greedily watching the increasing profit and loss surplus of Chicago, Burlington & Quincy, jointly owned by the two roads. When the Burlington was earning 11 per cent. they felt that the time had come for it to pay something more than the interest on the cost of its ownership. When it began to show from 13 to 14 per cent. they saw the possibility of a "melon" in its surplus over the 8 per cent. disbursed on its stock. In 1911 the road earned 15 per cent. and still paid only 8 per cent. In the period closed with June 30, after a very severe winter and other unfavorable conditions which left some of the transcontinentals with a deficit after dividends, the Burlington earned about 132 per cent. on its $110,000,000 of stock. The reason this company is able to continue to earn a large balance over dividends in spite of bad weather or business depression is that the management did not embrace the first opportunity to increase the payment on its shares. Instead, the surplus was plowed back into the property, as railroad men say. It was used for improvements, which are now earning a handsome return on the uncapitalized investment. In the Burlington the Northern Pacific and Great Northern have a sheet anchor which would enable them to weather a bad year without reducing their dividends. So far the Hill boards have shown no disposition to cut into the Burlington's surplus.

RAILROADS AS NATIONAL ASSETS

[THE Interstate Commerce Commission in its decision on "Advance of rates by carriers, in official classification territory" (Eastern roads), Feb. 22, 1911, weighed somewhat the question as to the ultimate equities in the growing railroad surpluses and increments of value in the United States. After considering the case presented by such improvements as the elevation of tracks, involving large expenditures for the benefit of the public, the Commission says: "It is difficult to see how it [the railroad] can, upon the theory of the Yellow Pine case, charge the entire expense of the improvement to the public through higher rates." It then continues (Senate Document, 725, 61st Congress, 3d session, p. 5459):]

Where lies the difference between a revenue-producing and a non-revenue-producing improvement? So long as the improvement is for the future the present must not be entirely taxed to provide it. The elevation of those tracks has added to the cost of the railroad; the value of the property which that company is using for the public benefit has been enhanced, and this justifies it in demanding from the public a greater return than formerly, but not in demanding the price of the improvement itself.

While this would seem to be the law of the situation, there is a suggestion of public policy which might under some conditions lead to a different conclusion. It is a wise thing for a nation as well as for an individual to lay up something for the future. This Nation in time to come must engage in active commercial competition with the rest of the world. We must manufacture and sell against other nations. Railway rates will enter as an important factor into that competition. Not only the rate upon the raw material to the factory and upon everything which enters into the cost of living will be of consequence, but also the rate from the factory to the port.

Germany and France to-day use their railroads to assist the home manufacture as against his foreign competitor by allowing a special rate upon articles for export.

In the past we have enjoyed cheap raw materials. Our food' has been cheap; our coal and our ores have been near the surface; our lumber has been plentiful. These resources are being exhausted; the cost of food is increasing; our forests are being depleted. We must go deeper for our coal. All this will render the cost of production more expensive, and it might be wise to lay up in our railroads a fund which should be of assistance to future generations in offsetting this tendency to increase the price, were there any assurance that the fund when provided could be made available. There is the gravest doubt upon this point, for the reason that whatever is invested in these properties from earnings may belong, not to the public which has paid for it, but to the stockholders who have already received a full return upon their investment in the way of a dividend.

The president of the Pennsylvania Co. testified that since 1887 his company had put into the Pennsylvania lines east of Pittsburgh $262,000,000 from earnings. During all that time this company has also paid to its stockholders munificent dividends. Now to whom belongs this $262,000,000, a sum which, according to the statistical report of the Pennsylvania Railroad Co. to this commission for the year ending June 30, 1910, equals nearly two-thirds of the total cost of construction of the 2,123 miles owned by that company?

Suppose this commission were required to fix a value upon the Pennsylvania lines east of Pittsburg. Could any distinction be made between this sum which has accrued from the operation of the property and what has been paid in other sources?

We are not required at this time to express an opinion upon that point. What the claim of the railroads will be when the matter finally comes to an issue is well shown by a question which was asked upon the argument and answered by that

attorney who was urging most strongly the right of the railroad to accumulate a surplus for this purpose:

Question. The popular idea seems to be that these properties ought to be physically valued, and that the rate should be determined by the value of the property so fixed. In that case, would the surplus be entitled to be appraised as a part of the value?

Answer. As of the date that such a valuation takes place, the property as it stands belongs to the stockholders. That has been in accordance with the policy of the Government, and it would take a change in the policy of the Government to change that legal situation. So I think the valuation would necessarily be on the property as it stands.

In 9 I. C. C. Rep. 382, 417, the commission, in considering the financial condition of the Lake Shore & Michigan Southern Railway said:

The Lake Shore & Michigan Southern, on June 30, 1901, owned a majority of the capital stock of its competitor, the New York, Chicago & St. Louis Railroad Co., a majority of the capital stock of its connection, the Pittsburg & Lake Erie Railroad Co., almost one-half of the capital stock of the Lake Erie & Western Railroad Co., and $11,224,000 of the capital stock of the Cleveland, Cincinnati, Chicago & St. Louis Railway Co., besides smaller holdings in other companies. These stocks had been acquired, in addition to the payment of dividends not less than 6 per cent. for many years, out of net earnings. During the year 1902 it purchased, apparently out of surplus, $4,728,200 of the capital stock of the Indiana, Illinois and Iowa Railroad Co., the entire capital being $5,000,000.

This company after paying 7 per cent. dividend to its stockholders has a surplus each year sufficient to buy the control of a very considerable railroad. Before holding that its revenues ought to be further increased, or that the Government ought not to exercise any supervision over those revenues, it may be well to consider what the bearing of this process, continued for half a century, is to be upon two of the great economical problems before us, namely, the distribution of wealth and the control of the avenues of transportation.

The carriers in the proceeding now before us have claimed that they should be allowed to invest in improvements and additions to the property an amount equal to that paid by way

of dividends to stockholders. In the year 1910 railroad dividends aggregated $405,131,650. If this sum were to be invested in our railways annually for the next half century, it would amount at the expiration of that period to $20,256,582500, not regarding the item of interest. This sum is far in excess of the present total capitalization of our railroads. It is not improbable that it may equal the total amount which will be expended in railway development in the next half century, and upon this vast amount which has been accumulated in addition to a fair return upon the investment railway stockholders will claim a return. Every dollar which has thus been added to the value of these properties justifies, according to the claim of these defendants, an added net return, and it is further claimed that the Constitution of the United States protects these defendants in the right to impose such charges as will yield this return.

It is evident that until the status of this surplus is determined by legislative action or judicial interpretation, this commission can not properly permit an advance in rates with the intent to produce an accumulation of surplus for this purpose.