THE LEGAL, ECONOMIC AND ACCOUNTING PRIN- DETERMINATION OF RAILWAY CONTENTS. The extent and causes of the recent passenger fare legislation, p. 355; the constitutional right of the legislatures to fix rates, p. 361; the evolution of the doctrine of judicial review, p. 364; the economic principles involved in the determination of railway rates, p. 366; an outline of the problem from the standpoint of accountancy, p. 368; methods of separating expenditures between capital and expenses, p. 373; the apportionment of earnings, expenses and capital to the several States, p. 375; the allocation of joint expenses to the freight and passenger departments, p. 379; the separation of the interstate from the intrastate accounts, p. 384; an illustration of the several methods of allocation, using the data presented to the Wisconsin Railroad Commission by the C. M. & St. P. Ry. Co. for the year 1905, p. 388; the difficulties which the courts have experienced in the application of legal principles to rate questions due to methods of procedure and to the technical nature of the accounting problems involved, p. 393; an equitable solution of these problems may be secured through a commission of experts, subject to review by the courts, p. 399. THE I. HE active political agitation for a level maximum rate of two cents per mile in intrastate passenger transportation began in Ohio in 1906. After considerable discussion and full hearings1 before the Committee on Railroads and Telegraphs, a two-cent passenger fare act was reported, passed both houses of the legislature, was signed by the Governor and was put into operation by the railroads2 without any attempt being made to test its legality. During the same year the legislature of Virginia 1 The representatives of the railroads were heard and among others President McCrea of the Pennsylvania submitted a statement showing that with a three-cent fare that company, according to the method of prorating expenses then in use, was conducting a portion of its passenger business at a loss. 2 March 10, 1906. passed an act empowering and requiring the State Corporation Commission "to fix and prescribe a schedule of rates for the transportation of passengers by all transportation companies" and further provided that until a schedule of rates was fixed the railway companies should issue mileage books to be sold at the rate of two cents per mile. The validity of this act was contested and finally it was declared unconstitutional by the State Court of Appeals. In the meantime the State Corporation Commission had been taking testimony and making an investigation with a view of determining what was a fair rate of compensation, and on April 27, 1907, handed down a decision requiring certain railways denominated "trunk lines" to charge not more than two cents per mile for intrastate passenger fares. The remaining railroads were grouped into three classes and allowed to charge two and one-half, three, and three and one-half cents per mile respectively. A third State to take action during the year 1906 was Maryland, where a law was passed requiring all railroads doing business in the State with certain minor exceptions to issue and keep for sale mileage books of five hundred and one thousand miles, unlimited in time and good for the families and employees of the purchaser, at two cents per mile. With the assembling of the legislatures in the early months of 1907, acts reducing the legal maximum passenger rate from three to two cents per mile were introduced in what may fairly be called a wholesale fashion. In several of the States a two-cent passenger fare bill was advocated by the respective governors in their annual messages to the legislatures. These bills were vigorously pushed in the committees, hurried through the legislatures and signed by the governors with inadequate consideration in view of their economic importance to the railways and to the public. The net result of this avalanche of passenger fare legis 'Laws 1906, c. 174. 'Railroads chartered in the State whose gross passenger receipts are less than $5,000 annually. 1 Iowa, Indiana, and some others. With the exception of Governor Hughes of New York, who vetoed the two-cent act passed by the legislature on the grounds that it had not received the consideration that was desirable and further that it was the proper function of the Public Utilities Commission to make a thorough investigation before action was taken. lation during the past two years has been to provide by law for a level maximum two-cent per mile rate in eight States, a twocent rate for main lines and a slightly higher rate for subsidiary lines in five, a two and one-fourth rate in two, and a two and one-half rate in three others.10 In addition two other States11 have enacted laws requiring the railway corporations to issue mileage books that are expected to materially lower rates, and, finally, when Oklahoma entered the Union as a State a two-cent fare clause12 became a part of her permanent constitution.13 This remarkable movement on the part of the legislatures or other public authorities in twenty-one States,14 embracing in general the territory lying between New England and the Rocky Mountain States and representing approximately two-thirds of the population of the country, has few parallels in our past legislative or economic history. In the spontaneity of its origin and its resistless onward sweep it is comparable with the granger movement of the seventies. The latter movement, however, was local in its scope, affecting a comparatively small section of the country, while the railway legislation of the past two years was essentially national in its character and effects. In the latter aspect it is more like the interstate commerce legislation of 1887. The interstate commerce act differed radically in one point, viz. it was under consideration by Congress for a period of thirteen years, during which time two important commissions15 were constituted to study the railway problems of the day and their reports became the basis of extended discussion in the halls of Congress and the public press. The Hepburn Arkansas, Illinois, Indiana, Minnesota, Nebraska, Ohio, Pennsylvania, Wisconsin. 8 'Iowa, Michigan, Missouri, West Virginia, Virginia. 12 For a review of the railway legislation of the past two years, see The Railway Age for July 16, 1907, and several succeeding issues. Also the American Political Science Review, vol. i, No. 4, p. 638 et seq. 13 The constitution of Oklahoma provides that the Railroad Commission of that State may make exceptions in the case of those railways that are able to prove that a two-cent rate is unremunerative. amendment was also preceded by a long period of public agitation and full consideration16 by the national congress. The causes of this movement, so sudden and so unexpected, lie deep in the popular discontent with railway conditions, in the fear of the giant railway consolidations and in the feeling of exalted power that often comes to a democracy realizing its new found strength.17 While the active causes undoubtedly are obscure at the present time, and almost inextricably mixed with the political issues in the several States, it is clear to the impartial observer that a movement so widespread in its scope and so unanimous in its popular approval is likely to be founded on fundamental economic conditions which create the demand and approve the action when the demand is realized in the enactment of appropriate legislation. The most fundamental of these causes rests upon the unprecedented growth of the railway business during the past decade and the consequent increase of railway earnings. During the twelve years, 1895-1906, the railroads of the United States increased their single1s track mileage1 approximately twenty-four per cent., their gross earnings1o one hundred and fifteen per cent. and their net earnings19 one hundred and twenty-five per cent.; operating expenses, on the other hand, including as they do in American railway accounting liberal allowances for improvements, increased only one hundred and eleven per cent., somewhat less than the increase in gross and considerably less than in net earnings. The enormous increase in gross earnings is the result chiefly of the increased volume of traffic and secondarily of the economies effected in the operating departments, particularly in the transportation of freight. During "Hearings before the Committee on Interstate Commerce. U. S. Senate, vols. i-v, 1905. "It is significant that this movement followed in the wake of the great popular political uprising during which time the former bosses and political leaders were quite generally overthrown and new leaders arose. 18 The total mileage operated, including second, third, fourth, side and yard tracks, increased during the years of 1895-1905 inclusive from 233,275.40 miles to 306,796.74 miles or over thirty-one per cent. the eleven years from 1895 to 1905 inclusive the passenger traffic almost doubled in volume20 while the freight traffic increased by about one hundred and twenty per cent.20 The economies effected especially in the freight department have been almost as noteworthy as the increase in the volume of traffic. An increase of approximately one hundred per cent. in the number of passenger miles has been accomplished by increasing the train mileage forty-five per cent. and the train load twenty-seven per cent. During the same period, the freight train mileage increased only twenty-one per cent. while the average freight train load increased from one hundred and eighty-nine tons to three hundred and twenty-two tons or slightly over seventy per cent. The combined result of the various economies effected in the operation of trains has been to increase both the gross and the net train mile revenue by almost fifty per cent.21 Notwithstanding this phenomenal increase in the volume of the traffic accompanied at the same time by marked economies in the operation of trains, thus increasing the net earnings from two distinct sources, passenger fares22 have in general remained practically stationary while freight rates22 show only a moderate decline. Moreover, the actual decline in rates has affected a comparatively small number of patrons, being caused largely by the elimination of discriminatory rates through the activity of the Interstate Commerce Commission, shippers associations and city rate bureaus, by the development of carload traffic and by the shipment of an increasing proportion of low grade traffic. A third factor which has had considerable influence on legislation was unfortunately contributed by certain railway financiers who were generally believed to be guilty of questionable practices in connection with the reorganization of several rail |