. “Looks like of rolling lawn. For a moment her eyes Thomas Jefferson in extreme youth, what?" rested on the big white hotel with its redAt the same moment Wayne was thinkroof and spreading porticos and white, fat, ing, too, how typical the young man's clearfluted pillars glistening in the golden light. cut features were of pictures he had seen of

Some robins were hopping about under some of the former great orators and statesan apple-tree, but otherwise the lawn was men of the South. quite deserted and silent, and the only sign For a moment they stopped while Janet of life was at the Casino, where two old gathered her skirts about her, preparatory men were dozing with their chairs tilted to picking her way over the narrow stream back and their feet resting on the porch that crossed their path. railing. The girl crept noiselessly to the “Do you think Thomas in extreme old woman's side, and putting her arm youth,” she asked, "is from the village, or about her shoulders pressed her own cold could he be one of those rare specimenslittle cheek against the hot, tear-stained a new beau at the Springs?”. face of her mother. “Is it as bad as that?” “From the village," Wayne ventured, she asked.

and he based his supposition on the young “Yes, Eleanor. It's as bad as that. We man's much-worn and ill-fitting suit of seem to have come to the end. Perhaps a gray clothes, which Janet had apparently week or two more and there will be nothing overlooked on account of the cameo face - just nothing."

and the straightforward but deferential She took her mother's hand and led her glance from the stranger's dark eyes. slowly back to the rocking-chair, and when “Oh, do you really think so?" she sighed, slowly picking her way across the stepping- buildings, formerly called “The Bar," but stones. “That would be a real calamity. I now generally known under the more recounted ten couples of perfectly beautiful fined name of “The Casino." On the lower blondes dancing together in the cotillion floor the bar still existed; the second and last night, all trying to look as if they pre- only other floor was divided into two bedferred it that way and as if their mothers rooms and one larger room which was furwouldn't let them dance with men, even if nished with a round table and many canethey had been asked.”

bottomed chairs. This was called “The Wayne took her ungloved hand and Meeting Room," and was devoted to those helped her across the last puddle

of the male guests who cared less for golf “It's good to have a man,” he suggested, and tennis and dancing than they did for "even an old one, to depend on always at the great American game of draw-poker. the Springs—no?”

On this particular evening, which was With an almost imperceptible pressure, early in August, and when the season at the Janet dropped his hand and smiled at an Springs, to quote the words of the local sociapple-tree in a neighboring field. Wayne ety reporter, was at its“very height,” Wayne had his winters quite free, but for several had gone to his room to dress for supper. summers he had loved Janet Hone with a When far advanced in his somewhat ornate very moderate passion.

toilet-indeed, when just about to add the "You're not so awfully old,” she said. very last touches which would perfect the “You might be much older and still be whole—the wick of his lamp gave a few rated as eligible—at the Springs.”

dying splutters and went out, leaving him “That helps some,” Wayne sighed, “be- in complete darkness. He lighted a match in cause I never feel old except at a summer the hope of finding a friendly candle, but in resort. I suppose it's because all the girls this he was disappointed. However, he had appear so very young and—and attractive. heard some one stirring about in the next In town one never seems to have the time room, and without more ado went out into or inclination to resent old age or rainy the hallway and knocked at his neighbor's weather. Do you know that only last night door. I was thinking that when I first met you, “Come in, please," said a low voice with ten years ago at Seabright, you were ten a very Southern accent, and Wayne opened and I was thirty-just three times your the door. age. But now you are twenty and I am The young man whom he had met that forty—just half as old as I am.”

afternoon while on his way to the village he She looked up and contracted her eye- found standing in his shirt-sleeves at the brows in a look of mock perplexity. mirror, carefully brushing his hair.

Isn't it terrible?” she said. “I suppose “I have the next room,” Wayne said, if you had kept on with your calculations, “and my lamp has gone out. I wanted to you would have found that in a few years know if you could loan me a candle for a more I would be as old as one of those nice few moments.” grandmothers who gossip on the hotel “Of course," the young man said, “but porch, and you would be a boy making won't you sit down?” horrible noises with a mechanical toy." Wayne could not understand at the time

They had reached the village store by now, why his host should be so embarrassed and and while Janet went in to make her mod- his manner so confused, but his hospitality est purchases Wayne sat outside and swung was evidently sincere, and so Wayne achis legs from a molasses barrel and talked cepted a chair and began the conversation town gossip with some barefooted picka- by telling him his name. ninnies and a few homeless dogs. On their “I'm very glad to have the honor of your return they again passed the tennis-court, acquaintance,” the young man said. “My but the young man with the Thomas Jeffer- name is Blackwood—John Blackwood.” son features had disappeared, and neither “I hope you have come for a long stay, of them saw him again until late that even- Mr. Blackwood. I find it much pleasanter ing.

having a neighbor." Since his arrival at the Springs, Wayne The young man seemed still more conhad occupied a bedroom in one of the out- fused at Wayne's greeting, and then sud

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