plant, etc. Others, again, have one flat rate, including both buildings and machinery, although they recognize that the two are subject to different degrees of depreciation. In the case of one or two important companies it was found that the single rate of depreciation was carried still further, including not only machinery and buildings, but even the value of the real estate. Still others, as has been pointed out earlier in the discussion of the question of repairs and maintenance, carried no allowance for depreciation, but charged all additions to the plant by way of new machinery, extensions of buildings, etc., to the repair account, thus paying for it out of current earnings.

It therefore becomes clearly apparent that some uniform rate for depreciation as well as repairs would have to be adopted. A modern mill equipped with looms of the latest construction, which have been in operation only a few years, will manifestly have an entirely different repair account from that of a mill with looms anywhere from twenty to fifty years old. Not only will the efficiency, and therefore the resultant labor cost per unit of product, be different in the two mills, but the actual expenses incurred for repairs will be vastly greater in one case as compared with the other. Repairs may vary greatly from year to year. A new plant may go on for a number of years incurring only a slight expense for repairs which makes up for the preceding years. An older mill, after running for several years, may spend a considerable amount of money on overhauling the mill, charging the expense to repairs for that year, and, as a result of this, run for several years after that at a small expense. It would be purely a matter of accident for the investigation of the board to cover either the one or the other year, yet neither the heavy expense for repairs during the one year nor the very light expense during the intervening years would be a fair figure to be charged to the repair account.

To arrive at an accurate estimate of the repair account would have required taking the repairs for several years and then averaging the amount. This could not be done without a care

ful audit of every item of expense to separate the expenses properly chargeable to repairs from those incurred for plant additions and betterments. With the limited time at the disposal of the board such a procedure was out of the question. The only way out of the difficulty was, therefore, to arrive at a normal rate for depreciation and repairs, based upon the experience of leading engineers engaged in the erection of textile plants and the installation of textile machinery. After a consultation with such engineers and a leading appraisal company in the United States, which has appraised a large number of textile plants both in the cotton and woolen industries at different stages in the lives of the plants, it was found that a fair normal rate to be allowed for cotton-manufacturing plants for depreciation and repairs would be 22 per cent. on buildings and 5 per cent. on machinery and equipment, and this rate was uniformly charged for all plants. In apportioning the total allowance between repairs and depreciation, the repair expense actually incurred during the year under investigation was deducted from the amount equal to 5 per cent. on the value of the machinery and 22 per cent. on buildings, and the difference thus obtained was allowed for depreciation. It should be noted that in any case the element of depreciation is a very small factor in the cost of production per unit of product.

CAPITALIZATION AND URBAN LAND VALUES

[FROM the Principles of City Land Values, by R. M. Hurd, cited above on the subject of rents, are taken the following cogent expressions of broad experience on the subject of capitalization.]

Capitalization rate [page 129]. With an established economic rent, the sole remaining factor to transform this into intrinsic value 1 is the rate of capitalization. As capitalization rates vary with securities, Government bonds selling below a 2 per cent. basis, railroad bonds and stocks on a 31⁄2 to 5 per cent. basis, and industrials on a 7 to 10 per cent. basis, so the rates of capitalization of urban rents vary from 4 per cent. for the highest class of property in the largest cities, to 5 and 6 per cent. for second-class property in the same cities, or for first-class property in smaller cities, 7, 8 and 10 per cent. for tenements in the largest cities, and 12 to 15 per cent. for temporary utilization or disreputable purposes in the smaller cities. The great power of capitalization rates on values is due to the fact that for every change of 1 per cent. in the rate of capitalization, values may change from twelve to twenty-five times the difference in interest. For example, a property with a net income of $10,000 would sell on an 8 per cent. basis at $125,000, on a 6 per cent. basis at $166,000, and on a 4 per cent. basis at $250,000. The lower the capitalization rate the greater the effect of any changes of values: For example, a fall from 8 to 7 per cent. adds but 14 per cent. to the value of the property, while a fall from 5 to 4 per cent. adds 25 per cent. to the value of the property. Moreover, as low interest rates apply to the

1 ["Intrinsic value," a term with a good many troublous implications, may be here understood as valuation, or capitalization.-ED.]

largest properties all further, fractional lowering of rates results in an enormous mass of values. The marked difference between capitalization rates of high-class and low-class property in the same city indicates the large number of people who desire to own high-class property, and the few who desire to own low-class property. The reason for such preference is that with high-class property, rents are more stable and easily collected, the property is more quickly and certainly convertible, it can be mortgaged at a lower rate of interest and for a larger percentage of value, the buildings depreciate much less rapidly and the prospects of increase in value are better.

Land a slow asset. That land, even of the highest type and in the largest cities, is a slow asset, is due to a number of causes, among them being the fact that land is not easily passed from hand to hand as are stocks and bonds, land involves personal or directly deputed management, where stocks and bonds do not, there is no Exchange with daily quotations giving the values of land, as with stocks and bonds; and finally the value of land is influenced by many complex changing factors, whose effects are differently estimated by differcnt people. Because land is a slow asset, convertibility or certainty and speed in selling it, produces a high premium for the best property by lowering its capitalization rate.

Farm acreage to city sites.1 Starting from the condition of no value in land when a city originates, let us consider the scale of average values of residence and business land in cities of various sizes, land used for other purposes being omitted as being more of an individual problem. At the outer circumference of cities land is held as acreage, the prices per acre advancing from the normal value of farm land near cities, $50 to $150 per acre, up to market-garden land, which may earn interest on $300 to $1,000 per acre, and, finally, to speculative tracts held at $500 to $5,000 per acre, whose prices are based on the estimated earnings of the land when it secures the an

1[The following paragraphs reproduce the chapter entitled, "Scale of Average Values," pp. 133-144.]

ticipated utilization. Since the proportion of land occupied by streets averages about 35 per cent., the conversion of acreage into lots means a loss in building area of that percentage, so that with the expenses of platting, opening streets, taxes, loss of interest, etc., it is generally estimated that property bought by the acre must sell by the lot for double the acre price in order to avoid loss in handling.

Mechanics' residence lots. The cheapest lots in any city are those utilized for workmen's houses, varying in smaller cities from $150 to $300. The larger the city the larger the number of well-paid mechanics and the greater the effective demand for lots. A mechanic's lot on the outskirts of a small city differs from one on the outskirts of New York not only in price but in size, those in small towns having 50 to 60 feet frontage, and those in New York 15 to 20 feet frontage with usually two-family houses on them. Thus an average price of $150 for 50 x 100 foot lots in large cities would be equivalent to $7,700 per net acre after platting, or $5,000 per acre as acreage. In the outskirts of the smaller cities platted land runs as low as $2 to $4 per front foot, and there are built up mechanics' sections with street car accommodation less than a mile from the center of cities of 30,000 population, where land sells at but $5 per front foot, equivalent to 5 cents per square foot.

Better residence lots. From this figure, land for detached residences grades upwards more in proportion to the class of people utilizing it than the size of the city, to land worth $20 to $30 per front foot for the residences of small shopkeepers and clerks, and $40 to $75 for the more fashionable residences in cities of 75,000 population and under. Such residence property would have good street car service, graded streets, sidewalks, sewer, gas, water, electric light, etc., the cost of which may vary from $5 to $15 per front foot. The best residence land in cities of 100,000 to 200,000 population runs from $75 to $150 per front foot, in cities of 200,000 population to 400,000 population from $300 to $500 per front foot, and in New