To connect asset currency with "wild cat" banking is to ignore the facts of our own financial history. And finally it should be pointed out that under the proposed system the notes must be at least as safe as deposits are to-day. And no one charges that our deposit system is unsound.

One of the first objections raised against any proposal for greater elasticity of note issue is that it will mean inflation. Elasticity will mean inflation, if it works in the direction of expansion only. That is what is very likely to happen under our present system if we add much to the public debt. We may even say it has already happened when we remember that the national banks have trebled their circulation in the past eight years. True elasticity means contraction as well as expansion. The experience of Canada is the best refutation of the charge of inflation. The Suffolk bank system gives additional testimony. Both systems have operated under far less governmental restraint than would be enforced in this country.

It has been proposed to make sure that the credit notes will be redeemed when no longer needed by adding to the proposed law a clause forbidding any bank to pay out over its counter any notes but its own. All notes finding their way into any other bank will then be certainly returned for redemption. This was done by Massachusetts to give added strength to the Suffolk system. This would undoubtedly make current redemption certain. The necessity of such a provision is, however, very doubtful. Redemption was enforced without it in the Suffolk system. Canada does not find it necessary. Moreover, under a system of scattered, independent banks like our own, such a provision would often defeat the very end we are aiming at. The occasion might often arise when local needs would exhaust the note-issuing power of local banks. Then the banks should be able to borrow the notes of other banks, situated where the need is not so great. This is frequently done even in Canada, where the system of branch banking makes the occasion for it arise far less frequently than it would in the United States. Such a provision would certainly be unwise in this country unless we are prepared to adopt the system of branch banking. Even then the wisdom of such a restriction is open to question.

The superiority of asset currency over bond-secured notes seems to be established both by theoretical reasoning and practical experience. The situation in the United States is undoubtedly a complicated one, and the progress of reform must be slow and difficult. Further delay, however, will only increase the difficulties. Reform should begin at once, and the high standing of the individuals and organizations whose influence is being exerted in favor of the general plan outlined above gives reason to believe that the initial step will not be much longer delayed. FRED ROGERS FAIRCHILD.

Yale University.

THE BASIS OF RATE-MAKING AS AFFECTED BY COMPETITION VERSUS COMBINATION

OF RAILROADS.

CONTENTS.

The law of increasing returns, p. 79; the responsiveness of traffic, p. 80; discrimination between places, p. 81; discrimination between shippers, p. 82; comparative rates applied to different commodities, cost of service vs. value of commodity, p. 82.

EFORE proceeding far in the study of railway rates and the

diverse effects upon rate-making of competition versus combination of railroads, it is desirable to premise that railroads are subject to the law of increasing returns. The fact is, of course, sufficiently familiar. It is here briefly referred to that it may be kept in mind during the remainder of the discussion, since the conclusions reached are logical deductions from it. Perhaps the idea may be most simply and clearly expressed by the statement that with a given unit of equipment, successive units of business, i. e., successive units of application of labor, result in more than proportionate return. We may, perhaps, assume that the units of equipment are relatively large and the unit increments of business relatively small. Up to the point of fullest utilization of the equipment, each increment of business yields a larger return than the preceding. The idea may be differently stated so as to throw the emphasis on another phase. In industries of large equipment and organization, there is obvious a marked distinction between fixed costs and operating costs. Certain charges, such as interest on funded debt, salaries of executive force, depreciation fund, etc., are relatively independent of the amount of business done, relatively independent, that is, within certain limits. There are other, operating costs which maintain a fairly constant ratio to the amount of business. When the charges as a whole are considered, it becomes evident that within the limits of existing equipment and organization capacity, increased utilization of that equipment and organization does not proportion

ately increase business expenses. The endeavor has been made to give the law a general statement. Its application to railroads need not, of course, be enlarged on.

The fact that railroads are operated under a law of increasing returns lies at the basis of the systems of rate-making. Since increased traffic is carried at proportionately less cost and therefore yields proportionately greater profit, it becomes worth while to get this increased traffic, even if to do so it must be carried at lower rates. The expense of carrying each additional unit of freight may be regarded from a twofold point of view: we may assume that each unit should bear a proportionate share of the total cost of operation and management; or we may regard the fixed costs as a separate element to be met somehow, but not to be assessed on the separate units of business in any definite proportion. In the latter case, each unit of traffic must bear the special additional cost of its own moving, the cost, that is, to which the road is subjected above what it would have to meet were that traffic refused. If anything more is paid, be it ever so little, the business is regarded as desirable.

We are thus led to a consideration of rate-making as dependent on the principles under discussion. It has been seen that where reduced rates of transportation will result in increased traffic, such reduced rates will be offered, provided that there remains any surplus whatever above the special, additional cost of moving this increased traffic, to apply on the fixed or permanent costs. It has now to be noted that these reductions are not general. They take place where and when increased traffic will result, and on those commodities, increased transportation of which can be secured by means of such reductions. In other words, these reductions take place on traffic which is responsive, and take place according to this responsiveness. It has now to be shownand this is the principal theme of the discussion-how the conditions under which this responsiveness of traffic affects rates, vary according as we have competition of railroads or combination of railroads. In the one case, scientific rate-making must lead to one result; in the other case, it must lead to an entirely different result. It is not the purpose to discuss any effects which combination may have to increase rates as a whole. It is intended

here, only to emphasize the relation of rates to each other,-to consider the effects of competition versus combination: on relative rates between different places (towns or trade centers); on relative rates as between different corporations; on the relation of rates applied to different commodities.

In the first place, there has to be noted the relation of freight rates applied to different places, what is commonly known as place discrimination or discrimination between different towns. When two or more railroads connect a couple of trade centers by different routes, each may have a monopoly of the traffic to and from intermediate points on its own line. It results that competition for the through traffic reduces the charge on such traffic below that for transportation of goods between intermediate points. This is the effect of competition of roads. Reductions

are made on the through traffic below that on local traffic, because it is the through traffic which is responsive. Attention needs to be called to the fact that reductions take place here, not because the traffic is responsive in an absolute sense, not, that is, because by such reductions, traffic, as a whole, can be increased, but only because it is relatively responsive, responsive relative to that particular road, because traffic is so gained by that road at the expense of a rival. If the rival road adopts a similar policy, both lose. So much for the effects of competition in inducing discrimination among different towns. Under a régime of combination, conditions tend to be different. Here, charges are likely to be based on principles of cost and value. If reductions are made in favor of traffic between any two places, it will only be because such traffic is absolutely responsive; it is not because one road will gain traffic at the expense of another that the reductions take place, but because the total traffic of the district served is thus enlarged. There is no reason to believe that the principle of reducing rates where traffic is responsive in the absolute sense, results in so great discrimination against local points and in favor of terminal points, as does reduction induced by rivalry of competing roads, and the consequent relative responsiveness of traffic at certain points. The reason why a road subject to competition on a part of its traffic makes reductions on such traffic, is that