RAILROAD 
 
 VALUATION AND RATES 
 
 BY 
 
 MARK WYMOND 
 
 WYMOND & CLARK 
 
 RAND-MCNALLY BUILDING 
 
 CHICAGO 
 1916 
 

 Copyright 1916 
 
 By 
 MARK WYMOND 
 
 Press of the 
 
 Drovers Journal Publishing Co. 
 Chicago 
 
FOREWORD 
 
 This book is intended primarily as a treatise on 
 the Principles of Rates and their relation to Valua- 
 tion and Rate Regulation. In view of this fact, the 
 reader is entitled to an explanation of why the first 
 four chapters are devoted to what at first sight seem 
 unrelated subjects. 
 
 No discussion in regard to the proper basis for 
 rate-making can last very long without reference to 
 Capitalization and Valuation. The discussion on 
 capitalization finally turns on the abuses practiced 
 in the construction and promotion of railroads. Pro- 
 motion and construction are most intimately con- 
 nected with capitalization in fact, very much more 
 so than capitalization is with rate-making. 
 
 There is seemingly some confusion on the part of 
 some authors and publicists in regard to the facts 
 concerning and the conditions surrounding the pro- 
 motion and construction of our railroads and the 
 relation which such facts and conditions have to 
 capitalization. Many of us have come to accept 
 these widely published interpretation of facts for 
 the facts themselves, generally because we do not 
 take the time to make the investigation necessary 
 to determine their accuracy. 
 
 The general impression one gets from much of 
 the discussion and criticism of the railroad situation 
 
6 VALUATION AND RATES 
 
 is, that the original promoters of railroads have in- 
 variably reaped enormous, and hence unearned, 
 rewards ; that the construction of the roads has been 
 attended invariably by fraud and that the most of 
 the original capitalization, and all of the increases 
 in the last twenty years, represent only the "nerve" 
 of the financier in injecting water into railroad se- 
 curities. 
 
 There are undoubtedly many well-authenticated 
 instances in which the conditions recited are true, 
 but we are inclined to judge a whole class of individ- 
 uals or all members engaged in some line of business 
 or industry by the actions of only a few of them, for- 
 getting that these are not representative of the mass. 
 
 We have seen, in some instances, that editors of 
 important publications and professors of our uni- 
 versities, who lead public opinion, have said or done 
 very foolish things, yet we regard these professions 
 with respect and believe that as a class they are in- 
 telligent and well-informed men. Ministers and 
 priests have broken their vows; lawyers have been 
 unfaithful to the interests of their clients; doctors 
 have violated confidence reposed in them; and yet 
 as a class we regard the minister, priest, lawyer and 
 doctor more highly than we do other classes of men, 
 and because as a class they are worthy of our regard 
 and confidence, irrespective of what individual mem- 
 bers of their professions may have done. Our judg- 
 ment is based on the normal and usual things not 
 on the extraordinary and abnormal. 
 
 For these reasons it has appeared to the author 
 that a historical statement of the facts regarding 
 these matters, in so far as they have a bearing on the 
 main subject, would assist in obtaining a better un- 
 derstanding of them and their relation to our sub- 
 ject. This statement will be brief and confined only 
 
FOREWORD 7 
 
 to those prominent features of interest in the con- 
 nection named. 
 
 No one man can, from his own experience, speak 
 with final authority on all of the many sides of rail- 
 road affairs. If he is to write for the purpose of in- 
 forming those unfamiliar with the detail of railroad 
 work and its problems, he should, however, have 
 been in actual contact with some of them, in order 
 that he have a basis of practical experience on which 
 to form his judgment as to what are essential facts 
 and their relation to each other. 
 
 All of us, even when we attempt to be thoroughly 
 honest with ourselves and with others, are uncon- 
 sciously biased by our environment and service. The 
 reader of a book which discusses subjects on which 
 there is such diversity of opinion as exists at the 
 present time as to railroad matters, is entitled to 
 know the bias of any one who assumes to inform 
 him. 
 
 The writer has had some thirty years experience 
 in connection with the promotion, construction, re- 
 construction, operation and valuation of railroads, as 
 an engineer in the service of railroad corporations; 
 of banking institutions, financing or investigating 
 their operation, organization or physical property; 
 of local communities and of industrial or mining cor- 
 porations seeking to better existing or procuring new 
 transportation facilities; of a traffic association in 
 special freight rate work. In addition he has in- 
 vestigated specifically the rate structures of certain 
 important traffic territories and published traffic 
 maps, showing graphically their rate adjustments, for 
 the information and use of the traffic officials of the 
 larger commercial and industrial corporations and 
 railroads. It is hoped that this experience, in such 
 diversity of service, may give some assurance to the 
 
8 VALUATION AND RATES 
 
 reader of his impartial attitude in making the state- 
 ments of what he believes to be the essential facts 
 and their proper interpretation and relation to each 
 other. 
 
 The book may be considered as being divided into 
 two broad divisions of Historical fact and a discus- 
 sion of the Principles of Rates. The first four chap- 
 ters, namely, Historical, Promotion, Construction 
 Reconstruction and Capitalization, are descriptive 
 and historical. The others, on Valuation and Rates, 
 are devoted to the various phases of those subjects. 
 
HISTORICAL 
 
 Railoads are the legal and actual successors of 
 the older turnpikes and canals. The invention of 
 MacAdam in the early part of the Nineteenth Cen- 
 tury was responsible for the turnpikes, which cheap- 
 ened the cost of transportation through providing a 
 good solid road for team traffic at all times. 
 
 Francis, in his "History of the English Railways/' 
 states : "In the Seventeenth Century the charge for 
 conveyance amounted in many cases to a prohibi- 
 tion. Heavy goods cost from London to Birmingham 
 7 a ton, from London to Exeter 12 were paid. 
 Coal was rarely seen save in the neighborhood which 
 produced it." An advertisement of the York and 
 London Stage Coach in 1706 promised to be in Lon- 
 don on the fifth day out of York and to run from 
 London to York in four days. 
 
 The history of the pre-railroad era serves to em- 
 phasize the fact that transportation facilities are 
 absolutely essential to an extensive commerce, and 
 that the present traffic of the railroads is made up 
 in greater part, not of the transportation of com- 
 merce existing at the time of their construction, but 
 of that part of it which the transportation facilities 
 themselves have made possible. 
 
 The canals, which were the first systems of trans- 
 portation, were intended, and from their nature 
 could be used only for the transportation of bulky 
 and low-priced commodities. The time required for 
 transportation precluded their use for the carrying 
 of ordinary merchandise of comparatively high value 
 now moved by the railroads under merchandise tar- 
 iffs. The business on the turnpikes consisted chiefly 
 of carrying this latter class of traffic, the transporta- 
 
10 VALUATION AND RATES 
 
 tion of which required greater speed than was pos- 
 sible on the canals. The rates charged for carrying 
 such traffic too were very much higher than those de- 
 manded for the bulky commodities. 
 
 The railroads, therefore, in their earlier history, 
 competed with the canals, which carried bulky 
 freight at low rates, on the one hand, and the turn- 
 pikes, which carried higher class traffic at much 
 higher rates, on the other. 
 
 Development of the Steam Railroad 
 
 Rails were first used in the coal mines of England 
 during the Seventeenth Century to facilitate the 
 handling of the cars used in carrying coal from the 
 working to and from the mouth of the pits. These 
 rails were first of wood, laid flat upon the ground 
 or supported by stones or other device. In 1767 
 cast iron rails were first used as a substitute for 
 these wooden rails. 
 
 The first railroads used generally by the public 
 for the transportation of passengers and freight 
 were laid in the turnpikes. The track consisted of 
 two plain strap rails, laid level with the surface of 
 the road. The railroad company provided only this 
 rail for the use of the carrier, who supplied his own 
 vehicles and teams for moving it. 
 
 The next development was a rail with a flange 
 turned up to confine the wheels to the rail. In the 
 last and final development, as to general design, the 
 flange was placed on the wheel instead of the rail, 
 which necessitated the raising of the rail above the 
 surface of the road. 
 
 As such construction affected the operation of the 
 turnpikes by the teams not using the rails, and as 
 the operation of the vehicles over the rails laid in 
 the turnpikes necessitated very sharp turns and 
 
HISTORICAL 11 
 
 steep grades in following the contour of the country, 
 the separation of the rail traffic from the team traffic 
 was suggested, which required a right of way de- 
 voted to the rail traffic only, and of the construction 
 of the embankments and excavations, to avoid the 
 expense of ascending and descending the hills. 
 
 The construction of the embankments required 
 the building of bridges across the streams, and other 
 forms of construction as we see them now on the 
 railroads. This last development was brought about 
 by the invention of a practical steem engine which 
 could be operated over the railroad. 
 
 Modern railroads owe their origin to George Ste- 
 phenson, the builder of the first practicable steam 
 engine for the Stockton and Darlington Railway, 
 originally operated as a horse railway, and which 
 in 1823 was authorized to use steam for tractive 
 purposes. This experiment proved the practicabil- 
 ity of moving people and commodities economically 
 and the enterprise was a financial success for its 
 promoters. 
 
 The first railroad, after the invention of the steam 
 engine, charged one rate for the cost of carriage and 
 another entirely separate rate for the use of the 
 road alone. This will be understood from the copy 
 of the original tariff* of one of them which follows : 
 
 Tonnage Rates Per ton 
 
 (For use of road only) per mile 
 
 s d 
 
 For all limestone 1 
 
 For all coal, lime, dung, compost, manure and 
 
 material for roads 1.5 
 
 For all coke, culm, charcoal, cinders, stones, 
 sand, clay, building, paving and pitching 
 *From Acworth's "Elements of Railway Econom- 
 
12 VALUATION AND RATES 
 
 s d 
 stones, flags, bricks, tiles and slates 2 
 
 For all sugar, corn, grain, flour, dye woods, 
 timber, staves, deals, lead, iron and other 
 metals 2.5 
 
 For all cotton and other wool, hides, drugs, 
 manufactured goods, and all other wares, 
 merchandise, matters and things 3 
 
 Passenger Rates 
 
 For every person traveling thereon not more 
 
 than 10 miles, in any vehicle 1 6 
 
 For ditto, exceeding 10 miles but not above 
 
 20 2 6 
 
 For ditto, above 20 miles 4 
 
 For every horse, mule, ass, or other beast of 
 draught or burden, and for every ox, cow, 
 bull or neat cattle carried in or on such 
 
 carriage, not exceeding 15 miles 2 6 
 
 For ditto, exceeding 15 miles 4 
 
 For every calf, sheep, lamb or pig, any dis- 
 tance 9 
 
 Per ton 
 
 Carriage Rates per mile 
 
 s d 
 
 For all lime, limestone, dung, compost, ma- 
 nure and materials for roads, stone, sand, 
 clay, building, pitching and paving stones, 
 tiles, slates, timber, staves and deals 8 
 
 For all sugar, corn, grain, flour, dye-woods, 
 
 lead, iron and other metals 9 
 
 For all cotton and other wools, hides, drugs, 
 
 groceries, and manufactured goods 11 
 
 For all wines, spirits, vitriol, glass and other 
 
 hazardous goods 14 
 
 For all coal, coke, culm, charcoal and cinders 2J 
 
 For all persons, cattle and other animals, such 
 rates as the company may decide upon. 
 
HISTORICAL 13 
 
 It will be noted from the tariff, which was among 
 the first actually used, that the railroads recognized 
 from the beginning that competition, rather than 
 cost of service, controlled the rates. They com- 
 peted with the turnpikes for passenger and high- 
 class merchandise traffic at high rates, and with 
 the canals for the slow, bulky freight at very much 
 lower rates. The principle thus established has 
 been in effect ever since, not only on English rail- 
 roads, but on those of all countries. It is mentioned 
 here merely to show the circumstances which were 
 responsible for it. 
 
 First Railways in the United States 
 
 The Mohawk and Hudson Railroad, now part of 
 the New York Central Lines, started its construction 
 in 1825; the survey of a railroad from Boston to 
 Albany was begun in 1829; in 1830-31 the Boston 
 and Worcester and the Boston and Providence were 
 started; work was begun on the construction of a 
 line from Boston to New York in 1832 ; construction 
 of the Camden and Amboy Railroad, in Pennsyl- 
 vania, was started in 1827 ; the Baltimore and Ohio 
 started its construction in Maryland in 1828. 
 
 These railways were naturally built through dis- 
 tricts of the greatest density of population. They 
 were begun at the Atlantic seaports and built inland 
 to those points which had been developed more or 
 less by the transportation provided by the canals 
 or other water courses and turnpikes. 
 
 The following table shows the growth of the rail- 
 roads in the United States from 1828 to 1914, both 
 as to absolute mileage and the average annual in- 
 creases in miles. 
 
14 VALUATION AND RATES 
 
 Mileage of Railroads in the United States 
 
 Average annual 
 Mileage increase 
 
 in Miles 
 
 1828.. 3 
 
 1830 41 19 
 
 1840 2,200 216 
 
 1850 7,500 530 
 
 1860 29,000 2,150 
 
 1870 49,000 2,000 
 
 1880 93,671 4,467 
 
 1890 163,597 6,992 
 
 1900 193,346 2,975 
 
 1910 240,439 4,709 
 
 1914 252,231 2,948 
 
 The construction of new railways in the United 
 States, from the beginning in 1825 to the present 
 time, has been limited only by the capital available 
 for the purpose. The immense area extending from 
 the Atlantic Ocean to the Great Plains, and for some 
 distance eastward from the Pacific, had a favorable 
 climate, fertile soil, virgin forests and valuable min- 
 eral deposits, in immense quantities ; in much of the 
 intervening mountainous region the most valuable 
 deposits of precious metals in the world were known 
 to exist. Under these conditions it was clear, even 
 in the earlier days, that the transportation of goods, 
 and the products of farm, forest and mine, even 
 in undeveloped territory, would pay for its cost, the 
 interest on the required investments and a profit to 
 the investor. What disappointments there were in 
 connection with such enterprises occurred mainly 
 through lack of capital to complete them and the 
 failure to realize that time was a large factor in the 
 transaction that even with such great potential 
 wealth, it required time for converting it into actual 
 
HISTORICAL 15 
 
 usable wealth and some financial provision for the 
 lean years of the development period. 
 
 The domestic capital available for constructing 
 railroads was limited. It was derived chiefly from 
 the shipping interests and the sudden rise of the 
 cotton industry, which occurred at this time. In 
 1833 the removal of $29,000,000 of government 
 deposits from the United States Bank to state in- 
 stitutions, and the distribution of the government 
 surplus among the states, after the final extinction 
 of the national debt in 1835, made available an in- 
 creased capital for railroad construction purposes. 
 
 Basis for Financing: 
 
 The first railroads in the eastern states were con- 
 structed with funds obtained by subscriptions to 
 capital stock, no bonds being issued. This plan an- 
 swered very well in territory already developed, but 
 not in undeveloped territory, for the reason that the 
 returns on investments could not be immediate. In 
 that portion of the eastern states in which the rail- 
 roads connected the larger towns and traversed 
 manufacturing districts, the traffic for the railroad 
 was provided in advance of its construction. The 
 subscription to the stock of such a railroad was 
 therefore a well insured investment, but in the un- 
 developed territory, where the railroad had to create 
 its own traffic, an investment in its stock was neces- 
 sarily speculative. 
 
 The original stock subscription had called for 8% 
 on the whole investment. It is apparent that this 
 stock subscription plan for raising capital failed to 
 use the possible credit of the railroad to its fullest 
 extent. To extend its borrowing capacity, a plan 
 was devised for dividing the capital of the railroad 
 into two distinct parts: 
 
16 VALUATION AND RATES 
 
 First, bonds, on a loan basis of 6%, secured by 
 the physical property and franchises of the railroad ; 
 second, stock, which was unsecured by physical 
 property but which had an interest in the profits of 
 the operation of the enterprise. In order that this 
 form of financing should be as remunerative to the 
 investor as the former 8% subscription shares, a 
 bonus of the stock was given with the bonds to stim- 
 ulate investment. This made the bondholder, both 
 the creditor as to the cost of the physical property 
 and a partner in the anticipated profits of the enter- 
 prise. This plan used to the fullest extent the credit 
 of the enterprise and made feasible much construc- 
 tion not otherwise possible. 
 
 From the first, the legislatures of the various 
 states, appreciating the many material advantages 
 to be gained through improved transportation facil- 
 ities, voted aid directly to such enterprises by way 
 of subsidies, or by purchase or guarantee of the 
 bonds of the constructing companies. This was 
 supplemented in many instances by county and city 
 aid. Prior to 1890 this was a very common prac- 
 tice ; since that time most of the states have enacted 
 legislation forbidding the voting of aid by the people 
 of the state, counties, or municipalities for the con- 
 struction of new railroads. 
 
 Foreign Investments in United States Railroads 
 
 Construction of railroads had proved profitable in 
 England, where land was high priced and labor in 
 consequence cheap. Land in the United States was 
 very cheap and its potential wealth in fertility of 
 soil and minerals was known to be great. Land in 
 England to be used for railroad purposes had to be 
 obtained by individual bargaining and its cost had 
 been great. The Act of Eminent Domain in the 
 United States provided a means for condemning re- 
 
HISTORICAL 17 
 
 quired land for railroad use, which made its acquisi- 
 tion comparatively easy and cheap. This one item 
 of real estate alone explains in large part the great 
 difference in cost per mile of English railroads, aver- 
 aging $200,000, and roads in the United States aver- 
 aging now for the whole country approximately 
 $55,000 per mile a little more than 27% of the 
 cost of English railroads. 
 
 During the period between 1815-1830 the United 
 States paid 125 millions of its bonds and had extin- 
 guished its entire national debt by 1835, thereby 
 strengthening its credit abroad. These were the 
 fundamental conditions which caused the large Eng- 
 lish and European investments in securities of United 
 States railways and stimulated their construction. 
 This source of supply of capital was restricted by 
 the panic of 1837, at least as to the railroads west 
 of the Allegheny Mountains. The discovery of gold 
 in California in 1849 renewed it and it continued 
 until the panic of 1873. Foreign capital was again 
 invested in large amounts between 1878 and 1892 
 and was responsible to a large extent for the extra- 
 ordinary activity in railway construction during the 
 period 1880-1890. The amount of foreign capital 
 invested in the shares of United States railways in 
 the period 1890-1896 and the decrease in the amount 
 between 1896 and 1905 is shown by the following 
 tabulation : 
 
 Per Cent of 
 Foreign Stock 
 * 1890-96 1905 
 
 Illinois Central 65 21 
 
 Pennsylvania 52 19 
 
 Louisville & Nashville 75 7 
 
 New York, Ontario & Western 58 12 
 
 *Ripley's "Railroads Finance and Organization" 
 
18 VALUATION AND RATES 
 
 N. Y. Central & Hudson River 37 9 
 
 Reading 52 3 
 
 Great Northern 33 2 
 
 Baltimore & Ohio 21 17 
 
 Chicago, Milwaukee & St. Paul 21 6 
 
 The foreign bond holdings were probably a larger 
 percentage of the total than in the case of stock. 
 
 The following is a statement compiled by Mr. L. 
 F. Loree, President of the Delaware & Hudson Com- 
 pany between October, 1914, and April, 1915, which 
 shows a summary of United States railroad securi- 
 ties held abroad: 
 
 Preferred Stock, First $ 161,281,000 
 
 Preferred Stock, Second 100,000 
 
 Common Stock 633,802,000 
 
 Notes 61,376,000 
 
 Debenture Bonds 204,005,000 
 
 Collateral Trust Bonds 227,610,000 
 
 Mortgage Bonds 1,269,057,000 
 
 Equipment Bonds 17,364,000 
 
 Car Trusts 808,000 
 
 Receivers' Certificates 998,000 
 
 Total $2,576,401,000 
 
 Number of roads requested to furnish infor- 
 mation 145 
 
 Number of roads having securities abroad . 100 
 
 Number of roads not having securities 
 abroad 36 
 
 Number of roads not reporting 9 
 
 Causes of Increased Railroad Construction 
 
 The territory comprised within the grain-growing 
 areas in the north central states and at least as far 
 
HISTORICAL 19 
 
 west as the Missouri River, had been very generally 
 settled up by the early '70s. The production of 
 grain at this time vastly exceeded the needs of these 
 communities, but the cost of transporting the surplus 
 to the eastern states and the Atlantic ports for ex- 
 port was prohibitive at the rates then current, on 
 account of the long haul involved. The business of 
 the railroads serving this territory, generally known 
 as "grangers," was unprofitable and in a bad way 
 financially at this time. It was during this period 
 that the price of corn was so low in some of the 
 states within this area that it was used as fuel. It 
 was perceived by the railroads* that a large tonnage 
 at the low rate was more profitable on the whole 
 than a very much smaller tonnage at a high rate. 
 The rates on all grains and other agricultural prod- 
 ucts were readjusted and reduced to such an extent 
 that the surplus of these commodities could be prof- 
 itably hauled to distant markets in the east and 
 much of it sent abroad. The adoption of this policy 
 was responsible for the prosperity of the "granger" 
 roads, which immediately followed the reduction in 
 grain rates. Providing a market for this surplus 
 made it profitable to extend the area of agricultural 
 operation in producing more grain, involving the 
 construction of extensions of the existing railroads. 
 
 The general effect of this circumstance is to be 
 observed in the activity of railroad construction 
 which prevailed between the years 1878 and 1890. 
 The density of traffic, thus brought about, demanded 
 in turn the reconstruction of the railroads. After 
 the country had recovered from the effects of the 
 
 *The result of the competition between the New York Central 
 lines and the Erie Canal was the principal cause for the general 
 rate reduction, the railroad having taken practically all of the 
 canal traffic by low rates. The increased traffic reduced the cost 
 of transportation to such an extent that the lower rates were 
 more profitable than the former high rates. 
 
20 VALUATION AND RATES 
 
 panic of 1893 and money was again available at 
 reasonable interest rates, a period of reconstruction 
 of the main trunk lines followed, during which im- 
 mense sums were expended in the rectification of 
 line and the reduction of grade. 
 
 In addition there was a very general increase in 
 the size and the capacity of locomotives used, which 
 involved of course a large expenditure in purchasing 
 them. At the same time, it was realized that the 
 percentage of dead weight to the total load of 
 freight cars affected the economy of operation to a 
 large extent. The lighter equipment was replaced 
 by heavier, more economical cars, which while car- 
 rying the traffic at smaller cost per unit, involved a 
 large outlay for new equipment. 
 
 The reconstruction of the roadbed and the use of 
 heavier motive power and rolling stock, together 
 with the construction of additional main tracks, 
 greatly increased the carrying capacity of the lines 
 as a whole. This increased capacity of the main 
 line was greater however than the capacity of the 
 roads at their terminals. The expansion of ter- 
 minals became, and still remains, a very serious 
 matter from the operating and financial standpoint. 
 The land necessary to be acquired in making the 
 terminal extensions is many times more valuable 
 per unit of area than the land originally required, 
 and the difficulty of securing capital for this purpose 
 is a most difficult problem for those charged with 
 the financial management of the railroad properties. 
 
 Character of Railways 
 
 Railways may be divided into three general 
 classes: Military, Political and Commercial. On 
 account of its isolation geographically and its trea- 
 ties with adjacent countries, military roads are not 
 
HISTORICAL 21 
 
 required in the United States. The best examples 
 of roads of this class are the network of railways 
 constructed by Germany around all of its frontiers; 
 by France on its northern frontier, on account of the 
 German construction; the Austrian railways, built 
 along its frontiers, and the Trans-Siberian Railway 
 of Russia, constructed for the purpose of rapid 
 mobilization of its army, which is scattered over an 
 immense territory. These roads, while to some ex- 
 tent serving the commercial interests of the coun- 
 tries, have been designed primarily for military use. 
 
 The best examples of political roads in this coun- 
 try are the Union Pacific and the Northern Pacific. 
 Prior to the construction of these lines, that portion 
 of the country lying east of the Rocky Mountains 
 had no connection commercially with that lying west 
 thereof, except by the water route around Cape 
 Horn. There was comparatively little commerce 
 between the people of the eastern and western por- 
 tions of the country, and it is conceivable that with- 
 out the ties of commercial intercourse, the portion 
 of the United States lying along the Pacific coast 
 might easily have become alienated from the eastern 
 portion. 
 
 The Canadian Pacific was built by the Dominion 
 of Canada for the same purpose, and it has had 
 much to do with the making of a united country out 
 of what might well have been unrelated states. The 
 Intercolonial was constructed and is now operated 
 by the Dominion for the purpose of tying together 
 the eastern provinces. 
 
 In the period between 1870 and 1913, the Domin- 
 ion Government has paid in subsidies and in other 
 aid to steam railroads, the immense sum of $269,- 
 000,000. The population in round numbers in 1870 
 was 3,700,000; in 1911, 7,200,000. This is a very 
 large expenditure per capita, but the development 
 
22 VALUATION AND RATES 
 
 i 
 
 seems to have warranted it, as such enterprises as 
 the construction of the Canadian roads could not 
 have been successfully consummated without this 
 government aid. 
 
 The general policy of the Dominion Government 
 has been to give a subsidy of $6,400 in cash per mile 
 in aid of the construction of new railroads. The 
 provinces supplement this with additional aid, the 
 general subsidy in Ontario being $2,000 per mile 
 in cash with certain grants of land in addition. The 
 total grants given to the Grand Trunk Railway for 
 the construction of its Lake Superior branch totaled 
 $8,400 in cash and 6,000 acres of land per mile of 
 main line. 
 
 The general policy of the Mexican Government, 
 during the regime of President Diaz, was to grant 
 government aid to all new railroads, with the same 
 general purpose in view as that of the Unite4 States 
 and Canada, namely, the unification of the people 
 of its several states. 
 
 Commercial railroads are those which are con- 
 structed for the purpose of making a profit from 
 their operation. There are some few exceptions 
 to this, notably the construction of the Cincinnati 
 Southern, by the city of Cincinnati, originally built 
 to protect its southern markets against the competi- 
 tion of Louisville, Ky., and the Baltimore & Ohio 
 Railroad, constructed largely by the city of Balti- 
 more and the state of Maryland, designed primarily 
 to protect the port of Baltimore in its traffic inter- 
 course with the interior, against the competition of 
 the more northern Atlantic seaports. 
 
 The discussions contained in the following chap- 
 ters do not apply to any other than commercial roads 
 as here defined, except where the application is 
 obvious. 
 
PROMOTION 
 
 When the production, or the productive capacity 
 of a community exceeds its own needs, as to one or 
 more commodities, there arises a necessity for some 
 means of interchanging its surplus production for 
 other commodities which it requires and which are 
 produced more economically in other' communities. 
 Some system of transportation is required to effect 
 the interchange economically. 
 
 The work of promoting a railroad to supply this 
 need consists, speaking broadly, of (1) ascertaining 
 as nearly as may be the probable volume of traffic 
 which the interchange involves; (2) ascertaining 
 the approximate cost of constructing the railroad; 
 (3) procuring sufficient funds to construct such 
 railroad and purchase the motive power and equip- 
 ment required to move the traffic. 
 
 Classification 
 
 The construction of new railroads may be divided, 
 from a Promotion standpoint, into four classes: 
 
 (1) Those constructed by new companies in un- 
 developed* territory. 
 
 (2) Those constructed by new companies in ter- 
 ritory served wholly or in part by existing compa- 
 nies. 
 
 (3) Those constructed to develop such special 
 commodities as timber, mineral or stone. 
 
 (4) Those constructed by operating companies, 
 as extensions of existing lines, into partially devel- 
 oped territory; into undeveloped territory; or to 
 connections with existing railroads. 
 
 The procedure in organization, construction and 
 financing will differ very materially for these several 
 
 * Territory not provided with transportation facilities. 
 
24 VALUATION AND RATES 
 
 classes of new lines. Financial considerations will 
 generally be controlling, as the ability to secure cap- 
 ital limits the extent and determines the character 
 of the construction. 
 
 Difficulty in securing capital for roads in classes 
 (1) and (2) is much greater than in classes (3) and 
 (4) ; as the earnings can not be definitely known in 
 advance, the investment is largely speculative in con- 
 sequence. In the case of class (3), the extent and 
 the commercial value of the area to be developed 
 may be known in advance and the market for the 
 product fairly well defined, for which reasons the 
 element of risk will be small, compared with classes 
 (1) and (2). Class (4) roads have an advantage 
 on account of credit based on the physical property 
 and franchises, together with a known earning ca- 
 pacity of an operating line. 
 
 Time Factor in Development 
 
 With classes (1) and (2), even when the potential 
 wealth makes ultimate earnings certain, the time 
 required for development can only be a matter of 
 speculation. Failure to consider this time factor 
 has been the most prolific source of disaster to the 
 original investors in railroad securities. Not only is 
 the capital required for the construction of the road 
 to be considered, but also the much larger capital 
 required for the development of the country, in 
 building new industries, opening mines and develop- 
 ing farms. Evidently this latter development must 
 take place before the traffic of the railroad itself can 
 assume any considerable proportions. 
 
 The contract between the Canadian Government 
 and the Grand Trunk Railway, for the operation of 
 the Eastern division, and for the construction and 
 operation of the Western division of the newly con- 
 
PKOMOTION 25 
 
 structed Grand Trunk Pacific Trans-continental line, 
 recognizes the importance of the time required for 
 development in connection with the construction of 
 new railroads. This contract contains the following 
 provisions, in connection with the Eastern division: 
 
 "For the first seven years of the said term the 
 Company shall operate the same, subject only to 
 payment of 'working expenditure* ; for the next suc- 
 ceeding forty-three years the Company shall pay 
 annually to the Government, by way of rental, a 
 sum equal to three per cent per annum upon the 
 cost of construction of the said Division, provided 
 that if, in any one or more of the first three years 
 of the said period of forty-three years, the net earn- 
 ings of the said Division, over the above 'working 
 expenditure/ shall not amount to three per cent of 
 the cost of construction, the difference between the 
 net earnings and the rental shall not be payable by 
 the Company, but shall be capitalized and form part 
 of the cost of construction, upon the whole amount 
 of which, rental is required to be paid at the rate 
 aforesaid after the first ten years of the said lease, 
 and during the remainder of the said term." 
 
 It is to be noted that the Government allows the 
 Railroad Company the use of a railroad, which the 
 Government built, for a period of seven years with- 
 out rental of any kind. It allows a further period 
 of three years if the returns from the operation 
 of the road, over its operating expenses, shall not 
 amount to the 3% of cost, which is the rental pro- 
 posed for the remaining period provided for in the 
 contract. 
 
 In the mountainous section of the Western Divi- 
 sion, the Government agrees to pay the interest on 
 the bonds for the first seven years after the comple- 
 tion of the line (with no recourse on the Company 
 for the interest so paid). 
 
26 VALUATION AND RATES 
 
 Elements of Risk 
 
 From this contract it is evident that the risk in 
 such an enterprise to an operating company, for a 
 period of from seven to ten years, is so great that 
 private capital will not undertake it. The contract 
 in effect provides, that the government by remission 
 of its first seven years' rental in one case, and the 
 payment, by it, of the interest charge on the bonds 
 in the other, assumes what is considered to be the 
 entire risk of the enterprise. This contract empha- 
 sizes the point, that while there may be no doubt of 
 the potential wealth of a territory and the eventual 
 success of the enterprise, the element of time re- 
 quired to convert such wealth into actual useable 
 assets, and thus assure success, is as important as 
 the matter of capitalization itself. The reasonably 
 anticipated returns on capital invested in the con- 
 struction of roads in classes 1 and 2, on account of 
 the uncertainty of time required for development, 
 must therefore be much larger than for roads in the 
 other classes. 
 
 A large part of the original investors in railroads 
 have lost much of their investment. Perhaps 75% 
 of the total mileage of the United States has at some 
 time in its history been administered by a receiver. 
 This, in spite of the fact that the territory developed 
 has been one of great potential wealth and that 
 the railroads have ultimately become paying prop- 
 erties. 
 
 Extensions of systems, by the construction at one 
 time of several hundred miles of line, have usually 
 proven very disastrous, not only to the directly inter- 
 ested railroads themselves, but to the general busi- 
 ness interests of the country. The history of the 
 Northern Pacific, Santa Fe, Union Pacific and Cana- 
 dian Pacific are well known illustrations of this fact. 
 
PROMOTION 27 
 
 i 
 
 The larger part of the railroad mileage in the 
 United States has been built as class 1 and 2 roads. 
 The present large systems are made up of many 
 short lines, which were originally unrelated local 
 units. The line of the New York Central, from New 
 York City to Buffalo, was originally operated by 
 fourteen different companies. Many roads originally 
 built as class 3 have been improved and extended 
 and fall into class 1 or 2. All of these circumstances 
 have been factors in determining the location, char- 
 acter, capitalization and organization of our rail- 
 roads as they now exist. 
 
 Charter 
 
 The first step to be taken in organizing a railroad 
 corporation is to obtain a charter from the state. 
 The reasons for incorporating are several: 
 
 (1) The right to collect the charges made for 
 transporting goods, or using transportation facilities, 
 must be granted by the state. This principle was 
 first established when the building of toll roads and 
 canals, constructed by private capital, were author- 
 ized by the state, and the railroads are the succes- 
 sors of these earlier forms of transportation. 
 
 (2) Without the right conferred by the Act of 
 Eminent Domain to condemn land necessary for its 
 right of way, the expense in procuring it would often 
 be prohibitive. Under this right an owner may be 
 compelled by the court to deed his land at a reason- 
 able price, if the necessity for its use for transporta- 
 tion purposes is proven, the theory of the law being 
 that the needs of the public as a whole are superior 
 to the rights of the individual. The state has power 
 to condemn land for public purposes, and it may and 
 does delegate this right, through charter, with rea- 
 sonable restrictions, to a railway company. Origi- 
 
28 VALUATION AND RATES 
 
 nally, and particularly in the eastern states, charters 
 were obtained by a special act of the legislature. 
 Now, in all states, charters are granted under the 
 general laws. 
 
 (3) To unite the resources of many individuals 
 in a common enterprise. The amount usually in- 
 volved is too large for an individual or a small body 
 of individuals on a partnership basis. 
 
 (4) To limit the individual liability of those par- 
 ticipating in the enterprise. 
 
 (5) To insure a continuation of the organization 
 of the property, regardless of the death of individual 
 members, which a partnership or other form of or- 
 ganization does not afford. 
 
 (6) To provide a means for entering upon the 
 property of others, without trespass, for the purpose 
 of surveying and making the necessary examination 
 to establish the route or secure data relating to the 
 construction of the railroad. 
 
 The application for the charter must state the 
 purpose of the incorporation, the proposed route in 
 a general way, the names of the incorporators, the 
 amount of the capitalization and the money actually 
 paid in, and other details varying as to the several 
 states. Some of the states require, before issuing 
 the charter, that the promoters make application to 
 the Public Utilities Commission, or similar body, for 
 a "certificate of necessity" for the purpose of inves- 
 tigating the proposed enterprise, before granting the 
 charter. At the hearing before the Commission, in- 
 quiry is made as to the character of the promoters, 
 of their ability to manage the enterprise and raise 
 the necessary capital, whether the proposed line is 
 merely a duplication of present facilities, promoted 
 for the purpose of blackmailing existing companies, 
 or if being honestly promoted and constructed, it 
 
PROMOTION 29 
 
 would constitute an additional and unnecessary 
 charge on the communities traversed. 
 
 Usually the amount of capitalization of the com- 
 pany, at the time of its application for a charter, will 
 be such as to provide money necessary to ; (a) make 
 surveys and examinations of various routes, with 
 maps, profiles and estimates of cost; (b) compile 
 statements and statistics of probable traffic in ter- 
 ritory tributary to the line; (c) secure options, deeds 
 and franchises for real estate for right of way and 
 terminal purposes; (d) defray the cost of presenting 
 the proposed enterprise to prospective investors and 
 securing the capital to construct it; (e) pay the cost 
 of preliminary organization and legal expense at- 
 tending the procuring of the charter, appearing be- 
 fore commissions and such matters. 
 
 Cost of Preliminary Work 
 
 The actual cost of performing these several serv- 
 ices will vary widely with the circumstances sur- 
 rounding the enterprise. If the proposed railroad 
 traverses communities urgently in need of transpor- 
 tation, or of additional facilities, they themselves 
 will furnish much gratuitous service and the cost 
 of obtaining options or deeds for the necessary real 
 estate will, with favorable local sentiment, be the 
 minimum, as will the collection of data relating to 
 resources and probable traffic and the cost of pre- 
 liminary organization and legal expense. 
 
 In other communities, especially where the pro- 
 posed line crosses or approximately parallels for 
 some distance roads in operation, and transportation 
 needs are already wholly, or partially supplied, the 
 expense and time required in securing right of way 
 will be vastly increased, not only on account of the 
 lack of interest of the citizens, but often from the 
 
30 VALUATION AND RATES 
 
 active opposition of the trained organization of the 
 existing railroad whose territory is invaded. 
 
 The cost of the surveys will vary with the to- 
 pography of the country and with the number of 
 cities and towns located along the proposed line, or 
 with the accessability of the district traversed. Sur- 
 veys in wooded, mountainous country cost more than 
 in prairie country; through open fields, where indi- 
 vidual land holdings are measured in acres, less than 
 in cities where land is measured in square feet; in 
 districts having good roads, less than in a wilder- 
 ness, where roads and trails must be constructed 
 before even survey parties and their supplies may 
 be transported. 
 
 Reconnaissance 
 
 The work of the engineer will consist first of a 
 reconnaissance of the country to determine, as nearly 
 as may be, the general points through which the pro- 
 posed line will be constructed. He will note the 
 valleys running in the direction of the line ; the de- 
 pressions in ridges or mountains, separating the val- 
 leys; favorable crossings of all streams, as well as 
 of other railways; the location of lakes or other 
 obstacles to be avoided ; the most f easable route for 
 entrance into cities and villages, taking into account 
 the character of the property needed or damaged 
 by any particular route he may wish to try. If the 
 line be in a district not thoroughly explored, he will 
 note its natural advantages from a traffic standpoint, 
 such as soil, timber, mineral and stone. 
 
 Preliminary Surveys 
 
 Having determined on one or more general routes 
 to be tried, a "Preliminary" survey will be made, 
 connecting these various controlling points estab- 
 lished by the engineer. This survey will show the 
 
PROMOTION 31 
 
 distance between the points and the elevations to be 
 overcome. Often it will be run a second or more 
 times, either in whole or in part, as the first survey 
 will develop features not possible to foresee in the 
 reconnaissance. Surveys over alternative routes will 
 then be made and the cost of construction and the 
 advantages of the several lines will be compared 
 carefully. 
 
 The general route being thus established, the 
 location of the proposed line will be made. In the 
 preliminary surveys, the line connecting the several 
 controlling points are "angle" lines that is, turn- 
 ings to the right or left to avoid obstacles or to take 
 advantage of favoring topography will be made by 
 turning angles. 
 
 Location 
 
 In the location, the straight lines between the 
 points will be connected by the curves of the pro- 
 posed operated line. The located line is a job of 
 "cut and fit" that is, to so adjust the line to the 
 topography of the country that it may, for any given 
 standard as to gradient* and curvature, be con- 
 structed for less money than any other possible line. 
 
 As the preliminary surveys progress, a map and 
 profile of the country along and adjacent to the line 
 of survey are made, which show all natural objects 
 and differences of elevation. The located line is 
 first projected on the map and a survey of it is then 
 made on the ground, first by "trial" and next by the 
 final location. 
 
 The cost of preliminary lines, per mile run, will 
 be much less than for trial and final location, as in 
 the former, slight turnings by angle are made to 
 one side of obstructions, such as trees and build- 
 
 * Gradient is the ratio of rise to distance. If the grade line rises 
 one foot vertically in each one hundred feet, the gradient is 1$. 
 
32 VALUATION AND RATES 
 
 ings, while the located line must be accurately run 
 as it is to be constructed, or carefully "offset" when 
 the character of the obstruction requires it. 
 
 Map 
 
 The map of the proposed located line is prepared, 
 showing in detail the topography of the country by 
 contour lines ; the exact course of all streams crossed 
 or adjacent to the line; the location of buildings, 
 roads, fences, railroads and all other natural ob- 
 jects; the position of property lines, with owners' 
 names, within say 2,000 feet of the line; the posi- 
 tion and distance to government or other established 
 monuments marking recorded land divisions, and 
 every physical detail of the country. It will also 
 show the location and extent of proposed structures ; 
 the length and degree of curves; road and stream 
 diversions; the location of proposed passing tracks, 
 sidings, stations, water tanks and all other construc- 
 tion, as well as the acreage of land required for right 
 of way and terminal purposes. 
 
 Profile 
 
 A profile is prepared showing, by longitudinal sec- 
 tion, the variation in elevation of the surface of the 
 ground along the center line of the proposed rail- 
 road, with the grade line and the gradients of the 
 finished roadbed; the cubic contents of all cuts and 
 fills and the character of material to be excavated; 
 the length and character of all tunnels, bridges, cul- 
 verts and other structures within the proposed road- 
 bed. 
 
 Estimates 
 
 From these maps and profiles, and from notes 
 taken in the field for the purpose, an estimate of the 
 cost of the proposed construction is made in detail, 
 
PROMOTION 33 
 
 under the general headings* of Track, Real Estate 
 and Damage, Graduation, Bridging, Buildings, Minor 
 Structures and Miscellaneous. 
 
 The preparation of this data is of the utmost 
 importance, as the financing of the entire construc- 
 tion is based on the estimates submitted by the en- 
 gineer. Even after all of the data mentioned above 
 has been collected, tabulated and digested, there re- 
 main questions of judgment of the engineer as to 
 probable cost, and such estimates should always in- 
 clude a percentage to cover contingencies, such per- 
 centage varying with the conditions surrounding the 
 enterprise. 
 
 Contingencies 
 
 This item of contingencies in such estimates is 
 often severely criticised and generally characterized 
 as a "guess." A little consideration, however, shows 
 the necessity for its inclusion. 
 
 The cost of the graduation that is, of excavating 
 the materials in the cuts or borrow-pits for embank- 
 ments and in tunnels can not be definitely known 
 in heavy work** until it has been completed and 
 placed in operation, and often not then. An engi- 
 neer knows that the slopes of any excavation, with- 
 out regard to the lines which he may design for the 
 finished cross section, will do a certain amount of 
 "slipping" into the finished work. In cases where 
 the construction lies along steep slopes, this slipping 
 may grow into a "slide" of considerable extent 
 how considerable, must always be problematical. It 
 may be a few thousand cubic yards, or it may con- 
 tain several times the total yardage in his excavation 
 
 *Such estimates now are usually made under the thirty-one 
 headings prescribed by the Interstate Commerce Commission for 
 railroad accounting. 
 
 **Deep cuts and high fills. 
 
34 VALUATION AND RATES 
 
 as designed. The Panama Canal is not the only ex- 
 cavation that slips; any excavation exposed to the 
 elements continues to do so, more or less, until it 
 becomes seasoned or sodded with vegetation. 
 
 In the excavation of tunnels, even with the most 
 thorough examination by preliminary drilling and 
 test pits, faults in the rock structure, large under- 
 ground flows of water, strata of clay or disintegrated 
 material, are contingencies which can be provided 
 for in a general way only. 
 
 Thorough tests by drilling, or test pits when prac- 
 ticable, confine the estimates of probable cost of 
 bridge foundations within rather narrower limits 
 than in the instances just cited, but the contingency 
 of sudden floods and obstacles in the foundation, not 
 disclosed by the preliminary examination, must be 
 taken into account. Under favorable conditions, the 
 foundation of a bridge pier may be placed within a 
 few weeks if no untoward circumstances intervene. 
 On the other hand, a sudden rise in the stream may 
 destroy a cofferdam which had been placed, in which 
 excavation had been made and masonry foundation 
 started. If a large contingent item has been added 
 and the work is attended by peculiarly favorable cir- 
 cumstances, the estimate is excessive; if conditions 
 are reversed it is insufficient. 
 
 The law of averages is the resort of the engineer 
 in such matters. Either his own, or the recorded 
 experience of others, generally both, will determine 
 the proper percentages to add to cost. The diffi- 
 culty, of course, lies in finding a recorded experience 
 of work exactly like the one proposed, as no two 
 pieces of construction fulfill this condition. In the 
 allowances made for these differences he will show 
 his skill or its lack. 
 
 On such items as track that is, ties, rails and 
 track fastenings the larger part of the item is ma- 
 
PROMOTION 35 
 
 terial, from the railroad viewpoint, the market price 
 of which is not subject to excessive or sudden fluc- 
 tuation and may be known within small limits of 
 variation. The labor cost for this item will usually 
 not exceed 15% of its total cost and the addition for 
 contingencies will be correspondingly small. The 
 same is true, in a general way, of buildings and 
 minor structures. 
 
 The percentage to be added for contingencies on 
 light work shallow cuts and smaller bridges will 
 be less than on work which includes deep cuts, tun- 
 nels and important bridges. Some illustrations from 
 actual construction, which are given in the following 
 chapter, will serve to show the nature of contingen- 
 cies which the estimate seeks to cover. 
 
 Cost of Surveys 
 
 The cost of making surveys and preparing esti- 
 mates will vary with the conditions surrounding the 
 enterprise, as heretofore noted. The following in- 
 stances are cited showing what actual costs* have 
 been in certain situations, some of them on work 
 coming under the direction of the author, or within 
 his personal knowledge; others being taken from 
 recorded statements of engineers in charge of such 
 work. These instances are given as applying under 
 the conditions named and are not offered as typical, 
 except for those particular conditions. 
 
 (A) In the cleared, hilly country of southwest- 
 ern Wisconsin, the cost per mile for accepted loca- 
 tion was almost exactly $100 per mile, which in- 
 cluded all costs as stated in (B). The route was 
 determined in advance by the requirement that the 
 
 * These costs are for the engineering work in the field and office 
 and do not include any overhead charge. 
 
36 VALUATION AND RATES 
 
 line pass through certain towns, situated within a 
 few miles of each other, and close to mine shafts in 
 operation and known mineral deposits. This elim- 
 inated the examination of adjacent territory and re- 
 duced the cost of examination and surveys to a 
 minimum. 
 
 (B) In the rolling prairie country of southern 
 Illinois, with little timber, country largely under cul- 
 tivation and accessible by roads, the cost of the final 
 location of 115 miles was at the rate of $110 per 
 mile, terminus to terminus. The cost of surveys and 
 examinations in adjacent territory and of abandoned 
 lines is included in this cost, the cost per mile stated 
 being for miles of accepted location. This included 
 the salaries, expenses and subsistence of the engi- 
 neers and the field parties making the surveys, and 
 the drafting and other office salaries and expenses. 
 It involved the running of 285 miles of preliminary 
 line and 160 miles of location. 
 
 (C) In Arkansas and Oklahoma, principally a 
 prairie country, with occasional "choppy" topog- 
 raphy, partly timbered, the cost of completed loca- 
 tion per mile, on the basis of mileage of adopted 
 location, was $192 the average cost per mile of 
 preliminary survey being $26 and of location $71* 
 
 The location involved the examination of several 
 alternate routes, the country being in large part un- 
 developed territory, the surveys being made before 
 the "Indian Territory" was made a part of the state 
 of Oklahoma. 
 
 (D) In the wooded, mountainous country of 
 West Virginia, the Little Kanawha Syndicate spent 
 $151.53 per mile of located line, running 1,426 miles 
 of preliminary line and 602 miles of location. This 
 
 *Report of Mr. Lavis, C. E., on the Choctaw, Oklahoma & Gulf 
 R. R., now part of the Rock Island System. 
 
PROMOTION 37 
 
 cost includes all salaries, field and office expenses, 
 purchase of instruments and supplies incident to the 
 making of surveys and preparing maps, profiles and 
 estimates, with everything ready to contract for the 
 construction of the line. On the basis of the main 
 line mileage, terminus to terminus, omitting located 
 line abandoned, the cost was $278.23 per mile of 
 line. 
 
 (E) For a belt line in a city of 30,000 population, 
 in western Kentucky, with a connecting line 10 miles 
 in length, to a river crossing, the survey and prep- 
 aration of maps and estimates, cost at the rate of 
 $350 per mile, on basis of 10 miles. The work in- 
 volved the mapping of existing railroads in the city 
 and the survey of short lines connecting them at 
 various points. 
 
 (F) In Canada, in the uninhabited territory lying 
 between the existing railroads and Hudson Bay, the 
 engineer reporting to the government on the prob- 
 able cost of the surveys stated: 
 
 "The experience of the Canadian Northern and 
 Grand Trunk Railways seems to indicate that the 
 cost is usually from $300 to $500 per mile for a 
 final location in such a country." 
 
 It will be noted from the foregoing that in a de- 
 veloped country, devoid of timber, with the possible 
 location confined within narrow limits, the cost of 
 making surveys and estimates will be the minimum 
 as shown by (A) ; that the cost will increase with 
 the number of possible locations to be examined 
 as shown by (B) and (C) ; that in wooded, moun- 
 tainous country the cost is almost three times the 
 minimum cost as shown by (D) ; that in uninhab- 
 ited territory, difficult of access and distant from 
 transportation facilities, the cost may be from three 
 to five times the minimum; that for city districts 
 (small cities) and immediately adjacent territory, 
 
38 VALUATION AND RATES 
 
 the cost is three and one-half times the minimum 
 noted. In large cities it will be much greater than 
 this. 
 
 Estimating Traffic 
 
 To arrive at the probable traffic that may be rea- 
 sonably expected at a given time on a proposed rail- 
 road is a difficult task, and, except in special situa- 
 tions, it can never be determined with exactitude. 
 The best that can be done is to state that it will not 
 fall below a certain figure and that it will probably 
 not exceed some other figure; of many enterprises 
 even this much may not be determined in advance 
 with certainty. This fact is to be remembered, not 
 only in its application to the following discussion, 
 but also in connection with the financing of the proj- 
 ect, upon which it has a most important bearing. 
 
 An obvious exception to this statement is that class 
 of railroads, usually short, but often important from 
 a traffic standpoint, which are constructed especially 
 to develop some commodity, as lumber or coal and 
 other products of mines, in a particular locality. 
 
 In these instances, the extent of the timber tract, 
 or of the mineral deposit, the cost of manufacturing 
 or producing it and the extent of the market for it, 
 may be known within comparatively narrow limits 
 of variation, and the traffic offered for transportation 
 may be determined accurately in advance. There 
 are, of course, fluctuations in the demand for even 
 these every day necessities, but they are those of 
 ordinary business and are not peculiar to the busi- 
 ness of transportation. 
 
 The traffic on this class of roads will rarely bear 
 any important relation to the population of the ter- 
 ritory traversed or that adjacent to it. 
 
PKOMOTION 39 
 
 Methods of Estimating Traffic 
 
 There are three general methods employed in de- 
 termining the traffic expectation of a proposed road : 
 
 (1) On the basis of population in the territory 
 tributary to it. 
 
 (2) By estimating each possible source of traffic 
 in detail as the production of each factory, sawmill 
 plant, and even individual farms. 
 
 (3) By comparison with railroads in operation 
 in similar territory. 
 
 The first method involves the determining of; (a) 
 the factor of annual revenue per capita and; (b) 
 the population of the territory which may be con- 
 sidered as tributary to the proposed line. 
 
 The reports of the Interstate Commerce Commis- 
 sion are the reliable sources of information as to the 
 operating statistics of the railroads. 
 
 The area of the United States is divided by the 
 Interstate Commerce Commission into ten groups, as 
 shown on the map. The Interstate Commerce Com- 
 mission's reports give, for the United States as a 
 whole, and for each of the ten groups, the gross 
 earnings per mile of road operated and, formerly, 
 the per capita earnings. 
 
 The average earnings per capita for the entire 
 country is of little value in determining the prospec- 
 tive earnings of any particular line of proposed road. 
 Neither is the average earnings for the entire group 
 in which the proposed line is located serviceable, 
 even as a very rough approximation. The following 
 table given in the Interstate Commerce Commission's 
 report for 1900 will serve to illustrate this fact. 
 (The report for 1910 does not contain similar infor- 
 mation, which explains the use of tables now out 
 of date, but the figures are close enough to the truth 
 for this illustration.) 
 
40 
 
 VALUATION AND RATES 
 
PROMOTION 41 
 
 Revenue Per Capita by Groups 
 From I. C. C. Report 1900 
 
 Total Percentage of total 
 
 Group, revenue. Pass. Freight. Pass. Freight. Other. 
 
 1 $17.31 $6.59 $9.26 38 53 9 
 
 2 21.55 4.75 15.43 22 72 6 
 
 3 23.14 4.68 16.74 20 72 8 
 
 4 10.39 2.18 7.46 21 72 7 
 
 5 10.62 2.12 7.65 20 72 8 
 
 6 23.74 4.64 17.04 20 72 8 
 
 7 35.05 6.60 25.77 19 73 8 
 
 8 20.30 3.77 14.76 18 73 9 
 
 9 13.97 2.55 10.44 18 75 7 
 
 10 30.49 7.90 20.49 26 67 7 
 
 Entire 
 
 U.S. 19.67 4.28 13.88 22 70 8 
 
 The passenger earnings with variations from $2.12 
 to $7.90 per capita, and the freight from $7.46 to 
 $25.77 per capita, show that the average for the 
 entire United States is not applicable to any particu- 
 lar line. 
 
 The large total earnings per capita in Group 7 is 
 caused by the fact that the proportion of the rates 
 on through business between groups lying on either 
 side of it is credited to Group 7. As the area in 
 Group 7 is large, the population small, the length of 
 line great, relatively, the earnings per capita are 
 much above the average for other groups. The point 
 to be noted is, that the figure per capita would have 
 no value as indicating the probable revenue to be 
 derived from developing the territory within Group 
 
 7 itself, as the revenue is not derived from traffic 
 originating in or destined to points located in that 
 group. The same is true, in lesser degree, of Groups 
 
 8 and 10. 
 
 The earnings in Groups 2, 3 and 6 vary within 
 narrow limits and are large on account of the terri- 
 
42 VALUATION AND RATES 
 
 tory being adapted to agriculture, manufacturing 
 and mining, which interests interchange their re- 
 spective products. 
 
 The products of Groups 4 and 5 are in the main 
 agricultural, and the per capita earnings are small. 
 These groups, however, contain such districts as the 
 coal fields of West Virginia and the manufacturing 
 and mining districts of Birmingham and Chattanoo- 
 ga, where the per capita earnings of individual lines 
 are large. Evidently the average for the groups 
 would not apply to a railroad developing a mining 
 district within them. 
 
 The second method, if used at all, requires much 
 skill and good judgment, based on experience, in 
 applying it. 
 
 It is not a difficult matter, although it usually en- 
 tails much labor, to make an inventory of all sources 
 of traffic within a given area at the time the inves- 
 tigation is made. This does not solve the question 
 completely, for in all new enterprises it is che further 
 development of existing sources of traffic and the 
 creation of new ones that furnish the profit to the 
 railroad. To estimate the extent of prospective busi- 
 ness is a difficult matter; to predict with any cer- 
 tainty the time required to develop the anticipated 
 increase which is more important to the original 
 investor than the ultimate amount is not possible. 
 At the best, this method can be only an educated 
 guess ; it serves, however, to check other methods. 
 
 The third method by comparison with other rail- 
 roads in similar territory is much more satisfactory. 
 There are no two railroads exactly alike as to con- 
 ditions surrounding their operation, and the skill of 
 the estimator in making allowances for the differ- 
 ences will be the measure of the accuracy of the 
 estimate. 
 
PROMOTION 43 
 
 The operating factors of an entire system of rail- 
 road, comprising several thousand miles of line 
 traversing territory with varying characteristics, are 
 not applicable to a new railroad, say 100 miles long. 
 The figures of a division or a shorter unit are the 
 ones to be applied. 
 
 Not only are the earnings of the operated road 
 at the time of the investigation to be secured, but if 
 possible the earnings in the years immediately fol- 
 lowing its completion, as the time required to de- 
 velop the traffic is the essence of the estimate, from 
 the standpoint of an investor in a new railroad. 
 
 Detailed Analysis Important 
 
 In determining the extent of the territory to be 
 considered tributary to the proposed line, the maps 
 of the country traversed and adjacent to it must be 
 studied in detail. The shipper may always be relied 
 upon to go to the railroad most convenient for him. 
 The location of ridges, character of roads, and posi- 
 tion of bridges over large streams will often deter- 
 mine the boundaries of the actual tributary territory. 
 After the boundaries have been defined, the actual 
 population at a given time may be obtained from 
 the school census and other sources, the growth in 
 population in recent years being also noted as form- 
 ing a basis for the prediction of prospective traffic. 
 
 Where there are other railroads serving the towns 
 along the proposed line, the whole population can- 
 not be included in the estimate of population served 
 by it. A percentage based on the number and rela- 
 tive importance of the several lines to the particular 
 community considered will be used. Such circum- 
 stances as the location of the several freight stations 
 of competing lines must be taken into account. If a 
 
44 VALUATION AND RATES 
 
 shipper has a choice of delivering goods to a station 
 within two or three city blocks, he will rarely haul 
 it one mile to another, if the loading and transpor- 
 tation facilities are equal. Failure to realize the im- 
 portance of such matters has resulted disastrously 
 to some prominent enterprises, one illustration of 
 which will suffice. 
 
 The line of the New York Central between Chi- 
 cago and New York, built during the early days of 
 railroad construction, penetrated to the centers of 
 business at its termini and passed through the busi- 
 ness centers of all cities and towns along the line. 
 The eagerness of the various cities and towns for 
 transportation facilities and the comparatively low 
 price of land at the time of construction, made this 
 possible. 
 
 In the '80s, its entire line between these termini 
 was paralleled by competing lines. The construc- 
 tion of the first line had increased the population of 
 all of the cities and towns, and in consequence the 
 price of real estate had been multiplied many times. 
 The cost of real estate and consequential damage for- 
 bade the construction of a new line into the business 
 centers of the termini and the intermediate cities, 
 In consequence the stations of the new lines were 
 located at some distance from the business centers, 
 and the cost of delivery of freight was greater to 
 such stations than to those of the older road. There 
 was no reason why a shipper should pay more for 
 hauling his freight to and from the new station, and 
 this meant that either the old road obtained prac- 
 tically all of the business or the new road was forced 
 to make a concession to the shipper (reduce its own 
 revenue) to compensate him for the increased cost 
 of trucking his freight a greater distance. A care- 
 ful analysis of the traffic expectancy would have dis- 
 closed this fact as to the intermediate towns, 
 
PROMOTION 45 
 
 At the New York terminus a different condition 
 obtained. As the terminus of the new road was 
 across the Hudson River, it involved, for a passenger, 
 a ferry trip across the river and a long ride there- 
 after to the business center of New York, while the 
 terminus of the old line was in the city near its busi- 
 ness center. Evidently no great amount of passenger 
 revenue could be anticipated for the new road with- 
 out making concessions in fare (reducing its rev- 
 enue) to the passenger. 
 
 The freight situation in New York was somewhat 
 different, however, because a large proportion of 
 transfers to freight terminals was made by car fer- 
 ries on the rivers, and the terminus of the new road 
 was about as favorably situated for this purpose as 
 the old. Its freight traffic expectancy at New York, 
 therefore, was comparable with that of the old road. 
 
 It is needless to add that, in the competition for 
 business which ensued between the new and the old 
 roads, the newer roads were forced into bankruptcy. 
 This instance is given to emphasize the need of con- 
 sidering all of the factors in making or analyzing 
 traffic estimates; many others, similar in a general 
 way, might be quoted. 
 
 To determine the earnings per capita of the oper- 
 ated line, with which the comparison is made, an 
 examination of its territory should be made in the 
 same manner as above outlined. Due allowance 
 being made for differences in surrounding conditions, 
 the revised per capita earning is applied to the pop- 
 ulation within the area tributary to the new road, 
 and its gross annual earnings thus estimated. 
 
 In this connection, the matter of division of rates 
 on the prospective traffic should be made a special 
 study. The practice of allowing the road which 
 originates or delivers the traffic a certain arbitrary 
 amount or a minimum percentage of the entire trans- 
 
46 VALUATION AND RATES 
 
 portation charge from origin to destination, without 
 regard to the distance which the originating or de- 
 livering road may move the traffic, is recognized by 
 all the railroads of the country. 
 
 The revenue derived from any shipment passing 
 over more than two roads will generally be divided 
 pro rata, on a basis of mileage, after the deductions 
 of the minimums allowed for the originating and 
 delivering lines have been made. On many roads 
 this principle of "minimums" will affect the revenues 
 radically, which the following example will serve to 
 show: 
 
 An independent railroad, 25 miles long, serves a 
 mine producing ore, which is shipped a total distance 
 of 400 miles to a smelter, over the originating line A 
 and its connecting line B. The freight rate is on 
 the basis of 5 mills per ton-mile, making the total 
 revenue $2 per ton. If "A" is allowed a minimum 
 of 25%, its proportion of the revenue will be fifty 
 cents per ton ; if the division is made on the mileage 
 basis, its proportion will be one-sixteenth of the total 
 revenue, or twelve and one-half cents per ton. 
 
 The principle involved is, that the revenue of a 
 railroad is not in all cases based on the product of 
 its tonnage by a fixed rate per mile of its haul. If 
 its traffic is made up largely of business which it 
 delivers or originates, its revenue per ton-mile will 
 be comparatively large ; if it is made up principally 
 of business in which it acts as an intermediate car- 
 rier, its revenue per ton-mile will be small. 
 
 On all large systems, the business consists of a 
 large amount of both classes of traffic; on shorter 
 lines and smaller systems, it may, and often does, 
 consist of a great predominance of one class over the 
 other, and in consequence any given tonnage will in 
 the one case produce a much greater revenue than in 
 the other. 
 
PROMOTION 47 
 
 In the past, traffic estimates have not generally 
 received such detailed analysis, but have consisted 
 principally of the personal opinions of the estimators, 
 more or less expert, with little reliable data to sup- 
 port them. The margin of profit in transportation 
 has now become so narrow that the better methods 
 are absolutely essential in making even approximate 
 traffic estimates. 
 
 This discussion shows clearly, however, that as to 
 the roads built in the earlier periods of railroad 
 construction, and as to all roads in undeveloped ter- 
 ritory, the element of risk for those investing in such 
 enterprises was very large indeed on account of the 
 uncertainty of the estimates of traffic expectancy. 
 
 The cost of making traffic estimates will vary with 
 the conditions. In the case of a short extension of 
 an operated road, the estimate is usually made by 
 its chief traffic officials, the field work of gathering 
 data being done by one or more of the minor traffic 
 officials. 
 
 In the case of an extension of several hundred 
 miles, or of a new company, or of an independent 
 investigation by the prospective underwriters of the 
 enterprise, it would involve the payment of a large 
 fee for the services of a traffic expert and the em- 
 ployment of enough assistants to collect the data 
 and tabulate and arrange it for consideration and 
 analysis. The costs per mile vary so widely that 
 the figures for any particular situation would serve 
 no useful purpose for specific application, even if 
 such figures were available. 
 
 Real Estate and Franchises 
 
 In the earlier period of railroad construction, at 
 least for the first one or two railroads traversing the 
 same territory, the difficulties and cost of obtaining 
 
48 VALUATION AND RATES 
 
 land for right of way, depot grounds and terminal 
 purposes were the minimum. In many instances the 
 required land was given without cost to the railroad, 
 and in addition a bonus in money. The promoter, 
 in presenting the matter to prospective investors, 
 was often able to show deeds for the larger part of 
 the required land and guarantees of the several com- 
 munities covering the cost of acquiring the balance. 
 
 The difficulty and cost of acquiring land for a rail- 
 road varies with the character and extent of the 
 transportation existing in the territory traversed at 
 the time of the proposed construction. This is as 
 true now as it ever was, the difference between pres- 
 ent and earlier conditions being, that in that portion 
 of the country east of the 100th meridian and west 
 of the 120th, the country, generally, has been pro- 
 vided with transportation. 
 
 Webb, in "Economics of Railway Construction," 
 illustrates this. "If the whole country was grid- 
 ironed with railroads running north and south and 
 east and west, at a distance apart of 25 miles, only 
 one point in each square would be as far as 12.5 
 miles from a railroad. Such squares would have 50 
 miles of road for 625 square miles of territory, or 8 
 miles for 100 square miles of territory. The aver- 
 age for the whole United States, 8.08, is even now 
 (1912) greater than this. Maine is the only state 
 east of the 95th meridian in which the number is 
 less than 8." 
 
 This means, generally speaking, that railroad con- 
 struction east of the 100th meridian will in future 
 consist of short lines or branches from existing roads. 
 The most notable exception to this will be the rare 
 construction of new connections between large sys- 
 tems, necessitated by radical changes in manage- 
 ment. 
 
PROMOTION 49 
 
 Options and Franchises 
 
 With the exception first noted, the cost of real 
 estate is an important item for a proposed railroad, 
 being a considerable percentage of total cost. To 
 estimate it exactly, in advance of its acquirement, is 
 not possible. 
 
 In so far as practicable, options will be taken on 
 needed land immediately after the location of the 
 line is decided on, and in many instances before even 
 a survey is made. These will state the price at 
 which the land owner will deed the required prop- 
 erty within a stated period of time. 
 
 Under favoring conditions the cost of the option 
 of purchase will be nominal in small towns and 
 country districts. Unless there is some urgent de- 
 mand for the road, (and with some owners in any 
 event) the price demanded for the option may be 
 a considerable percentage of the purchase price. 
 
 For property within cities, particularly the high 
 priced property, the option will rarely be given with- 
 out the payment of a substantial percentage of the 
 purchase price. The point to be noted in this con- 
 nection is, that the possible amount of loss to the 
 promoters is seriously affected by the ease with 
 which the options are obtained, and the amounts of 
 the cash payments made to secure them, for in case 
 the line is not financed, the amounts so paid are ir- 
 revocably lost. This condition increases the risk to 
 be assumed by the promoters of the enterprise. 
 
 In addition to the charter secured from the state, 
 it will be necessary in most states to obtain from 
 the County Commissioners (in some states Public 
 Service Commission or similar body) the right to 
 cross the public highways and, from incorporated 
 cities and towns, the right to cross or occupy public 
 streets and other public places or property. This 
 
50 VALUATION AND RATES 
 
 may be a simple matter or a very complicated one, 
 involving the expenditure of considerable sums of 
 money and much time. Some of our worst munic- 
 ipal scandals have arisen in connection with the pro- 
 curing of railroad franchises in cities. 
 
 Elements of Cost and Damage 
 
 Some of the right of way must be condemned, even 
 under the most favorable conditions. The courts 
 must authorize the passing of title to land taken 
 from any estate in which minor heirs are interested. 
 No agreement between administrators of such estates 
 involving the title of land is valid without the sanc- 
 tion of the court. 
 
 In all cases where the company can not agree with 
 the land-owners as to price of land to be acquired, 
 the value of the land taken and the consequential 
 damage to adjoining land must be determined by a 
 jury or commissioners appointed by the court. The 
 item of damage to land not taken is the serious one 
 for the railroad company, as the following illustra- 
 tions will show: (See Figure No. 1.) 
 
 The court instructs the jury to determine three 
 separate and distinct things: 
 
 (1) The market value of the tract of land taken 
 by the railroad, in this case 5 acres. 
 
 (2) The damage to the two remaining tracts, 
 "A" containing 20 acres and "B" containing 615 
 acres. 
 
 (3) The benefit to A and B which may fairly be 
 expected from the operation of the railroad. 
 
 The market value of the right of way is proven 
 by witnesses to be, say $100 per acre. The triangu- 
 lar strip "A" is cut off from the balance of the own- 
 er's land "B" and subjects him to perpetual incon- 
 venience and danger in crossing an operated railroad 
 
PROMOTION 51 
 
 in doing his farm work. Furthermore, his field is 
 not square and it will not be possible to convince a 
 jury (or a judge either) that such a field is as desir- 
 
 Area of A 20 Acres 
 
 Area of B 615 Acres 
 
 Right of Way 5 Acres 
 
 640 Acres 
 
 Figure 1. Land Damage 
 
 able as if it were, in spite of the fact that it will 
 raise as much corn or wheat per acre in its triangu- 
 lar form as it did before. The very best that the 
 company could expect as to "A" would be the assess- 
 ment of 50% of market value as the damage (whole 
 damage less benefit.) As to "B" it is no longer 
 square and to the ordinary jury, particularly in an 
 agricultural community, a net damage of $5 per acre 
 seems not excessive. 
 
 The cost of land and consequential damage to the 
 railroad company for the five acres actually taken is : 
 
52 VALUATION AND RATES 
 
 Five Acres of Right of Way at $100 $ 500 
 
 Damage to A 20 Acres at $50 1,000 
 
 Damage to B 615 Acres at $5 3,075 
 
 Total Land and Damage $4,575 
 
 The cost to the railroad company is $915 per acre, 
 through land whose market value, for agricultural 
 purposes, is $100 per acre. 
 
 It may be argued that the supposed case is ex- 
 treme and that the ordinary holdings of land are less 
 than 640 acres. If the entire holding had been 160 
 acres, (as shown by dotted line in the figure) with 
 the damages assessed as in the case noted, the cost 
 per acre to the railroad company would have been 
 $435 per acre of land actually taken. If the holding 
 had been 40 acres, the damage would have been the 
 same on both sides of the right of way and the cost 
 per acre to the railroad would have been $450 per 
 acre of land actually taken. 
 
 Should the construction of the roadbed contem- 
 plate a deep cut or high fill across the land, the 
 damage is still further increased. 
 
 The consideration of the fact that the owner of 
 "A" may sell to "C" or "E" and that the damage 
 and inconvenience of cultivating "A" on account of 
 the railroad crossing would thereby be eliminated, is 
 not allowed, the damage being assessed on the basis 
 of continued ownership of "A." 
 
 The conditions shown in Figure 2 are not uncom- 
 mon. The land value and damage is determined as 
 in the instance just given, but there must be added 
 to it the damage to improvements. Even though the 
 right of way of the railroad does not actually include 
 any part of the residence, barn or water supply, it 
 destroys the home site, making it impracticable 
 (practically impossible) to use the buildings for the 
 
PROMOTION 
 
 53 
 
 purpose for which they were constructed. An in- 
 vestment of $3,000 in residence, barn, granary, poul- 
 try houses and sheds for farm tools, would provide 
 only a very modest home place and its whole value 
 
 's Figure 2. Improvement Damage 
 
 is practically destroyed for that purpose. The cost 
 to the railroad company for the five acres of land 
 required by it is then: 
 
 Five Acres of Right of Way at $100 $ 500 
 
 Damage to 35 Acres at $50 1,750 
 
 Damage to Buildings and Improvements . 3,000 
 
 Total Land and Damage $5,250 
 
 The cost to the railroad company is $1,050 per 
 acre, through land whose market value is $100 per 
 acre. 
 
 The instances just given apply to cost and damage 
 of agricultural and other land outside of cities and 
 towns ; the following relates to the cost and damage 
 within cities. 
 
 It is to be noted; first, that the individual tract 
 of land (city lot) within cities is much smaller than 
 
54 
 
 VALUATION AND RATES 
 
 in the country ; second, that the area within cities has 
 generally been improved with buildings and other 
 construction to a much larger extent than in the 
 country. By reason of this the consequential damage 
 to land will be comparatively less (a smaller per- 
 centage of the total cost per acre on basis of land 
 required) and the damage to buildings and other 
 property much higher in city than in country prop- 
 erty. , ? 
 
 i I 
 
 \ 
 
 1 
 i 
 
 i 
 i 
 
 \ 
 
 i 
 i 
 
 
 t 
 
 / 
 
 \ 
 
 
 \! 
 
 i K 
 
 Figure ( 3, | X 
 
 The sketch shown as Figure No. 3 illustrates the 
 condition in subdivided city property. It represents 
 a city block, containing 12 lots with a 50 ft. frontage 
 150 ft. deep, with a 20 ft. alley between the lots. 
 
 The most unfavorable condition is the location of 
 the right of way as shown by solid lines. In this 
 case it is evidently the better policy to buy the whole 
 block, to avoid contingent damage suits by the own- 
 ers of the only two lots in the block not actually 
 touched by the right of way lines. 
 
PROMOTION 55 
 
 Suppose the value of each lot, which contains (150 
 ft. x 50 ft.) 7,500 square feet, is $100; the value is 
 one and one-third cents per square foot. The area 
 within the block, actually occupied by the right of 
 way, contains (375 ft. x 100 ft.) 37,500 square feet, 
 which at the rate of one and one-third cents per 
 square foot makes its value $500. The twelve lots 
 which must be taken will cost $1,200, or 2.4 times 
 as much as the value of the property actually re- 
 quired for railroad purposes. In addition to this, 
 the entire value of all improvements on the property 
 must be added to the cost. 
 
 The most favorable condition is the location of the 
 right of way shown by the dotted lines. In this case 
 the six lots on the right side of the alley must be 
 taken and the railroad company is liable for contin- 
 gent damage to the property on the left side of the 
 alley, if it is of such a character (as residence prop- 
 erty) that the facts will support the claim. 
 
 The railroad company must pay all of the costs 
 of the proceedings in condemnation suits. Where 
 the number of condemnations is any considerable 
 percentage of the total, it will add materially to the 
 cost of the land required. 
 
 This fact has a bearing on the price to be paid for 
 land not obtained by condemnation. The buyer for 
 the railroad company has two limits to the price he 
 will pay ; one its market value without any addition, 
 as the minimum; another the value which experi- 
 ence teaches him the land owner may obtain by a 
 condemnation proceeding, plus the cost of the con- 
 demnation proceeding. The land owner, or his law- 
 yer, will also have an idea of value based on this 
 latter consideration, and the railroad buyer will give 
 his maximum price before going to court, to avoid 
 the delay and the risks of an uncertain jury. 
 
56 VALUATION AND RATES 
 
 Statistics show that, through farm lands, the ac- 
 tual cost per unit of land (as an acre) is, as an aver- 
 age for a whole line, from 2 to 3.5 times its market 
 value; through incorporated towns and cities from 
 1% to 2y 2 times the market value. The explanation 
 of the latter factor being lower than the first lies in 
 the fact that the company, within incorporated lim- 
 its, usually buys all of a tract of land which its right 
 of way encroaches upon, however small the area 
 involved may be, and the consequential land damage 
 as a result is smaller than in the case of farm lands 
 where the damaged area not required is generally 
 large. 
 
 The circumstances related above are the basis of 
 the oft-repeated complaint of the railroads that they 
 pay much more than anybody else for land. The 
 truth of the matter is that their cost includes more 
 than one item, viz. : 
 
 (1) Cost of land purchased under necessity both 
 as to time and location. 
 
 (2) Consequential damages to land not taken, by 
 reason of the impracticability of the location of its 
 right of way following or conforming to established 
 land lines, and of the nature of the use to which the 
 land is put danger, delay and inconvenience to its 
 neighbors from operation of trains. 
 
 (3) Damage to improvements, such as buildings, 
 water supply and the rearranging of division lines 
 within an owner's tract. 
 
 (4) The expense of procuring the land by con- 
 demnation proceedings or otherwise, involving em- 
 ployment of experts, expensive court costs, attorney's 
 fees and long delays to construction. 
 
 If a manufacturer's plant, from the nature of its 
 operation required a long "shoestring" of land, 
 partly straight and partly curved, winding in and 
 out between and into buildings constructed for other 
 
PROMOTION 57 
 
 purposes, in a district theretofore devoted to other 
 purposes than manufacturing, as residence property, 
 his costs would approximate the railroad companies' 
 cost. 
 
 Many construction, and practically all physical 
 valuation estimates of cost of railroad real estate, 
 have been made by applying the factors above men- 
 tioned to a proposed line or the particular section of 
 operated line under consideration. That is, the 
 number of acres in any agricultural section was mul- 
 tiplied first by the ascertained market value and then 
 by a factor of say three (the one commonly em- 
 ployed) ; in areas within incorporated limits the mar- 
 ket price was first multiplied by two and this product 
 was applied as a unit cost to the land under con- 
 sideration. 
 
 The conditions surrounding different lines of rail- 
 roads vary so widely, that the results thus obtained 
 are not even fair approximations. The work in- 
 volved in giving each tract of land or each block, or 
 several blocks of property, detailed consideration is 
 necessary and well repays the cost and time re- 
 quired. Even so the estimate will be based on many 
 uncertainties and must be stated with many reserva- 
 tions. 
 
 Relative Importance of Real Estate 
 
 For new railroads traversing an agricultural dis- 
 trict in greater part, the cost of the real estate will 
 not usually fall below 10% of the total cost of the 
 road (note specific exceptions heretofore referred 
 to) ; nor will it often exceed 25% of such total cost. 
 For railroads constructed largely in and adjacent to 
 centers of population as belt lines and connecting 
 lines in and near large cities the cost of the real 
 estate rarely forms so small a percentage of the 
 
58 VALUATION AND RATES 
 
 total cost as 25% and often is several times the total 
 cost of all other items. 
 
 Securing Capital 
 
 The cost of presenting the data heretofore men- 
 tioned and of securing the needed capital for con- 
 struction, will be very much larger for new com- 
 panies than for the older operating companies mak- 
 ing extensions. In the one instance the investment 
 is to be based on faith in an untried venture ; in the 
 other on past performances of a property and its 
 management. 
 
 In the latter instance, provided its reputation jus- 
 tifies it, the presentation to bankers who underwrite 
 such enterprises is comparatively a simple matter, 
 attended to by the executive officials of the operat- 
 ing road. These bankers, after examining the data 
 submitted and getting the opinion of their own ex- 
 perts as to its reliability and the correct interpreta- 
 tion of what it means from an economical standpoint, 
 accept, reject or defer, as the case may be. If the 
 promoter of the new company can impress such 
 bankers favorably at the start he is, indeed, fortu- 
 nate above the majority of his kind. 
 
 Details of Financing 
 
 In the earlier days of railroad construction, par- 
 ticularly in that portion of the country west of the 
 Allegheny Mountains, a not uncommon plan adopted 
 was to obtain a portion of the money by local sub- 
 scription within or adjacent to the territory to be 
 traversed by the proposed railroad, and a certain 
 other portion from eastern or foreign syndicates. 
 
 If the local subscriptions were of an amount suf- 
 ficient to provide for the real estate, grading, bridg- 
 ing (except important iron or steel bridges) and ties, 
 it was not difficult for a meritorious enterprise to ob- 
 
PROMOTION 59 
 
 tain money for the important bridges, track super- 
 structure rails, fastenings and switches and for 
 the motive power and rolling stock to operate it. 
 
 The wealthier members of the local community 
 had either large holdings of land or controlled the 
 conduct of the larger business interests, which were 
 certain to be very greatly benefited by the railroad 
 in some cases their value would be more than dou- 
 bled immediately after the lines were placed in oper- 
 ation. In so far as their assets or credit permitted, it 
 was a good business proposition to make the utmost 
 possible sacrifice to obtain the improvement, even 
 if it did not in itself pay a return on the investment 
 or proved eventually a partial or complete loss. (In 
 very many instances it did involve a complete loss 
 for the original local investors, so far as the railroad 
 investment itself was concerned.) 
 
 It will be noted that the grading and the timber 
 for bridges, culverts and ties and what payments 
 were required for land, did not involve the sending 
 of money outside of their own district, as local labor 
 and resources provided them. 
 
 With these items of construction provided for, the 
 risk of the outside capital was very much reduced, 
 particularly if the local subscribers' investment was 
 represented by stock and the outside investment by 
 bonds, with a bonus of stock which was a very 
 usual condition. It will be noted, too that the con- 
 tingencies of construction which may be large in 
 real estate, grading and bridging, are remote in such 
 items as bridge superstructure, track and equipment. 
 
 The bonds were secured by the real estate, the 
 grading, a larger part of the bridging and the ties, 
 for which no bonds were issued, and by the rail and 
 equipment for which bonds were issued. The bonds, 
 therefore, had a relatively large value of physical 
 property as security and hence a reasonable margin 
 
60 VALUATION AND RATES 
 
 of safety, and their owners an interest in prospective 
 profits, through their holdings of the stock bonus. 
 Further, the enterprise was protected from hostile 
 local legislation, to which foreign capital is some- 
 times subjected, by reason of the local interest in the 
 profits of the enterprise. 
 
 If the promoter could obtain through state, 
 county, city or township aid, the entire amount 
 which the bond investor would not supply, his task, 
 though large, was confined within definite limits and 
 consisted in convincing the several communities of 
 the merits and importance to themselves of the en- 
 terprise. Such aid often had to be supplemented by 
 individual subscription, which involved an immense 
 amount of personal work and long delays. 
 
 State, city and county aid are now generally for- 
 bidden by statute in the various states, and wisely 
 so; for the greater part of the time during which 
 such aid was given, however, it was beneficial and 
 wise legislation, the abuses which finally discredited 
 it being assignable rather to lack of proper super- 
 vision in extending the aid than to anything inher- 
 ently wrong in the principle as applied to a coun- 
 try urgently in need of transportation. 
 
 With variations to meet local conditions, this plan 
 was very generally followed in much of the early 
 construction in fact, was the only practicable one 
 by which so large an area could have been devel- 
 oped within the time in which it was accomplished. 
 Usually, extensions to the lines so constructed were 
 then made as first outlined above. 
 
 Cost of Promotion 
 
 The actual cost of promotion is seldom obtainable. 
 In fact, it may be anything from a fraction of one 
 per cent to twelve per cent of construction cost. In 
 estimates of physical valuation it is generally in- 
 
PROMOTION 61 
 
 eluded as a part of the "General Expenditure" item, 
 which latter item is stated as a percentage of total 
 cost, without any specific amount or percentage be- 
 ing assigned to promotion separately. A few known 
 instances may be of interest, although they have no 
 general application. The promotion costs next given 
 cover all expenses ready to let construction con- 
 tracts. 
 
 The cost of promoting a line, 170 miles in Illinois, 
 through a good agricultural country, under consid- 
 eration for three years, was one and one-half per 
 cent of estimated construction- cost of railroad and 
 equipment. 
 
 The promotion expenses on the K. C. M. & O. 
 R. R., 610 miles long, from Wichita, Kas., to Fort 
 Sill, Tex., exceeded 10% of the construction cost. 
 
 The promotion expenses of a twenty-five mile line 
 in Wisconsin was less than one per cent of its esti- 
 mated total cost. 
 
 Acworth, the English authority, in "Railway Eco- 
 nomics," states that the probable cost to English 
 railroads for promotion has been, as an average, 
 $20,000 per mile. This covers the cost of parlia- 
 mentary and all other proceedings preliminary to 
 construction. 
 
 Element of Risk in Promotion 
 
 By far the larger part of the railroads which have 
 been promoted have never gotten any further than 
 the promotion stage. To say what proportion of the 
 roads promoted have actually been constructed 
 would be hazarding a guess, for there is no record 
 covering the matter. We have now in the country 
 something over 250 thousand miles of railroad, and 
 it is safe to say that certainly more than four times 
 that mileage has been promoted. 
 
62 VALUATION AND RATES 
 
 A reference to the files of the "Engineering News" 
 and other such papers, which record weekly what 
 is termed "Construction News," but which is oftener 
 "Promotion News," will disclose how many rail- 
 road enterprises relatively get to the actual con- 
 struction stage. 
 
 During the period of active railroad construction, 
 extending from 1880 to 1907, several pages of the 
 periodical mentioned were covered by short an- 
 nouncements concerning proposed railroads which 
 were under survey preparatory to submitting them 
 for the purpose of financing. The same pages con- 
 tained notices of contracts for railroad construction 
 work which had been awarded. The promotion no- 
 tices during the period mentioned were certainly as 
 high as ten to one of actual construction. 
 
 This statement is not made for the purpose of 
 establishing an absolute or definite percentage 
 which has existed between promoted and con- 
 structed railroads, but only to make clear that the 
 number of promoted railroads has exceeded the 
 number of constructed railroads many times. 
 
 The practical application of this fact is, that pro- 
 motion instead of being very profitable, has been, 
 as a business, very unprofitable, even though in 
 some instances individuals have made some money 
 out of it. As a corollary of this, the chance of loss 
 of money invested in promoting railroads is very 
 large indeed perhaps as great as for money in- 
 vested in prospecting for minerals under expert 
 advice. 
 
 Many railroad enterprises which have survived 
 the promotion stage have been constructed to the 
 extent of providing a roadbed and the smaller 
 bridges for the track, on which no track has ever 
 been laid. This class of abandoned railroad con- 
 struction is scattered all over the country, in the 
 
PROMOTION 63 
 
 central, southern, and eastern states. Some of these, 
 particularly in mountainous districts, have involved 
 the expenditure of large sums of money. Today 
 these expenditures are represented only by a scar on 
 the landscape a nuisance obstructing beneficial 
 use of the land. They serve as an enduring illus- 
 tration of the fact that availability of capital is the 
 controlling factor in the construction of new rail- 
 roads, and that money invested in them is subject 
 to a very large element of risk. 
 
 Summary of Promotion 
 
 From the foregoing relation we may summarize 
 the prominent facts and conditions relating to the 
 promotion of railroads : 
 
 (1) The difficulties and expense of promotion 
 are proportional to the risk involved in the enter- 
 prise, being much greater on new lines than in the 
 extension of existing operated lines. 
 
 (2) The very large element of risk involved in 
 operating new railroads is recognized in recent con- 
 tracts of the Canadian Government covering a large 
 mileage, these contracts being based on the prem- 
 ise that the revenues of the roads for a period of 
 from seven to ten years will not exceed the oper- 
 ating expense the interest on the investment mean- 
 time being assummed by the government. This 
 supports the statement that the original investors 
 in railroads in the United States have very gener- 
 ally lost a large part of the interest on their in- 
 vestments and often all of their investments as well. 
 
 (3) The element of risk attending the exten- 
 sion of existing operated roads is less than in the 
 case of new roads. Extensions of existing operating 
 roads, involving the construction of several hundred 
 miles of line at one time, have invariably been dis- 
 
64 VALUATION AND RATES 
 
 astrous, as the records of the Atchison, Topeka & 
 Santa Fe, Union Pacific, Northern Pacific and Cana- 
 dian Pacific show. 
 
 (4) Promotion is a valuable service rendered in 
 supplying an urgent public need. It is real work, 
 of an expert character, demanding exceptional qual- 
 ifications. It must provide many definite things, 
 such as obtaining a charter, franchises for the use 
 of streets, roads, and other public places; an ac- 
 curate survey of the entire country to be traversed, 
 and a definitely located line, with maps, profiles, and 
 estimates of cost; a large amount of statistical data 
 relating to probable traffic which must be gathered 
 in the territory to be served, tabulated, and properly 
 interpreted. All of this work must be performed 
 by trained men, expert in their particular lines. 
 
 (5) Money must be provided for performing 
 these several services; the preliminary expense of 
 obtaining the charter and forming a legal organiza- 
 tion ; the cost of making the surveys, which involves 
 the employment of large forces of field and office 
 men, and the payment of the cost of securing traffic 
 data in the field, of compiling it in the office, and 
 of analyzing it by a traffic expert. In the aggregate 
 these expenses may be anything between 1%% and 
 12% of the cost of constructing the line, the ordinary 
 cost being near the lowest stated. 
 
 (6) In connection with the reliability of the data 
 prepared for promotion purposes (this affects the 
 matter of procuring capital), the contingencies at- 
 tending construction are known to be many, and this 
 knowledge tends to cast doubt on the reliability of 
 the estimates of the engineer as to cost. The nature 
 of the work, the construction of bridge foundations, 
 erecting large spans over deep rivers with treach- 
 erous bottoms, the large slides, the almost certain 
 washouts during construction or early operation for- 
 
PROMOTION 65 
 
 bid an accurate determination of cost in advance of 
 actual construction. Even with the most expert as- 
 sistance and close analysis, the estimate of traffic 
 expectancy of the line contains many elements of 
 uncertainty. The cost of the required real estate 
 and the delays incident to acquiring it may not be 
 known in advance with any exactness. That is, the 
 estimates of cost, even under the most favorable cir- 
 cumstances, are uncertain and based on judgment 
 largely. 
 
 (7) It follows from (6) that an investment in 
 new railroads must be based largely on faith. It is 
 difficult to procure capital on that basis and the re- 
 turn on the capital must be large indeed to justify 
 the investment. 
 
 The securities of new railroads in consequence 
 have seldom been underwritten, except as to a small 
 percentage of the total, by bankers. The capital 
 has been secured from local investors and through 
 aid granted by municipalities and states. Such in- 
 vestment and aid have been based on the benefits 
 to be derived from the operation of a transportation 
 facility and not on the basis of anticipated monetary 
 return on the investment itself. 
 
 Securing capital from such diverse sources re- 
 quired much work and time, and necessitated the 
 employment of men of exceptional qualifications. 
 
 (8) The rewards of promotion have not been 
 great to the promoters themselves as a whole, though 
 they have been, in exceptional cases, profitable to 
 individual (or groups of individuals) promoters. 
 
CONSTRUCTION-RECONSTRUCTION 
 
 Engineering 
 
 When construction of a proposed railroad is de- 
 cided upon, it will be carried out under one of the 
 three plans described later in this chapter. What- 
 ever method is employed the Constructing Engineer 
 will have entire charge of, and responsibility for the 
 construction of the work. 
 
 It will be divided into sections called residencies, 
 varying usually from 8 to 15 miles in length, accord- 
 ing to the nature of the work. Each of these sec- 
 tions will be assigned to a Resident Engineer, who 
 will have immediate charge of all construction. In 
 cases where the length of the proposed line re- 
 quires it, these Resident Engineers will report di- 
 rectly to Division Engineers, who in turn report to 
 the Chief Engineer. 
 
 The Resident Engineers "cross section" the line 
 to determine the quantities of grading, place stakes 
 marking the edges of excavations and "toes" of em- 
 bankments, indicate on the ground by stakes the di- 
 mensions of all structures such as culverts, bridges 
 and trestles, and mark the lines of the right of way. 
 They supervise all of the construction as it pro- 
 gresses, note classification of excavations, examine 
 and give directions as to bridge foundations, ma- 
 sonry, pile driving, timber framing, and all other 
 construction work. Once each month they make an 
 estimate of the quantities of work done by each con- 
 tractor, which is the basis of the monthly payment 
 to him. 
 
 Standards of Construction 
 
 In the office of the Chief Engineer, standard plans 
 for the construction of all classes of excavations, em- 
 
CONSTRUCTION-RECONSTRUCTION 67 
 
 bankments, tracks and structures are prepared, as 
 well as plans for structures requiring special consid- 
 eration. 
 
 The standards of construction will be determined 
 with due regard to the character of the proposed 
 road. If the line is designed as a through line of 
 probable heavy traffic, evidently the standards of 
 construction will be much higher than for branches 
 or lines of light traffic. 
 
 For new companies, the available capital will be 
 the controlling factor in determining the character 
 of construction standards. With such lines in the 
 past, it has oftener been a question of whether a 
 line could be constructed at all with the available 
 capital, rather than what kind of a road was to be 
 constructed. 
 
 In the case of extensions of operating roads, the 
 standards of the operated line will be followed to 
 secure uniformity of operating conditions, altered, of 
 course, where experience has shown such changes 
 to be desirable. 
 
 In either case the general condition is, that much 
 time will be required to develop a traffic sufficient 
 to meet the charges and expenses after the con- 
 struction has been completed. Due regard for the 
 interests of both the bondholders and the operating 
 company usually requires that the road be put into 
 operation for the least possible expenditure of 
 money. 
 
 The limit, of course, is that these economies of 
 construction must not unduly handicap the road 
 after it has been placed in operation. To so design 
 the location and construction that its economies do 
 not go so far on the one hand that the cost of op- 
 eration is excessive, and still conserve the interest 
 of the original investors on the other, demands the 
 
68 VALUATION AND RATES 
 
 highest sort of engineering skill and business judg- 
 ment. 
 
 Gould Extensions in Pittsburgh District 
 
 The extensions of the Gould System into the Pitts- 
 burgh District, by means of the Wabash Pittsburgh 
 Terminal from the west on the one hand, and the 
 extension of the Western Maryland from the east 
 on the other, is a recent example of the great im- 
 portance of availablity of capital in connection with 
 the construction of all new railroads, including the 
 extension of well-established large systems. 
 
 The Gould System of roads, comprising the 
 Wabash, the Missouri Pacific, Denver & Rio Grande, 
 Cotton Belt, International Great Northern, Texas 
 & Pacific, and other southwestern lines, acquired 
 control of the Wheeling & Lake Erie Railroad in 
 1901. This brought the system within sixty miles 
 of Pittsburgh, the greatest tonnage-producing cen- 
 ter in the United States. In 1902 the Western Mary- 
 land, which reached inland from tide water at Bal- 
 timore, was acquired. 
 
 The construction of the two gaps in the Pitts- 
 burgh district, and of the Western Pacific from 
 Salt Lake City, Utah, to San Francisco, would have 
 made this the only system in the United States un- 
 der one control, extending completely across the 
 country from the Atlantic to the Pacific Ocean. 
 
 There was enough guaranteed traffic from the 
 Pittsburgh district, which was assured by contracts 
 with certain steel corporations located therein, to 
 assure a return on the money spent in constructing 
 the two extensions into that district. 
 
 The territory to be traversed by the extensions 
 was very rugged and, as the tonnage to be 
 hauled was large, it required that the standards 
 of the road should be high, particularly as to grades 
 
CONSTRUCTION-RECONSTRUCTION 69 
 
 and curvature. The cost of right of way and of 
 real estate for terminal purposes within the city of 
 Pittsburgh was necessarily very large. 
 
 The Pennsylvania, Baltimore & Ohio and the 
 Pittsburgh & Lake Erie Railroads, theretofore had 
 practically controlled the entire traffic of this dis- 
 trict, and in consequence the proposed extensions 
 of another system aroused their active opposition. 
 The largest financial institutions of the country are 
 heavily interested in the securities of these latter 
 roads, and the proposed invasion of their territory 
 by the Gould System caused them to actively oppose 
 the plans for financing these extensions.** 
 
 In spite of the fact that the traffic for the new 
 line was assured in advance, its amount and nature 
 definitely known, and the further fact that the 
 financing was based on the credit of a system which 
 had been in operation for many years, sufficient 
 capital was not found to complete the construction 
 of these proposed lines, and those who had invested 
 their money in the undertaking suffered large 
 losses. 
 
 Expedients for Reducing Construction Cost 
 
 Savings in construction cost are effected princi- 
 pally by the following expedients: 
 
 (1). By employing "stiff" grades that is, a 
 grade having a large ratio of vertical rise to dis- 
 tance the surface of the ground can be more 
 nearly followed by the grade line than where easy 
 
 **There is nothing reprehensible in the opposition of the oper- 
 ating roads, and the financiers associated with them, under the 
 conditions related; the same policy of opposition would have been 
 adopted by commercial or industrial corporations similarly cir- 
 cumstanced. The position of the roads occupying the territory, in 
 such instances, is that the proposed invasion simply results in a 
 duplication of existing facilities, which are adequate to meet all 
 reasonable transportation demands of the district served. 
 
70 VALUATION AND RATES 
 
 grades are employed. The principal items affected 
 by this expedient are Graduation and Bridging. 
 The following illustrations will serve to show the 
 extent to which these two items may be affected 
 by an alteration in the maximum gradients: 
 
 A through line 170 miles in length projected 
 through a rolling prairie country on grades of 0.4% 
 north bound and 0.6% south bound was surveyed 
 and the estimates for the cost of construction made 
 thereon. The construction of the line was not un- 
 dertaken for various reasons. 
 
 Two of the towns situated along this abandoned 
 survey line, 25 miles distant from each other, con- 
 ceived the idea of constructing a local branch line 
 to better their transportation facilities. A survey 
 over the same ground as that occupied by the 
 through line was made, using gradients of 1.5% in 
 both directions. 
 
 The estimated cost on the through line for grad- 
 ing per mile was $4,215 and for bridging $1,470. 
 On the local branch line, the estimated costs were, 
 for grading $1,400 and for bridging $400, the 
 larger part of the difference in cost being attributa- 
 ble to the saving effected by the use of the stiffer 
 grade, a smaller part being accounted for by the 
 difference in area of the proposed cross-section of 
 excavations and embankments. 
 
 In a very hilly country a survey was made to de- 
 termine the relative economy of making the con- 
 trolling gradient 0.3% in both directions on the one 
 hand, or 0.4% north bound and 0.6% south bound 
 on the other. The estimated cost of the line using 
 the 0.3% gradient was $63,800 per mile; of the 
 0.4%-0.6% line $54,600 per mile, the cost of the 
 equipment not being included in either case. 
 
 (2). In prairie or comparatively flat country, the 
 employment of curvature will not usually effect a 
 
CONSTRUCTION-RECONSTRUCTION 71 
 
 saving of any great amount. In a hilly or moun- 
 tainous country, however, curvature may be em- 
 ployed to effect a very considerable saving in con- 
 struction cost. 
 
 Where the grade line of a railroad is supported 
 between the ridge at the top and the valleys at the 
 bottom, in passing from one valley over a ridge into 
 the other, it frequently is located on steep slopes 
 and the turns are in many cases very abrupt. This 
 necessitates sharp curvature to avoid expensive 
 grading. 
 
 On many railroads, if the grade line is to ap- 
 proximate the contour of the surface, a large num- 
 ber of sharp curves are absolutely essential, even on 
 the most important of trunk lines, to make the con- 
 struction of the line economically possible. For 
 branch lines traversing such districts, where the an- 
 ticipated traffic is not large, many of them can not 
 be considered at all, unless extremely sharp curves, 
 and a large number of them, are used. 
 
 (3) . The cost of the construction will be affected, 
 to a considerable extent, by the widths of the fin- 
 ished excavations and embankments. During much 
 of the earlier construction, the standards were usu- 
 ally about as follows : 
 
 In earth excavation, 16 ft. base, with slopes of 
 1:1 that is, 1 foot horizontal to each foot vertical 
 depth. 
 
 In rock excavation, 14 ft. base, slopes % to 1. 
 
 On embankments, 14 ft. base, slope 11/2 to 1. 
 
 On important lines, the standards of construction 
 today are usually about as follows : 
 
 In earth excavation, base 26 ft., slope 1V2 to 1. 
 
 In rock excavation, base 24 ft., slope *4 to 1. 
 
 On embankments, base 20 ft., slope iy% to 1. 
 
 It will be readily seen from these dimensions, that 
 the quantities of grading may be varied to a con- 
 
72 VALUATION AND RATES 
 
 siderable extent by the adoption of different stand- 
 ard cross-sections. 
 
 (4) Saving of cost in original construction may 
 be made by constructing as much of the bridging as 
 possible in a temporary manner. As to a large part 
 of it, even where the line is of considerable impor- 
 tance, it is usually economical to construct temporary 
 timber trestles, at the time of original construction, 
 although masonry and steel structures are contem- 
 plated for the future. 
 
 On a new line the cost of transporting by wagon 
 the sand, cement, stone, and steel required for 
 bridges is a very large part of their total cost. A 
 cubic yard of masonry weighs more than two tons, 
 and wagon transportation will cost usually between 
 thirty and fifty cents per ton-mile. Suitable sand 
 and stone are seldom found near the bridge sites 
 in many instances not even in the construction dis- 
 trict. In practically all cases cement and steel are 
 shipped in by other railroads, and unless the line 
 closely parallels an existing railroad the hauls are 
 long. 
 
 The plan usually followed is to build a temporary 
 structure of timber, replacing the timber structure 
 with the permanent structure at the time the tem- 
 porary one would otherwise be renewed. The bulky 
 materials of the permanent structure may then be 
 hauled by train to the bridge site at a cost of about 
 % cent per ton-mile. The cost of using timber piers 
 under 100-foot spans, of moderate height, is about 
 35% of the cost of masonry piers. 
 
 A comparison of vitrified tile pipe with cast iron 
 pipe, for small culverts, shows comparative costs as 
 follows : 
 
CONSTRUCTION-RECONSTRUCTION 73 
 
 * Comparative Cost of Pipe Lineal Foot 
 
 Diameter 
 
 of Pipe. Cast Iron. Vitrified Tile. 
 
 12" $1.31 $0.75 
 
 18" 2.92 1.10 
 
 24" 4.37 1.45 
 
 30" 5.83 2.00 
 
 36" 7.87 3.75 
 
 It will be seen from this that very considerable 
 saving may be made by employing temporary struc- 
 tures in the original construction of bridges and 
 culverts. 
 
 (5). Ordinarily, on new lines, all of the build- 
 ings, such as passenger stations, freight sheds, en- 
 gine houses, machine shops, and store rooms, are 
 frame structures of cheap construction, and the 
 fewest number possible to conduct the business are 
 built. 
 
 (6). As the traffic for new lines is usually light 
 for the years immediately following the construc- 
 tion, a comparatively light track is used. 
 
 In the case of the extension of operated lines, it 
 is customary to use what is termed "relayer" rail, 
 that is, rail which has been used in the main line 
 and has become too much worn for that class of 
 traffic, but which is good enough for use on lines 
 of less traffic. One particular purpose in using this 
 "relayer" rail is to avoid the "kinking" of new rail, 
 as all of the grading will be undergoing a process 
 of shrinkage and settlement during the eight years 
 (usually) following the construction of the road. 
 
 (7). In the matter of sidings at local stations 
 and of passing tracks for the operation of single 
 track lines, the business being light and the trains 
 
 *Cost affected by length of haul. 
 
74 VALUATION AND RATES 
 
 in consequence few, the construction will be limited 
 to bare necessities. 
 
 (8). Unless the constructed line is a very im- 
 portant one, and will carry a large traffic imme- 
 diately after its construction, the track is ballasted 
 with earth from the side of the track. 
 
 Ballast placed upon a new grade undergoing the 
 shrinkage heretofore mentioned, will disappear in 
 a short time within the embankments upon which it 
 is placed. It is therefore not economical to place 
 expensive stone or gravel ballast on new roads for 
 at least three or four years after their completion. 
 
 (9). In the matter of road crossings, that is, the 
 crossing of the line of the railway by public high- 
 ways and private roads, the traffic on newly con- 
 structed roads being light and the trains in conse- 
 quence comparatively infrequent, the danger of ac- 
 cidents at such crossings is very much less than on 
 busy main lines. The separation of the grade of 
 the highway from that of the railroad is generally 
 a very expensive matter, as will be shown in the 
 following pages, and to avoid it, crossings are made 
 at grade wherever possible. 
 
 The same conditions exist at points where the 
 new line crosses other railroads. Formerly railroads 
 crossed each other at grade, or not, as they were 
 able to make agreements with each other; for the 
 last twenty years, however, the state commissions 
 have in most instances compelled a separation of 
 grades in original construction at points where rail- 
 roads cross each other. 
 
 (10) . On account of the infrequent train service, 
 there will be no large expenditure for signals;* 
 
 *Moving signals; such fixed signals as "whistle," "road-cross- 
 ing," etc., will be practically the same on the new as the older 
 road. These latter are unimportant as to cost. 
 
CONSTRUCTION-RECONSTRUCTION 75 
 
 about the only signals required being those at tele- 
 graph stations and drawbridges. 
 
 (11). The character of the track and of the 
 bridges heretofore mentioned, together with the 
 light traffic, require the use of comparatively light 
 engines, and the expenditure for equipment is in 
 consequence much less than will be required when 
 the traffic has grown. 
 
 (12). The yards at intermediate stations and 
 at terminals will for the same reason light traffic 
 be much smaller than the increased traffic will later 
 demand. 
 
 All of these expedients for keeping the cost of 
 the original construction at the minimum are justi- 
 fiable from an economic standpoint. Most of the 
 criticism of the original location and construction 
 of the earlier periods is not justified when the actual 
 conditions obtaining at the time of original construc- 
 tion are considered. It is repeated here that the 
 availability of capital and the time required to de- 
 velop the business of new lines are absolutely con- 
 trolling factors in new railroad construction. 
 
 All new lines should of course be located and 
 constructed with the view of eventual change when 
 the traffic density has increased to the extent of 
 justifying the additional expenditure. At points 
 where the cost of original construction is heavy, 
 however, it will be expedient very often to avoid 
 the construction of tunnels and other expensive 
 work by adopting a temporary line, using higher 
 gradients than are controlling on other parts of the 
 line. 
 
 While the operating expense will be increased 
 on account of "doubling the hill" or of the pusher 
 service required at such points, the financial condi- 
 tions will generally be such as to force the adoption 
 of the temporary line costing less to construct. 
 
76 VALUATION AND RATES 
 
 Estimates of Construction Cost 
 
 The following illustrations will serve to give the 
 comparative costs per mile of newly constructed 
 railroads, in districts with varying topographical 
 characteristics : 
 
 For a proposed railroad in the rolling prairie coun- 
 try of the north central states, 170 miles in length, 
 with controlling grades of .04-.06, connecting two 
 large systems of operated railroads, the estimated 
 costs** per mile were as follows: 
 
 (Estimate A) Cost per mile. 
 
 Graduation $ 4,129 
 
 Bridging and Culverts 920 
 
 Track 7,450 
 
 Ballast 1,500 
 
 Miscellaneous 1,569 
 
 Administration, Interest, Engi- 
 neering 1,750 
 
 Real Estate 1,000 
 
 Equipment 5,000 
 
 $23,318 100.0 
 
 The column showing the percentage of each item 
 to the total will indicate the relative importance of 
 any particular item. 
 
 The following estimate of cost of construction 
 was made from surveys for a line 25 miles in length 
 in a very hilly country in southwestern Wisconsin. 
 The line was to be operated as a branch line of an 
 operated road, designed to serve a city of 5,000 
 population and a large number of small zinc mines : 
 
 **None of these estimates include bankers' commissions and 
 discounts, which are always a large percentage of construction 
 costs. 
 
CONSTRUCTION-RECONSTRUCTION 77 
 
 (Estimate B) Cost per Mile. 
 
 Graduation $ 7,382 
 
 Bridging and Culverts 3,561 
 
 Track 5,782 
 
 Miscellaneous 1,568 
 
 Real Estate 2,424 
 
 Administration, Interest, Engi- 
 neering 1,105 
 
 Equipment 1,963 
 
 $23,785 
 
 It will be noted that the cost per mile of this 
 branch line, through a hilly country, was practically 
 the same as for the through line in a rolling prairie 
 country. If the standards of grades, track and 
 other construction had been the same for this branch 
 line as for the one first estimated, the cost would 
 probably have been between two and three times 
 that given in Estimate B. 
 
 The following estimate of cost of construction 
 is for a line 37 miles in length in a hilly country, 
 designed to be operated as a through line, carrying 
 a large traffic: 
 
 (Estimate C) Grade 
 
 Grade 0.3% 0.4-0.6% 
 
 Distance 36.5 miles 37.0 miles 
 
 Earth Excavation base 26'-lV2 ! slope 
 Embankment base 20'-l!/2 -1 slope 
 Bridging-Concrete Masonry 
 Track 80 Ib. ballasted 
 
78 VALUATION AND RATES 
 
 Grade 
 
 Grade 0.3% 0.4-0.6% 
 Cost Per Mile. 
 
 Grading $42,363 $32,190 
 
 Bridging 4,301 5,840 
 
 Track 9,267 9,267 
 
 Minor Structures .. 866 855 
 
 Terminals 2,466 2,432 
 
 Real Estate 1,000 1,000 
 
 Overhead Expense 3,556 3,042 
 
 *$63,819 *$54,626 
 
 *Does not include equipment. 
 
 In comparing the estimate for the line shown in 
 Estimate C, it should be noted that it does not in- 
 clude equipment, as do the preceding estimates. 
 Note the large increase in cost which the perma- 
 nent character of the construction and low grade 
 require. 
 
 The estimated construction cost of the Kansas 
 City, Mexico & Orient from Kansas City to the 
 Rio Grande River in Texas, amounting in the aggre- 
 gate to 1,194 miles, was as follows: 
 
 (Estimate D) Cost Per Mile. 
 
 All items of Roadway* $19,526 
 
 Equipment 4,381 
 
 General Expenditure ....... 2,793 
 
 ""Includes real estate. 
 
 $26,700 
 
 This road traversed a comparatively flat country 
 through the states of Kansas, Oklahoma and Texas. 
 It covers the actual costs of over 600 miles of line, 
 with the estimated cost to complete the balance. 
 It includes a double track belt line at Kansas City, 
 Kansas, which has been constructed, but not as 
 yet placed in operation. It is a fair average of the 
 first cost of lines of its character in the southwest. 
 
CONSTRUCTION-RECONSTRUCTION 79 
 Additions to Cost of Original Construction 
 
 At the time a railroad is completed and first 
 placed in operation, which usually begins with a 
 few comparatively light trains, it is by no means 
 sufficient to serve the needs of even a moderate 
 traffic. In addition to the current maintenance and 
 repairs of roadway and structures, there will be 
 certain small extensions of facilities and betterments 
 which will usually be constructed by the company 
 without increasing the capitalization. 
 
 These additions to the cost of first construction 
 are very apparent when a physical valuation of a 
 railroad property is made. In ascertaining the 
 actual cost from the records of 1,645 miles of the 
 Northern Pacific, in the State of Washington, which 
 was determined to be $75,458,000, it was found 
 that $8,848,000* of the total amount had been ex- 
 pended since the completion of the original con- 
 struction. 
 
 In comparing such estimates as those given above, 
 which are original construction costs, with lines 
 which have been in operation for some time, this 
 fact must be kept in mind that is, the increase in 
 cost over original construction cost, which has usu- 
 ally been an increment made up of many small 
 extensions and betterments constructed without ad- 
 ditions to capital. 
 
 Contingencies of Construction 
 
 This subject has been discussed in a general way 
 in connection with the subject of estimates in the 
 preceding chapter. Some illustrations from actual 
 experience will serve to show why actual costs have 
 often largely exceeded preliminary estimates, even 
 
 *Some of this is probably due to reconstruction. 
 
80 VALUATION AND RATES 
 
 when normal percentages have been added thereto 
 for contingencies. 
 
 In excavating the approach to a 1200-foot tunnel 
 in the Cumberland Mountains of eastern Kentucky, 
 the work of a large construction force extending 
 over a period of six months was entirely lost on ac- 
 count of a slide from the mountain entirely filling 
 the excavation as though it had never been made. 
 A thin strata of soapstone, located just below the 
 grade of the finished excavation, caused the slide 
 of the material when a surface ditch, built high on 
 the hillside to intercept the surface water, had fur- 
 nished the means for lubricating the soapstone 
 strata. Drilling down to grade along the center 
 line of this tunnel approach would not have disclosed 
 the presence of this sub-strata. 
 
 The loss occasioned by this slide was not limited 
 to the work performed in excavating the material 
 alone. In order to prevent further sliding the whole 
 approach was timbered from end to end with the 
 heaviest of timber bents and lagging. Further, the 
 closing of the approach delayed the work on the 
 tunnel, which latter delay lengthened the time for 
 getting the entire line into operation. 
 
 The line of the Greenbrier extension of the Ches- 
 apeake & Ohio Railroad in West Virginia follows 
 the steep slopes of the Greenbrier River for a dis- 
 tance of 100 miles. These slopes were apparently 
 composed of loose rock and large boulders, which 
 had fallen from the rock bluffs, standing close to 
 the edge of the river. The excavations were what 
 is generally termed "side hill work" that is, the 
 cross-section of the railroad was partly in excava- 
 tion and partly in embankment. 
 
 After these excavations were completed material 
 from these steep slopes moved down onto the road 
 bed, on account of a clay substratum, and continued 
 
CONSTRUCTION-RECONSTRUCTION 81 
 
 to do so for some years after the road was placed in 
 operation. The amount of material contained in 
 these slides was a very large percentage of the total 
 excavation along the line. While apparently rea- 
 sonable allowances had been made in the construc- 
 tion estimates, based on similar construction in the 
 same territory, the estimates were inadequate to 
 cover this unforeseen circumstance. 
 
 There are certain contingencies which assume the 
 dimensions of a catastrophe, such as the destruc- 
 tion of the road bed of an entire division of the San 
 Pedro, Los Angeles & Salt Lake in the Rocky Moun- 
 tains, immediately following its construction. While 
 this, as a matter of fact, occurred immediately after 
 the road had been placed in operation, it might as 
 well have occurred during construction. 
 
 The engineers in constructing the line had laid 
 their grade line with such data relating to previ- 
 ous high water as were available. The flood which 
 caused the destruction was evidently unprecedented. 
 
 Another class of contingencies is that of acci- 
 dents caused through carelessness or disobedience 
 of instructions. The falling into the river of the 
 immense channel span of the St. Lawrence River 
 bridge in Canada, is an extreme example of this, as 
 the loss was the greatest ever occasioned by a bridge 
 accident. The falling into the river of the channel 
 span of the Louisville & Jeffersonville Bridge, 
 caused by faulty construction in the false work, was 
 another example of this class of contingencies. 
 
 Unexpected increases in price of labor are not 
 peculiar to railroad construction, but serve to vitiate 
 many construction estimates. 
 
 What has just been said in regard to contingen- 
 cies of construction is not lessened in force by the 
 fact that the contractor for the work assumes a 
 large share in certain classes of these contingencies, 
 
82 VALUATION AND RATES 
 
 as experience shows that if they become great, the 
 contractor fails and the company bears the burden 
 in the end. 
 
 Construction Organization 
 
 There are three general methods followed in con- 
 structing new railroads: 
 
 (1.) New railroad companies those not oper- 
 ating existing railroads have very generally let a 
 contract to a Construction Company to build the 
 line at a certain stipulated price per mile. Pay- 
 ment for the work is usually made in stocks and 
 bonds of the railroad company, and such payment 
 is made as certain specified sections, say 20, 50 or 
 100 miles of line are completed, ready for operation. 
 
 (2.) Another method is that of the railroad, in 
 its corporate capacity, letting a contract direct to 
 one or more firms of general railroad contractors. 
 
 The contracts are usually let after competitive 
 bidding. The quantities of material shown on the 
 engineer's profile and in his estimates are the basis 
 of these bids. The contract usually provides unit 
 prices for the various classes of work to be per- 
 formed, such as 18c per cubic yard of earth exca- 
 vation, 4c per pound for steel bridges erected. 
 
 (3.) The third method contemplates the con- 
 struction of the work in greater part by the railroad 
 company's own forces. This latter method is usu- 
 ally confined to branch lines, short extensions, or 
 isolated sections of work. 
 
 The work required in railroad construction is of 
 a varied character, consisting of earth, rock and 
 tunnel excavation, the construction of culvert and 
 bridge masonry and the erection of steel bridges; 
 the framing and erecting of timber bridges, frame 
 buildings and many other things and structures. 
 These require different kinds of construction plants 
 and labor, skilled and unskilled. 
 
CONSTRUCTION-RECONSTRUCTION 83 
 
 No one organization, even among the largest rail- 
 road contracting companies, possesses sufficient 
 plant to construct a railroad of any considerable 
 length within a reasonable time. From this arises 
 the necessity for letting portions of the general con- 
 tract to sub-contractors. In the main, these sub- 
 contractors will be assigned to the particular work 
 next stated. 
 
 It may be divided into several general classes of 
 work; the sub-contractor will be qualified to handle 
 one, or several of these classes : 
 
 (a) In marshy ground, where it is necessary to 
 borrow material for embankments from the side, 
 the work is usually performed with wheelbarrows, 
 or by casting directly from the borrow pit into the 
 bank, the ground itself being too soft to support the 
 weight of teams. 
 
 (b) In dry ground where the heights of the em- 
 bankments are not too great and in excavating cuts 
 of moderate depth and hauling them into embank- 
 ments, "scrapers" operated with teams are em- 
 ployed. 
 
 (c) Where the haul on the material from the 
 excavation to the embankment is longer than may 
 be economically done with scrapers, "graders" are 
 employed to load wagons, which the long haul ne- 
 cessitate. 
 
 (d) The rock excavations, when they are of 
 considerable depth, require power drills, small dump 
 cars and track, together with derricks and other 
 rock-handling appliances. 
 
 (e) The deeper cuts, which usually entail longer 
 hauls on the excavated material, are generally exca- 
 vated by steam shovel plants, which include small 
 contractors' engines, cars and track. 
 
 (f) Tunnel construction requires compressor 
 
84 VALUATION AND RATES 
 
 plants and power drills together with track, and 
 cars for transporting the material excavated. 
 
 (g) The work of building small culverts and of 
 laying drain pipes, which do not require derricks 
 and other plants, will be performed by small forces 
 of men. 
 
 (h) The driving and construction of pile and 
 frame trestles, requiring the use of pile drivers and 
 the work of bridge carpenters, will usually be done 
 by other contractors than those engaged on the 
 larger and more important bridges. 
 
 (i) The work of constructing the foundations and 
 masonry of bridge piers and abutments of the more 
 important bridges will be assigned to contractors 
 having such equipment as derricks, pile drivers, tugs 
 and barges. 
 
 (j) The work of erecting the steel bridging 
 upon these piers and abutments, and the erection 
 and construction of the necessary false work be- 
 tween them requires the use of derricks, travelers 
 and other special equipment, and this work will 
 usually be assigned to firms engaged exclusively 
 in it. 
 
 The general contractor, or the construction com- 
 pany, will generally do some portion of the work 
 with his or its own forces, particularly the danger- 
 ous or most difficult portions of it. It (or he) will 
 usually construct such things as track, fences, road- 
 crossings, buildings and other minor structures. 
 
 The railroad company retains an amount usually 
 15% due on current monthly payments as a guar- 
 antee of the completion of the work under the con- 
 tract. The sub-contractors above referred to are 
 usually men or firms of comparatively small financial 
 resources, who must be assisted financially in start- 
 ing their work and often in completing their con- 
 tracts. The general contractor for the railroad com- 
 
CONSTRUCTION-RECONSTRUCTION 85 
 
 pany, or the construction company to whom it dele- 
 gates the power to construct its railroad, assumes 
 this burden of financing the sub-contractor and man- 
 aging the actual work of construction. 
 
 The construction work will be let to these sub- 
 contractors, whether the railroad company lets a 
 contract to a general contractor or to a construction 
 company. In view of this, it is difficult to under- 
 stand why the method of doing the work through a 
 construction company is so severely criticised by 
 some present day writers. In principle, there is no 
 difference which course the company pursues, and 
 as to abuses, they may as well occur under the one 
 as under the other plan. 
 
 That there have been abuses of the method of 
 employing a construction company to exercise the 
 duties of a general contractor is not disputed; in 
 some cases the abuse has been so flagrant as to con- 
 stitute absolute fraud, and the same may be said of 
 the alternative plan. What it is meant to empha- 
 size here is, that the employment of a construction 
 company in the construction of a new railroad is 
 not evidence of fraud or bad faith on the part of 
 the railroad company, or the promoters of a railroad 
 enterprise. This impression might readily be gained 
 by reading many publications discussing this 
 subject. 
 
 Financial Difficulties in Early Operation 
 
 The ten-year period immediately following the 
 construction of a road, particularly in an unde- 
 veloped territory, is a trying one from the stand- 
 point of the operating department and the financial 
 management. 
 
 The operating expense is very much above the 
 normal expense of older roads, on account of the 
 settlement of the new embankments and the sliding 
 
86 VALUATION AND RATES 
 
 in of the slopes of the new excavations. The settle- 
 ment of embankments and the closing of ditches in 
 the cuts, make "soft" track, which in turn increases 
 the cost of conducting transportation, through the 
 slow schedules and delays occasioned by the condi- 
 tion of the track. 
 
 The lack of accurate data in regard to the area 
 of waterways required at bridges and culverts will 
 have been responsible, in a few instances, for their 
 construction with less area than the conditions re- 
 quire. In consequence there will be "washouts" 
 along the line, necessitating unusual maintenance- 
 of-way expenditure and increased cost for maintain- 
 ing the train service. 
 
 It is during this period that the revenues of the 
 company are the minimum. While the country may 
 be developing rapidly on account of the new trans- 
 portation facilities, a sufficient period of time has 
 not elapsed to create even a moderate traffic for the 
 railroad. In addition, there is practically no 
 "through" business, the traffic being confined to the 
 local business of the line. 
 
 At the end of the first eight or ten-year period 
 the larger part of the ties will need renewing, as 
 that is about the average life of a tie. On account 
 of the settlement of the embankments and of the 
 "soft" cuts, the rail will have become badly "surface 
 kinked," and be unfit for passenger train service 
 and expensive to maintain for any service what- 
 ever. The temporary wooden bridges and trestles 
 will require an abnormal amount of replacement 
 work. 
 
 The combination of operating revenues at a min- 
 imum, of operating expenses at a maximum, and 
 of poor credit in consequence, has very often caused 
 the financial collapse of the railroad at this time, 
 even though the enterprise may have been well con- 
 
CONSTRUCTION-RECONSTRUCTION 87 
 
 ceived (as to eventual earning capacity) and skill- 
 fully managed during the period of development. 
 
 The difficulties of new railroads here related are 
 not abnormal ones; they are the usual and normal 
 conditions surrounding a railroad newly constructed. 
 Even in those few instances where the traffic seems 
 ready in advance of actual construction, it requires 
 time to adjust traffic to a new line of transportation. 
 
 For these reasons, many of the original railroads 
 have been foreclosed by the bondholders and the 
 property bought in by other railroads or new cor- 
 porations, at a price very much below what it had 
 cost to construct them. The prices paid for these 
 railroads bore no relation whatever to cost or the 
 value of the physical property. In all instances they 
 were based on what the purchaser supposed their 
 earning capacity to be when operated as transpor- 
 tation facilities. All of our present systems of rail- 
 roads are made up, in large part, of original short 
 lines acquired in this way. 
 
 Prior to 1870 the maximum length of a line for 
 efficient operation was generally 100 miles. The 
 Pennsylvania Railroad in the 50's had 500 miles; 
 the New York Central between New York and Buf- 
 falo, formed by consolidating some fourteen com- 
 panies, was, in 1858, about 500 miles long; the 
 Chicago & North Western had over 500 miles in 
 1866. Between 1870 and 1890 the maximum sys- 
 tem had grown to approximately 5,000 miles. Be- 
 tween 1890 and 1900 single systems aggregating 
 10,000 miles of line were organized. 
 
 The following table, from Ripley's "Railroads 
 Finance and Organization," shows the number of 
 roads over 1,000 miles in length at various periods: 
 
88 VALUATION AND RATES 
 
 1867 
 
 Number. 
 1 
 
 Per Cent of 
 U. S. Mileage 
 7 
 
 1877 
 
 11 
 
 20 
 
 1887 
 
 28 
 
 44 
 
 1896 
 
 44 
 
 57 
 
 1900 
 
 48 
 
 60 
 
 1910., 
 
 54 
 
 67 
 
 Effect of Combination of Railroads on 
 Density of Traffic 
 
 The effect of combination of railroads on the 
 density of traffic is very marked. The following sim- 
 ple illustration will serve to show the reason for 
 this: 
 
 In the figure, let the horizontal line B represent 
 a railroad 100 miles long, not connected with any 
 other railroad, having stations at five-mile intervals, 
 or 21 stations in all. If each station on this line in- 
 terchanges traffic with each of the other stations, 
 there will be a total of 210 station interchanges of 
 traffic. 
 
 Let the line A represent a similar railroad as that 
 described for B. If railroad A and B were con- 
 nected up, the total station interchanges would be 
 much larger than the sum of A and B interchanges 
 when operated alone. The interchange when con- 
 nected up would be : 
 
 Interchanges between points on B. ... 210 
 
 Interchanges between points on A .... 210 
 Interchanges between points on A 
 
 and points on B (21X21) 441 
 
 861 
 
 That is, by doubling the mileage, in combining the 
 two single 100 miles of line into one line of 200 
 
CONSTRUCTION-KECONSTRUCTION 89 
 
 miles, we have increased the number of station in- 
 terchanges to such an extent that they are more than 
 four times that of the 100-mile line. 
 
 Station Interchange 
 
 Line B Alone 
 
 100 Miles 
 
 Station Interchange 
 
 Line A, B & C 
 
 300 Miles 
 
 I I 
 
90 VALUATION AND RATES 
 
 If still another 100-mile line C is added to these 
 two, making a single line of 300 miles, the station 
 interchanges will be: 
 
 Between Line A and B as above 861 
 
 Between Line A and C 861 
 
 Between Line B and C 861 
 
 2583 
 
 The 300-mile line is only three times as long as 
 the original 100 mile line, but the number of station 
 interchanges is more than twelve times as large. 
 
 If the amount of traffic were directly proportional 
 to the number of possible station interchanges, the 
 figure showing "Station Interchange" would illus- 
 trate graphically the increased traffic density due to 
 the combination of the three 100-mile lines into one 
 300-mile system. 
 
 While traffic density does not increase directly 
 with the possible station interchanges, it does in- 
 crease in relation to it. This is the true explanation 
 of the cause of increased density on main lines, 
 which is due to the constantly increasing areas 
 served by the railroad, through extension into new 
 territory and combination of existing railroads. 
 
 Effect of Traffic Density on Operating Expense 
 
 The combination of many theretofore independ- 
 ent short lines into small systems concentrated the 
 traffic on certain lines, which required a large in- 
 crease in the number of trains required to handle it. 
 This had a most important effect on the operation of 
 such lines. 
 
 It will be remembered that when first constructed 
 every possible expedient was used to reduce the first 
 cost of construction to a minimum, which meant in- 
 creasing distance, using large amounts of curva- 
 
CONSTRUCTION-RECONSTRUCTION 91 
 
 ture and stiff grades, when these were necessary to 
 secure cheap construction work. 
 
 While the traffic of the line remained light, the 
 increased distance, curvature and stiff grades did 
 not affect the operating expenses very seriously. 
 With the number of trains increased, however, these 
 physical factors affected operating conditions very 
 materially, even to the extent of limiting the total 
 carrying capacity of the line (as compared with a 
 line not having these disadvantages) . 
 
 Effect of Distance, Curvature, and Grades 
 on Operating Expense 
 
 In connection with the location and reconstruc- 
 tion of railroads, engineers have determined the 
 effect that distance, curvature, and grades have on 
 operating expenses. 
 
 For additional distances, measured in miles, on 
 the basis of an operating cost of $1.76 per train- 
 mile the average for the United States in 1914 
 the added annual cost per mile for each train round 
 trip is $642. If there are 30 trains each way per 
 day, the total annual savings in operating expense 
 that may be made, if the distance is reduced one 
 mile, is then $19,260. 
 
 Each degree of curvature on the railroad will in- 
 crease the operating expense ninety-five cents, an- 
 nually, for each train round trip. If there are thirty 
 trains each way per day the annual saving that 
 may be made by eliminating one degree of curva- 
 ture is $28.50. 
 
 The grades of a railroad are of two kinds : 
 
 Ruling grades are those which limit the tonnage 
 or length of train which may be hauled by a given 
 engine. Minor grades are those that do not limit 
 the tonnage or length of train which may be hauled, 
 
92 VALUATION AND RATES 
 
 but involve the lifting of the tonnage over ele- 
 vations. 
 
 Ruling grades have greater effect on operating ex- 
 pense than any other one of the physical factors in- 
 volved. The receipts being a certain fixed sum, the 
 cost of handling the traffic will be very nearly pro- 
 portional to the number of trains required to handle 
 
 it. 
 
 Roads of light traffic and branch roads do not 
 
 usually have a sufficient volume of traffic to be seri- 
 ously affected by ruling grades. The passenger 
 traffic is not generally affected, the high speed of 
 the service demanding high steaming capacity to 
 haul even light loads. The effect of the ruling 
 gradient is usually confined to limiting the velocity 
 of the train. Local freight trains usually are sent 
 out with many fewer cars than the engine can haul 
 and are therefore not affected by ruling grades. 
 
 The traffic in bulky freight, such as ore, coal, 
 timber, and all other car-load freight that is han- 
 dled in through trains, which are made as heavy as 
 the grades will permit, is the portion of the traffic 
 which is affected by the ruling grade. 
 
 The revenue derived from moving this traffic is 
 fixed. The cost of a train-mile is nearly constant. 
 If the grade is reduced, any given engine can haul 
 a larger number of cars in a single train and the 
 gross amount of the through freight tonnage can be 
 handled by fewer trains. 
 
 A Mikado engine weighing a total of 405,500 
 pounds, having 196,000 pounds on its drivers, will 
 have a tractive power of 49,000 pounds. When mov- 
 ing slowly up a 0.6% grade, the total resistance to 
 traction is 18 pounds per ton of load drawn. Divid- 
 ing 49,000 pounds by 18 pounds, we have 2,722 tons 
 as the gross train load the engine can haul. De- 
 ducting the total weight of engine and tender, 202 
 tons, leaves 2,520 tons as the net load the Mikado 
 
CONSTRUCTION-RECONSTRUCTION 93 
 
 can haul slowly up a 0.6% grade. In the same man- 
 ner the net load which the same engine can haul 
 up a 1.0% grade will be found to be 1,683 tons. 
 
 Dividing the 1,683 net tons by the 2,520 net tons 
 shows that it will only require two-thirds as many 
 engines of equal tractive power to haul a given 
 tonnage up a 0.6% grade as up the 1.0% grade, or, 
 stated differently, two engines will haul on a 0.6% 
 grade as large a tonnage as three engines will haul 
 up a 1.0% grade. (1683x3-50492520x2-5040) 
 
 To ascertain the saving that can be effected by 
 operating two daily trains instead of three, an 
 analysis of the operating cost is necessary. This 
 shows that the effect on operating expenses of op- 
 erating one additional train is 33 J% of the normal 
 average cost. 
 
 The average cost of a train-mile being $1.76, and 
 the cost of operating an additional train being one- 
 third of the average cost, the saving effected by 
 using one less train is one-third of $1.76 equals 59 
 cents. The annual saving in operating expense for 
 operating one less round trip train would be per mile 
 of road: 
 
 59 cents per train mile x 2 trips x 365 -$430.70. 
 
 If the division is 100 miles long, the annual sav- 
 ing would be $43,070 for each train saved. 
 
 If the total tonnage was 5,040 tons the load that 
 could be hauled by two engines on the 0.6% grade 
 then the annual saving would be the amount saved 
 by operating one less train. If the total tonnage to 
 be moved were double or 10,080 tons the capacity 
 of four engines on the 0.6% grade then the annual 
 saving would be the amount saved by operating two 
 less trains, or $86,140. 
 
 It must be remembered, to avoid confusion, that 
 this is the saving effected by reducing the controll- 
 ing grade so that the number of trains required to 
 
94 VALUATION AND RATES 
 
 move a given tonnage is less. This is a different 
 matter from the next mentioned, which concerns 
 what it costs to lift a train over a hill. 
 
 The effect of grades on operating expense is: 
 For controlling grades (maximum grades), the in- 
 creased cost of operation on account of each foot 
 of difference in elevation (rise plus fall divided by 
 2) is $3.74 annually, for each train round trip. For 
 minor grades it is $2.81 per foot. 
 
 Increased Interest Charge v. Decreased 
 Operating Expense 
 
 In order to shorten the distance, eliminate curva- 
 ture, and reduce controlling grades so that heavier 
 trains may be moved, it is necessary to expend cer- 
 tain sums of money in re-constructing the road. 
 Interest must be paid on this money, and in order 
 to know whether the expenditure is wise, the ad- 
 ditional annual interest charge on the new capital 
 required must be compared with the amount of op- 
 erating expense that may be saved by operating 
 over the improved road. 
 
 Application of Principles 
 
 The following illustration will serve to show the 
 application of these principles to the solution of a 
 definite proposition. 
 
 One of the larger railroad systems had recon- 
 structed its line from Chicago to the southern Illi- 
 nois coal fields on a basis of 0.3% grade north and 
 0.5% grade south bound. A section of the line 70 
 miles in length, from the coal field south to the 
 Ohio River, had not been reconstructed and from 
 the nature of its curvature and ruling grades its 
 cost of operation was high. The line had 9 degree 
 curves, with a total of 2,954 degrees of curvature 
 and ruling grades in both directions of 1.3%. 
 
CONSTRUCTION-RECONSTRUCTION 95 
 
 The operation consisted of three daily passenger 
 trains each way per day, one local freight and two 
 through freight trains. A proposed new connection 
 on the 70-mile section promised a large increase of 
 through northbound tonnage, consisting principally 
 of such commodities as pig iron, lumber and phos- 
 phate rock. This additional, with the existing ton- 
 nage, required the movement of 9,000 tons per day 
 of through north bound traffic. 
 
 A survey of the 70-mile section developed the 
 fact that the ruling grades could be reduced to the 
 standards established north of the coal fields, by 
 using one pusher grade 8 miles long at one summit, 
 for a total cost of $2,300,000. These definite con- 
 ditions necessitated the solving of the problem of 
 whether the fixed annual charge for interest on the 
 cost of improving the line would be greater or less 
 than the saving in operating expense which the im- 
 provement would effect. 
 
 As the northbound tonnage exceeded the south- 
 bound, the northbound grade was the ruling grade. 
 The northbound grade was 0.3%. The new line re- 
 duced the distance 1.6 miles; the curvature 2,074 
 degrees and the rise and fall in the grade line 280 
 feet. 
 
 The total through freight to be hauled was 9,000 
 tons. The Mikado locomotive heretofore mentioned, 
 with a total weight of 405,500 pounds, has a tract- 
 ive power of 49,000 pounds. The total train re- 
 sistance on a 1.3% grade is 32 pounds per ton of 
 train. Dividing 49,000 by 32 gives 1,531 tons as the 
 gross load the engine can haul. Subtracting the 
 total weight of the engine, 203 tons, leaves 1,328 
 tons as the net load of cars and lading. Assuming 
 the weight of the empty cars as one-third of the 
 total weight, the tons of freight that can be hauled 
 
 will be : 
 
 1,328 tons less^p =896 tons. 
 
96 VALUATION AND RATES 
 
 Dividing the total through tonnage to be moved, 
 9,000, by 896 tons per train, gives 10, which is the 
 number of daily trains that would be required to 
 move the tonnage on a 1.3% grade. 
 
 Using the same engine on a 0.3% grade, it will 
 be found that only 4 trains will be required to move 
 the 9,000 tons. Two such engines (the road and 
 the pusher engine) will move the tonnage up the 
 pusher grade. 
 
 The factors heretofore given when applied to the 
 number of trains saved by reducing the ruling grade ; 
 to the number of degrees of curvature eliminated; 
 to the distance shortened; to the reduction in the 
 rise and fall of the grade line, will indicate the an- 
 nual saving in operating expense which the improve- 
 ment in these operating factors will effect. 
 
 Summarizing these different annual savings, we 
 have: 
 
 Reducing ruling grade $164,894 
 
 Reducing curvature 27,584 
 
 Reducing distance 14,380 
 
 Reducing rise and fall 14,660 
 
 Total annual saving in op- 
 erating expense $221,518 
 
 The cost of the improvement, as before stated, 
 was $2,300,000, which at 5% interest would make 
 an increased annual interest charge of $115,000. 
 The annual profit to the railroad in making the im- 
 provement is therefore $221,518, annual saving in 
 operating expense, less $115,000 increase in fixed 
 charge (interest), which is $106,518. 
 
 When the traffic density of a line has increased 
 considerably, such questions as the one involved in 
 the illustration will come up for solution. The anal- 
 ysis of them is always from an economic standpoint, 
 the possible saving in operating expense being com- 
 
CONSTRUCTION-RECONSTRUCTION 97 
 
 pared with the increased interest charge on the new 
 capital required to make the improvement in the 
 operating physical factors of distance, curvature, 
 and grade. Whenever the saving exceeds by a con- 
 siderable amount the increased interest charge, the 
 improvement will be undertaken, if money at rea- 
 sonable rates of interest is available for the pur- 
 pose. 
 
 In this connection it must be noted that the pos- 
 sible saving in operating expense, by improving the 
 grades and other factors, increases directly with the 
 number of trains. It follows that what might be 
 a good investment in improving the line if ten daily 
 trains were run, would be ill advised and unwar- 
 ranted from an economic standpoint if only five 
 were run. It is the increased traffic density which 
 makes the net saving in cost of moving the traffic 
 possible. 
 
 Reconstruction 
 
 The conditions attending the reconstruction of 
 railroads were very different from those that ex- 
 isted at the time of their original construction. 
 Economy in operation rather than available capital 
 was the controlling factor. It must be remembered, 
 however, that this last sentence applies to roads 
 whose reconstruction assured very large and im- 
 mediate returns on the cost of the improvement, as 
 for instance, the Lucin Cut-Off of the Union Pacific, 
 which effected an annual saving of $1,000,000 in 
 operating expense by the expenditure of $10,000,000 
 for reconstruction. There are many railroads op- 
 erating today which might be reconstructed, from 
 an economic standpoint, if the capital for the im- 
 provement were available at a reasonable rate of 
 interest say five per cent per annum, with no dis- 
 count on the securities issued to provide for the 
 improvement. 
 
98 VALUATION AND RATES 
 
 The financing of the reconstruction had the ben- 
 efit of a credit based on the accomplishments of a 
 going concern, whose past earnings were known. 
 Further, the minimum available traffic on which 
 to base the calculation for possible operating econ- 
 omies was definitely known, and, in consequence, the 
 justifiable expenditure for reconstruction could be 
 stated with reasonable certainty. 
 
 Changes in Character of Road, Structures 
 and Equipment 
 
 This reconstruction altered the character of the 
 original roads in many important particulars, both 
 as to their roadbed and equipment. The most im- 
 portant changes are stated in the following para- 
 graphs : 
 
 (a) The most important single feature of the 
 reconstruction, both as to cost of the improvement 
 and of the effect on operating expense was the 
 reduction of the ruling gradient of the road, for the 
 purpose of increasing the tonnage which could be 
 hauled in one train. 
 
 (b) The increased length of train, made possi- 
 ble by reduction in the ruling gradient, necessitated 
 the reduction of curvature, both as to amount and 
 to the sharpness of curves, on account of their 
 effect on such longer trains. 
 
 (c) To reduce the gradients and curvature, with 
 the expenditure of the least possible amount of 
 money for reconstruction, often necessitated an en- 
 tirely new location of the line at certain points. 
 This required the purchase of a new right of way 
 at very much higher unit prices than was paid for 
 the original line, it having served to develop and 
 thus increase the value of property in the entire 
 district traversed. An illustration of the amount 
 
CONSTRUCTION-RECONSTRUCTION 99 
 
 of this increase is shown by the two following in- 
 stances : 
 
 In the construction of a line in Southern Illinois 
 near a county seat town, the railroad was compelled 
 to take a parallel strip of land for a distance of 
 about one-half a mile through a growing orchard; 
 the cost for this additional land exceeded $5,000 per 
 acre.** In the reconstruction of the L. & N. R. R., 
 near Nashville, Tenn., through property whose nor- 
 mal value was perhaps $200 to $300 per acre, the 
 cost of a parallel strip of land exceeded $4,000 per 
 acre. 
 
 The reason for this large increase in unit price 
 per acre for land required for reconstruction is prob- 
 ably found in the fact that some authorities hold 
 that a railroad company exhausts its right of con- 
 demnation when it acquires its original right of 
 way; hence individual bargaining, rather than con- 
 demnation proceedings, must be resorted to in the 
 acquirement of real estate for reconstruction pur- 
 poses. Whether this latter proposition is legally 
 sound or not, there is no question as to the cost of 
 real estate for reconstruction purposes being many 
 times greater than the current market price of land 
 adjoining it. 
 
 (d) When the reconstruction of the line does 
 not involve a new location, it is necessary to con- 
 struct temporary tracks to carry the traffic while 
 the reconstruction work is being prosecuted. As 
 reconstruction work is confined to lines of compar- 
 atively heavy traffic, these temporary tracks must 
 of necessity be of substantial construction, and, in 
 consequence, add much to the cost of reconstructing 
 the line. 
 
 (e) In order to effect economies in the main- 
 tenance of the roadbed, and to prevent the loss of 
 
 **A mile of right of way, of the usual width, would cost $60,000 
 on this basis of land value. 
 
100 VALUATION AND RATES 
 
 expensive ballast, which the heavy traffic requires, 
 the cross-sectional areas of excavations and embank- 
 ments is very much increased over that of the orig- 
 inal construction. 
 
 Reduction of the grade deepens excavations, mak- 
 ing them longer, which increases the length of the 
 hauls on the materials from the excavations into 
 the embankments. The longer hauls, in turn, in- 
 crease the cost per yard of material excavated. That 
 is, both the quantity of material and the price per 
 unit, is very much increased in reconstruction work 
 over that of the original construction. 
 
 (f ) As the life of untreated timber trestles and 
 other timber structures in the roadbed is, as an av- 
 erage, only ten years, the annual cost of maintaining 
 such structures is comparatively high. The cost of 
 masonry is very much less when the transportation 
 cost of its constituent materials is reduced. As here- 
 tofore stated, the cost of transporting such material 
 by wagons is about forty cents per ton-mile, while 
 its cost in railroad cars is less than one-half cent 
 per ton-mile. It is evident from this, that in many 
 situations, it will be economical to use masonry 
 structures in a reconstructed line, while it would 
 be the reverse of economical to use them in original 
 construction. 
 
 For this reason, in practically all reconstruction 
 work, the temporary structures are replaced by 
 permanent structures of masonry and steel or rein- 
 forced concrete. This replacement, as shown, is 
 economical in itself, but it increases the capital ex- 
 penditure to a very large extent. Comparisons be- 
 tween the costs of temporary timber structures and 
 of various permanent structures to replace them are 
 shown in the following : 
 
 The average cost of trestles on the Santa Fe in 
 Illinois for 1910, using untreated timber, was $11.20 
 
CONSTRUCTION-RECONST^IICTION 10 1 
 
 per lineal foot for open-deck ires-ties: -for 
 trestles with ballasted floors, the cost was $16.20; 
 the cost of concrete trestles varies between $20 and 
 $25 per lineal foot. 
 
 A temporary trestle, constructed for the purpose 
 of carrying a public highway under the roadbed, 
 where the height of the embankment is 20 feet, 
 would cost something less than $1,400; the cost 
 of a reinforced concrete underpass, to replace such 
 temporary timber structure, would be $5,800, or 
 about four times the cost of the temporary struc- 
 ture. The difference in cost between timber and 
 masonry piers for girder span bridges is approxi- 
 mately as $10 is to $28, per lineal foot of bridge. 
 
 (g) The weight, and consequently the cost, of 
 the steel bridges has increased rapidly, as the in- 
 crease in density of traffic requires heavier engines. 
 The weight of the steel structures is, of course, pro- 
 portional* to the weight of the equipment, which 
 it carries. The following statement, taken from 
 Gillette's "Cost Data," shows the increase in weight 
 of locomotives on the B. & O. R. R. between 1835 
 and 1895: 
 
 Weight in Tons. 
 1835 ....................... 10.7 
 
 1851 ....................... 37.3 
 
 1863 ....................... 45.4 
 
 1873 ....................... 52.6 
 
 1881 .................. . ____ 54.3 
 
 1886 ....................... 56.6 
 
 1890 ....................... 66.5 
 
 1894 ....................... 80.4 
 
 1895 ........... ............ 95.0 
 
 A Mikado engine, a not uncommon modern type, 
 weighs approximately 200 tons total of engine and 
 tender. 
 
 *Not directly proportional. 
 
102 % VALUATION AND RATES 
 
 The Xiazna Viaduct, a steel structure, constructed 
 on the Erie R. R. in 1882, weighed 1,400 tons. The 
 weight of the viaduct which replaced it in 1910 was 
 3,350 tons, or more than double the weight of the 
 original structure. This is a typical, rather than an 
 isolated case of increase in weights of bridges. 
 
 (h) The timber culverts and tile pipes of the 
 original construction are, in most instances, re- 
 placed with cast iron pipe in reconstruction. The 
 difference between the cost of a 36-inch vitrified 
 tile pipe and of a cast iron pipe, under an embank- 
 ment 20 feet high, is as $300 is to $630. 
 
 (i) The frame depots of the original construc- 
 tion will generally be replaced with brick passen- 
 ger stations, having' brick or concrete platforms 
 and some type of permanent construction for the 
 freight houses. The cost of the original frame sta- 
 tions was usually between 12c and 15c per cubic 
 foot ; the cost of the permanent structures which re- 
 place them, will seldom be less than 25c per cubic 
 foot, and sometimes considerably higher than this. 
 The size of the building will usually be increased, 
 as well as the unit price. 
 
 (j) The cost per mile of track, using 60-lb.* rail, 
 not including ballast, is $7,500; the cost of track, 
 using an 85-lb rail, without ballast, is $9,650. A 
 great many of the railroads were originally con- 
 structed with 56-lb and 60-lb rail, and in some in- 
 stances even lighter than this. On any important 
 main line, the rail is seldom less than 85-lb. rail, and 
 in some instances exceeds 100-lb. 
 
 The more frequent train service, made necessary 
 by denser traffic, necessitates the location of passing 
 
 *60-lb. rail means that one yard, or three feet, of the rail 
 weighs 60 Ibs. The cost of the rail is directly proportional to 
 this weight, although the cost of track of 60-lb. rail is not directly 
 proportional to one of 85-lb. rail, as there are some items, such as 
 ties, which are common to both. In the 85-lb. track cost of im- 
 proved joints and tie plates is included. 
 
CONSTRUCTION-RECONSTRUCTION 103 
 
 tracks at shorter intervals than are required for the 
 lighter traffic of the original line. Passing tracks 
 are very often located at intervals of ten miles on 
 original construction, with the idea of placing inter- 
 mediate tracks at five-mile intervals when increased 
 traffic demands it. These will usually be built at 
 the time the road is reconstructed. 
 
 In many situations, particularly at points where 
 railroads cross each other, and at the entrance into 
 busy freight yards, the crossings and switches, which 
 replace those first laid, are constructed of manga- 
 nese steel, the cost of which is usually four times 
 that of the original construction. 
 
 The heavier traffic of the reconstructed line re- 
 quires ballast of rock, chats, or gravel. Even when 
 the road theretofore has been ballasted, a "raise" 
 of four inches or more of new ballast will be re- 
 quired. The cost per mile of twelve inches of rock 
 ballast will usually be about $3,900.* 
 
 It will be noted from these items, that the cost 
 of the track in reconstruction is very much higher 
 than the track of the original construction. 
 
 (k) The chance for accidents at railroad cross- 
 ings increases with the increase in number of trains. 
 Road crossings which may be operated in compar- 
 ative safety when the line carries only a light traffic, 
 become dangerous as the number of trains increase. 
 
 The authorities, both state and municipal, have 
 of late years insisted on the separation of the grade 
 of the highways from that of the railway at these 
 crossings, and this has necessitated an expenditure 
 of very large sums of money on the part of the rail- 
 roads in constructing new crossings over or under 
 the operated lines. The requirements, as to grade 
 and width of the approaches to these required cross- 
 
 *On basis of 60 cents for stone and 40 cents for labor inserting 
 and surfacing, making a total cost of $1 per cubic yard in place. 
 
104 VALUATION AND RATES 
 
 ings, are much more rigid than obtained at the time 
 of the original construction. This involves a very 
 much larger expenditure in the construction of con- 
 siderable embankments and, in most cases, the ac- 
 quirement of additional land upon which to con- 
 struct the new road approaches. 
 
 As an instance of the amount of money involved 
 in such changes of road crossings, the reconstruc- 
 tion of 36 miles of line in northern Indiana required 
 the abolishment of 54 grade crossings. The esti- 
 mated cost of separating the grade of the crossings 
 from that of the railroad was $293,500. This 
 amount, for the 36 miles of reconstruction, added 
 $8,150 per mile to the cost of the reconstructed line. 
 
 *The cost of crossing a double track railroad 
 with an overhead roadway 20 feet wide on the ap- 
 proaches, and 16 feet wide on the overhead bridge, 
 at current prices, is approximately $7,900, without 
 allowance for additional real estate or damage to 
 abutting property on account of the construction. 
 
 (1) What has just been said in regard to the 
 crossing of public highways, applies as well to the 
 crossings of other railroads, the cost of the latter, 
 however, being very much greater than the former. 
 
 Usually the work is not confined to the line under 
 reconstruction, but extends as well to the line of 
 the railroad which it crosses, for a considerable dis- 
 tance on each side of the crossing. When the cross- 
 ings occur in a district like that at Grand Crossing, 
 just south of Chicago, the cost is measured in mil- 
 lions of dollars, and even under the most favorable 
 conditions the cost is a considerable amount. 
 
 (m) Most of the reconstructed lines, at least 
 those of recent years, have adopted a system of 
 automatic signals to protect the train service. The 
 cost of such a system, using direct current, is from 
 
 *When adjoining land is the same elevation as the track. 
 
CONSTRUCTION-RECONSTRUCTION 105 
 
 $1,500 to $1,800 per mile; for alternating current, 
 $1,800 to $2,000 per mile. Inasmuch as the cost 
 of maintenance on the latter is about one-half that 
 of the former, the alternating current is being very 
 generally adopted. These figures are based on a 
 system of circuits with one mile blocks. 
 
 (n) The cost of the reconstruction is very much 
 increased when the traffic is such as to require a 
 second track, the amount of the increase depend- 
 ing on the character of the country, in which the 
 line is located. In a very hilly or mountainous coun- 
 try, where the line lies largely on the slopes of steep 
 hills, or in rock bluffs, the cost of the second track 
 alone will, in some instances, exceed the cost of 
 grading the original line. 
 
 (o) The capacity of the yards at the terminals 
 of a line must, in consequence of all the foregoing, 
 be very greatly increased to avoid serious blockades. 
 On account of the very large expenditures required 
 for obtaining the necessary real estate at important 
 terminals, this matter has in many cases been de- 
 ferred, as far as possible, and is today one of the 
 most serious operating problems of the railroad com- 
 panies. 
 
 Even in small places the cost of increasing term- 
 inal or yard facilities is necessarily high, and adds 
 materially to the cost per mile of reconstruction. 
 
 (p) As the density of the traffic increases, 
 heavier engines are more economical in operation 
 than the former lighter engines. The cost of light 
 passenger engines formerly had been from $6,000 
 to $10,000 for the American type. The heavier en- 
 gines of the Atlantic and Pacific type now cost 
 from $17,000 to $18,500; the Mogul engines here- 
 tofore in use, costing $8,000, have been in many in- 
 stances replaced by Consolidation and Mikado en- 
 gines costing $19,000. It is evident from this that 
 
106 VALUATION AND RATES 
 
 there has been a very large increase in the expend- 
 iture for motive power, caused by the increased 
 density of traffic. 
 
 The use of the larger engines has required the 
 reconstruction of the engine houses, and in such 
 reconstruction permanent structures have replaced 
 the temporary ones of the first line. A modern en- 
 gine house, as now constructed, costs $3,500 per 
 stall; the older engine houses, of temporary con- 
 struction, cost about $1,500 per stall. 
 
 The turn tables, at division and terminal points, 
 have been replaced on account of this increase in 
 size of engines. A 70-foot turn table costs prac- 
 tically $7,000; a modern 90-foot turn table costs 
 $13,100. 
 
 (q) Freight cars have also been improved, as 
 a result of increased business and of more econom- 
 ical design. The ratio of the weight of a freight 
 car to its carrying capacity has a very important 
 effect on operating economy. 
 
 In 1885 the standard box cars weighed 24,800 Ibs. 
 and had a carrying capacity of 50,000 Ibs., or two 
 times the weight of the car. At this time 60,000, 
 80,000 and 100,000 Ibs. capacity cars are standards 
 for various classes of service. The weight of a 
 100,000 Ib. capacity car is 38,500 Ibs., and its car- 
 rying capacity therefore 2.6 times its weight. 
 
 To handle such cars in long trains safely, requires 
 the use of improved couplers and air brakes. In 
 1889 less than 12% of the cars and locomotives in 
 use were equipped with air brakes; at the present 
 time practically all of them are so equipped. In 
 1889 less than 8 per cent of the cars were equipped 
 with automatic couplers; practically all cars are 
 now so equipped. 
 
 While the use of cars of high carrying capacity 
 is economical, the increased cost of such equipment 
 
CONSTRUCTION-RECONSTRUCTION 107 
 
 has added very materially to the capitalization of 
 the railroads. 
 
 Estimates of Cost of Reconstruction 
 
 The following estimated costs per mile* for re- 
 constructed roads may be of interest in this con- 
 nection : 
 
 In reducing the controlling grade on 61 miles of 
 railroad from 1.3% to 0.3-0.5% the costs were as 
 follows : 
 
 Per mile. 
 
 Grading $22,178 
 
 Bridging 3,502 
 
 Track 7,801 
 
 Minor Structures 1,018 
 
 Real Estate, Engineering, 
 
 General Expenditure 3,368 
 
 $37,867 
 
 It must be understood that not all of the 61 miles 
 of line was affected by the reconstruction. On cer- 
 tain portions the original grades were well below 
 the proposed controlling grade, the work being con- 
 fined to those points where the original grade ex- 
 ceeded the proposed controlling grade, or excessive 
 curvature required elimination. 
 
 The reconstruction cost of 34 miles of line in the 
 flat country of northern Indiana, the controlling 
 grade being reduced from 0.5% to 0.2%, was 
 $47,000 per mile of line. 
 
 Increased Capitalization Due to Reconstruction 
 
 It is evident that a very substantial increase in 
 the capitalization of the railroads has been neces- 
 
 *None of these estimates include cost of equipment or bankers' 
 commissions and discounts. 
 
108 VALUATION AND RATES 
 
 sary to cover the cost of the reconstruction of the 
 road bed and the improvement of the equipment. 
 This analysis by items explains the increase in the 
 average capitalization per mile of railroads in the 
 United States since original construction. 
 
 Prior to 1906 the capital actually employed in 
 transportation was not separated from "securities 
 owned" in statements of railroad capitalization. 
 Since that time the Interstate Commerce Commission 
 has required this division of capital account. For 
 this reason figures for comparative purposes are not 
 available for years prior to 1906. The following 
 table shows the net capitalization of active railroads 
 in the United States, per mile of line : 
 
 1906 $52,050 
 
 1907 58,200 
 
 1908 57,200 
 
 1909 59,200 
 
 1910 62,600 
 
 1911 63,900 
 
 1912 63,500 
 
 1913 65,900 
 
 1914 66,661 
 
 This table reflects the effect on capitalization of 
 this reconstruction period. It must be remembered 
 that this increase is due to this reconstruction and 
 not to arbitrary increases in capital, as many writers 
 and critics of the railroads have assumed. 
 
 The work of comprehensive reconstruction has 
 applied only to important main lines and lines hav- 
 ing a very large tonnage. Had all of the lines been 
 reconstructed in the manner heretofore described 
 the capitalization would have been much more than 
 doubled. 
 
CONSTRUCTION-RECONSTRUCTION 109 
 
 Constant Reconstruction 
 
 Railroads are in constant course of rebuilding, 
 improving and extending their facilities. In this 
 connection, the testimony of Mr. E. P. Ripley, Pres- 
 ident of the A. T. & S. F., in the hearing of the 
 Interstate Commerce Commission, in 1910, relating 
 to rates between Chicago and the Rocky Mountains, 
 is interesting. 
 
 In answer to the question of the Examiner of the 
 Commission as to whether the western roads "had 
 been built round about 50 years," he replied : 
 
 "Yes sir. Some of them longer, but they have 
 been in constant course of rebuilding ever since 
 they were constructed. The railroad of 50 years 
 ago would not carry anything now and the rail- 
 road of 50 years ago would not be considered even 
 equal to a contractor's plant for building a railroad. 
 They have been in constant course of rebuilding 
 ever since, and that has been going on indefinitely." 
 
 He further stated that within his recollection the 
 A. T. & S. F. has been rebuilt three times. 
 
 The President of the Baltimore & Ohio R. R., 
 Mr. Daniel Willard, made a statement, at a meet- 
 ing of the members of the headquarters staff of that 
 system, that during the five-year period, 1910-1915, 
 $100,000,000 had been expended on the system for 
 betterments, and that about $50,000,000 of the 
 amount had been expended for additional tracks, 
 terminals and grade reductions. 
 
 The same thing is true of every one of the large 
 systems. Combinations of smaller roads into sys- 
 tems have concentrated traffic along certain lines 
 and general routes, requiring their reconstruction. 
 These first smaller systems have been combined into 
 larger systems, and still greater concentration of 
 traffic has required further reconstruction, the con- 
 struction of second tracks (in several instances of 
 
110 VALUATION AND RATES 
 
 six tracks), and an enormous expanding of yards, 
 terminals and other facilities. 
 
 The modern railroad is as far superior to the 
 railroad of 40 or 50 years ago as the first railroads 
 were to the old turnpikes. This fact must be con- 
 stanly kept in mind in considering the subject of 
 railroad capitalization, physical value and the re- 
 lated subject of railroad rates. 
 
 Summary of Construction and 
 Reconstruction Periods 
 
 The following is a fair summary of conditions 
 and the important facts relating to the Construction 
 and Reconstruction of the railroads: 
 
 (1) The availability of capital has been the con- 
 trolling factor in determining the character of the 
 construction of new lines. In the original construc- 
 tion many temporary structures were built to reduce 
 the original expenditure. The various expedients 
 for reducing capital cost were justified by the dif- 
 ficulty encountered in securing capital, and the cer- 
 tainty of the volume of traffic being small for a con- 
 siderable period next following construction. 
 
 These conditions as to capital have applied not 
 only to small roads, and to the earliest periods of 
 construction, but to large systems and to compara- 
 tively recent times, as exemplified in the experience 
 of the Gould System in its extensions into the Pitts- 
 burgh District and to the Pacific Coast. 
 
 (2) In addition to the current maintenance of 
 roadway and structures, the forces of the railroad 
 companies, and its contractors, have constructed 
 extensions of facilities and betterments out of earn- 
 ings, without increase of capitalization. Actual val- 
 uations of large systems have shown that these un- 
 capitalized additions form a very considerable per- 
 centage of the original cost of construction. 
 
CONSTRUCTION-RECONSTRUCTION 111 
 
 (3) Contingencies are incident to construction. 
 Many of them in actual work have been so great 
 as to constitute catastrophes, causing the loss of all 
 capital invested. In all construction, large addi- 
 tions to estimates must be made to provide for them, 
 but the records of most construction work have 
 shown, that even when seemingly sufficient addi- 
 tions have been made based on previous experi- 
 ence in similar work they are generally insufficient 
 to cover the actual conditions. 
 
 (4) The construction of a railroad involves many 
 different classes of work and a very large plant, 
 composed of many varying kind of tools and ma- 
 chinery. It is not expedient for a railroad or for 
 any firm of contractors, however large, to own a 
 plant of sufficient size to build a railroad unaided. 
 
 The necessities of construction require the let- 
 ting of the contract by a railroad to a contractor or 
 a construction company, and the subletting by them 
 of much work to smaller subcontractors. 
 
 While in isolated cases abuses have grown out of 
 the latter method of constructing railroads, such 
 instances do not serve to show any inherent fault 
 in the method of constructing new railroads through 
 a construction company. Either that, or some equiv- 
 alent expedient, is absolutely essential. In conse- 
 quence, the general condemnation of the practice 
 of constructing work through construction com- 
 panies is unwarranted, as the same abuses may and 
 do occur when the work is performed by a con- 
 tractor, or by the company with its own forces. 
 
 (5) Even in the case of well-conceived railroad 
 enterprises, honestly built and skillfully managed, 
 the combination of abnormally high operating ex- 
 penses, low operating revenue, and the necessity for 
 large renewals of ties, rails, and temporary bridge 
 and other structures at the end of the first ten-year 
 
112 VALUATION AND RATES 
 
 period, has caused the financial collapse of many 
 such enterprises. In foreclosure sales of these prop- 
 erties, neither the cost nor the physical value of the 
 property has determined the price for which they 
 have been sold, their earning capacity as transpor- 
 tation facilities being the basis of the price paid for 
 them. 
 
 (6) Combination of smaller roads into systems 
 has increased the density of traffic on certain lines. 
 Such increase has made it possible to consider ex- 
 penditure for making improvements in the physical 
 factors of distance, curvature, and grade, for the 
 purpose of reducing operating expense. When the 
 saving in operating expense is greater than the 
 interest charge on the capital required to improve 
 the operating conditions, the improvement is gener- 
 ally undertaken. 
 
 (7) The conditions surrounding the reconstruc- 
 tion of the railroad are very different from thosq 
 attending the original construction. Capital is avail- 
 able, as there is a certain definite traffic to be pro- 
 vided for by the money which is to be expended. 
 Credit is good for the reason that reconstruction is 
 undertaken only on account of an increased paying 
 business, the return on the money being assured, be- 
 cause the work is not undertaken unless it saves 
 more in operating expense than it costs in interest. 
 
 In consequence, the character of the improvement 
 is very different from that of the original road, econ- 
 omy in operation being the controlling factor and 
 not the capital available. All structures are of a 
 permanent nature, the equipment of greater ca- 
 pacity, and the motive power of greater size and 
 power, which means that the cost of everything on 
 the railroad is very much increased. 
 
 It is this condition that is responsible for the larger 
 present capitalization of reconstructed lines than ob- 
 
CONSTRUCTION-RECONSTRUCTION 113 
 
 tained before such reconstruction was demanded by 
 increased density of traffic. 
 
 (8) The first reconstruction occurred when 
 small isolated roads were formed into smaller sys- 
 tems. The combining of these into larger systems 
 necessitated further improvements of lines thereto- 
 fore reconstructed, that is, some lines have been re- 
 constructed in whole or in part more than once, and 
 the process will continue so long as the business of 
 the country progresses and the transportation facil- 
 ities are kept abreast of it. 
 
CAPITALIZATION 
 
 Functions of Transportation Companies 
 
 A Railroad Company has three separate and 
 distinct functions in transporting passengers and 
 freight. It supplies: 
 
 (1) A road over which the vehicles of transpor- 
 tation may travel. 
 
 (2) A vehicle and the motive power to carry 
 passengers and freight over the road. 
 
 (3) An organization to conduct transportation 
 and to maintain the road and equipment. 
 
 This division of the work of a railroad company 
 into its fundamental parts must be made to obtain 
 an understanding of its financial organization. 
 
 The furnishing of a road involves the acquiring 
 of land upon which to construct it, the excavation 
 of cuts and tunnels, the building of embankments, 
 the construction of bridges and culverts and of the 
 track that is laid upon them. It must provide sta- 
 tions through which to receive and deliver freight, 
 and accommodate its passengers; buildings to house 
 its engines and cars, water and fuel stations to oper- 
 ate them, and shops in which to repair them ; build- 
 ings to protect its tools and store supplies. It must 
 provide means for carrying public highways, private 
 roads and other railroads across its roadbed, and 
 many other things of a like nature. 
 
 The money spent in providing all of these struc- 
 tures and things is irrevocably committed a perma- 
 nent investment in a transportation facility that is 
 to be operated as long as transportation is required 
 that is in perpetuity, as far as we now know. The 
 term of a bond, which is an evidence of such an in- 
 vestment, may therefore, with safety be a long 
 
CAPITALIZATION 115 
 
 ; :.:.. 
 
 period of time. In the United States it is usually 
 from 30 to 100 years. 
 
 The furnishing of a vehicle and the motive power 
 requires the providing of locomotives, passenger and 
 freight cars and such floating equipment as transfer 
 barges, boats and tugs. The money spent in pro- 
 viding this road and floating equipment is an invest- 
 ment, the life of which should not exceed the years 
 of useful service of the equipment for which the 
 money is expended. 
 
 If the useful life of the engine or car is 20 years 
 or 25 years and it then, through use, depreciation 
 or obsolescence, is no longer serviceable in transpor- 
 tation, the term of the bond (or equipment trust cer- 
 tificate) which is the evidence of the investment, 
 should not exceed 20 or 25 years, and the safety of 
 the investment demands that it shall be considerably 
 less. It is usually from 10 to 15 years in this country. 
 
 To furnish an organization to operate the equip- 
 ment over the road and to maintain the road and the 
 equipment, the railroad company must be allowed 
 to collect charges sufficient in the aggregate to pay 
 for the labor and supplies required : 
 
 (a) In conducting such transportation; 
 
 (b) In repairing and maintaining the roadbed, 
 structures and equipment, and to provide for: 
 
 (c) Payment of interest on the money invested 
 in the roadbed and equipment ; 
 
 (d) A profit for the company providing the 
 facilities and operating them. 
 
 Stockholders 
 
 The money needed to pay the cost of constructing 
 the roadbed, structures and equipment was obtained, 
 in the earlier periods of railroad construction, by 
 subscription to the shares of the railroad company. 
 The share holders were partners in the enterprise 
 
116 VALUATION AND RATES 
 
 and furnished all of the money required to provide 
 these facilities ready for operation. 
 
 The difference between the shareholders of a rail- 
 road and of partners in an ordinary business enter- 
 prise is that the liability of the former, as to the 
 debts of the corporation, is limited to a certain speci- 
 fied amount the face value of the shares they hold. 
 
 This form of financing was simplicity itself; the 
 holder of each share of stock contributed the same 
 amount toward the cost of constructing the railroad 
 and received the same proportion of the profits aris- 
 ing from its operation as every other holder of a 
 similar share. 
 
 The capitalization of some very important systems 
 is still made up in larger part of these shares of 
 stock, but there is not a railroad in this country 
 whose capitalization is represented entirely by 
 shares.* 
 
 Early Financing 
 
 The first roads constructed in this country tra- 
 versed comparatively thickly settled communities 
 which had been developed industrially to a consider- 
 able extent. In consequence traffic was assured in ad- 
 vance of their construction, and also an immediate 
 return on the money invested in them. The earlier 
 operation of railroads in England had demonstrated 
 their ability to earn a fair return on the money 
 invested in them and such investments were there- 
 fore attended by little risk. 
 
 So long as the construction was confined to thickly 
 settled and industrially developed districts, this 
 mode of financing answered all of the requirements. 
 It soon became apparent that the railroads could 
 be employed in developing districts thinly settled 
 and with few existing industries, and that such 
 
 *The D. L,. & W. had a funded debt of only $334 per mile in 
 1914. 
 
 
CAPITALIZATION 117 
 
 enterprises would eventually be profitable, although 
 the return on the investment would not be imme- 
 diate. 
 
 As related in the Historical chapter, the supply 
 of capital has always been insufficient in this country 
 for the needs of railroad construction. Any method, 
 then, that provided additional capital or credit that 
 could be employed in extending existing railroads 
 was a public benefit. 
 
 Evidently the plan of securing capital by subscrip- 
 tion did not fully employ the credit of the railroad, 
 for the physical property produced through the ex- 
 penditure of original cash subscriptions could be 
 used as security in borrowing money for extensions 
 or betterments of the property. 
 
 Bonds 
 
 Borrowing by railroads in their corporate capacity 
 had its source in the following conditions, which 
 were found to be incident to railroad construction 
 and operation: 
 
 (1) The final cost of railroads, through the con- 
 tingencies attending the construction of the work, 
 exceeded the estimates of cost on which the original 
 financing was based. 
 
 (2) The temporary construction, (necessitated 
 by the limited capital available and the high cost 
 of permanent construction in districts remote from 
 other transportation facilities at the time of original 
 construction) had to be replaced by permanent 
 structures when the traffic density of the line in- 
 creased to an extent justifying the necessary expen- 
 diture. 
 
 (3) After the railroad was completed and ready 
 for operation, it needed a cash working capital with 
 which to conduct its business, which necessity, often, 
 had not been provided for in the original financing. 
 
118 VALUATION AND RATES 
 
 To provide for these necessities, money was bor- 
 rowed and the loan secured by a mortgage on the 
 physical property and franchise of the railroad com- 
 pany. The evidence of this indebtedness is the rail- 
 road bond. 
 
 It will be understood from the foregoing, that the 
 holder of a bond is a creditor of the railroad, as 
 distinguished from a holder of the stock, who is the 
 owner of the railroad, and responsible for its opera- 
 tion and management. 
 
 The first railroad shares had paid a return of 8% 
 on an investment in which little risk was involved. 
 These new enterprises, however, were speculative, 
 to a greater or less extent, and required a larger 
 return on the investment on that account. 
 
 To stimulate the construction of new lines, inves- 
 tors were offered a share of anticipated profits. 
 They were given bonds bearing 6 to 8% interest for 
 their actual investments, which were secured by the 
 physical property which their investment produced, 
 and in addition a bonus of stock. 
 
 As heretofore shown in the chapter on Promotion, 
 these investments were, in many cases, still further 
 secured by other improvements and land, for which 
 no bonds were issued local investors accepting 
 stock for their investments. 
 
 State Aid 
 
 The people of the interior districts those lying 
 beyond the then constructed roads and having no 
 means of cheap intercommunication appreciating 
 the benefits which cheap transportation had con- 
 ferred on those communities enjoying it, adopted 
 means to provide themselves with railroads. 
 
 Through their state legislatures, they encouraged 
 and assisted new railroad enterprises by subscribing 
 directly to their bonds, or guaranteeing the interest 
 
CAPITALIZATION 119 
 
 on them. This method of financing otherwise impos- 
 sible enterprises, perhaps more than any other one 
 thing, was responsible for the fact that bonds became 
 the most important part of railroad capital. 
 
 It must be remembered in this connection, how- 
 ever, that a large number of the railroads have in the 
 past, and at the present time do sell their stock at 
 and above par in obtaining required additional cap- 
 ital. The general impression that only the bond 
 (funded debt) portion of railroad capital represents 
 actual cash expenditure is entirely erroneous. 
 
 Ratio of Stocks and Bonds 
 
 Originally some of the states prohibited the issue 
 of bonds in greater amount than the total amount 
 of stock, on the principal that a share of stock rep- 
 resented an amount equal to its face value, which 
 was actually invested in the property and that the 
 property acquired through such investment was the 
 sole security for the payment of all borrowed money ; 
 hence bond issues would not be secured if they ex- 
 ceeded in amount the stock issue. 
 
 In 1913 the state of Massachusetts, at the time 
 of placing the railroad companies' finances under 
 the supervision of the public service commission, 
 changed its laws and permitted bond issues of twice 
 the amount of stock. Some other states allow bond 
 issues to the extent of three times the amount of 
 stock. 
 
 The following table shows the division of the total 
 capitalization of all railroads in the United States, 
 June 30, 1914, earning more than $100,000 annually. 
 
 Funded Debt 
 
 Mortgage Bonds $ 8,496,370^538 
 
 Collateral Trust Bonds 1,182,683,530 
 
 Plain Bonds, Debentures, and Notes 1,142,016,070 
 
120 VALUATION AND RATES 
 
 Income Bonds 254,230.505 
 
 Miscellaneous Obligations 72,700,640 
 
 Equipment Bonds 418,540,270 
 
 Total Funded Debt $11,566,541,553 
 
 Stock 
 
 Common Stock $ 7,304,479,846 
 
 Preferred Stock 1,376,279,858 
 
 Total Stock $ 8,680,759,704 
 
 Total Capitalization 20,247,301,257 
 
 Funded Debt Percentage of Total. .57.13% 
 
 Stock Percentage of Total .42.87% 
 
 Certain portions of this total capitalization are 
 held by the railroad companies, as the following 
 statement shows: 
 
 Stock Funded Debt 
 
 Total Outstanding.$8,680,759,704 $11,566,541,553 
 Held by Railways. 2,638,783,512 1,849,423,832 
 
 Not held by Rail- 
 ways $6,041,976,192 $ 9,717,117,721 
 
 Average per mile (not 
 
 held by railways) $25,492 $41,169 
 
 Total Actual Capitalization per Mile of Line . $66,661 
 
 The item of "Held by Railways" is deducted be- 
 cause there are duplications of securities that is, 
 operating systems issue securities based on the secur- 
 ities of their subsidiaries. 
 
 Combination 
 
 The result of the local and state encouragement 
 of railroad construction was a large number of local 
 roads, operating independently in their own terri- 
 tories, having little relation with each other. In the 
 late 50's there were only a few roads, like the New 
 
CAPITALIZATION 121 
 
 York Central and the Pennsylvania, with more than 
 100 miles of line, and these two had only about 500. 
 
 It became apparent to the shrewder railroad man- 
 agers that the combination of these small, unrelated 
 lines would be profitable, as increased traffic density 
 would decrease operating expense and improve the 
 traffic situation. 
 
 These combinations of smaller roads into small 
 systems first, and later into large systems by further 
 combination of the smaller ones, were effected in 
 various ways. When the consent of all the stock- 
 holders of the two properties which were to be 
 combined could be obtained, they were merged into 
 one corporation. In other instances, one road leased 
 another, operating it as part of its own road and 
 paying either a fixed rental or one based on the 
 earnings of the leased property. In still other in- 
 stances, one road bought a majority of the stock 
 of another road for the purpose of controlling its 
 operation. 
 
 In order to avoid paralleling an operating road, 
 traffic agreements have often been made, by which 
 one road uses in part certain tracks, terminals, or 
 other facilities of another road in common with it, 
 at some agreed rental and under conditions provided 
 for by agreement. Some roads are operated jointly 
 by two or more roads, both of the latter securing an 
 outlet, or connection, which would otherwise neces- 
 sitate a duplication of transportation facilities. 
 
 In effecting these combinations, it was inevitable 
 that in some instances certain properties necessary 
 to a proposed combination of several lines were pur- 
 chased at prices which exceeded their cost that is, 
 they were sold on the basis of their value to the 
 purchaser, rather than on the cost to the seller. 
 
 It is the same proposition the farmer encounters 
 when he buys forty acres of land to "square up" his 
 
122 VALUATION AND RATES 
 
 farm or the manufacturer when, through expanding 
 business, additional land is required for extending 
 his plant. All of them pay on the basis of their 
 necessity. 
 
 On the other hand, many roads a great many 
 more than of the class just mentioned were pur- 
 chased, in forming these combinations, at prices far 
 below what they had cost their original owners to 
 construct. The circumstances which made this pos- 
 sible have been explained in the chapter on Con- 
 struction and Reconstruction. 
 
 It will be noted, however, that in all instances, 
 the railroads were sold on the basis of their value 
 as transportation facilities not on the basis of orig- 
 inal cost, nor of their physical value. 
 
 Holdings of the Securities of Other Railroads 
 
 Combinations of roads by purchase of their stocks 
 have been very much facilitated by the use of Col- 
 lateral Trust Bonds* in financing such operations. 
 A road with a good dividend record can sell its 
 collateral trust bonds, based on the securities of the 
 purchased road, and so obtain control of it with the 
 expenditure of comparatively little money. 
 
 Inasmuch as the combination reduces operating 
 expense and betters the traffic conditions, such secur- 
 ities are usually desirable, particularly if some guar- 
 antee of the bond or advantageous conversion clause 
 is added. 
 
 It has often been necessary, in effecting the com- 
 bination of two or more roads, to construct new lines 
 to connect them. The price of the securities of an 
 operating road would usually be affected injuriously 
 if it undertook the construction of any considerable 
 
 *These are a mortgage issued by one railroad company on the 
 stocks and bonds of another company, deposited with a trustee. 
 They depend for interest upon revenues that accrue from these 
 deposited securities. 
 
CAPITALIZATION 123 
 
 mileage of connecting line, (or extension) in its cor- 
 porate capacity. For this reason such work is per- 
 formed under a separately incorporated subsidiary 
 organization, whose securities, after the construction 
 has been completed, are purchased with the collat- 
 eral trust bonds of the parent corporation. 
 
 Railroads have often purchased a small portion 
 of the stock of their important connections, to obtain 
 representation on their boards, in order to protect 
 their traffic relations with such connections. These 
 holdings are usually only a small part of the total 
 issue of securities of these connections. 
 
 It will be noted that by purchasing the securities 
 of the lines which it seeks to combine with its own 
 system, and those of the companies through which 
 it constructs necessary connecting lines and exten- 
 sions, the parent company accumulates a greater or 
 less amount of the securities of "other railroad" com- 
 panies. 
 
 It is difficult to understand why this practice of 
 owning the securities of "other railroads" is so 
 severely censured by the critics of railroad financial 
 management, as the combination of the lines is bene- 
 ficial to both the public and the investors in railroad 
 securities. On a simple relation of the facts, the 
 whole arrangement seems well adapted for accom- 
 plishing what is desired. Certainly the object to 
 be attained is unobjectionable from any standpoint. 
 
 There is no doubt that this method of financing 
 and control may be used improperly, but the same 
 is true of any other. There is nothing wrong in one 
 railroad company owning the securities of another, 
 unless there is some particular circumstance that 
 makes it so. The wholesale condemnation and sus- 
 picion of such ownership, without regard to the cir- 
 cumstances attending it, is unjust and not warranted 
 generally by the facts. 
 
124 VALUATION AND RATES 
 
 Holding Companies 
 
 The practice of bringing large mileages of various 
 systems of railroad under one general management, 
 exercising control through small holdings (nom- 
 inally) of stock, has also been very severely criti- 
 cised and characterized as "high finance," and as 
 being dangerous and prejudicial to the interests of 
 the general public and to investors in the securities 
 of the railroads concerned. 
 
 The financial authority of the many constituent 
 railroads of a large system must be concentrated 
 somewhere, and it must be absolute to be effective. 
 If it were necessary to consult the holders of the 
 securities of each subsidiary company, the manage- 
 ment of all large systems would be embarrassed to 
 such an extent that it could not hope to be effective. 
 Holding companies, when properly employed, are 
 used to concentrate financial authority of many re- 
 lated companies. 
 
 The Atlantic Coast Line Company is such a hold- 
 ing company. It has financial control of the Atlan- 
 tic Coast Line Railroad Company and the Louisville 
 & Nashville Railroad Company, the former having 
 21 subsidiary companies and the latter 22. The ag- 
 gregate length of the two systems is about 11,000 
 miles, and the total capital approximately $725,- 
 000,000. The capital of the holding company is 
 $12,600,000. Control of the holding company could 
 be had by owning $6,400,000 of its capital that is, 
 $6,400,000 could be made to control 11,000 miles of 
 railroad and $725,000,000 of railroad capital. 
 
 These two systems are not competitive, but sup- 
 plement each other. In the operation of the prop- 
 erties, the organizations are entirely independent of 
 each other; it is only in the financial management 
 that they are under one control. 
 
CAPITALIZATION 125 
 
 What essential difference is there between such 
 an arrangement for financial direction and say that 
 of the Atchison, Topeka & Santa Fe, which is a 
 system of 11,000 miles under one control? 
 
 The Louisville & Nashville is typical of all large 
 American railroad systems. It has been formed 
 largely by the combination of many small roads, the 
 majority of which were not profitable when operated 
 independently. 
 
 These smaller roads paid high rates of interest on 
 the money actually invested in them. In some cases 
 they were not operated as efficiently as desirable and 
 as to practically all of them, insufficient revenue from 
 operation prevented them from giving the best of 
 service to the public. Many of them for a large part 
 of their corporate life, were administered under the 
 direction of the courts, by a receiver. 
 
 Both the Louisville & Nashville and the Atlantic 
 Coast Line are honestly administered as to their fin- 
 ances, efficiently operated and give excellent service 
 to the public. What ill effect to the public, or to the 
 investors interested in their securities, has followed 
 from the fact that they are administered financially 
 through a holding company? 
 
 The mere fact that a group of dishonest men might 
 control such large interests is no argument against 
 the method. Abuses arising from mis-management 
 may be corrected in the courts, as the course of 
 events in the Rock Island System's affairs show. Men, 
 or groups of men, in charge of small railroads have 
 been dishonest quite as often as similar men in 
 charge of large railroads systems, and the same is 
 true of industrial corporations. 
 
 An objection based on the possibilities of dishon- 
 esty would rest against any of cur institutions, such 
 as the United States Supreme Court or the Interstate 
 Commerce Commission as well as against the hold- 
 ing company. 
 
126 VALUATION AND RATES 
 
 The possible damage and loss which either of these 
 highly respected agencies might inflict on the people 
 whom they serve is incalculable. The fact that they 
 might do so does not deter us from vesting them with 
 our authority. If they should prove unfaithful we 
 would dismiss them individually, but would not, for 
 that reason, abolish the Court or the Commission as 
 institutions. 
 
 In large affairs, particularly in financial manage- 
 ment, there must be a concentration of authority and 
 freedom from embarrassing restraint. A holding 
 company, or some equivalent method of control, is 
 essential, in some instances, to efficiency in financial 
 management and is not prejudicial to public interest. 
 In the instance used above for illustration, it would 
 be utterly impracticable to vest the financial author- 
 ity of the system in the 43 constituent railroads, 
 located in ten Southern states. 
 
 The following important and practical advantages 
 are responsible for holding companies: 
 
 They concentrate the financial control of many 
 subsidiary corporations and hence assure greater 
 efficiency in financial management; they provide a 
 means of financing new construction in several 
 states ; they facilitate the combination and extensions 
 of systems, by the issuing of their collateral trust 
 bonds, based on the securities of their subsidiary 
 companies; they widen the market for railroad se- 
 curities, as their bonds are available for certain in- 
 vestments, while the stocks of the controlled rail- 
 roads are not. 
 
 Reconstruction 
 
 The combination of various independent lines into 
 systems concentrated traffic along certain of them, 
 necessitating their reconstruction, to effect savings 
 in operating expense, as stated in the previous chap- 
 ter on Construction and Reconstruction. 
 
CAPITALIZATION 127 
 
 The cost of this reconstruction, which has been 
 very large, is responsible for practically all of the 
 increase in capitalization of most railroad systems. 
 Some other factors, hereafter mentioned, have con- 
 tributed somewhat to this increase, but such 
 amounts, while large in the aggregate, are small 
 relatively, when compared with actual reconstruc- 
 tion cost, a considerable percentage of which has 
 never been capitalized at all. 
 
 Readjustment of Bonded Debt 
 
 A railroad is never finished. It is constantly be- 
 ing improved reconstructed, extended. The mod- 
 ern railroad system, in normal times, is consoli- 
 dating independent lines with its system and segre- 
 gating others which its experience indicates are not 
 needed in its development or operation. It must 
 constantly adapt itself to the changing conditions 
 of a developing country, and so long as the country 
 progresses, these changes in its organization and 
 additions to and improvements of its facilities must 
 be expected and provided for by its financial or- 
 ganization. 
 
 There are only a few securities in this country 
 which are issued with perpetual interest-bearing 
 provisions; most investors prefer a bond providing 
 for the payment of its principal at some specified 
 time, as 30 or 50 years from its date of issue. 
 
 It is not often intended that the bond shall be 
 actually paid in cash at maturity and the obligation 
 be discharged. Modern financing contemplates the 
 payment of the principal of railroad bonds by the 
 issue of other bonds, which is termed refunding the 
 debt which the original bonds represent. 
 
 The purpose in naming a definite time for the 
 payment of the bond is to provide for an adjust- 
 ment, at stated intervals, of the rate of interest 
 which the bond pays. If the current rate of interest 
 
128 VALUATION AND RATES 
 
 on other long term investments varies considerably 
 from the rate of the railroad bonds, their market 
 price will vary proportionally with the difference 
 in the two rates, and it is desirable that the price 
 of bonds be comparatively stable. 
 
 The constant need for additional railroad capital 
 to pay for additions and betterments, in connection 
 with the varying conditions of the money market, 
 results in securities of varying rates of interest and 
 with many differing conditions and a large mass 
 of securities of conflicting and often of uncertain 
 relative rights. In the reorganization of the Union 
 Pacific in 1895, there were fifteen different commit- 
 tees, representing separate interests, owning the vari- 
 ous classes of its securities; in the Atchison Topeka 
 & Santa Fe reorganization of 1889, there were forty- 
 one groups of bondholders. 
 
 For these reasons, periodic readjustment of the 
 funded indebtedness of all railroad companies is 
 an essential of sound financial condition. 
 
 Reorganization 
 
 Most of the railroads of the country have, in 
 whole or in part, been through one or more reor- 
 ganizations of their finances, following a receiver- 
 ship caused by bankruptcy. These financial diffi- 
 culties have been caused either by extensions into 
 undeveloped territory, dissension among bondhold- 
 ers, or too small a margin between net earnings and 
 fixed charges. 
 
 All of the long extensions, particularly of the 
 Pacific roads those involving the construction of 
 several hundred miles of line at one time have been 
 attended by bankruptcy.* It is an inevitable ac- 
 companiment of such enterprises. 
 
 *The extension of the C., M. & St. P. to the Pacific coast was 
 made after the country had been developed. It is, of course, an 
 exception to this general statement. 
 
CAPITALIZATION 129 
 
 In the western and southwestern portions of the 
 country, there are hundreds of miles of barren ter- 
 ritory absolutely devoid of traffic before it is pro- 
 vided with transportation which must be traversed 
 in reaching the rich traffic territory of the Pacific 
 Coast. 
 
 Evidently a railroad may not be terminated in a 
 desert, where there is no traffic, when rich traffic 
 territory lies beyond it. The lack of revenue in a 
 territory barren of traffic for some years following 
 the construction period, together with the high price 
 which must be paid for the use of money employed 
 in such hazardous enterprises, have, however, com- 
 bined to bankrupt all of them. 
 
 The situation in the far western country is not 
 analogous to that of states east of the Missouri 
 River, where the line developed its traffic as it was 
 extended, and it was in consequence wise to make 
 shorter periodic extensions, allowing time in the 
 intervals for at least a partial development of the 
 country already traversed. 
 
 In addition to the main line, the development of 
 a territory to a paying basis also involves the con- 
 struction of a considerable mileage of branch lines, 
 whose aggregate cost may be a large percentage 
 of the total cost of the main line. The Western 
 Pacific, as it now exists, is an example of a line 
 constructed across barren areas to a territory rich 
 in traffic, which it does not now reach for lack of 
 developing branch lines. 
 
 The factor of time time required for the devel- 
 opment of the business and of the country has 
 operated against all of them, without regard to de- 
 tails of management or plan of financing. This by 
 some writers has been termed "over-expansion/' 
 and yet it is an unavoidable accompaniment of rail- 
 road building of this kind. 
 
130 VALUATION AND RATES 
 
 In many instances, particularly in the earlier rail- 
 road construction period, the large construction 
 cost, the high rate of interest on capital, or small 
 earnings, either singly or in combination, have made 
 the operation of some roads unprofitable. In such 
 cases the only feasible financial plan is to scale 
 down the funded debt to such an extent that the 
 net earnings, less fixed charges, leaves a balance as 
 a profit for operating the road. Such conditions re- 
 quire a reorganization of the whole financial 
 structure. 
 
 It generally has happened that the larger part 
 of the bondholders have received no interest for 
 some time prior to the reorganization. The stock- 
 holders are usually required to pay all or the larger 
 part of the cash required to rehabilitate the phys- 
 ical property and provide the necessary working 
 capital for the reorganized company. 
 
 As the reorganization has been occasioned by in- 
 ability to pay fixed charges, it is essential that the 
 funded debt be reduced, so that fixed charges may 
 be proportionately reduced. 
 
 Certain classes of the junior bonds, in all reor- 
 ganizations, will be replaced partly by mortgage 
 bonds and partly by stock or income bonds, the pay- 
 ment of interest on the latter being conditioned by 
 the clause "if earned" that is, a large part of the 
 security afforded by the foreclosure power of the 
 old bonds is surrendered for a contingent interest 
 in anticipated, but unassured profits of future op- 
 eration. 
 
 This sacrifice of a portion of the security of the 
 investment, and the loss of interest during the 
 period prior to reorganization, is generally com- 
 pensated for by a larger aggregate amount of bonds 
 and stock than the former amount of mortgage 
 bonds. 
 
 
CAPITALIZATION 131 
 
 To illustrate, in the Atchison, Topeka & Santa 
 Fe reorganization of 1895, certain bondholders were 
 given $75 in new mortgage bonds and, $40 in in- 
 come bonds a total of $115 in securities for each 
 $100 of their old mortgage bonds, the interest pay- 
 ment on the income bond being conditioned "if 
 earned." As these bondholders had received no 
 interest for three years prior to the reorganization, 
 they were (in effect) to be paid defaulted interest 
 later if future operations proved profitable. 
 
 This plan reduced the funded debt 25% and so 
 was good financing, but it increased the total capi- 
 talization 15%, which, under the circumstances, was 
 was a fair adjustment. 
 
 Likewise, the stockholders, who advance cash for 
 rehabilitating the property and furnishing working 
 capital, are given part bonds and part stock for 
 their cash and old stock. 
 
 The net effect of all reorganizations has been to 
 reduce funded debt and to increase the total capi- 
 talization, which, considering the losses of the se- 
 curitity holders prior to the reorganization, the sur- 
 render of their foreclosure rights, and the cash pay- 
 ments of the stockholders for reorganization pur- 
 poses, is not an unfair adjustment of a difficult sit- 
 uation. 
 
 The increased capitalization following reorgani- 
 zation, has been more widely criticised than any 
 other one feature of railroad financing. A fair 
 statement of the conditions obtaining at the time of 
 reorganization would be, that the adjustment, as 
 between the various security holders, has usually 
 been fair, and that the increased capitalization rep- 
 resents previously defaulted interest on the bonds 
 nd new cash put into the property for the purpose 
 f rehabilitating it, paying the floating debt and 
 viding a working capital. 
 
132 VALUATION AND RATES 
 
 This is not "high finance." It is an adjustment 
 in railroad finances similar to those made every 
 working day in the year in both large and small 
 undertakings in commercial and industrial lines. 
 
 Commissions and Discounts 
 
 The marketing of railroad securities, in large 
 amounts, requires the services of underwriting syn- 
 dicates. Such services must be paid for from the 
 proceeds of the sale of the securities. 
 
 In some instances these commissions amount to 
 very considerable sums. In 1903 the Pennsylvania 
 paid a commission of 2y%% on an issue of $90,000,- 
 000 new shares; in 1905 the same percentage on 
 a $100,000,000 issue of convertible bonds; in 1908, 
 following a panic, it sold its mortgage bonds at 92 
 to a syndicate of bankers. 
 
 The New Haven had a contract with Morgan 
 & Co. for underwriting its bonds for a commission 
 of 1%%; after the collapse of the Mellen manage- 
 ment it paid commissions of 2y%% per cent on its 
 6% convertible bonds. 
 
 In other instances, in addition to the underwrit- 
 ing charges, the bonds are sold at a discount. The 
 Western Pacific, under financial stress, sold its 
 bonds, which were guaranteed by the Missouri Pa- 
 cific and Denver & Rio Grande, at the large dis- 
 count of 20%, realizing 40 millions in cash for 50 
 millions in bonds. 
 
 The amount of these commissions and discounts 
 will vary with the conditions prevailing in the 
 money market at the time the securities are issued. 
 While these charges will be less for the stronger 
 companies than for the weaker, they are common 
 to all railroad issues of securities. 
 
 It is evident that if no provision is made for them, 
 that repeated readjustments will seriously affect 
 
CAPITALIZATION 133 
 
 the capital of the company. Some device for meet- 
 ing such charges should be provided, as the ex- 
 penditure is not represented by any tangible asset 
 of the railroad. They must be considered also in 
 making a valuation of the property. 
 
 Summary 
 
 The following are the essential facts relating to 
 capitalization : 
 
 The total capitalization by which is meant the 
 sum of the funded debt (represented by bonds) 
 and the capital stock or shares for the railroads of 
 the country, as a whole, probably does not exceed 
 the present cost of the property, that is, its original 
 cost plus what has since been expended upon it in 
 betterments and improvements. 
 
 The capitalization of some systems is less than 
 actual cost on account of the construction of new 
 and reconstruction of old lines out of earnings no 
 additions to capital having been made to cover the 
 cost of such work. 
 
 Some systems, through purchase of bankrupt and 
 other railroads, at prices much below their cost, 
 have a total capitalization less than the actual cost 
 of the railroads which such capitalization covers. 
 
 Only in isolated cases does the funded debt alone 
 equal the present cost of the physical property of 
 the railroad. 
 
 In some cases, through large issues of common 
 stock, the total capitalization exceeds actual pres- 
 ent cost. The percentage of mileage of such roads 
 to the total mileage of the country is small. 
 
 As a corollary of the preceding propositions, the 
 capitalization of any particular road does not nec- 
 essarily bear any relation to its actual present cost. 
 
 The practice of one railroad owning the securities 
 of another is generally caused by necessities of 
 
134 VALUATION AND RATES 
 
 financing in combining various railroads or in ex- 
 tending existing systems. As the combinations are 
 in the interest of the public and the railroad in- 
 vestors, there is nothing improper in the practice, 
 unless there is some circumstance applicable to 
 that particular situation that makes it so. General 
 condemnation of such ownership, therefore, is not 
 warranted. 
 
 The organization of a holding company does not 
 involve any principle inherently wrong. The chief 
 objection that has been urged against them is the 
 possibility of using them improperly. The same ob- 
 jections may be made as to our most cherished ad- 
 ministrative and judicial institutions. Some of our 
 most efficient railroad systems, which are controlled 
 financially through a holding company, are hon- 
 estly administered, efficiently operated and give ex- 
 cellent service to the public and are the best argu- 
 ment in justification of this method of financial man- 
 agement. 
 
 The increased capitalization following reorgani- 
 zation usually represents an adjustment of previ- 
 ously defaulted interest on bonds and cash payments 
 for rehabilitating the property, for discharging the 
 floating debt and for providing working capital. 
 The methods which have been used in reorganiza- 
 tions are not those of "high finance," but are sim- 
 ilar in nature to e very-day adjustments in large 
 and small undertakings in commercial and indus- 
 trial lines. 
 
 The increased capitalization per mile shown by 
 the statistics of the last twenty years, is due almost 
 wholly to the expenditures for reconstruction and 
 other beneficial improvements necessitated by in- 
 creased traffic density. 
 
 Unless provision is made in rates for the pay- 
 ment of commissions and discounts incident to 
 
CAPITALIZATION 135 
 
 financing extensions, reconstruction, readjustment, 
 and reorganization, such charges will seriously af- 
 fect the capital account. These charges must be 
 considered also in making the valuation of the prop- 
 erty of railroads. 
 
 The following table, showing the capitalization 
 per mile of fifty prominent railroads for the year 
 1914, divided as to funded debt, preferred and com- 
 mon stock, will be interesting in connection with 
 this statement: 
 
 Capitalization of Fifty Important Railroads 
 
 (Compiled from publication of Kissell, Kinnicutt & Co., Brokers, 
 
 Chicago and New York.) 
 *Year Ended June 30, 1914. 
 
 Per Mile of Line Operated. 
 
 Average Pre- Com- Total 
 
 Railroad Miles Funded f erred mon Capital - 
 
 Operated. Debt. Stock. Stock, ization. 
 
 Atchison, Topeka & Santa Fe. 10,908 $28,712 $10,467 $17,952 $57,131 
 
 Atlantic Coast Line 4,646 28,536 44 14,541 43,121 
 
 Baltimore & Ohio 4,478 88,394 13,146 33,947 135,486 
 
 Boston & Maine 2,252 39,451 1,399 17,542 58,482 
 
 Buffalo, Rochester & Pittsburg 581 51,184 10,327 18,072 79,583 
 
 Canadian Pacific 11,825 20,509 6,615 21,987 49,111 
 
 Central Railroad of New Jersey 678 68,246 40,467108,713 
 
 Chesapeake & Ohio 2,346 74,692 27,767 101,459 
 
 Chicago & Alton 1,033 83,135 x841 18,918 121,813 
 
 z!8,919 
 
 Chicago, Burlington & Quincy 9,139 22,236 12,128 34,363 
 
 Chicago Great Western 1,496 25,563 29,504 30,245 85,312 
 
 Chicago, Milwaukee & St. Paul 9,684 34,418 11,963 12,066 58,447 
 
 Chicago & Northwestern 8,070 26,245 2,775 16,123 45,143 
 
 * Cleveland, Cincinnati, Chicago 
 
 & St. Louis 2,381 40,233 4,199 19,763 64,195 
 
 Colorado & Southern 1,866 33,283 t4,555 16,613 59,006 
 
 $4.555 
 *Delaware & Hudson 904 68,938 47,016 115,954 
 
 * Delaware, Lackawanna & 
 
 Western 958 334 44,130 44,464 
 
 Denver & Rio Grande 2,583 47,868 19,270 14,712 81,850 
 
 Erie 2,257 110,846 f21,219 49,791 188,940 
 
 $7.084 
 
 Great Northern 7,781 38,650 29,700 68,350 
 
 Hocking Valley 351 76,054 31,339 107,393 
 
 *Fiscal year of railroads showing this prefix ends December 31, 
 1914. xPrior. zPreferred. fFirst preferred. JSecond preferred. 
 5 Leased line. kCapital stock. 
 
136 
 
 VALUATION AND RATES 
 
 Per Mile of Line Operated. 
 
 Average 
 Railroad Miles 
 
 Funded 
 
 Pre- 
 ferred 
 
 Com- Total 
 mon Capital - 
 
 Operated. 
 
 Debt. 
 
 Stock. 
 
 Stock. 
 
 ization. 
 
 Illinois Central 
 
 4,768 
 
 41,372 
 
 2,095 
 
 22,922 
 
 66,389 
 
 Kansas City Southern 
 
 827 
 
 58,104 
 
 25,393 
 
 36,275 
 
 119,773 
 
 Lehigh Valley 
 
 1,440 
 
 53,563 
 
 74 
 
 42,015 
 
 95,652 
 
 Louisville & Nashville 
 
 4,937 
 
 37,363 
 
 
 14,364 
 
 51,727 
 
 Minneapolis & St. Louis 
 
 1,646 
 
 27,069 
 
 3,543 
 
 9,238 
 
 39,850 
 
 Missouri, Kansas & Texas .... 
 
 3,825 
 
 36,806 
 
 3,398 
 
 16,544 
 
 56,748 
 
 Missouri Pacific System 
 
 7,284 
 
 41,881 
 
 
 11,354 
 
 53,235 
 
 *New York Central 
 
 3,774 
 
 103,872 
 
 
 59,773 
 
 163,645 
 
 *New York, Chicago & St. 
 
 
 
 
 
 
 Louis 
 
 523 
 
 54,822 
 
 9,560 
 
 26,768 
 
 112,182 
 
 
 
 
 21.032 
 
 
 
 New York, New Haven & 
 
 
 
 
 
 
 Hartford 
 
 2,046 
 
 117,171 
 
 
 87,980 
 
 205,151 
 
 New York, Ontario & Western. 
 
 568 
 
 53,947 
 
 7 
 
 102,313 
 
 156,267 
 
 Norfolk & Western 
 
 2,036 
 
 54,840 
 
 11,296 
 
 52,927 
 
 119,063 
 
 Northern Pacific 
 
 6,325 
 
 47,802 
 
 
 39,209 
 
 87,011 
 
 *Pennsylvania 
 
 4,511 
 
 52,529 
 
 
 110,663 
 
 163,192 
 
 *Pittsburg, Cincinnati, Chicago 
 
 & St. Louis 
 
 1,472 
 
 48,697 
 
 20,323 
 
 25,540 
 
 94,560 
 
 Reading System 
 
 1,020 
 
 48,447 
 
 k41,648 
 
 
 90,095 
 
 Rock Island Co. (C., R. I. & P.) 
 
 8,205 
 
 35,141 
 
 
 9,141 
 
 44,282 
 
 'Rutland 
 
 468 
 
 24,964 
 
 19,352 
 
 426 
 
 44,742 
 
 St. Louis Southwestern 
 
 1,735 
 
 32,587 
 
 11,466 
 
 9,426 
 
 53,479 
 
 St. Louis & San Francisco .... 
 
 5,259 
 
 55,733 
 
 1949 
 
 5,513 
 
 65,237 
 
 
 
 
 $3,042 
 
 
 
 Seaboard Air Line 
 
 3,084 
 
 36,243 
 
 7,747 
 
 12,036 
 
 56,026 
 
 Southern Pacific 
 
 10,422 
 
 56,075 
 
 
 26,162 
 
 82,237 
 
 Southern Railway 
 
 7,032 
 
 35,521 
 
 8,532 
 
 17,064 
 
 61,117 
 
 Toledo, St. Louis & Western . . 
 
 450 
 
 64,155 
 
 22,198 
 
 22,198 
 
 108,551 
 
 Union Pacific 
 
 7,597 
 
 43,983 
 
 13,103 
 
 29,269 
 
 86,355 
 
 
 2,514 
 
 43,434 
 
 15,592 
 
 21,161 
 
 80,187 
 
 Western Maryland 
 
 661 
 
 97,732 
 
 15,172 
 
 74,779 
 
 187,683 
 
 Wheeling & Lake Erie 
 
 459 
 
 95,105 
 
 10,864 
 
 43,573 
 
 175,671 
 
 
 
 
 26,129 
 
 
 
 Wisconsin Central 
 
 1,123 
 
 36,017 
 
 10,033 
 
 14,369 
 
 60,419 
 
VALUATION 
 General 
 
 Valuations of property are made for various pur- 
 poses. The valuation of steam railroad property is 
 made usually for either of the following purposes: 
 
 Taxation. 
 Financing. 
 
 Sale, Consolidation or Segregation of one or more 
 properties. 
 
 Lease Trackage rights. 
 Establishing a system of accounting. 
 Rate Regulation. 
 
 The State of Michigan was the first to undertake 
 the valuation of railroad property for the purpose 
 of establishing the taxable value. Later the State 
 of Wisconsin, under a clause in its taxing laws which 
 provided for the taxing of railroad property on the 
 same basis as other property in its vicinity, valued 
 all of the railroads in that state. These valuations 
 were also used in connection with rate regulation. 
 
 In procuring additional capital for railroad pur- 
 poses, it is becoming more the general practice 
 among banking interests to require a valuation of 
 the physical property used as the basis for such 
 financing. 
 
 In 1912 the Canadian Commission required the 
 Canadian Pacific Railway to have its property in 
 the Province of Ontario valued, before allowing a 
 large issue of new securities. Very often bonds are 
 issued secured by some terminal, bridge or large 
 yard, and the specific property mortgaged is valued 
 to determine the margin of safety of the loan. 
 
138 VALUATION AND RATES 
 
 When one railroad company is consolidated with 
 another, the relative values of the physical proper- 
 ties, under some circumstances, will affect the agree- 
 ment providing for the consolidation. 
 
 In some instances, mining and lumbering com- 
 panies have owned both the mine or timbered area 
 and the railroad serving it. After the country has 
 developed to such an extent that it has become an 
 important public carrier, the State and Interstate 
 Commerce Commissions have demanded the segre- 
 gation of the railroad operation from that of the 
 mining or other industry associated with it. 
 
 The Mississippi River and Bonne Terre Rail- 
 road, in the lead district of eastern Missouri, is an 
 instance of this kind, the railroad owned by the 
 same corporation that owned the mines and smelt- 
 ers being segregated entirely from the mining in- 
 terest in 1913, which necessitated the valuation sep- 
 arately of all of the railroad property. 
 
 Often one railroad leases its line, or some fa- 
 cility, for operation by another. In order to de- 
 termine the fair rental for such use, the property is 
 valued and the rental is made an amount giving 
 a certain agreed percentage (interest on the invest- 
 ment) of the value of the property used. 
 
 The Grand Trunk and Wabash Railroads operate 
 jointly the line belonging to the former, extending 
 from Detroit, Michigan, to Buffalo, N. Y., and 
 Niagara Falls, Ontario. All facilities are used 
 jointly and the Wabash Railroad pays for the use 
 of the property a certain agreed percentage on the 
 physical value, such physical value having been de- 
 termined by a detailed valuation. 
 
 The Interstate Commerce Commission requires 
 that all railroad property accounts be kept in a 
 prescribed form, which provides for more than fifty 
 headings of accounts, as grading, bridging, rails, 
 ties, locomotives, passenger cars. 
 
VALUATION 139 
 
 As to such items as grading, bridging and many 
 others, it is not possible for many roads to segre- 
 gate these various items from their total cost of road, 
 and in order to do so the physical property is valued 
 in detail. The Manufacturers Railroad, a terminal 
 road located in St. Louis, Mo., was valued, and the 
 values determined were used as a basis for its ac- 
 counting. 
 
 Capitalization Valuation Rates 
 
 The following discussion of the Federal valuation 
 of the property of the carriers is presented in con- 
 nection with the subject of railroad rates. In fact, 
 the Valuation Act passed by Congress was enacted 
 mainly for the purpose of facilitating intelligent rate 
 regulation by the Interstate Commerce Commission. 
 It has a further interest in the fact that a possible 
 outcome of valuation and the discussion it will entail 
 may be final government ownership, in some form, 
 of the property of the carriers.** 
 
 The immediate result of the valuation will proba- 
 bly be felt less in these two directions, however, than 
 in the matter of the capitalization and credit of the 
 carriers. As shown in a following chapter, the re- 
 lation of the value of the property employed in 
 transportation to the rates charged therefor, is gen- 
 eral only being applicable to the schedule of rates 
 as a whole, rather than to any particular rate, or 
 class of rates, or rates between particular points or 
 territories. 
 
 In the opinion of the writer, based on a consid- 
 erable practical valuation experience, a fair valua- 
 tion of the property of the carriers will, in nearly all 
 cases and certainly as to a majority of them, disclose 
 a larger amount as the actual present value or worth 
 
 **The writer does not believe that government ownership is 
 either probable or desirable. 
 
140 VALUATION AND RATES 
 
 of railroad property than is represented by the pres- 
 ent capitalization. Such a valuation, established 
 under Government authority, should therefore serve 
 to strengthen the credit of all such railroads, as, 
 after it has been completed, investors may know the 
 intrinsic values upon which their securities are 
 based. 
 
 This discussion relates to the broader principles 
 underlying valuation and certain elements of value 
 which the writer thinks should be included therein. 
 
 A reading of the previous chapter on Capitaliza- 
 tion shows clearly, that the capitalization of the 
 modern railroad company does not necessarily rep- 
 resent, even remotely, its physical value ; in fact, it 
 seldom does so. The two extremes in railroad capi- 
 talization are represented by those companies who 
 have raised all the money it was possible to borrow 
 on their physical property and franchises on the one 
 hand, and on the other by those companies who have 
 improved and extended their properties with the 
 minimum possible issue of securities. 
 
 The New York Central and the Pennsylvania Rail- 
 road Company proper, four-track railroads in large 
 part, have a total capitalization of practically $163,- 
 000 per mile. The Erie, with its double-track main 
 line just completed between New York and Chicago, 
 has a capitalization of $189,000 per mile. 
 
 The Illinois Central, including its double-track 
 main line from Chicago to New Orleans, has a total 
 capitalization per mile of $66,000; the Wabash, 
 practically single track throughout its whole extent, 
 $80,000 per mile, and the Toledo, St. Louis & West- 
 ern, $108,000 per mile. 
 
 Many railroads have expended a large part of 
 their earnings in improving and extending their lines 
 without capitalizing the cost of such improvements. 
 The Pennsylvania and the Burlington are notable ex- 
 amples in a long list of companies pursuing such a 
 
VALUATION 141 
 
 policy. It has been stated that the general policy 
 of the Pennsylvania has been to spend a dollar for 
 improvement for each dollar distributed in divi- 
 dends. Whether this be true or not, a large portion 
 of its earnings have gone into betterments of the 
 property without capitalization. 
 
 *At the other extreme, the capitalization of the 
 Chicago & Alton was increased arbitrarily, by a 
 former management, $33,000,000, only $3,000,000 
 of which was expended in actual improvements of 
 the property, the balance representing the amount 
 on which the earnings of the road were supposed to 
 give a fair return. 
 
 When the matter of the justice of a rate is under 
 consideration, there arises a difficulty in determining 
 the value of a railroad property from its earning 
 capacity, as the earnings themselves depend directly 
 on the rates which are in dispute. To establish a 
 value of a property on such a basis, for the purpose 
 of rate regulation, would simply be arguing in a 
 circle. 
 
 As neither the capitalization nor the earning ca- 
 pacity may be used in determining the fair value of 
 the property employed in rendering the service for 
 which rates are charged, other values must be ascer- 
 tained to form a basis for gaging the amount upon 
 which a fair return may be demanded. 
 
 The defense of the railroads heretofore, in resist- 
 ing the attempts at radical reductions in rates which 
 have been ordered by various commissions and other 
 rate-regulating bodies, has been that such rates were 
 below the cost of the service, and if made effective 
 
 *The statement made in this paragraph is based on public 
 statements made at the time the matter was publicly investi- 
 gated. The writer has no means of knowing whether these were 
 accurate or not. Many such statements are grossly exaggerated. 
 The statement is used here merely to illustrate the fact that the 
 capitalization of various railroads is not based on uniform finan- 
 cial methods. 
 
142 VALUATION AND RATES 
 
 would operate to confiscate their property. This at 
 once brings up the question of what their property 
 is worth, that is, what is the value of the property 
 on which they are entitled to a return? 
 
 Federal Valuation Act* 
 
 In order to meet this situation, Congress amended 
 the "Act to Regulate Commerce" by adding a new 
 section providing for the valuation of the property 
 of all the carriers subject to the provisions of the 
 Act. Stated very generally, the Act directs the In- 
 terstate Commerce Commission to ascertain various 
 costs as to each piece of physical property, and sep- 
 arately, of all land used for common carrier pur- 
 poses; of land held for other purposes than a com- 
 mon carrier; the financial and other history of pres- 
 ent and preceding corporations; the amount and 
 value of aid granted railroads by the United States, 
 state and municipal governments; the amount and 
 value of concession in rates made by the carriers to 
 such governments. 
 
 A brief statement of the reasons which induced 
 the passage of the Valuation Act will assist in ob- 
 taining an understanding of its principal provisions. 
 
 Summary of Commissions' Reasons for Valuation 
 
 The grounds upon which the Interstate Commerce 
 Commission has based its demands for a physical 
 valuation of railroad property may be summarized 
 as follows: 
 
 (1) To obtain the cost and value of railroad 
 property, franchises and equipment, as they were di- 
 rected to do in the original Act to Regulate Com- 
 
 *Blackface type are used in this chapter to indicate the em- 
 phasis of the author of this book. This is to be remembered in 
 reading quotations from other books, documents or laws. 
 
VALUATION 143 
 
 merce, which involves among other things, the com- 
 piling of the corporate history of the (each) rail- 
 roads. The cost and value, when found, will show 
 "the relation existing between the present worth of 
 railroad property and its cost to those who are the 
 proprietors of it." 
 
 (2) To establish a basis upon which to pass a 
 satisfactory judgment as to the reasonableness of 
 railway rates. 
 
 (3) To establish a basis for reasonable railway 
 taxation. 
 
 (4) To establish a proper depreciation reserve 
 for the purpose of protecting investors against deple- 
 tion of their property by an under-statement of the 
 cost of maintenance, and to protect the public 
 against unduly high rates by charging improvements 
 to cost of transportation. 
 
 (5) To obtain the correct amount which is to 
 appear as assets of the railroads in their balance 
 sheets, which must be known to determine the profit 
 secured to the investment. 
 
 (6) To determine which roads are under-cap- 
 italized and which are over-capitalized. 
 
 (7) To afford a means for the organization of 
 railway statistics in general, "which is the founda- 
 tion for all safe investigation." 
 
 Railway Securities Commission 
 
 The Railway Securities Commission, in its report 
 to the President, advocated the valuation of railroad 
 property and expressed its views of the relation 
 which would or should exist between such valuation 
 and the securities of the railroads. 
 
 This Commission stated that the valuation, if 
 properly applied, should not involve a reduction of 
 the outstanding securities of the railroads, nor the 
 prevention of the issuing of new securities when the 
 
144 VALUATION AND RATES 
 
 amount of outstanding securities exceeded the phys- 
 ical value of the properties. 
 
 "An attempt to scale down old securities is clearly 
 out of the question. Apart from the obvious con- 
 stitutional difficulties of such a course, considerations 
 of public expediency themselves forbid it. The di- 
 rect loss from the unsettlement of legal and equit- 
 able relations would be very great. The indirect 
 loss from the withdrawal of confidence in American 
 railway investments would be immeasurable. 
 
 "It is hardly necessary to add that your commis- 
 sion does not believe that the cost of reproduction 
 of the physical property of the railroads, however 
 carefully computed, is the sole element to be con- 
 sidered in determining the present value of a rail- 
 road, or that the outstanding securities could or 
 should be made to conform to any such arbitrary 
 standard." 
 
 Senate Committee 
 
 The senate committee, reporting on the bill, said, 
 among other things: 
 
 "The committee proposes certain amendments 
 which it considers essential to enable the commis- 
 sion to secure every element of the value of the 
 property of the common carriers, so classified and 
 analyzed as to enable the commission and the courts 
 to determine the fair value of the property for rate- 
 making purposes. 
 
 "The courts, from the first, have used various 
 terms descriptive of the values and elements of 
 value to be determined as a basis for ascertaining 
 the fair value of railway property. Some of these 
 terms they have altogether rejected. Others have 
 come to have an accepted meaning by commsisions 
 and courts, and are recognized as covering all the 
 elements of value attaching to the property of com- 
 mon carriers for rate-making purposes. 
 
VALUATION 145 
 
 "When these values are once ascertained, each 
 aids in correcting the other, and is given such weight 
 as it is entitled to in enabling the commission and 
 the courts to arrive at the fair value of the prop- 
 erty of the carrier used for its purposes as a com- 
 mon carrier. These terms accepted by recognized 
 authority are: (1) The original cost to date; (2) 
 the cost of reproduction new; (3) cost of repro- 
 duction less depreciation; (4) other values and ele- 
 ments of value, that is, intangible values." 
 
 Senator La Follette, in presenting the report of 
 the committee to the Senate, said, among other 
 things : 
 
 "This bill does not prescribe the values that shall 
 ultimately be assembled by the Interstate Commerce 
 Commission in ascertaining the fair value as a basis 
 for rate-making, but it does direct the Interstate 
 Commerce Commission to ascertain every element of 
 value which, under the decisions of the courts the 
 courts are still in a transition period is now being 
 considered as properly included in ascertaining the 
 fair value of the railroad property as a whole in fix- 
 ing reasonable rates." 
 
 What the Act Requires of the Commission 
 
 It will be well to state at this point, what the act 
 requires the Interstate Commerce Commission to do 
 in connection with the proposed valuation, and some 
 other things which it does not require of it. 
 
 The act requires the ascertainment of three costs, 
 viz: 
 
 First, what it has cost to produce the railroad as 
 it now exists. 
 
 Second, what it would cost, at the time of the val- 
 uation, to reproduce the railroad new, if it were non- 
 existent. 
 
 Third, what it would cost, at the time of the val- 
 uation, to reproduce the railroad less the amount of 
 
146 VALUATION AND RATES 
 
 depreciation of its property existing at the time of 
 the valuation. That is, depreciation must be defin- 
 itely determined, and assigned a value in dollars 
 and cents. 
 
 In addition, there are certain elements of value 
 which an inventory of the physical property will not 
 disclose, such as the expense of promotion, organiza- 
 tion, engineering and the value of the business as a 
 going concern, which must be ascertained. 
 
 The Commission is specifically directed to ascer- 
 tain each of these costs and values separately, and to 
 state the method used in determining them. While 
 the methods used in determining them are discre- 
 tionary with the Commission, the act does not leave 
 to its discretion which cost or value is to be used for 
 rate-making or other purposes for which the valua- 
 tion may be employed. What value will finally be 
 assigned to the property is to be determined after 
 these various stipulated costs and values have been 
 ascertained. 
 
 The reason for this has been shown in the fore- 
 going statement of the discussion of the bill in Con- 
 gress, viz: that the courts have laid down the rule 
 in many cases, that all of the various costs and val- 
 ues provided for in the act have a bearing on the 
 present value of the property and that the true value 
 can not be determined except by giving considera- 
 tion to all of them. 
 
 Provisions of the Law 
 
 The law provides for the valuation of all railroads 
 engaged in interstate commerce and the securing of 
 information concerning their stocks, bonds and other 
 securities. It is an amendment, designated Section 
 19a of the Act to Regulate Commerce which was 
 approved in 1887. 
 
 It provides that the Commission shall investigate, 
 ascertain and report the value of all property owned 
 
VALUATION 147 
 
 or used by every railroad engaged in interstate com- 
 merce, and it is directed to make an inventory which 
 shall list the property of such railroads in detail and 
 show the several values provided for in the act, 
 classifying the physical property as nearly as prac- 
 ticable in conformity with the classification of ex- 
 penditures for road and equipment heretofore estab- 
 lished by the Commission. 
 
 The requirement of listing the property in detail 
 necessitates the making of an inventory of each sep- 
 arate piece of railroad property, such as the quan- 
 tities of material involved in excavating the cuts, 
 building the embankments and the classification of 
 such material, as earth, loose rock and solid rock; 
 the quantities of rails, ties, track fastenings, 
 switches, ballast; the quantities of steel, masonry 
 and yardage and classification of materials in bridge 
 foundations ; the kind, size and quantity of all pipes, 
 concrete and other culverts; the kind and quantities 
 of material in fences, road crossings, telegraph and 
 telephone lines of the railroad ; the signal and inter- 
 locking plants; buildings, fixtures and grounds; 
 docks and wharves; tools, machines and appliances 
 for performing work, and every single piece of phy- 
 sical property of the railroad company. 
 
 Also in detail, as to kind, design and quantity, 
 all locomotives, passenger, freight and work cars, 
 floating equipment, power plants and their equip- 
 ment, shops, enginehouses, turntables, water sta- 
 tions, fuel stations, and all other items of equipment 
 and appurtenances relating to its construction, main- 
 tenance and renewal. 
 
 This inventory is not to be made in "lump sums," 
 but each cut, fill, bridge, culvert, building, inter- 
 locker plant, signal, locomotive, car and transfer 
 boat must be listed and valued separately. 
 
 In round numbers, there are 250,000 miles of rail- 
 road line in the United States, and, of course, many 
 
148 VALUATION AND RATES 
 
 more track miles. The amount of property to be val- 
 ued under this provision of the law is somewhere be- 
 tween ten and fifteen billion dollars.* Ascertaining 
 the value is the biggest job of its kind ever under- 
 taken, and the valuation of all railroad properties 
 will hardly be determined finally within the coming 
 ten years. 
 
 Of the three costs which must be determined as to 
 each separate piece of property, the first is original 
 cost. 
 
 Original Cost 
 
 The idea of the law is to obtain the original cost 
 of the railroad from the records of the company. 
 This is a most difficult, in fact, impossible task, as to 
 all of the railroads. 
 
 The old records of the Baltimore and Ohio Rail- 
 road were destroyed in the Baltimore fire; those of 
 the Union Pacific Railroad in the Omaha fire; the 
 Southern Pacific records in the fire following the 
 San Francisco earthquake; of many of the large 
 systems with headquarters in Chicago, by the fire of 
 1873, and the same is true as to the original records 
 of many other roads. 
 
 In the combination of smaller roads into larger 
 systems, many records were lost or destroyed, in 
 fact many of the original records were of little value, 
 as the systems of book-keeping were as numerous as 
 the book-keepers, prior to the appointment of the 
 Interstate Commerce Commission, in 1887. Often, 
 in such combinations, the smaller road was bought 
 outright, its original cost being of no interest to the 
 purchasing road. 
 
 In many cases the actual construction of the rail- 
 road was performed by a construction company and 
 the only record appearing in the railroad company's 
 
 "This does not include the value of real estate. 
 
VALUATION 149 
 
 books is a statement of the amount paid such com- 
 pany as provided in the construction contract. 
 
 There was no uniform system of construction ac- 
 counts prior to 1908,** and the construction and 
 maintenance accounts of the companies were seldom 
 kept, prior to that time, so that expenditures could 
 be segregated accurately. 
 
 The railroads have been reconstructed, not only 
 once, but several times as to many of them. Few of 
 the original structures remain. Heavier equipment 
 demands entirely new bridges, more substantial 
 track structures, longer and heavier turntables, 
 larger engine houses, and this has changed not only 
 the size but the character of many structures. 
 
 It is quite likely as to most railroads, and as to 
 some features in all of them, that the effort to ob- 
 tain original cost must be abandoned. 
 
 Cost of Reproduction New 
 
 This cost is determined by supposing that the sur- 
 roundings of the railroad remain as they are at the 
 time of the valuation, but that the right of way of 
 the railroad is bare and it is necessary to reproduce 
 all of the structures, equipment and physical prop- 
 erty of the company as it exists at the time of the 
 valuation on such bare right of way. 
 
 The detail of the assumed condition is not defi- 
 nitely settled as yet. It is a matter of great im- 
 portance, as the assumptions affect the unit prices 
 at which different structures and material are to be 
 estimated and as to whether some items are to be in- 
 cluded or not. 
 
 The actual work of making the federal valuation 
 is under the immediate supervision of a Director. In 
 the early part of 1915 the Director submitted a list 
 
 **Classiflcation of road and equipment accounts was not pre- 
 scribed by the commission until 1908. 
 
150 VALUATION AND RATES 
 
 of questions to the railroads, State Commissions and 
 others interested in the valuation, in order to 
 obtain the views of all parties in interest as to the 
 basis on which the valuation was to be made, that 
 is as to the assumptions to be made in considering 
 the cost of reproduction new, the manner of deter- 
 mining depreciation and appreciation, what over- 
 head charges are to be allowed, the manner of de- 
 termining unit prices, the manner of estimating cost 
 of land and many other matters of vital importance 
 in determining the various costs and values required 
 to be ascertained by the Valuation Act. Some of 
 these questions of the Director's will be discussed 
 in order to make clear the more important factors 
 which are involved in the making of a valuation of 
 railroad property. 
 
 Assumptions as to Conditions 
 
 Director's Question (1) : In determining the "cost 
 of reproduction new," to what extent should refer- 
 ence be had to conditions as they existed at the time 
 of original construction? 
 
 (a)/ The road runs through an orchard which did 
 not exist at the time of original construction. In de- 
 termining cost of reproduction new, shall the value 
 of the land be determined with or without the trees? 
 
 (b) Should an allowance be made for clearing 
 and grubbing and, if so, shall it be allowed where 
 the road runs through what is now tillage land, but 
 what at the time of construction was a forest? 
 
 (c) A building was wrecked when the road was 
 constructed. Is the expense of the wrecking to be 
 included in the reproductive cost? 
 
 (d) Are present geological and topographical 
 conditions to be taken, or is inquiry to be made as 
 to what these conditions were at the time of original 
 construction ? 
 
VALUATION 151 
 
 (e) Should it be assumed that present transpor- 
 tation facilities are in effect, or must reference be 
 had to such facilities as existed when the road was 
 constructed ? 
 
 In considering what are fair assumptions as to 
 the conditions prevailing at the time of reproduction, 
 no inflexible rule can be made to apply to all con- 
 ditions and circumstances. Common sense in com- 
 bination with fairness and flexibility must be the 
 essence of the rules. 
 
 The fair assumptions are : That the right of way 
 of the railroad is considered to be, at the time of 
 the valution, in the same condition in which it was 
 at the time of original construction; that is, it was 
 not graded, and if it were in a timber country, it 
 was covered with timber which had to be cleared 
 and the roots grubbed out before the excavations 
 could be made, and if any building or other im- 
 provement stood on the right of way, it had to be 
 paid for, as well as the cost of wrecking and remov- 
 ing it. 
 
 The mere fact that some farmer had since planted 
 an orchard along side of the right of way adds no 
 value to the physical property of the railroad, and 
 the railroad company should not derive any benefit 
 from such a fact, nor should it be penalized because 
 other farmers happened to cut all of the trees from 
 the land on both sides of the right of way at other 
 points. 
 
 In so far as the condition of the right of way is 
 concerned, it should in all particulars, be considered 
 as it existed at the time of the original construction, 
 geologically and topographically, in so far as such 
 conditions can be determined. In some cases it will 
 not be possible to determine what all of the condi- 
 tions were, accurately, but with general construction 
 experience, some local inquiry and investigation of 
 available records as a basis, and a desire for fair- 
 
152 VALUATION AND RATES 
 
 ness as a guide, there is little chance for serious er- 
 roneous assumptions as to original conditions. 
 
 That all transportation facilities are in effect as 
 at the date of the valuation, except the one being 
 valued, is the only practical assumption, all things 
 considered. It is possible to build a railroad in al- 
 most any situation, at some price, but it is not hu- 
 manly practicable and certainly not economically so, 
 to construct a railroad in some situations if no trans- 
 portation facilities were available for transporting 
 certain materials necessary for its construction. 
 
 What would it cost to haul rails from Pittsburgh 
 or Chicago to a railroad like the Union Pacific, start- 
 ing at Omaha, if no transportation facilities were 
 available? The prices at which rail and other track 
 and bridge material would have to be estimated, on 
 account of this haul, would be ridiculous. 
 
 Nor is this all, for if there were no rail transporta- 
 tion, most of the central states would be covered 
 with timber, as there would be no market for it, and 
 its price would be very low; there would be a very 
 limited market for grain and other farm products, 
 and in consequence fewer farms; interior manufac- 
 turing centers of any considerable size would not be 
 possible, and the cost of all manufactured articles 
 on the proposed railroad would be prohibitive. 
 
 Such assumption as that no transportation facili- 
 ties are in effect do violence to common sense and 
 lead the mind into vain and endless speculation. 
 What effect such an assumption would have on an 
 actual valuation would be difficult to say, for if fol- 
 lowed to its logical conclusion it would effect many 
 items of cost. 
 
 All rails and other articles of steel and iron manu- 
 facture would be estimated at very high prices; tim- 
 ber, at very low prices in some situations, very high 
 in others ; labor usually at very low prices ; practic- 
 ally all of the grading would be estimated on the 
 
VALUATION 153 
 
 basis of manual labor, as the cost of transporting 
 heavy machinery, such as steam shovels, would pro- 
 hibit its use. 
 
 To summarize and answer this question directly, 
 the fair assumption for general application and 
 there may be some exceptions to it the right of 
 way of the railroad under valuation should be con- 
 sidered as being in the condition it was actually in 
 when original construction was undertaken, and that 
 the condition as to the adjoining land, transportation 
 and other facilities and sources of supply, are those 
 which exist at the time of the valuation. 
 
 Director's Question (2) Should the road be re- 
 produced in the form and manner in which it was 
 originally built? 
 
 (a) For example, gravel was brought from a con- 
 siderable distance in point of fact, but a gravel bank 
 is available to-day at much less cost. Shall the road 
 be allowed the haul which was actually made? 
 
 (b) The rail originally was relay. In determin- 
 ing cost of reproduction new, should we apply the 
 relay price or the price of new rail? 
 
 (c) The rail now in branch lines and siding was 
 originally laid new in the main track and taken from 
 there to the branch line or siding. Shall this be 
 treated as new rail and priced and depreciated ac- 
 cordingly, or shall it be treated as relay rail when 
 laid? 
 
 The reproduction should be generally of new 
 structures of like kind as the existing structures. 
 There are some exceptions to this. 
 
 As to the example (a), the road should be al- 
 lowed the short haul on the ballast; to be consistent 
 as to the assumption in regard to conditions stated 
 in the last paragraph of the discussion of Question 
 (1) "sources of supply are those which exist at the 
 time of valuation." 
 
154 VALUATION AND RATES 
 
 The other examples (b) and (c), with the at- 
 tached questions, are impossible conditions. A relay 
 rail is a second hand rail an old rail, which has 
 been used, as distinguished from a new rail. Evi- 
 dently it is impossible to determine the "cost of re- 
 production new" with an article which is itself "sec- 
 ond hand." 
 
 There are some things which must be treated in 
 another way, and the following circumstance illus- 
 trates a certain class of items which require special 
 treatment. A safe in the ticket office of a railroad 
 under valuation had cost originally about $2,000, 
 being an old safe, but in good condition and an- 
 swering every purpose for which a safe was re- 
 quired. To reproduce in kind would have cost prac- 
 tically the same amount. An improved, modern 
 safe, affording the same security and with equal 
 usable inside space, could be purchased for $400, 
 and that was the amount allowed as the cost of re- 
 production new. 
 
 The loss in railroad value was due to the advance 
 in the art of safe-making and it should, as in any 
 other business, be written off. This is not to be con- 
 fused with obsolesence or inadequacy, which is an- 
 other matter, as the safe under consideration served 
 the purpose as well as a new safe. Such deviation 
 from usual methods, however, must be carefully con- 
 sidered. 
 
 Three Periods Organization Construction De- 
 velopment. 
 
 Simply making an inventory of the many single 
 items and structures found on the right of way and 
 assigning a unit price to each, without taking into 
 consideration the relation they bear to each other 
 and the cost of assembling them into a completed 
 whole, will not give the whole cost of reproducing 
 the railroad. 
 
VALUATION 155 
 
 As shown in preceding chapters, there are three 
 distinct periods that precede successful operation. 
 In arriving at reproduction cost, it must be assumed 
 that the same procedure must be had as experience 
 shows has been followed in constructing similar 
 work in the past. 
 
 In the chapter on Promotion, the initiation of 
 the enterprise has been described in detail the pre- 
 liminary organization, obtaining the charter, the 
 making of the reconnoissance, preliminary surveys 
 and location, the maps, profiles and estimates of 
 cost ; estimate of traffic tributary to the line ; the 
 presentation of the matter to arrange for the financ- 
 ing of the work and the options and tentative agree- 
 ments preceding actual construction. 
 
 All of these things require time and skill of the 
 highest order. All of them are necessary to be done, 
 and the cost of doing them must be included in the 
 cost of reproduction new. 
 
 In the chapter on "Construction and Reconstruc- 
 tion," the next or construction period is described in 
 detail. Standard and special plans, specifications, 
 right of way maps and construction profiles must be 
 drawn; the construction forces organized, and the 
 work staked out and its execution supervised; the 
 land not obtained by purchase condemned; agree- 
 ments for crossing other railroads, for the use of 
 roads, streets and other public places must be made, 
 as well as for the crossing of the proposed track by 
 private roads and public highways; the soliciting of 
 bids and finally the awarding of the construction 
 contracts. 
 
 The acquiring of the land and other rights, as 
 pointed out, is a tedious process, often involving pro- 
 tracted litigation and much expense and delay. All 
 of these things must be considered in the cost of re- 
 production. 
 
156 VALUATION AND RATES 
 
 After the construction period comes the one of 
 development. The forces in the various depart- 
 ments must now be organized and trained to main- 
 tain the track and structures and operate the equip- 
 ment; equipment must be "broken in" and properly 
 assigned; errors in construction must be corrected; 
 traffic must be obtained and experiments of various 
 kinds, often expensive, must be tried; in fact, the 
 work of the whole organization must be co- 
 ordinated. 
 
 This period will extend over several years under 
 the most favorable circumstances. At the begin- 
 ning the , earnings from operation will be nothing 
 and gradually increase as the enterprise develops. 
 These things are incident to the development of all 
 railroads, and their cost is properly a part of the 
 cost of reproduction and must be included in it. 
 
 Overhead Charges 
 
 The Interstate Commerce Commisson recognizes 
 this and provides, through certain accounts in its 
 classification of expenditures for road and equip- 
 ment, the following: 
 
 Engineering. 
 
 Earnings and Operating Expenses during Con- 
 struction. 
 
 General Expenditures, which includes: Law ex- 
 pense, stationery and printing, insurance, taxes, in- 
 terest and commissions, other expenditures. 
 
 Director's Question (3) : What overhead charges 
 should be allowed, and in what amount? By over- 
 head charges are meant items like engineerijig, con- 
 tingencies, interest, taxes, etc. How shall the time 
 necessary to reproduce the property be determined? 
 
 Engineering 
 
 Overhead charges for engineering will generally 
 be uniform, but there are certain situations that re- 
 
VALUATION 157 
 
 quire special consideration. The engineering cost is 
 generally stated as a percentage of the cost of all 
 road items,** real estate and equipment not being 
 included. 
 
 On terminal and belt railroads and as to the large 
 terminal facilities of the larger systems, the cost of 
 engineering, expressed in a percentage of the cost 
 of the work, is sometimes double that of the aver- 
 age cost of those portions of the railroad not simi- 
 larly situated. 
 
 The actual cost of the engineering on new roads 
 in certain general classes should form a fair basis 
 for establishing the proper percentage to be used 
 for estimating reproduction cost for any given road ; 
 that is, different roads and different divisions of the 
 same road, should be classified as mountainous, 
 hilly, rolling prairie, flat prairie, swampy, etc., and 
 the actual cost percentage of engineering should be 
 ascertained for such general types and applied gen- 
 erally to similar situations on all railroads. 
 
 If the variation between these types of road was 
 found to be large it would be necessary to classify 
 all roads in this regard; if small, a general average 
 could be fairly used. The percentage used should, 
 however, be based on actual cost records of a period 
 as near the date of the valuation as practicable. The 
 terminal properties should be investigated separ- 
 ately. 
 
 Contingencies 
 
 All valuations should contain an allowance for 
 contingencies, to cover omissions, errors and uncer- 
 tainties. Experience shows that final cost invaria- 
 bly exceeds estimates, even when the greatest care 
 and skill are employed in preparing them, unless 
 
 **Road items include all items of grading as cuts fills and 
 tunnels, bridges, buildings, structures of all kinds and all physi- 
 cal improvements. 
 
158 VALUATION AND RATES 
 
 provision is made for the many contingencies aris- 
 ing during the prosecution of the work, as explained 
 in detail in the chapter on Promotion. 
 
 Study of a completed railroad, with complete con- 
 struction records** eliminates many of the contin- 
 gencies which can not be foreseen in the case of an 
 unconstructed road, but there are still large elements 
 of uncertainty to be considered, such as claims, de- 
 lays, fluctuating markets, omissions, uncertainties as 
 to land values and damages, lack of knowledge of 
 foundations,tt especially on the older roads where 
 complete records are not available character of 
 material in tunnels, and many other items. 
 
 Some percentage of total cost must be added to 
 cover these elements of uncertainty. The proper 
 percentage, from the nature of things, can never be 
 more than a guess. It should probably not be less 
 than 5% in any case, and not usually more than 10% 
 of the cost of all items, when applied to work al- 
 ready constructed. 
 
 Interest During Construction 
 
 Payments for the use of money are much the same 
 as payments for labor or material. The company 
 must have some fund from which to make payments 
 during the construction period and must pay for its 
 use. The amount to be allowed is the interest on the 
 total cost of the road (exclusive of equipment), for 
 a period equaling one-half the estimated construc- 
 tion period. 
 
 **Such records are seldom available, except on roads recently 
 completed, and even as to these, details are seldom complete 
 enough for any great refinement in estimating. 
 
 ttSome valuators of wide experience contend that the percent- 
 age to be added for contingencies should be larger in reproduction 
 estimates than in the case of new construction, on account of the 
 lack of complete records as to original conditions particularly as 
 to foundation and tunnel work. There is much evidence to sup- 
 port this contention. 
 
VALUATION 159 
 
 The allowance for interest during construction 
 should be based on the credit of the company op- 
 erating the road ; that is, on what interest it actually 
 has paid for the money borrowed in a period, say of 
 ten years, preceding the valuation, averaging the 
 interest rate for the entire period. This is the only 
 safe basis for predicting this feature of reproduction 
 cost. 
 
 The recorded experience of various railroads for- 
 bids the adoption of a general rate to be applied 
 to all railroads alike. A railroad doing business in 
 a highly developed mining or manufacturing dis- 
 trict can certainly borrow money at a lower rate of 
 interest than a line less favorably situated as to 
 traffic possibilities. 
 
 The time necessary to perform the work can not 
 be determined with any degree of refinement or of 
 assurance of the correctness of the conclusion. No 
 railroad over 11,000 miles long, like the A., T. & 
 St. Fe, for instance, was ever built as a system at one 
 time; our whole experience relates to piece-meal 
 construction a few miles or a few hundred miles at 
 the most, at one time. Actual reproduction of such 
 systems, simultaneously along the whole line, would 
 be practically impossible. 
 
 The only course open for practical consideration 
 of reproduction, is to divide the system into units, 
 the proper length of which is open to discussion. 
 The unit of operation is the division, which varies 
 from about 250 miles on a road of dense traffic to 
 500 miles in some instances where traffic is light and 
 train service in consequence infrequent, the average 
 for the whole country being probably about 350 
 miles. 
 
 Except in cases where there is some special con- 
 dition which does violence to the assumption, the 
 unit for consideration of reproduction might well be 
 the operating division. With this as a basis, a fair 
 
160 VALUATION AND BATES 
 
 estimate as to the time required for construction may 
 be made, by considering in detail the quantity and 
 character of the work to be performed. Large 
 terminals, tunnels, difficult bridge foundations, par- 
 ticularly heavy rock cuttings, would of course re- 
 quire longer time to construct than light rolling 
 prairie work. 
 
 Actual Allowances General Principle 
 
 Such items of general expenditures as law, sta- 
 tionery, insurance and taxes, may be obtained from 
 the records for such items on any given road, and 
 the amount applied as to half the estimated time 
 of construction, in considering reproduction cost. A 
 bankers' commission should be allowed for the sale 
 of securities. 
 
 In the Milwaukee Three-Cent Fare Case, Pro- 
 fessor M. E. Cooley, who had charge of the valua- 
 tion of the Michigan railroads for that state, testified 
 that the following were fair percentages to be added 
 to the inventory value : 
 
 Per Cent. 
 
 For Contingencies, certain items 5 
 
 For Contingencies, general & 
 
 For Engineering 4 
 
 For Insurance during construction ... y% 
 For Organization and legal expense. . 2y% 
 For Interest during Construction. ... 6 
 
 Total 23 
 
 Authorities do not agree as to the proper per- 
 centages to be added for the items named above, 
 but the values shown will serve to indicate that the 
 overhead charges form a very considerable per- 
 centage of the total value under all circumstances. 
 
 The general principle to be applied in the de- 
 termination of all of these overhead charges is that 
 
VALUATION 161 
 
 a percentage rate based on previous experience is 
 the safest method possible. Any other method in- 
 volves a large factor of speculation. 
 
 Cost of Reproduction New Less Depreciation 
 
 The writer's definition of the term depreciation, as 
 used in this statement, is: A lessening in value for 
 the purposes for which the property is used. 
 
 Before discussing the requirements of the Valua- 
 tion Act as to depreciation, attention is directed to 
 the distinction between the depreciation of the sim- 
 ple component parts of a property or plant and de- 
 preciation of the plant as a whole. 
 
 A tie or a rail is a simple property and a com- 
 ponent part of the track or the railroad as a whole. 
 The rail may deteriorate from age and use and 
 such deterioration is depreciation in the rail itself. 
 But if the rail is properly maintained at all times 
 during its useful life and replaced by another at the 
 end of such life, the current depreciation of the rail 
 is not to be considered as depreciation of the track 
 or the railroad as a whole. 
 
 If the rail is not properly maintained at all times 
 and is not replaced by another when it comes to 
 the end of its useful life, the railroad as a whole is 
 depreciated by the amount of the deferred main- 
 tenance or replacement which is due. 
 
 Failure to make this distinction between the 
 simple component parts of a railroad and the rail- 
 road as a whole which from its nature has an in- 
 definite life, through continuously applied mainte- 
 nance and replacement of worn simple parts has 
 led many valuators into the error of stating that 
 the present value of the property is to be obtained 
 by deducting from the cost of reproduction new of 
 the railroad as a whole, the current depreciation of 
 some of its simple component parts, even when 
 
162 VALUATION AND RATES 
 
 proper maintenance has been applied to such parts, 
 when and as often as needed and replacements of 
 worn parts made when required. 
 
 The only actual depreciation in the property, as 
 a whole, is the deferred maintenance and replace- 
 ments that is the maintenance or replacements 
 which should have been previously applied, but 
 which in fact were not applied when needed. 
 
 This subject is treated in greater detail in follow- 
 ing pages, attention being directed to it in advance 
 of the following discussion to emphasize the distinc- 
 tion of the depreciation of the many simple proper- 
 ties, which when placed in proper relation to each 
 other make a railroad, and the depreciation in the 
 railroad considered as one whole working plant. 
 
 The law provides that the amount of the deprecia- 
 tion for each separate part of railroad property be 
 determined definitely and that such depreciation be 
 subtracted from the cost of reproduction new to ob- 
 tain the cost of reproduction less depreciation. 
 
 Depreciation Appreciation 
 
 There are certain parts of a railroad that begin to 
 depreciate as soon as they are installed. The most 
 important of these are rails, ties, timber structures, 
 bridges, buildings, equipment and machinery. There 
 are certain other items that appreciate in value with 
 age, such as graduation (excavation and embank- 
 ments) concrete masonry and ballast. 
 
 The Director has submitted the following ques- 
 tions in regard to depreciation and appreciation 
 which are discussed in turn : 
 
 Director's Question (4) : Shall allowance be 
 made for appreciation and if so as to what parts of 
 the property? Shall account be taken of solidifica- 
 tion and adaptation, and if so, shall this be by addi- 
 tion of a percentage of all grading quantities? 
 
VALUATION 163 
 
 What allowance, if any shall be made for shrink 
 or swell in determining quantities as shown by actual 
 measurement in present embankments, and shall this 
 allowance be made by reference to local conditions 
 or by some uniform per cent? 
 
 Appreciation Embankment 
 
 From the impact of operated trains and from the 
 action of the elements, embankments become solidi- 
 fied; that is, the material returns to the condition 
 which it was in before being excavated and moved 
 into the embankment; it no longer shrinks and 
 washes away, and it becomes covered perhaps with 
 a growth of vegetation which protects it from the 
 action of the elements. 
 
 There are, in some instances, extraordinary values 
 to be attached to solidification of embankments. 
 Roadbeds constructed across a marsh, or other 
 swampy areas of considerable extent, usually have 
 cost much more to maintain in the fifteen or twenty 
 years immediately following construction than their 
 original cost. 
 
 The railroads crossing the Kankakee and other 
 marshes in northern Illinois and Indiana are ex- 
 amples of the type of construction referred to. The 
 roads have been maintained only by the use of ex- 
 pensive pile retaining walls, cribbing, cross-laying 
 and other devices. The amount of material hauled 
 in by trains in the years succeeding the original con- 
 struction period has often greatly exceeded the quan- 
 tities as shown by the original cross-sections. The 
 work too has extended to the bridges and culvert- 
 structures under such embankments. 
 
 In the construction of second tracks and other ad- 
 ditional facilities, built many years after original 
 construction, the same difficulties have been encoun- 
 tered and are apparent now on work but recently 
 
164 VALUATION AND RATES 
 
 constructed. In some instances high railroad em- 
 bankments have caused the ground surface on either 
 side to raise as much as fifteen feet. 
 
 An embankment which has become stable in such 
 a situation is evidently worth more (in some cases 
 several times as much) than a newly reproduced 
 embankment. In certain districts there are large 
 areas of marsh or swampy ground, and appreciation 
 in the value of the embankments due to solidification 
 should have special consideration in them. 
 
 It will be difficult to determine the amount spent 
 during the period of solidification in all cases, but a 
 study of available data should be made in order that 
 a fair general basis for estimating be found. 
 
 Appreciation Excavation 
 
 On a new railroad the slopes of the excavations 
 slide, or the material washes down into the ditches, 
 requiring the employment of additional labor and 
 work trains in keeping them clear. After a period 
 of time (eight to ten years usually) these slopes be- 
 come "seasoned" by the elements and remain stable 
 and the cost of cleaning the ditches in the excava- 
 tions is only a small part of the cost during the sea- 
 soning period. The additional expense of mainte- 
 nance in excavations during the period of adaptation 
 seems to bear a relation to the length of the cuts 
 rather than the yardage. In excavations less than 
 five feet this expense is probably negligable. 
 
 Additional allowance should be made for the re- 
 moval of soft or otherwise unsuitable material which 
 existed in the cuts at the time of original construc- 
 tion, and for cross-laying with timber or other device 
 used which was essential to maintaining the opera- 
 tion of the road during the period of adaptation. 
 Such additional allowance can not be made general 
 but must be applied specifically in any given situa- 
 tion. 
 
VALUATION 165 
 
 Embankments and excavations which have under- 
 gone seasoning are more valuable than when first 
 constructed, and an item expressing this appreciation 
 in value must be added to the cost of the reproduc- 
 tion new. It has been usual in valuation work to 
 allow from two to five cents per yard for the appreci- 
 ation of embankments, and from $500 to $1,000 per 
 mile of excavations over five feet in depth. 
 
 Appreciation Ballast 
 
 After tracks are first ballasted, there is a consider- 
 able expense involved in maintaining them at line 
 and surface, due to the facts that the ballast works 
 into the roadbed and that the ties have not become 
 firmly embedded in the ballast. Extra labor is con- 
 stantly required to adjust the track and additional 
 ballast to maintain it at its proper level. 
 
 The original ballast under the ties in an old road- 
 bed will generally be found below the bottom of the 
 second or subsequent application of ballast used in 
 raising the track out of face. Ballast placed on a 
 foundation of previously compacted ballasting ma- 
 terial is more valuable than ballast placed on un- 
 compacted earth. 
 
 The measure of the appreciation is the value of 
 the ballast contained in an area say 10 feet wide and 
 12 inches thick (approximately the area of the first 
 ballast), less the value of the embankment which it 
 displaces. For example, if ballast is worth 50 cents 
 per yard and the embankment 25 cents per yard, the 
 appreciation is 25 cents per cubic yard of ballast and 
 this price is to be applied to 10 cubic feet or 0.37 
 cubic yards per lineal foot of track. 
 
 The allowance for appreciation of ballast should 
 not be made in rock excavations or other material 
 where the original ballast could not have been forced 
 down by the traffic into the under-lying material. 
 
166 VALUATION AND RATES 
 
 If allowances are made for solidification it would 
 seem to take care fully of the swell and shrinkage 
 of embankments, for solidification is itself an adjust- 
 ment or a return to its natural condition of material 
 moved from its original place. The allowance of 
 shrink or swell for the purpose of estimating the 
 cost of haul is an unnecessary refinement. 
 
 Depreciation General 
 
 Director's Question (5) : How shall depreciation 
 be determined? 
 
 (a) By mortality tables? If used, shall these 
 be general or made with reference to the property 
 of each carrier? 
 
 (b) By actual observation? 
 
 (c) By combination of these two methods? If 
 by combination, what weight shall be attached to 
 age and what to observed condition? 
 
 (d) Should obsolesence and inadequacy be con- 
 sidered ? 
 
 Depreciation should be determined by a combina- 
 of mortality tables tables showing the estimated 
 useful life of certain structures and materials by 
 observation, and in many instances the application 
 of available data to special conditions. 
 
 Depreciation Ties 
 
 General mortality tables must be used with care, 
 having due regard to actual conditions. For instance, 
 the average life of a tie for the whole United States 
 ought not to be the basis of depreciation of ties on 
 any given road. 
 
 Certain roads, as in Missouri and Arkansas, are 
 located in territories where large supplies of good 
 white oak ties are still available for their use. The 
 life of these ties will often be over 11 years as the 
 average for a whole division. Certain other roads, 
 
VALUATION 167 
 
 as in Michigan, use principally softer, less durable 
 ties, whose actual track life will hardly exceed 8 
 years in main line track. 
 
 Ties in a sidetrack may remain there safely for 
 a period of twelve years, while ties in a near-by 
 main-line must be removed in eight years. The rec- 
 ord of tie purchases will show accurately the actual 
 life of ties on any particular division, and for each 
 kind of service, and the life so established should be 
 the basis for depreciation on that particular division. 
 
 Normally, the removal of ties will be the same for 
 each year. To illustrate: if the records show the 
 average life of ties to be ten years and there are 
 3,200 ties per mile, the renewals each year will be 
 320 ties. Then the oldest ties in the track will have a 
 remaining life of one year, and the newest ties a life 
 of ten years, and the other ties a life varying from 
 two to nine years, the average for all being five and 
 a half years. The average depreciation then would 
 be, four and a half years, or forty-five per cent of 
 the total life. 
 
 Depreciation Rail 
 
 Rail has three distinct values: new, relayer and 
 scrap. When new, it is laid in the main line and re- 
 mains there until it becomes worn to such an extent 
 that it causes "rough riding" for fast passenger 
 trains, when it is removed to less important or branch 
 lines. At that time it becomes relayer. When it is 
 no longer suitable for such service, it is again re- 
 moved and placed in yards or industrial spurs, where 
 it remains until it is finally removed and sold as 
 scrap. 
 
 The rail records for any particular section of track 
 will show the life of the rail in each situation, and 
 the depreciation can be readily ascertained on that 
 basis. 
 
168 VALUATION AND RATES 
 
 Consideration must be given to the conditions on 
 the particular track under investigation. The rail 
 in the main line will have a main line life of fewer 
 years on a division over which 30 trains are operated 
 daily than on a division over which only 10 trains 
 are operated. On two main lines, both of which 
 have the same number of trains, one being composed 
 in greater part of few curves and easy grades and 
 the other with steep grades and many sharp curves, 
 the main line life of the rail in the former will be 
 much longer than in the latter. 
 
 Rail taken from the main line and laid in a branch 
 line track will not have a total life as great as if laid 
 in a little used siding. The depreciation must, in 
 the case of main tracks, on any division, be based 
 on the record of actual rail renewals over a period 
 long enough to show the average main line life of 
 the rail on that division. 
 
 The total life main line life plus life as relayer 
 of rail on any division can also be determined from 
 the rail record. The depreciation of relayer rail will 
 generally be based on observation, the limits of value 
 being set by a maximum present value as that of re- 
 layer, and a minimum of scrap value plus 25 per 
 cent, the latter value being based on the generally 
 recognized assumption that any material in actual 
 use is worth 25 per cent more than its scrap value. 
 
 Supposing a main line life of rail, from the records 
 is 10 years; its total life from the records 30 years,* 
 the following values in various conditions would ob- 
 tain, on the basis of a cost of $30 per ton for new 
 rail, $22 for relayer and $12 for scrap : 
 
 The wearing value for main line service would be 
 cost new $30, less value as a relayer, $22, equal $8 
 
 * These values for life of rail must not be taken as typical for 
 rail in these two classes of service, as they are only used for the 
 purpose of illustration. Life of rail varies widely in different 
 situations. 
 
VALUATION 169 
 
 or a depreciation of 80 cents per ton, per year. 
 After it had been in the track five years its depre- 
 ciation would be $4 and its present value $26. 
 
 To depreciate rail twenty years old in a branch 
 line: The relayer wearing value is $10 relay er 
 value $22 less scrap value $12 or an annual de- 
 preciation, on basis of 20 years relayer life, of fifty 
 cents per ton. The total depreciation for the twenty 
 year old branch line rail would be: 
 
 10 years in main line depreciation 80 cents per 
 year $8 
 
 10 years in branch line depreciation 50 cents 
 per year 5 
 
 Total depreciation $13 
 
 Present value $30 new, less depreciation, $13, 
 $17. 
 
 For any rail in use, the minimum present value 
 would be scrap ($12), plus 25 per cent ($3), equals 
 $15 per ton. 
 
 Such rates of depreciation would be based on nor- 
 mal maintenance. If observation shows that it has 
 not been normal, further depreciation*** should be 
 allowed in some instances, for the reason that no sub- 
 sequent maintenance, in any amount, could offset 
 certain damages to rail, such as the spreading of 
 the head of the rail at joints, due to the joints being 
 allowed to stay "down" for extended periods through 
 neglected track work. 
 
 Depreciation as here outlined may be made with 
 some assurance of practical accuracy. Depreciation 
 on a basis of a general average for a system, a state 
 or the whole country, would be unfair, giving in 
 some instances depreciation much too low, in others 
 too high. 
 
 ***This is the only depreciation which affects the value of the 
 investment or the true present value. 
 
170 VALUATION AND RATES 
 
 Depreciation Buildings, Structures and Equipment 
 
 In station and other buildings, the government 
 practice and classification may well be followed, 
 which consists in assigning a certain life** to frame, 
 brick and other buildings and depreciating them on 
 that basis. To depreciate such structures on obser- 
 vation alone would be unreliable, as paint and small 
 repairs conceal depreciation not visible, but which 
 experience shows actually exists. 
 
 On the other hand, the life assigned to any class 
 of buildings is based on normal maintenance and if 
 inspection shows that the maintenance has not in 
 fact been normal, the depreciation should be in- 
 creased. No rigid rule may be laid down for the 
 allowance to be made for lack of maintenance ; it is 
 necessarily a matter of judgement and careful in- 
 spection, with a basis of construction and mainte- 
 nance experience. 
 
 In the case of such structures as timber trestles, 
 their actual life may be obtained for any division 
 from its maintenance records, and a straight line 
 depreciation made on the basis of such recorded life. 
 
 Other structures, such as well constructed bridge 
 piers and abutments, should be depreciated by the 
 amount required to place them in 100 per cent con- 
 dition. Often the only depreciation consists of the 
 cost of re-pointing the joints or other inconsequential 
 repairs. 
 
 On such items as equipment and machinery no 
 general rule for appraising depreciation may be 
 stated ; it must be based on the experience and judg- 
 ment of practical men. 
 
 **The total useful life of such buildings is to be determined from 
 the maintenance records of the road being valued not on as- 
 sumed values. 
 
VALUATION 171 
 
 Obsolesence and Inadequacy 
 
 Obsolesence and inadequacy should be considered 
 carefully. Where the structure or machine does not 
 perform, or is not capable of performing, any useful 
 service, its value should not be included in the cost 
 of reproduction, except as it might have scrap value. 
 
 An old round-house, used partly to house a small 
 steam plant and as a storage warehouse, should be 
 estimated on the basis of such use. An old cast-iron 
 turntable appurtenant thereto, but too short to turn 
 any of the engines in service, has no value other than 
 scrap. In some situations it would not be entirely 
 obsolete, but in the plant of a modern railroad, with 
 large engines, it is wholly inadequate and of no value 
 as a turntable. The same is true of the older en- 
 gines, which are too light for either road or switch- 
 ing service ; their value is that of scrap or what they 
 would bring if sold for use in some other service. 
 
 Obsolesence and inadequacy should not be taken 
 into account however as long as the structure, equip- 
 ment, tool or thing is employed in beneficial service. 
 
 Depreciation Not Deductible From Capital 
 
 The purpose for which the valuation is made 
 should determine whether or not depreciation should 
 be deducted from the cost of reproduction new. If 
 acquisition of the property is contemplated,* there is 
 no question but that the depreciation should be de- 
 ducted, as the purchaser assumes the burden of re- 
 storing the depreciated items to their condition new. 
 When the valuation is to be used for rate-making 
 purposes, however, the condition is different. 
 
 *As a matter of fact railroads are sold on the basis of their 
 value as transportation facilities not on the basis of physical 
 value. As a transportation facility, an old railroad is more val- 
 uable than a new one. 
 
172 VALUATION AND KATES 
 
 All practice, and the law itself in all cases, directs 
 that the cost of the repair and renewal of structures 
 and equipment be charged to operating expense. 
 The cost of repair and renewal is not to be considered 
 as a shrinkage of capital, or investment, but as one 
 of the elements of the cost of operation, for which 
 the rate charged must provide, in the same way as it 
 does for the other elements of cost of operation. Be- 
 ing an operating expense, and in consequence a cur- 
 rent liability of the stockholder, it is not deductible 
 from the capital account except in case of sale, when 
 the purchaser thereby assumes the liability of the 
 stockholder. 
 
 Treatment of Depreciation 
 
 The reason for making this distinction in the treat- 
 ment of depreciation arises from the necessity of 
 solving certain problems presented by practical val- 
 uation. To illustrate : 
 
 The agreement for the use of Grand Trunk prop- 
 erty, used jointly by that road and the Wabash, pro- 
 vided that the cost of the maintenance of the prop- 
 erty be apportioned between the two roads. On ac- 
 count of this provision in the agreement, the Wabash 
 assumed the liability of restoring the depreciation 
 of the simple component parts of the property to 
 their condition new and therefore in determining the 
 value of the property upon which it must pay rental 
 to the Grand Trunk, the depreciation, both current 
 and deferred, was deducted from cost of reproduc- 
 tion new. 
 
 The valuation of the Canadian Pacific, in Ontario 
 which was made under an order of the Canadian 
 Railroad Commission was made for the purpose of 
 determining whether or not the physical value of 
 the railroad property justified an issue of proposed 
 securities. The depreciation of the property de- 
 
VALUATION 173 
 
 preciation of its simple parts was not deducted 
 from cost of reproduction new. Note that the Com- 
 mission was having the value of the property deter- 
 mined from an investment standpoint. 
 
 Railroads which are in a bad way financially are 
 often investigated by financial institutions interested 
 in their securities. In determining present value 
 the commercial value is the one that bankers are 
 interested in the only depreciation taken into ac- 
 count is the deferred maintenance maintenance 
 and replacements which should have been applied 
 but which in fact have not been applied. This is the 
 only depreciation which is regarded by them as 
 affecting the commercial value of the property. 
 
 Analogy Between Railroads and Commercial Lines 
 
 The conditions in this particular, as to railroads, 
 are not essentially different from those that obtain 
 in other lines of business. The following illustration 
 shows that in commercial lines, as well as railroads, 
 the purpose for which the valuation is used deter- 
 mines whether or not depreciation is to be deducted 
 from cost of reproduction new. 
 
 Suppose a printer starts business with one new 
 press, the useful life of which is ten years and the 
 cost $1,000; that each year, for ten years, he buys 
 a similar press; in addition, he is to maintain a de- 
 preciation fund to keep his investment unimpaired. 
 At the end of ten years, he will have ten presses, 
 which have cost him $10,000. 
 
 The following table shows his financial status dur- 
 ing the ten year period : 
 
174 
 
 VALUATION AND RATES 
 
 STATEMENT OF INVESTMENT, DEPRECIATION 
 AND PHYSICAL VALUE 
 
 Total 
 End 
 
 of 
 Year 
 
 1st 
 
 2nd 
 
 3rd 
 
 4th 
 
 5th 
 
 6th 
 
 7th 
 
 8th 
 
 9th 
 
 Number 
 
 of 
 
 Presses 
 ...1 
 ...2 
 ...3 
 ...4 
 ...5 
 ...6 
 ...7 
 ...8 
 ...9 
 10th. .10 
 
 Total In- 
 vestment 
 $1,000 
 2,000 
 3,000 
 4,000 
 5,000 
 6,000 
 7,000 
 8,000 
 9,000 
 10,000 
 
 Amount Placed 
 in Deprecia- 
 tion Fund 
 $100 
 200 
 300 
 400 
 500 
 600 
 700 
 800 
 900 
 1,000 
 
 Physical 
 Value of 
 
 Plant 
 
 $900 
 
 1,700 
 
 2,400 
 
 3,000 
 
 3,500 
 
 3,900 
 
 4,200 
 
 4,400 
 
 4,500 
 
 4,500 
 
 Total in depreciation fund $5,500 
 
 His investment is now made up of $4,500 invested 
 in the plant and $5,500 invested in a fund which is 
 maintained to keep his original investment unim- 
 paired the two amounts making a total of $10,000. 
 From this time on, one of his presses will come to 
 the end of its useful life each year and the $1,000 
 placed in the depreciation fund each year will buy 
 a new press to take its place and his plant will be 
 maintained on that basis indefinitely. 
 
 At the end of the ten years, one press will have 
 come to the end of its useful life and have no 
 value.** The average depreciation on the other 
 nine presses will be 50 per cent and their total value 
 will therefore be $4,500, if sold on the basis of their 
 physical condition that is as second hand presses. 
 
 The printer's charges for the work done by his 
 presses, are made up of (1) his operating expenses 
 
 * 'Scrap value is neglected to simplify the illustration. 
 
VALUATION 175 
 
 (such as wages, power, rent, light, fuel, current re- 
 pairs, etc.) (2) interest on his investment and (3) 
 profit for conducting the business. In making his 
 charges for work performed, at the end of the ten 
 year period, he does not estimate his investment in 
 plant at $4,500, but at $10,000; if he based his 
 charges on the first amount he would not get a fair 
 return on his investment. 
 
 The rate which he charges his customers is based 
 on the $10,000 valuation. If he sold his physical 
 plant, on the basis of its physical value, he would 
 receive $4,500 for it and take the $5,500 fund to 
 make his investment good. 
 
 That is, in case of sale, the depreciation of the 
 property is deducted from the cost of reproducing 
 it new, but so long as he stays in business, his sched- 
 ule of charges is based on the cost of a new plant, 
 with no deduction made for depreciation. 
 
 It is immaterial whether a depreciation reserve 
 is actually maintained or not, so far as the valuation 
 upon which the schedule of charges is to be based 
 is concerned. The rates must be based on the cost 
 of reproducing the plant new, if there is to be a fair 
 return on the value employed. 
 
 The foregoing applies to that portion of deprecia- 
 tion that can not be taken care of by constantly ap- 
 plied maintenance. In the operation of his presses, 
 the printer, at intervals of three or four months, must 
 renew the rollers which ink the forms and replace 
 many of the gears and other minor parts of the ma- 
 chine. 
 
 The expenditures for such repairs he regards as 
 much a part of operating expense as pressmen's 
 wages, fuel, light or any other current expense. He 
 certainly will make no deduction in his charges for 
 printing because the rollers on his press will need 
 renewing in the near future. 
 
176 VALUATION AND RATES 
 
 In what essential particular is the depreciation of 
 the rollers on the printer's press different from the 
 depreciation of the ties in a railroad track? 
 
 Importance of Depreciation Method 
 
 An idea of the importance of the basis to be used 
 in the treatment of depreciation may be had by con- 
 sidering what effect some methods of valuation here- 
 tofore employed by state commissions would have on 
 capitalization or estimated present value, if applied 
 to all of the railroads in the country. 
 
 In 1912 a valuation of 1,187 miles of line** was re- 
 ported by the Kansas State Commission. The depre- 
 ciation on the whole property was reported to be 
 26.1%. That is the cost of reproduction new, less 
 depreciation was taken as 73.9% of the cost to re- 
 produce the property new and this 73.9% of repro- 
 duction cost was stated as the present value of the 
 property. 
 
 If this rule were applied to all of the railroads in 
 the country, assuming their value to be the same as 
 the capital, which is now 16 billion dollars in round 
 numbers, there would be a shrinkage in value of rail- 
 road property of over 4 billion dollars. 
 
 Fallacy of Deducting Depreciation 
 
 A railroad ten years old, which has been properly 
 maintained, is physically a more efficient tool of 
 transportation than it was the day it was finished. 
 
 A passenger train that may be moved with entire 
 confidence as to its safety at a speed of fifty miles 
 per hour on the ten-year old road is utterly impos- 
 sible on a new road. Any given freight engine can 
 haul more tons of freight in a train over the old road 
 than it can over the new road, and do it in less time. 
 
 **Union Pacific Railroad in the state of Kansas. 
 
VALUATION 177 
 
 The new road will require more labor to maintain 
 it than the old road. 
 
 That is, it costs less to maintain the structures and 
 equipment, and its traffic, both passenger and 
 freight, can be moved by it at less cost per passenger 
 or per ton of freight, and give better service to the 
 public when it is ten years old than when it was new. 
 There has been no lessening in value for the purpose 
 for which the property is used carrying passengers 
 and freight and hence there can be no deprecia- 
 tion. The value of the older road, using the term in 
 its commonly accepted commercial sense, is certainly 
 greater than that of the new road. 
 
 Any method of depreciation which shrinks the 
 capitalization of the older road below that of the 
 new, or gives to the newer road a greater present 
 value than the older road, evidently involves a most 
 serious error in the basis or the train of reasoning on 
 which it rests. 
 
 Ruinous Effect on Railroad Credit 
 
 If all capital invested in, or the present value of 
 railroads, is to be reduced by the adoption of such a 
 depreciation method of determining present value, it 
 will be impossible in the future to secure capital for 
 railroad construction or betterment, as an investor is 
 assured in advance, that without regard to the fact 
 that the property may be well maintained, and that 
 it is a more efficient tool of transportation, his capital 
 is to be arbitrarily reduced 26% within the follow- 
 ing few years on account of current deterioration in 
 the simple component parts of the plant. It is un- 
 thinkable that the Interstate Commerce Commission, 
 or the courts, will ever sanction any method of as- 
 certaining present value which involves such a con- 
 clusion. 
 
 It is begging the question to say that establishing 
 the present value will have no effect on the legal 
 
178 VALUATION AND KATES 
 
 capitalization. The general public the investors in 
 railroad securities will regard the Government val- 
 uation of the railroads as an expression of their in- 
 trinsic value the true commercial worth of the 
 property, expressed in dollars and cents, and the 
 amount on which a railroad will be allowed to earn 
 a fair return by the Commissions and Courts, in 
 judging rate schedules. 
 
 If the present value is stated to be less than the 
 capitalization, the stocks and bonds, which evidence 
 the capitalization, will immediately be marked 
 down by investors to the level of present value, with- 
 out regard to hair-splitting distinctions as to the legal 
 questions involved or to strained definitions of the 
 meaning of the terms depreciation, capital and value. 
 
 Reasonable Interpretation of Depreciation Clause 
 
 The reasonable interpretation of that portion of 
 the Valuation Act which requires the determination 
 of depreciation, will be found in item (4)* of the 
 summary of the reasons urged by the Interstate Com- 
 merce Commission, in its reports to Congress, for the 
 need of legislation in regard to railroad valuation, 
 viz: "To establish a depreciation reserve for the 
 purpose of protecting investors against depletion of 
 their property by an under-statement of the cost of 
 maintenance and to protect the public against un- 
 duly high rates by charging improvements to cost 
 of transportation." 
 
 Necessity for Depreciation Fund Questionable 
 
 Whether or not a depreciation fund is the best 
 method for providing for the maintenance of rail- 
 road property is a question open to discussion. At- 
 tention is directed to the distinction between the 
 maintenance of such properties as those of a gas or 
 water company or an urban street railroad -which 
 
 *Page 143. 
 
VALUATION 179 
 
 from the nature of their plants may not be main- 
 tained by constantly applied maintenance and that 
 of a railroad. 
 
 It is not economical to repair pipe lines in detail 
 that is to remove a pipe here and there and re- 
 place them singly. In a paved street, only a few in- 
 consequential repairs are made from time to time in 
 the track of a street railway, as the paved roadway 
 adjacent to its tracks must be maintained for street 
 traffic. The maintenance of such plants, speaking 
 generally, is applied periodically, in large amounts. 
 
 The maintenance of the railroad plant, as to the 
 most of it, is applied constantly, in small amounts a 
 tie here, a new angle bar on one side of a joint there, 
 new bolts and spikes in many places, as the economi- 
 cal maintenance of the track demands. 
 
 There may be certain parts of a railroad plant, 
 such as buildings and equipment, whose replacement 
 should be provided for by a depreciation fund that 
 is open to discussion but that maintenance of the 
 larger part of the railroad plant is better provided 
 for by the current expenditure for operating expense 
 is hardly open to discussion in the face of practical 
 railroad experience. 
 
 Actual Depreciation Allowances 
 
 In connection with the subject of Depreciation, 
 some allowances which have been made in actual 
 valuations may be of interest. 
 
 In the following statement the depreciations in 
 Column A were those deduced in evaluating a rail- 
 road with the following mileage classification : 
 
 Miles 
 
 Main Single Track 243.64 
 
 Main Second Track 88.02 
 
 Sidings 127.77 
 
 Total Miles of Track. , , .459.43 
 
180 VALUATION AND RATES 
 
 The valuation was made in 1913. 
 In Column B are shown the percentages of depre- 
 ciation used by the engineers of the Kansas State 
 Commission, in a valuation made in 1912, applying 
 to a mileage classified as follows: 
 
 Miles 
 
 Main Single Track 1,187.42 
 
 Second Main Track 66.87 
 
 Siding and Passing Track 251.75 
 
 Joint Track. . .41 
 
 Total 1,506.45 
 
 ** Depreciation Allowances on Actual Valuations 
 
 Road Items 
 
 Item A B 
 
 1 Engineering None None 
 
 2 Right-of-Way and Station Yard 
 
 Grounds None None 
 
 3 Real Estate None None 
 
 4 Grading *** 0.08% 
 
 5 Bridges, Trestles, and Culverts. . . 9.6% * 
 
 6 Ties 49.8 43.32 
 
 7 Rails ., 22.5 18.43 
 
 8 Frogs and Switches 25.6 21.11 
 
 9 Track Fastenings and Other Ma- 
 
 terials 26.2 17.61 
 
 10 Ballast None 15.49 
 
 11 Track Laying and Surfacing None 39.06 
 
 12 Roadway Tools 30.00 
 
 13 Fencing Right-of-Way 35.0 28.44 
 
 14 Crossings and Signs 50.0 30.12 
 
 15 Interlocking and other Signal Ap- 
 
 paratus 29.3 8.66 
 
 **The depreciation shown in the table is the current deprecia- 
 tion of the simple component parts of the property not the de- 
 preciation due to deferred maintenance. 
 
 ***An allowance was made for appreciation of Grading. 
 
VALUATION 181 
 
 16 Telegraph and Telephone Lines. .34.2 27.80 
 
 17 Station Buildings and Fixtures. . .28.0 31.91 
 
 18 Shops, Enginehouses, and Turn- 
 
 tables 38.9 36.31 
 
 19 Shop Machinery and Tools 48.0 44.80 
 
 20 Water Stations 26.7 19.79 
 
 21 Fuel Stations 32.0 30.40 
 
 22 Dock and Wharf Property 43.8 
 
 23 Miscellaneous Structures 45.3 24.97 
 
 All Road Items 12.07 27.45 
 
 After adding all overhead charges.11.31 
 
 * On Truss, Girder, and I Beams 12.98 
 
 On Pile Bridges 28.69 
 
 On Culverts 21.68 
 
 The percentages for a short but busy independent 
 coal road in Southern Illinois, valued in 1915, are 
 interesting. The main line mileage was 8.93 with 
 10.4 miles of sidings. The value of the equipment 
 was somewhat larger than the value of all items of 
 roadway and structures. Appreciation was allowed 
 on graduation and offset the depreciation on other 
 items to a large extent. The percentages for cur- 
 rent depreciation allowed were as follows: 
 
 On Total of Roadway Items 6.3% 
 
 On Equipment 26.4% 
 
 Total Valuation after adding all 
 
 overhead items 16.2% 
 
 The small percentage of depreciation on Roadway 
 items is explained by the facts that Real Estate, on 
 which there is no depreciation, constituted 30% of 
 the total of Roadway items and that the appreciation 
 on graduation was 25% of the total depreciation on 
 all other Roadway items. 
 
 A valuation, made in 1915, for a belt line in one 
 of the larger cities of the Central States, having a 
 
182 VALUATION AND RATES 
 
 mileage of 25.25 of all tracks showed the following 
 depreciations**: 
 
 On all Roadway Items 1.8% 
 
 On Equipment 9.5% 
 
 All items of Roadway, Equipment, 
 
 and overhead charges 2.0% 
 
 The total value of the property was at the rate 
 of $178,635 per mile of track. Real estate consti- 
 tuted 72% of the total value of all Road items, and 
 as there is no depreciation on this item and appre- 
 ciation was allowed on graduation, the net deprecia- 
 tion was very small. 
 
 Whenever real estate forms a larger part of total 
 value, as it generally will in terminal and belt rail- 
 roads, the depreciation will be much smaller rela- 
 tively than when the roadway and structures are 
 relatively more important. 
 
 Unit Prices 
 
 In connection with the subject of Unit Prices, the 
 Director has asked the following questions: 
 
 Director's Question 6 : "How shall unit prices be 
 determined? If for an average period, what shall 
 the period be and shall it be the same for all rail- 
 roads, no matter as of what date they are valued? 
 
 What allowance shall be made for the transporta- 
 tion of men and materials over the lines of the car- 
 rier itself while under construction?" 
 
 The unit prices should generally be based on an 
 average of prices prevailing during a period of, say 
 from 1910 the beginning of this decade to Jan- 
 uary, 1915, with a provision for readjustment at cer- 
 tain intervals, say, at the end of this decade, 1920, 
 if conditions at that time demand it. 
 
 **Current depreciation. 
 
VALUATION 183 
 
 In the item of labor, the cost has increased stead- 
 ily for all classes during the last ten years, so that 
 it is certain that the average price paid during the 
 preceding five years is not as large as it now is, or 
 is likely to be during the next succeeding five years. 
 The statistics of the Interstate Commerce Commis- 
 sion indicate and emphasize this condition. 
 
 The price of ties and timber, which form a large 
 part of railroad value, is greater now than the aver- 
 age for the preceding period and is likely to be 
 increased very considerably in the coming five-year 
 period, and the same is true of all cars into whose 
 construction lumber largely enters. Present prices 
 rather than the average for the preceding period 
 should be used for these reasons. 
 
 Rail prices have been practically constant for some 
 years; bridge and structural steel prices as well as 
 the cost of concrete and other masonry are about 
 the same now as the average for the preceding pe- 
 riod and that average might be used with entire 
 fairness. 
 
 In considering this matter, it must be recognized 
 that the valuation must be maintained as to prices 
 as well as to quantities, which the law recognizes 
 and provides for. It will be physically impossible 
 to keep valuations up to date at all times, in this 
 particular, and the only practicable method of pre- 
 serving their value is to provide for periodic adjust- 
 ments, required by changes in the cost of labor and 
 material, when the statistics for a decade are avail- 
 able as 1920, 1930. 
 
 The statistics of the Census could be used at such 
 times and would be the basis, in large part, for mak- 
 ing the readjustment in the valuations. The change 
 in value due to change in the prices for the various 
 items making up the valuation, would for subsequent 
 periods, be made by applying a percentage deter- 
 mined by consideration of the effect which the 
 
184 VALUATION AND RATES 
 
 changed prices would have on the value of any 
 item of the valuation. 
 
 In regard to the allowance to be made for the 
 cost of transportation of men and material over the 
 lines of the railroad itself, while under construction, 
 the suggestion made in answer to Director's Ques- 
 tion (3) would, if adopted, simplify the considera- 
 tion of this matter. The suggestion referred to is 
 the one made in connection with the question of 
 time required to reproduce the property, and pro- 
 vides that usually the operating division be taken as 
 the unit, it being clearly impracticable to consider 
 the construction of large systems as a whole. 
 
 If this suggestion is adopted, the railroad should 
 be allowed the same rates for transporting men and 
 material over its own lines to its nearest division 
 terminal as it would be allowed if it transported 
 them for another railroad company that is to say, 
 the legal tariff rates. 
 
 The cost of transportation of material from such 
 division terminal to the site of the work in which it 
 is to be used would be at a construction rate of say 
 5 mills per ton-mile the one heretofore very gen- 
 erally employed. 
 
 Land Values 
 
 The Valuation Act provides for the valuation of 
 railroad land as follows : 
 
 "Second: Such investigation and report shall 
 state in detail, and separately from improvements, 
 the original cost of all lands, rights of way, and ter- 
 minals owned or used for the purposes of a common 
 carrier, and ascertained as of the time of dedication 
 to public use, and the present value of the same, and 
 separately the original and present cost of condemna- 
 tion and damages or of purchase in excess of such 
 original cost or present value." 
 
VALUATION 185 
 
 The provisions of this section require the making 
 of an inventory of each separate tract or parcel of 
 real estate owned or used by the railroad company, 
 which includes all land used for right of way, ter- 
 minal purposes, yards, shops, office buildings, etc. 
 The original cost of the land and its present value 
 are to be stated separately. 
 
 Original Cost 
 
 To find the original cost of any land is easy when 
 the consideration named in the deed transferring the 
 land represents the amount actually paid for the 
 property. Railroad real estate deeds, however, like 
 other deeds, often name only a nominal amount 
 one dollar or one hundred dollars as the considera- 
 tion, while the actual price paid may have been 
 many thousand dollars. 
 
 As to old transfers of property, it will not be 
 possible to determine in all cases the original cost; 
 for transfers made since the Interstate Commerce 
 Commission's uniform classification of Construction 
 accounts has been in effect (since 1908) the com- 
 pany's books, in connection with the deeds or the 
 legal records, will show the original cost of the land. 
 
 Present Value 
 
 The present value of the property is a matter 
 which will provoke much discussion, as the value 
 of the real estate is a very large percentage of the 
 total value of railroad property, the percentage vary- 
 ing with the method employed in valuation and also 
 with the density of the population of the territory 
 traversed. 
 
 The present value of the land will generally be 
 established on the basis of the market price, as indi- 
 cated by transfers of adjoining lands or lands in 
 the vicinity. Where no recent transfers have been 
 made, the values will often be estimated on the basis 
 
186 VALUATION AND RATES 
 
 of the opinion of those expert in real estate values 
 in the particular locality under consideration. 
 
 Cost in Excess of Present Value 
 
 There is still another value to be determined, and 
 that is the original and present excess cost to the 
 railroad of the land used for railroad purposes over 
 the market value of the land surrounding it which 
 is used for other purposes, such as agricultural, 
 commercial, manufacturing or residence. 
 
 It is a matter of record that the railroads have 
 paid more per acre or per square foot for land they 
 have acquired than the market price of land ad- 
 joining it. The reasons for this excess of cost lie in 
 the factors of damage to abutting property and 
 improvements and the cost of obtaining the land 
 through condemnation proceedings in court. There 
 are some other factors which are explained in detail 
 in the following pages. 
 
 In all cases in which the railroad and the land 
 owners can not agree as to the price to be paid for 
 the land required by the railroad, such price and 
 the consequential damage to adjoining land and im- 
 provements must be determined by a jury or com- 
 missioners appointed by the court. The item of 
 damage to land not taken is the serious one for the 
 railroad. 
 
 In condemnation proceedings, the court instructs 
 the jury to find three values: (1) The market 
 value of the land to be taken by the railroad; (2) 
 The damage to the remaining land and improve- 
 ments of the land owner, arising from the construc- 
 tion and operation of the railroad; (3) The bene- 
 fits, if any, to the remaining land. 
 
 The amount to be paid by the railroad to the own- 
 er of the land is the market value of the land, plus 
 damage to adjoining land, plus damage to improve- 
 
VALUATION 187 
 
 ments, less any direct benefit which the railroad may 
 confer upon the land. 
 
 If the railroad right of way cuts the remaining 
 land into irregular or triangular shaped pieces, the 
 damage will be several times the value of the land 
 actually taken; if it necessitates the removal of 
 buildings or passes near them, the damage to the 
 improvements will be large. The railroad must pay 
 the cost of the legal proceedings in addition. 
 
 Whether the price paid is established by the court 
 or by agreement between the railroad and the land 
 owner, these damages must be paid. On this ac- 
 count, the average price paid by railroads in country 
 districts is from two to three times the market value 
 of the surrounding land; in city districts, from one 
 and one-fourth to two and one-half times such value. 
 
 These are the costs referred to in the act as the 
 "original and present cost of condemnation and dam- 
 ages or of purchases in excess of such original cost 
 or present value." 
 
 Method of Establishing Present Value 
 
 In order to bring out a discussion which will show 
 the different views as to the assumptions to be made 
 in connection with ascertaining land values, the Di- 
 rector has submitted, among others, the following 
 questions : 
 
 Director's Question (7) : "How should the 'pres- 
 ent value' of lands used for transportation purposes 
 be determined?" 
 
 "Should the cost of securing the right of way at 
 the present time be determined?" 
 
 "The act calls for the 'present cost of condemna- 
 tion and damages in excess of present value of lands/ 
 What is the meaning of this phrase and how shall 
 the information called for be arrived at?" 
 
 The term, present value, as used in the act, is 
 evidently intended to cover the present market value 
 
188 VALUATION AND RATES 
 
 of the land without regard to its use for railroad pur- 
 poses, because a following clause in the same para- 
 graph provides separately for the present cost of 
 condemnation and damages, or of purchase in excess 
 of such * * * present value." That is, the act 
 recognizes the fact that the present cost of acquiring 
 land for railroad purposes is, or may be, greater 
 than the present normal market value of similar 
 lands acquired or used for other purposes. 
 
 The purpose in requiring both values arises from 
 the fact that some commissions and others in interest 
 have contended that certain opinions of the Supreme 
 Court in reference to valuations have indicated that 
 the court does not approve of the reproduction meth- 
 od of ascertaining present value as applied to rail- 
 road real estate. 
 
 This matter is only mentioned here in explanation 
 of the provision of the act requiring that these two 
 costs or values be reported separately. The opinion 
 of the court in question will be referred to in the 
 following discussion. 
 
 With this view of the matter, the present value 
 of the land is to be established by ascertaining the 
 value of land adjoining or in the vicinity of the 
 railroad line, which may be done on the basis of 
 recorded transfers, or the opinion of those expert in 
 land values in the territory under consideration, and 
 often by a combination of both methods. 
 
 The method of ascertaining present value by es- 
 tablishing the ratio existing between the assessed 
 value and the market value may be used as a check 
 on the methods just mentioned, but should not be 
 substituted for them. 
 
 Necessity as to Time and Location 
 
 In determining the value of railroad land, how- 
 ever, it must ever be borne in mind that such land 
 
VALUATION 189 
 
 is always obtained under necessity, both as to time 
 and location, which tends in every instance to in- 
 crease the price over the price of normal land trans- 
 actions in which such necessities do not appear as 
 factors. 
 
 To illustrate, let us suppose that a manufacturer 
 requires a city block of property upon which to build 
 his proposed manufacturing plant. If any block in 
 the city will serve his purpose, his land purchase 
 may be made at the minimum cost, on account of 
 the competition among owners of suitable property 
 willing to sell. If some necessity demands that the 
 city block be within a certain area, say one mile 
 square, his market in which to purchase will be nar- 
 rower, with the probability that the price to be paid 
 will be somewhat higher. 
 
 If he is compelled to buy some one particular city 
 block, he must purchase at the sellers' price, as there 
 is no competition among the owners to sell, as there 
 was in the first instance mentioned. If to this neces- 
 sity, as to location, we add the necessity that the 
 purchase be made, say, within thirty days or three 
 months, his difficulties are multiplied many times. 
 
 The railroads as to practically all of their lands 
 are compelled to buy under necessity, both as to 
 time and location. 
 
 In ascertaining the cost of reproduction new, the 
 cost of acquiring the land must be added to the 
 present value, established as above. There are, in 
 the case of all railroads, certain lands which must 
 be condemned, such as the lands of minor heirs. In 
 addition, experience shows that there are certain 
 land owners with whom an equitable bargain for 
 acquiring the land can not be made, and such land 
 must in consequence be condemned. 
 
190 VALUATION AND BATES 
 
 The condemnation proceedings involve legal ex- 
 pense, the expense of expert witnesses and usually 
 long delays. All of these circumstances are factors 
 in determining the cost of reproduction new and 
 an amount should be added to the present value to 
 determine the reproduction cost. 
 
 Adjustment of Boundaries of Abutting Property 
 
 In this connection, attention is directed to the fact 
 that the conditions attending the acquirement of 
 land when cost of reproduction new is to be ascer- 
 tained, are different from those which existed at the 
 time the land was acquired for original construction. 
 
 At the time of original construction, the existing 
 boundaries of agricultural lands usually conformed 
 to some system of State or the Federal Government's 
 subdivision of lands ; the existing boundaries of land 
 in cities and towns conformed to the lines of the 
 subdivisions of property into lots and blocks, as made 
 by the original owners. 
 
 The right of way of the railroads at the time of 
 original construction, in most instances, could not be 
 located to conform to the existing land boundaries 
 and in consequence the taking of a narrow strip of 
 land across an existing farm or city block damaged 
 the remaining lands of the owner, as well as his 
 buildings and other improvements. 
 
 The records show that the damages were suf- 
 ficient to make the cost, per unit of area as an acre 
 or a square foot of railroad land, in territory out- 
 side of cities, from two to three times, and in cities, 
 from one and one-fourth to two and one-half times 
 the market value of adjacent lands. 
 
 During the time between the original construction 
 and the present, the owners of the land abutting on 
 the railroad right of way have in nearly all instances 
 
VALUATION 191 
 
 adjusted their boundaries with reference to the right 
 of way boundaries.* 
 
 A reference to the two sketch maps,** showing 
 the conditions at the time of original construction 
 and the time of reproduction, will make this clear. It 
 will be noted from the sketch showing the conditions 
 at the time of original construction, that the lands 
 of Jones and Brown were very seriously damaged by 
 interposing the narrow strip of right of way across 
 these lands, cutting both of them into two irregular 
 shaped parcels where there had been but one before. 
 
 The operation of trains was a continued source of 
 inconvenience and perhaps danger to the occupants 
 of the property in passing from one to the other of 
 the two parcels of land, which the right of way 
 separates. 
 
 It has usually happened that after the railroad has 
 been placed in operation, Brown sells to Jones all 
 of his land on one side of the railroad and Jones sells 
 to Brown all of his land on the other side, and as a 
 consequence neither is subjected to the danger and 
 inconvenience of crossing the right of way. The 
 same is true as to other lands shown on the sketch 
 that is, they will have very generally adjusted their 
 boundaries to the boundaries of the railroad right of 
 way. 
 
 The conditions, then, at the time of the reproduc- 
 tion will not be those existing at the time of the 
 original construction. There will usually be no sev- 
 erance or consequential damage to the land not tak- 
 en, because the right of way would only take the 
 outside edge of the parcel or tract of land and its 
 cost, if condemned, would be the same as the market 
 
 "This statement applies generally. In the case of a railroad 
 under valuation which had just beeni completed, the adjustment 
 of land boundaries to the right of way might not take place im- 
 mediately. 
 
 **Page 192. 
 
192 
 
 VALUATION AND RATES 
 
VALUATION 193 
 
 price** of abutting land, plus the cost of acquisi- 
 tion. 
 
 In such cases as that of the land of Smith, on the 
 sketch showing conditions at reproduction, in which 
 the land on both sides of the right of way is held by 
 the same owner, severance and consequential dam- 
 age must be considered at the time of reproduction 
 in the same manner in which it is considered at the 
 time of original construction, if the cost of repro- 
 duction new is construed in its literal sense. 
 
 Fallacies in Former Land Valuations 
 
 In certain valuations which have heretofore been 
 made by or for some of the railroads, the present 
 value of the land was determined by another method, 
 which failed to take into account the difference in 
 conditions prevailing at the time of reproduction and 
 of original construction. 
 
 The present value of land (cost of reproduction) 
 in the valuations referred to, was obtained by multi- 
 plying the market value of the lands at the time of 
 the valuation by certain factors. These factors were 
 derived from the records of actual cost, which 
 showed the relation existing between the market 
 value of land and its cost to the railroads when ac- 
 uired for construction purposes. 
 
 As previously stated, land acquired for construc- 
 tion purposes outside of cities and towns has cost 
 the railroads as an average, from two to three times 
 and within cities from one and one-fourth to two 
 and one-half times its normal market value. 
 
 The error in these valuations consisted in the fail- 
 ure to take into consideration the adjustment of the 
 boundaries of abutting lands to the right of way, 
 
 **It must be remembered that this market price is to be based 
 on the purchase being made under necessity as to time and loca- 
 tion. 
 
194 VALUATION AND RATES 
 
 which had been made during the period following 
 original construction. 
 
 In the Minnesota valuations the ones which were 
 used in connection with the case known as the Min- 
 nesota Rate Case a second and additional error was 
 made by assuming a value of land for railroad pur- 
 poses higher than the market value of surrounding 
 land before multiplying by the factors mentioned 
 above. The court very properly decided that the 
 valuation of real estate on such a basis could not give 
 the true present value of the property. 
 
 It has been assumed in some quarters, from the 
 refusal of the court in this case to accept values de- 
 rived as just described, that the reproduction method 
 of determining present value is not to be applied in 
 valuing railroad real estate. 
 
 Had it been shown that the larger cost of railroad 
 real estate is to be accounted for by reason of the 
 necessities as to time and location and the cost of 
 condemnation proceedings, and if the valuation had 
 taken into account the adjustment of the boundaries 
 of abutting property in cases where such adjust- 
 ments had been actually made there can be little 
 doubt that the court would have accepted the prin- 
 ciple of reproduction as applied to railroad real es- 
 tate as it did when applied to the physical property 
 of the railroad existing thereon. 
 
 Adjustment of Boundaries Essential to Consideration 
 of Reproduction 
 
 Failure to take into account this adjustment of 
 the boundaries of the abutting property to the rail- 
 road property, would render it impracticable to con- 
 sider the cost of reproducing many existing railroads. 
 The right of way of the Illinois Central along and 
 near the lake front in Chicago is an instance of this 
 kind. 
 
VALUATION 195 
 
 It is not probable that any railroad would be al- 
 lowed at this time to obtain a right of way and con- 
 struct such a railroad through a district of the char- 
 acter which this railroad traverses in the city, neither 
 would it be profitable to do so from an economical 
 standpoint. Without considering the adjustment 
 which has been going on since original construction 
 between the abutting property and the railroad and 
 its operation, consideration of reproduction would be 
 entirely impracticable. 
 
 What the damage would be in the condemnation 
 of such property and of the riparian right, if it had 
 not become so adjusted, could only be a guess with- 
 out basis of fact to support it, because a right of way 
 for any considerable distance through property of 
 this character has never been condemned in this 
 country up to the present time. 
 
 A Fair Basis for the Valuation of Land 
 
 Justice Hughes in his opinion in the Minnesota 
 Rate Case stated that if the railroads were allowed 
 the present value of their land, as ascertained by the 
 value of adjoining land, they would have no cause 
 for complaint. 
 
 This view fails to take into account the fact that 
 railroad land is acquired under necessity as to time 
 and location, which factors always tend to make the 
 cost of such land the maximum. It does not take 
 into account the cost of acquisition, as by condemna- 
 tion and other expensive methods. 
 
 If to the present value of the land, established 
 with reference to the necessity under which it must 
 always be purchased, and its cost of acquisition, 
 there is added the original amount which was paid 
 on account of damage to land and improvements, 
 the railroads would be placed on a parity with other 
 land owners as to its real estate values. 
 
196 VALUATION AND RATES 
 
 Valuation of Land Not Used for Railroad Purposes 
 
 The third paragraph of the Valuation Act pro- 
 vides as follows: 
 
 "Third. Such investigation and report shall show 
 separately the property held for purposes other than 
 those of a common carrier, and the original and 
 present value of the same, together with an analysis 
 of the methods of valuation employed." 
 
 In order to provide for future tracks, extensions of 
 yards, terminals and other facilities, the railroads in 
 some instances have acquired more land than their 
 necessities demanded at the time of construction. In 
 acquiring land it often costs less to buy an entire 
 tract or parcel of land outright than to take only 
 what is required and pay damage on the balance. 
 Such lands are usually considered as held for com- 
 mon carrier purposes. 
 
 There arises at times a question whether certain 
 lands owned by a railroad company may be reason- 
 ably considered as held for common carrier purposes. 
 The purpose of this paragraph of the act is to ascer- 
 tain what part of railroad lands is not so held, in 
 order that its value may not be included in the in- 
 ventory of property employed for transportation 
 purposes. 
 
 The Director has asked the following questions in 
 regard to such lands : 
 
 Director's Question (8) : "When are lands 'owned 
 or used' for common carrier purposes? Should lands 
 in any case be classified as held for common carrier 
 purposes unless they are actually so used?" 
 
 Lands are "owned or used" for common carrier 
 purposes when they are directly employed in trans- 
 portation and also where they are incidental to rail- 
 road operation. Land included within the right of 
 way or other tracts of railroad property which is 
 used for such purposes as storage, grain elevation, 
 
VALUATION 197 
 
 stock yards, etc., even when the improvements there- 
 on are constructed by another, is incidental to rail- 
 road operation and used for common carrier pur- 
 poses. 
 
 In some instances, and particularly as to terminal 
 real estate, it is good policy from the railroad stand- 
 point, and in the interest of the public, that certain 
 lands be purchased in advance of actual existing 
 need. 
 
 The construction of terminals is usually followed 
 by sharp advances in the price of adjoining lands, 
 and such lands are often improved with very costly 
 buildings and other improvements. When the 
 growth of traffic demands the extension of facilities, 
 the price of the land, and oftener the price of the 
 improvements thereon, has become so large that it 
 is not economically possible to construct urgently 
 needed extensions. 
 
 Anticipation of reasonably expected future re- 
 quirements is a cardinal principle of business policy 
 and should be applied on a railroad as it is in other 
 lines of business. For this reason, lands which are 
 held by a railroad, which it may reasonably be sup- 
 posed will be required within say, twenty-five years 
 a generation should be included in the valuation. 
 
 It is needless to say that such holdings should be 
 subject to regulation, as some serious abuses might 
 grow out of unregulated holdings of such property. 
 
 Intangible Value 
 
 The Valuation Act provides for ascertaining "Oth- 
 er Values and Elements of Value," that is, other 
 values than that of the physical property. This evi- 
 dently is intended to include not only the overhead 
 charges mentioned, but certain other values which 
 are termed "intangible values." 
 
 The term is used to classify all expenses that are 
 Dreliminary to construction, such as legal expense of 
 
198 VALUATION AND RATES 
 
 organization, cost of franchises or permits, and in 
 addition, the value of the property as a "going con- 
 cern," of the "good will," if any, of the business, and 
 the cost of such developments as have caused ex- 
 penditure and yet do not show in the inventory. 
 
 The first of these have already been considered 
 under the head of overhead expenses, and it remains 
 to consider "good will," "going concern value" and 
 "development." 
 
 As a preface to the following discussion, it may 
 be well to state that the courts have very generally 
 decided that these three elements have a value which 
 should be included in the true value of the property, 
 but that the railroad commissions of the various 
 states have usually decided that nothing is to be 
 allowed for the three items except such expenditures 
 as may be shown from the records were actually 
 incurred in developing the business, and which do 
 not show in any way in the inventory of physical 
 property. 
 
 Good Will 
 
 The term "good will" has been defined by Lord 
 Elden, the English authority, as "nothing more than 
 the probability that the old customers will resort to 
 the old place * * * that it involves an element 
 of personal choice and is inappropriate where there 
 can be no choice and therefore should be given no 
 value." 
 
 English syndicates, in purchasing manufacturing 
 properties in the United States, have often expressed 
 the value of good will in terms of net earnings pro- 
 duced in a certain number of years. After valuing 
 the physical property, the value of the good will 
 which is to be added will be the sum of the net 
 earnings for the three to five consecutive years im- 
 mediately preceding the sale. 
 
 It has been very generally assumed that, as to 
 
VALUATION 199 
 
 the greater part of its business, most railroads enjoy 
 a monopoly. If this were true, there would be no 
 "good will" value in the business, as its customers 
 would have no choice of doing or refusing to do 
 business with it. As a matter of fact, this is far 
 from the true situation, as only a very small per- 
 centage of the business of most railroads is free 
 from competition. 
 
 It will be admitted at once, that on the bulk of the 
 through business between points distant from each 
 other, there is usually competition as to the whole 
 or greater part of the distance. What is not so 
 evident is that class of business shipped from a sta- 
 tion served only by one road to a market which has 
 more than one road serving it. 
 
 While the shipment may be non-competitive in 
 the sense that the shipper has no choice of roads, 
 the commodity itself comes into competition with 
 like commodity hauled by other roads into the same 
 market. In consequence, the business is competitive 
 in spite of the fact that the shipper has no choice, for 
 the road must make such rates and give such service 
 that he may compete with other shippers located on 
 other roads. 
 
 While the shipper has no choice of roads, he has 
 the option of going into the business or staying out 
 of it, and his decision is based on the rates and 
 services of the road and therefore there is an ele- 
 ment of good will in that class of traffic. The fol- 
 lowing will serve to illustrate this principle : 
 
 The Chicago & Eastern Illinois Railroad serves the 
 coal mines in the Brazil district of northern Indiana ; 
 the C., C., C. & St. L. Railroad serves the coal mines 
 in southern Illinois. The principal market for the 
 mines of both districts is Chicago. The mines lo- 
 cated on the C. & E. I. Railroad have only that road 
 to ship over in reaching their market, and the same 
 
200 VALUATION AND RATES 
 
 is true as to mines on the C., C., C. & St. L. Railroad. 
 However, if the C., C., C. & St. L. Railroad does not 
 make a rate for carrying coal to Chicago low enough 
 to place the product of the mines on its line on a 
 parity in the Chicago market with the product of 
 the mines located on the C. & E. I. it gets no business 
 at all. 
 
 In other words, in carrying coal to Chicago it com- 
 petes with the C. & E. I. Railroad, in spite of the 
 fact that neither of the shippers has a choice of rail- 
 roads over which to ship, but each coal operator has 
 the option of choosing on which road he will locate, 
 or of deciding whether or not his coal will be mined 
 and shipped, and his decision will be based on the 
 respective rates and service available from each com- 
 pany. 
 
 It may be stated, therefore, as a general proposi- 
 tion, that except as to that small percentage of ship- 
 ments moving between local stations on a railroad, 
 the entire business of the railroads is competitive, 
 and for this reason they are entitled, when the actual 
 conditions warrant it, to a value for the good will 
 of their business, in the same manner and to the 
 same extent that any mercantile business is. 
 
 Going Value 
 
 The following definitions, both legal and other- 
 wise, of the term, "going value," or "going concern 
 value," are quoted to convey the idea that this term 
 implies: 
 
 "The sum (going concern value) we understand 
 to be an expression of the added value of the plant 
 as a whole over the sum of its component parts, 
 which is attached to it because it is in active and 
 successful operation and earning a return." (Justice 
 Moody, in the Knoxville Water Company Case.) 
 
 "It is the value such a plant has over and above 
 its physical value, due to the fact that it is not a 
 
VALUATION 201 
 
 bare and idle system, but it is in actual operation, 
 doing business with a large number of customers. 
 It is something like the good will of a business, but 
 it is even more tangible." (The late William H. 
 Bryan, Consulting Engineer.) 
 
 "The city steps into the possession of a property 
 which not only has the ability to earn, but is, in fact, 
 earning. It should pay, therefore, not merely the 
 value of a system which might be made to earn, but 
 that of a system which does earn." (Justice Brewer 
 in Kansas City Waterworks Case, 62 U. S. Fed. Rep. 
 853.) 
 
 "The value of the structure is enhanced by the 
 fact that it is being used in, and in fact is essential 
 to, a going concern business. We speak sometimes 
 of a going concern value as if it is or could be sepa- 
 rate and distinct from structure value so much for 
 structure and so much for going concern. But this 
 is not an accurate statement. The going concern 
 part of it has no existence except as a characteristic 
 of the structure. If no structure, no going concern. 
 If a structure in use, it is a structure whose value is 
 affected by the fact that it is in use. There is only 
 one value. It is the value of the structure as being 
 used. That is all there is of it." (Judge Sav- 
 age, in Brunswick and Topham Water Districts vs. 
 Maine Water Company.) 
 
 The following decision of the Wisconsin Railroad 
 Commission, in the case of Payne and others of 
 Marinette against the Wisconsin Telephone Com- 
 pany, illustrates a rather different phase of this value 
 than those just quoted. 
 
 The losses incurred during the first years of oper- 
 ation may be considered either as the cost of estab- 
 lishing a going business or a development expense. 
 The distinction between these two elements is not 
 always clear. It is given here as illustrating the fact 
 
202 VALUATION AND RATES 
 
 that some rate-regulating commissions have recog- 
 nized the justice of allowing for the cost of estab- 
 lishing public utility corporations on a paying basis ; 
 that is, giving them a value as a going concern : 
 
 "If property is devoted to the public use and rea- 
 sonable care has been exercised in all the phases 
 of its management, but the owners have not yet 
 received a fair return during the earlier years of the 
 operation of the plant in which the property is used 
 for the convenience of the public, the deficits thus 
 incurred must be made up out of later earnings, in 
 so far as that is commercially possible and expedi- 
 ent. * * * 
 
 "The Commission holds that the actual wise ex- 
 penditure of money toward getting the business of 
 the plant established may be included in the value 
 to be allowed for the purpose of fixing rates." 
 
 Most of the decisions and opinions just given relate 
 to cases in which municipalities or districts have con- 
 demned waterworks, owned by private corporations, 
 which it was desired to bring under public owner- 
 ship, and to telephone systems. The nature of the 
 business of supplying water and telephones is more 
 nearly monopolistic certainly than the business of 
 transportation, as has been shown in the previous 
 discussion. 
 
 In view of the decisions of the United States Su- 
 preme Court, of the highest State courts and the 
 opinion of eminent engineers, and in one case, at 
 least, of a State Commission, it is difficult to escape 
 the conclusion that railroads should be allowed a 
 going concern value when their properties are to be 
 evaluated. If the valuation is to be made the basis 
 for purchase, there can be no question of the justice 
 of such an addition to physical value, nor does it 
 seem unreasonable in a valuation made as a basis 
 for fixing rates. 
 
VALUATION 203 
 
 To include only the physical property and the 
 overhead charges heretofore mentioned in making 
 the valuation, omitting the commercial value of the 
 system, leads to illogical conclusions when applied 
 to the various railroad systems of the country as they 
 actually exist. To illustrate the point: Consider 
 two trunk lines extending from Chicago to New York 
 the Erie and the New York Central. 
 
 The Erie Railroad through southern New York, 
 northwestern Pennsylvania and northern Ohio, cross- 
 es some very rough country topographically, involv- 
 ing large expenditures for grading the roadbed and 
 some sharp curvature and heavy grades in overcom- 
 ing the divides which it crosses. 
 
 The New York Central follows the valleys of the 
 Hudson and Mohawk rivers practically to the shores 
 of Lake Erie, whence it traverses the flat level lake 
 plains into northern Ohio. As to the greater part of 
 the distance, the cost for grading its roadbed has 
 been small, its grades are light, and except as to a 
 portion of the line along the Hudson river, there is 
 little curvature. Its distance between the termini 
 is twenty miles less than that of the Erie. It has 
 on its main line such cities as Albany, Utica, Syra- 
 cuse, Rochester, Buffalo, Cleveland and Toledo, 
 which the Erie reaches only over branch or connect- 
 ing lines or not at all. 
 
 The cost of reproducing the Erie (track for track) 
 will be very much larger than the cost of reproduc- 
 ing the New York Central, if only the physical 
 property and overhead charges are included in the 
 valuation. To say that it has equal value consid- 
 ered from a commercial standpoint is ridiculous. 
 
 The real difference in value, from a commercial 
 standpoint, is made up of the larger going value of 
 the New York Central, which is based largely on 
 good service, favorable topography and strategical 
 position. Establishing the value simply on the basis 
 
204 VALUATION AND KATES 
 
 of the component physical parts of a railroad is evi- 
 dently illogical, whether the valuation is to be the 
 basis for purchase or rate-making. 
 
 Early Deficits an Element of Going Value 
 
 The cost of establishing a railroad on a paying 
 basis may be considered either as an element of the 
 cost of going value or as a development expense. It 
 is treated here as one of the elements of going value. 
 
 Immediately after a railroad is constructed, its 
 earnings are practically nothing at all. Under very 
 favorable circumstances it may earn its operating 
 expenses and fixed charges in three or four years. 
 Experience shows, however, that ordinarily a much 
 longer period of time is required. The greater part 
 of the railroads of the country as to mileage have 
 gone into the hands of a receiver within the ten- 
 year period following their completion. On the 
 larger systems, with a large mileage in successful 
 operation, extensions have been made which did not 
 get into court, but their operation usually entailed 
 a loss for the parent system during their earlier 
 history. 
 
 Stated in another way, the cost of placing most 
 of the railroads on a paying basis has been deficits 
 in receipts as compared with expenses and charges 
 and the lack of profit during a considerable period 
 of their earlier operation. A railroad, therefore, 
 which is able to pay its expenses, charges and a 
 profit is a more valuable property than is repre- 
 sented by the reproduction cost of its physical com- 
 ponent parts, and the measure of such increased 
 value is certainly as great as its cost. 
 
 In consequence, to the value of the reproduction 
 cost, with overhead charges included, there should 
 be added the deficits of the early years of operation 
 and a fair profit for such operation. This is as 
 
VALUATION 205 
 
 much a part of the cost of producing a going rail- 
 road as labor, material, use of money, or any other 
 element of value which has found its way into the 
 working whole. 
 
 Development Cost 
 
 As used in this discussion, development expenses 
 are intended to cover that class of expenditures 
 which were necessary in bringing the railroad to its 
 present state of efficiency, but the physical property 
 for which the expenditure was made does not ap- 
 pear in the inventory of the property as it is operated 
 at the present time. 
 
 In the chapter on "Construction and Re-Construc- 
 tion," the manner in which railroads have been first 
 constructed and the necessity for their re-construc- 
 tion later has been explained in detail. It is the 
 general impression of the public, and of many rail- 
 road men, that the re-construction of the railroads 
 has been necessitated by errors made in locating the 
 original line, or in constructing it. Nothing could 
 be further from the truth. 
 
 The original locations were based on financial 
 necessity and the undeveloped condition of the coun- 
 try traversed; the temporary original construction 
 was necessitated by the excessive cost of permanent 
 work in districts without transportation with finan- 
 cial necessity added. As stated in the chapter re- 
 ferred to, it was oftener a question of whether the 
 railroad could be constructed at all rather than as 
 to what kind of railroad was to be constructed. The 
 stiff grades and sharp curvature employed on the 
 original roads were necessities, not mistakes, and 
 their employment indicated skill and sound business 
 judgment on the part of the engineers. 
 
 Had the railroads been first constructed to the 
 present-day standards as to grades, curvature and 
 
206 VALUATION AND RATES 
 
 character of structures, only a very small part of 
 the present extensive system of railroads could have 
 been constructed or, if constructed, operated except 
 at enormous losses. The meager available capital 
 and the certainty of limited traffic during the period 
 following construction would have forbidden it. 
 
 The economics of operation for an increased traffic 
 density necessitated the re-construction of the rail- 
 roads, and in such re-construction much of the orig- 
 inal construction had to be abandoned. Remember- 
 ing that the original line was absolutely essential in 
 producing the business which the reconstructed line 
 carries at the present time, a part of its cost is prop- 
 erly a part of the cost of the line as it now exists, 
 although no item would appear in an inventory of 
 the present line to cover it. 
 
 Permanent Structures Only to Be Included 
 
 There are certain items of the cost of the original 
 line which cannot properly be included namely, 
 those items which are in constant course of renewal, 
 the cost of which renewal is included in operating 
 expenses but those items which are capital charges, 
 not subject to renewal at operating expense, may 
 properly be included in the estimate for cost of de- 
 velopment due to abandoned lines. 
 
 The rails and steel bridge superstructure on aban- 
 doned lines may be removed and used in other situ- 
 ations or sold for scrap; the ties, timber bridges, 
 frame station and other buildings, fences, etc., are 
 temporary structures and things with comparatively 
 short life, renewable from operating expense. 
 
 No structure or thing of this character should be 
 included in the estimate of development expense, 
 but excavations and embankments, masonry bridge 
 piers and culverts, culvert pipes of tile or iron, and 
 all other permanent structures, not removable from 
 
VALUATION 207 
 
 an abandoned line, should be included in this esti- 
 mate. 
 
 Other Provisions of the Act 
 
 The fourth paragraph of the Valuation Act pro- 
 vides for an investigation and report upon the his- 
 tory and organization of present and previous cor- 
 porations operating the railroad property. 
 
 The fifth paragraph of the act provides for a re- 
 port of the amount and value of any gift or grant 
 of right of way, or donation made to the railroads 
 by the United States or other Government (State, 
 County or Municipal) , or by individuals or corpora- 
 tions ; also the grants of land to them by the United 
 States or other Governments, and the amount of 
 money derived from the sale of such grants and 
 the value of the unsold portion at the time acquired 
 and the present time; also the amount and value 
 of concessions and allowances made by the railroads 
 to the United States or other Governments, in con- 
 sideration of such aid, gifts, grants or donations. 
 
 During the earlier periods of railroad construc- 
 tion, the Federal Government, and some of the states, 
 made very extensive grants of unoccupied and other 
 lands, to encourage the building of railroads into 
 undeveloped territories, particularly west of the 
 Mississippi River. 
 
 In some instances the railroad was given each 
 alternate section of land (a section of land is one 
 mile square and contains 640 acres of land) for a 
 certain distance on each side of its line. The rail- 
 roads have sold a part of the land so granted and 
 retain some of it. 
 
 A portion of these lands have become valuable 
 through the subsequent discovery of coal or other 
 mineral under them, or through the increased value 
 of timber on such lands. 
 
208 VALUATION AND RATES 
 
 This paragraph of the law provides for a state- 
 ment of all lands granted the railroads and an in- 
 ventory of such land still held by them, together 
 with the value of such land at the time it was 
 granted and the present time. 
 
 It also provides for a statement of the value of 
 the concessions in reduced rates and free transporta- 
 tion made by the railroads to these governments on 
 account of their grants of land and other aid. 
 
 The purpose of these two statements and reports 
 is evidently to compare the value of the grants made 
 by the governments with the value of the rate con- 
 cessions made by the railroads. 
 
 The act provides that the Interstate Commerce 
 Commission shall prescribe the procedure and the 
 form and classification of the items of the valua- 
 tion; requires the railroads to furnish any data re- 
 quired by the Commission ; provides for the mainte- 
 nance of the valuation after it has been made and 
 for a hearing of protests by interested parties of 
 any valuation made under the supervision of the 
 Commission. 
 
 Conclusions 
 
 Based on the discussions contained in this chapter, 
 the following are fair conclusions as to the items 
 which are to be included and the methods to be 
 employed in evaluating railroad property: 
 
 (1) That as to all physical structures such as 
 track, buildings of all kinds, water and fuel stations, 
 fences, excavations, embankments and all rolling 
 stock engines and cars machinery, tools and all 
 equipment of any kind essential to the operation and 
 maintenance of the railroad, the cost of reproduction 
 new is the fair value of the physical property at the 
 time of valuation. 
 
 (2) That deterioration in a simple component 
 part of a railroad is depreciation in that particular 
 
VALUATION 209 
 
 part, but is not, necessarily, depreciation in the prop- 
 erty or plant as a whole. 
 
 If the simple parts of a railroad are maintained at 
 the standard required for economical operation and 
 worn parts are replaced when they have come to the 
 end of their useful life, there is no depreciation of 
 the railroad as a whole. 
 
 If proper maintenance is not applied to the simple 
 parts of a railroad and replacement of worn parts 
 made when due, there is depreciation in the property 
 as a whole, and the cost of making good the deferred 
 maintenance and applying the replacements due is 
 the measure of the depreciation in the railroad as a 
 whole. 
 
 (3) The cost of maintaining and replacing the 
 simple component parts of a railroad is a part of 
 the current expense of operating it, and has no con- 
 nection with the capital account or the present true 
 value of the property, so long as the railroad as a 
 whole is properly maintained for economical oper- 
 ation. 
 
 In consequence, if the cost of restoring that por- 
 tion of depreciation which is properly to be over- 
 come by expenditure for operating expense is de- 
 ducted from the capital or the present true value of 
 the railroad, such deduction confiscates the property 
 of its owner if such alleged true value is used as a 
 basis for determining the justice of rates. 
 
 (4) That the factors of necessity as to time and 
 location must be considered in establishing the value 
 of railroad real estate, and the cost of acquisition 
 must be included therein, as well as the original 
 amount actually paid (or estimated) for damage 
 to adjacent land and improvements, if the owners 
 of the railroad land are to be placed on a parity 
 with other land owners. 
 
210 VALUATION AND RATES 
 
 If the cost of reproduction new of the land is to 
 be found, consideration must be given to the adjust- 
 ment of the boundaries of abutting land to the lands 
 of the railroad which has occurred since the time 
 of original construction. 
 
 Where the line of the proposed reproduced rail- 
 road would divide the parcel or tract of land of any 
 owner, consequential damage to land and improve- 
 ments not taken must be considered and allowed as 
 a part of the cost of reproduction. 
 
 (5) That certain percentages to be determined 
 as far as possible from the available records of the 
 railroad under valuation, supplemented by general 
 experience, where such records are incomplete be 
 added for overhead charges, viz., Engineering and 
 General Expenditures. 
 
 (6) That a percentage be added for Contin- 
 gencies, the amount to be determined by the char- 
 acter of the work being valued. 
 
 (7) That an amount be added for Interest dur- 
 ing construction, equal to the interest on the whole 
 cost of all items, except equipment, for a period of 
 time equal to one-half the estimated time required 
 for construction, at the average rate which the par- 
 ticular railroad under consideration has paid for 
 capital or borrowed money, during the ten-year pe- 
 riod preceding valuation or during the first half 
 of the decade. 
 
 (8) That an amount be added for good will and 
 going value, the minimum being the aggregate of all 
 deficits in operating expenses and fixed charges and 
 lack of profits occurring between the completion of 
 the railroad and the time at which it returned a 
 profit on the actual value of the property. 
 
 This minimum is to be determined from the rec- 
 ords of the corporation, when these are available, 
 
VALUATION 211 
 
 or estimated on the basis of the recorded experience 
 of roads similarly situated when they are not. 
 
 That other elements of going value be considered 
 on each system particularly. 
 
 (9) That for the embankments, excavations, ma- 
 sonry, permanent culverts and other non-removable, 
 permanent structures on abandoned lines, their cost 
 be added to the value of the existing operated lines 
 as a development cost. 
 
 (10) As a corollary of (8) and (9), the total 
 commercial value of a railroad does not necessarily 
 bear a direct relation to the cost of ^reproducing its 
 physical property or the amount of its capitalization. 
 
 (11) That the Federal Valuation, now being 
 made, will affect the credit of the railroads advan- 
 tageously, if based on the same principles as are ap- 
 plied in determining other commercial values. 
 
 Current depreciation is an inevitable accompani- 
 ment of railroad operation. If it is to be deducted 
 from capital or present value (the investment being 
 impaired), an investor in railroad securities is as- 
 sured, in advance, of a large shrinkage in the value 
 of his investment. If depreciation (other than de- 
 ferred maintenance) is deducted from reproduction 
 cost, to determine present value of railroad property, 
 and the public come to regard such value as the in- 
 trinsic worth of the property, and the amount on 
 which railroads will be allowed to earn a fair return, 
 railroad borrowing for the purpose of providing ex- 
 tensions and betterments of existing railroads will 
 be practically barred. 
 
RATES 
 Basis of Rate Making 
 
 Railroads were first opened to public use in Eng- 
 land in 1830. From the speeches in the English 
 Parliament in 1836 to the present moment, the dis- 
 cussion of the proper basis for rate making has been 
 persistent. Speaking broadly, there are two possible 
 methods of making rates: (1) One based on Cost 
 of Service and (2) the other based on Value of 
 Service. There is in addition, of course, a basis com- 
 bining both methods and other conditions. 
 
 It may be said, in advance of the following dis- 
 cussion, that all tariffs of railway rates, in all coun- 
 tries, whether the railways be owned and operated 
 by the State or by private corporations, always have 
 been, now are, and, so far as students of the matter 
 are able to judge, always will be based on the second 
 method, in combination with other conditions, limited 
 in all cases, as to the minimum charge, by cost of 
 service. 
 
 In a matter of such vital public interest, however, 
 it is well to understand the reasons for the adoption 
 of any particular method rather than another, espe- 
 cially in these days, when many subjects heretofore 
 considered settled finally are being re-investigated, 
 tested and adapted to a changing economical and 
 social condition. 
 
 Cost of Service 
 
 The schedule of railroad rates as a whole must 
 provide for : 
 
 (1) Cost of Conducting Transportation. 
 
RATES 213 
 
 (2) Cost of maintaining Roadbed, Structures 
 and Equipment. 
 
 (3) Payment of interest on investment (on capi- 
 talization or valuation), rentals, taxes and all other 
 fixed charges. 
 
 (4) Profit to the operators of the transportation 
 facilities. 
 
 Cost of Service involves consideration of Capital- 
 ization, Valuation, Expenditures for Operating Ex- 
 pense and Income. These several subjects will be 
 discussed in turn. 
 
 Capitalization 
 
 The total length of line of railroads of the United 
 States reported by the Interstate Commerce Com- 
 mission in 1914, representing more than 98 per cent 
 of the entire mileage of the country, is nearly 250,000 
 miles, the total capitalization nearly $16,000,000,000, 
 the actual average capitalization per mile being 
 $66,661. 
 
 As to the real value of the property, compared 
 with its capitalization, it may be said of the rail- 
 roads, as a whole, that the valuation now being made 
 by the Interstate Commerce Commission will prob- 
 ably show a larger gross amount than the total cap- 
 italization, judging from the results obtained by in- 
 dependent valuations which have been made here- 
 tofore. 
 
 For the purpose of this discussion, then, the two 
 terms, capitalization and valuation, may be regarded 
 as synonomous. It must be remembered, however, 
 that as to particular roads, the valuation will in some 
 cases exceed and in others be less than the capital- 
 ization, as explained in the chapter on Valuation. 
 Certain relations between valuation and rates are 
 discussed in succeeding pages. 
 
 It has cost much to construct railroads, and, in 
 comparison with such cost, little to maintain them. 
 
214 VALUATION AND RATES 
 
 For the whole country the capital is nearly 16 billion 
 dollars, the annual maintenance cost,* nine hundred 
 and fifty million dollars, or practically six per cent 
 of the capital cost. 
 
 The profit of any business depends largely on the 
 extent to which its facilities are kept constantly em- 
 ployed. A railroad can not employ its facilities 
 fully, except on the main trunk lines and only at 
 times as to them. 
 
 With a volume of traffic nearly equal to its ca- 
 pacity, the receipts of a railroad will be relatively 
 high, as compared with its capital, and in conse- 
 quence the charge for capital will be light per unit 
 of traffic, or, stated concisely, the greater the volume 
 of traffic the smaller the capital charge per unit of 
 traffic. The exception to this is that immediately 
 after additional tracks or other facilities are con- 
 structed, even with a greater density of traffic, the 
 cost per unit may be greater for a time, as the in- 
 creased capital charge is spread over traffic but 
 slightly increased. 
 
 On branch and secondary main lines, even though 
 the capitalization per unit of length (as per mile) 
 is less than that of main trunk lines on account of 
 lower standards as to grades and other items affect- 
 ing the cost of construction in a large measure the 
 capital cost per unit of traffic is greater on account 
 of less density of traffic. For this reason, such 
 branch and secondary main lines should be allowed 
 to charge higher rates per unit of traffic than obtain 
 on lines of dense traffic. 
 
 The following table, compiled from the 1913 sta- 
 tistics of the Interstate Commerce Commission, will 
 illustrate the fact that the capitalization per unit of 
 traffic is less as the traffic density increases : 
 
 *Maintenance of roadway, structures and equipment. 
 
RATES 215 
 
 C 
 
 Railroads Mi 
 i 
 
 Pennsylvania Railroad . . : 
 Illinois Central 
 
 Traffic 
 Units* 
 ipital per per Mile 
 le of Line of Line 
 Q Dollars, in Thousands. 
 
 163,192 6,160 
 66,389 1,700 
 51,727 1,260 
 57,131 904 
 43,121 528 
 18,455 174 
 
 Capitalt 
 per 
 Unit of 
 Traffic 
 in Cents. 
 
 2.72 
 
 3.90 
 4,10 
 6.32 
 8.17 
 10.58 
 
 Louisville & Nashville . . 
 Atch., Top. & Santa Fe. . 
 Atlantic Coast Line .... 
 Manistee & N. Eastern . . 
 
 *Trafflc Units, as employed in this discussion, are passenger 
 miles plus freight ton-miles. 
 
 t Capital per Unit of Traffic is capital per mile in first column 
 divided by Traffic Units of second column. 
 
 This table shows that on systems of light traffic 
 and on branch lines, the portion of the total cost of 
 service which relates to the payment of interest on 
 capital, that is, fixed capital charges, is greater per 
 unit of traffic than on roads with dense traffic. The 
 Pennsylvania, with a capital per mile nine times as 
 large as the Manistee & North Eastern, has only 
 26% as much capital per unit of traffic as the latter 
 road that is, the cost for capital per traffic unit 
 on the Manistee & North Eastern is four times as 
 great as on the Pennsylvania. 
 
 Relation of Traffic to Operating Expense 
 General 
 
 In order to understand some phases of the eco- 
 nomics of rates, certain relations which exist between 
 Traffic and Operating Expense must be understood. 
 It does not cost as much per unit of traffic to haul 
 long distances as it does shorter ones. It costs less 
 per unit to haul traffic when 5 million tons per mile 
 of line are moved than when 1 million tons per mile 
 of line are moved. 
 
 This is true beyond dispute, for the statistics of 
 actual operation show it clearly. But the reasons 
 
216 VALUATION AND RATES 
 
 why it is true and, what is more essential to know, 
 how much less it does cost, cannot be understood ex- 
 cept by making a detailed analysis of operating ex- 
 pense for different traffic conditions. Fortunately 
 for the investigator, there is sufficient authentic data 
 available for the purpose of general analysis. 
 
 Interstate Commerce Commission Statistics 
 
 The Interstate Commerce Commission since 1887 
 has required the railroads to make reports to it of 
 their operating expense. These are made on pre- 
 scribed forms by over 98% of the railroads in the 
 United States. 
 
 One form for large roads that is, roads whose 
 annual revenues are in excess of $1,000,000 divides 
 operating expense into five main classes, which are 
 subdivided into 117 subitems. The other form for 
 small roads roads whose annual revenues are be- 
 tween $100,000 and $1,000,000 divides the expense 
 into five main classes, which are subdivided into 44 
 subitems. 
 
 These statistics, based on uniform classification of 
 all items of operating expense, furnish the data nec- 
 essary in making an analysis of it. They are used 
 by engineers in analyzing the effects of distance, 
 grades, and curvature on operating expense, and are 
 applied practically to the location and construction 
 of railroads ; by the operating department in investi- 
 gating the efficiency of its organization in managing 
 the property, and they should be employed in deter- 
 mining the true relation which exists between traffic 
 and operating expense. 
 
 In the following table, the five main classes into 
 which operating expense is divided are shown at 
 the head of the columns and the relation which each 
 class of expense bears to the total operating expense 
 is shown by percentages for a period of seven years. 
 
RATES 217 
 
 The figures are the average of all roads of the coun- 
 try reporting to the Interstate Commerce Commis- 
 sion. 
 
 What this table means, simply stated, is that of 
 each dollar spent by the average railroad for operat- 
 ing, a little more than 19 cents is spent on account 
 of maintaining the track, bridges, buildings, and 
 other structures of the company ; that about 23 cents 
 of each dollar is spent on account of maintaining lo- 
 comotives, cars, and shop machinery used in repair- 
 ing or renewing them; that 3 cents is spent by the 
 Traffic Department in securing and looking after the 
 traffic moved ; that 51 cents is spent in providing train 
 and switching crews, station employees, fuel, lubri- 
 cants, and water for engines, and other things re- 
 quired in actually moving the trains ; that 4 cents is 
 spent for paying the salaries and office expense of 
 general officers, for insurance, pensions and similar 
 items. 
 
 Main Divisions of Operating Expenses 
 
 Showing percentage of each class to total. 
 
 Year. 
 
 (i) 
 
 Maint. 
 of Way. 
 Per Cent. 
 
 (2) 
 Maint. 
 Equip. 
 Per Cent. 
 
 Traffic. 
 Per Cent. 
 
 Transpor- 
 tation. 
 Per Cent. 
 
 Gen- 
 eral Ex- 
 penditure. 
 Per Cent. 
 
 1908 
 
 19.73 
 
 22.06 
 
 2.89 
 
 52.01 
 
 3.31 
 
 1909 
 
 19.29 
 
 22.75 
 
 3.08 
 
 50.90 
 
 3.98 
 
 1910 
 
 20.22 
 
 22.66 
 
 3.07 
 
 50.29 
 
 3.76 
 
 1911 
 
 18.87 
 
 22.54 
 
 3.12 
 
 51.75 
 
 3.72 
 
 1912 
 
 18.35 
 
 23.02 
 
 3.11 
 
 51.87 
 
 3.65 
 
 1913 
 
 19.24 
 
 23.70 
 
 2.91 
 
 50.63 
 
 3.52 
 
 1914 
 
 19.13 
 
 24.13 
 
 2.89 
 
 50.02 
 
 3.83 
 
 Average . 
 
 19.22 
 
 22.99 
 
 3.02 
 
 51.08 
 
 3.69 
 
 (1) Maintenance of Way and Structures. 
 
 (2) Maintenance of Equipment. 
 
 The table shows that the percentage which each 
 class of expense bears to the total operating expense 
 is very nearly uniform from year to year. 
 
218 VALUATION AND RATES 
 
 '& | 5 -. : 
 
 The 'following tables** show the percentage 
 which each one of the 117 items of expense bears to 
 the total operating expense for the year ended June 
 30, 1914. For instance, 3 cents of the average rail- 
 road dollar was spent in renewing ties; nearly 7 
 cents for keeping up the roadbed and track; a 
 little more than 8 cents for repairing locomotives; 
 8% cents for repairing freight cars; about 6 cents 
 to pay locomotive engineers; 91/2 cents for furnish- 
 ing the road engines with coal; and so on through 
 the list, the relative expense for each item is shown. 
 
 Summary showing classification of operating ex- 
 penses for the year ending June 30th, 1914, and pro- 
 portion of each class to the total. Large Roads* 
 
 Operating Expense Percent 
 
 of Total 
 
 Item Operating 
 
 No. Maintenance of Way and Structures Expense 
 
 1. Superintendence of way and structures 0.977 
 
 2. Ballast 332 
 
 3. Ties 3.074 
 
 4. Rails 875 
 
 5. Other track material 987 
 
 6. Roadway and track 6.846 
 
 7. Removal of snow, sand, and ice - 266 
 
 8. Tunnels 051 
 
 9. Bridges, trestles, and culverts 1.685 
 
 10. Over and under grade crossings 071 
 
 11. Grade crossings, fences, cattle guards and signs 329 
 
 12. Snow and sand fences and snowsheds 021 
 
 13. Signals and interlocking plants 546 
 
 14. Telegraph and telephone lines 217 
 
 15. Electric power transmission 037 
 
 16. Buildings, fixtures and grounds 1.747 
 
 17. Docks and wharves 152 
 
 18. Roadway tools and supplies 249 
 
 19. Injuries to persons 144 
 
 20. Stationery and printing 037 
 
 21. Other expenses Oil 
 
 22. Maintaining joint tracks, yards and other facilities Dr. .773 
 
 23. Maintaining joint tracks, yards and other facilities Cr. .561 
 
 Total maintenance of way and structures 18.866 
 
 *Roads having annual earnings in excess of $1,000,000. 
 
 **These tables show the average for all roads reporting to the 
 Interstate Commerce Commission. 
 
RATES 219 
 
 Per Cent 
 of Total 
 
 Item Operating 
 
 No. Expense 
 
 Maintenance of Equipment 
 
 24. Superintendence of equipment 704 
 
 25. Steam locomotives repairs 8.183 
 
 26. Steam locomotives renewals 132 
 
 27. Steam locomotives depreciation 1.027 
 
 28. Electric locomotives repairs 036 
 
 29. Electric locomotives renewals 
 
 30. Electric locomotives depreciation 012 
 
 31. Passenger train cars repairs 1.523 
 
 32. Passenger train cars renewals 050 
 
 33. Passenger train cars depreciation 298 
 
 34. Freight train cars repairs 8.510 
 
 35. Freight train cars renewals 597 
 
 36. Freight train cars depreciation 2.001 
 
 37. Electric equipment of cars repairs 014 
 
 38. Electric equipment of cars renewals * 
 
 39. Electric equipment of cars depreciation 007 
 
 40. Floating equipment repairs 044 
 
 41. Floating equipment renewals 003 
 
 42. Floating equipment depreciation 019 
 
 43. Work equipment repairs 228 
 
 44. Work equipment renewals 038 
 
 45. Work equipment depreciation 079 
 
 46. Shop machinery and tools 546 
 
 47. Power plant equipment 018 
 
 48. Injuries to persons 117 
 
 49. Stationery and printing 054 
 
 50. Other expenses 025 
 
 51. Maintaining joint equipment at terminals, Dr 087 
 
 52. Maintaining joint equipment at terminals, Cr 044 
 
 Total maintenance of equipment 24.311 
 
 *Less than 0.001 per cent. 
 
 Traffic 
 
 53. Superintendence of traffic 765 
 
 54. Outside agencies 1.137 
 
 55. Advertising 379 
 
 56. Traffic associations 071 
 
 57. Fast freight lines 154 
 
 58. Industrial and immigration bureaus 082 
 
 59. Stationery and printing 320 
 
 60. Other expenses 006 
 
 Total traffic expenses 2.914 
 
 Transportation 
 
 61. Superintendence of transportation 1.256 
 
 62. Dispatching trains 845 
 
 63. Station employes 6.886 
 
 64. Weighing and car-service associations 117 
 
220 VALUATION AND RATES 
 
 Per Cent 
 of Total 
 
 Item Operating 
 
 No. Expense 
 
 65. Coal and ore docks 176 
 
 66. Station supplies and expenses 574 
 
 67. Yardmasters and their clerks 850 
 
 68. Yard conductors and brakemen 2.830 
 
 69. Yard switch and signal tenders 213 
 
 70. Yard supplies and expenses 079 
 
 71. Yard enginemen 1.637 
 
 72. Enginehouse expenses yard 524 
 
 73. Fuel for yard locomotives 1.570 
 
 74. Water for yard locomotives 109 
 
 75. Lubricants for yard locomotives 030 
 
 76. Other supplies for yard locomotives 035 
 
 77. Operating joint yards and terminals Dr 1.332 
 
 78. Operating joint yards and terminals Cr 793 
 
 79. Motormen 048 
 
 80. Road enginemen 5.947 
 
 81. Enginehouse expenses road 1.729 
 
 82. Fuel for road locomotives 9.423 
 
 83. Water for road locomotives 617 
 
 84. Lubricants for road locomotives 175 
 
 85. Other supplies for road locomotives 191 
 
 86. Operating power plants 058 
 
 87. Purchased power 048 
 
 88. Road trainmen 6.415 
 
 89. Train supplies and expenses 1.843 
 
 90. Interlockers and block and other signals operation 532 
 
 91. Crossing flagmen and gatemen 360 
 
 92. Drawbridge and operation 049 
 
 93. Clearing wrecks 267 
 
 94. Telegraph and telephone operation 296 
 
 95. Operating floating equipment 145 
 
 96. Express service .002 
 
 97. Stationery and printing 425 
 
 98. Other expenses 129 
 
 99. Loss and damage freight 1.555 
 
 100. Loss and damage baggage 014 
 
 101. Damage to property 204 
 
 102. Damage to stock on right of way 190 
 
 103. Injuries to persons 1.233 
 
 104. Operating joint tracks and facilities Dr 284 
 
 105. Operating joint tracks and facilities Cf .257 
 
 Total transportation expenses 50.192 
 
 General 
 
 106. Salaries and expenses of general officers 481 
 
 107. Salaries and expenses of clerks and attendants 1.542 
 
 108. General office supplies and expenses 182 
 
 109. Law expenses 564 
 
 110. Insurance 350 
 
 111. Relief department expenses .034 
 
RATES 221 
 
 Per Cent 
 of Total 
 
 Item Operating 
 
 No. Expense 
 
 112. Pensions 174 
 
 113. Stationery and printing 159 
 
 IIS 1 ^. Valuation expenses 078 
 
 114. Other expenses 122 
 
 115. General administration, joint tracks, yards and ter- 
 
 minals Dr 046 
 
 116. General administration, joint tracks, yards and ter- 
 
 minals Cr 015 
 
 Total general expenses 3.717 
 
 Recapitulation of Operating Expenses 
 
 1. Maintenance of way and structures 18.866 
 
 2. Maintenance of equipment 24.311 
 
 3. Traffic expenses 2.914 
 
 4. Transportation expenses 50.192 
 
 5. General expenses 3.717 
 
 Total operating expenses 100.000 
 
 Ratio of operating expenses to operating revenue.. 72.048 
 
 Summary showing classification of operating ex- 
 penses for the year ending June 30, 1914, and pro- 
 portion of each class to the total. Small Roads* 
 
 Operating Expense Percent 
 
 Item Operating 
 
 No. Maintenance of Way and Structures Expense 
 
 1. Superintendence of way and structures 1.268 
 
 2. Maintenance of roadway and track 19.182 
 
 3. Maintenance of track structures 3.972 
 
 4. Maintenance of buildings, docks and wharves 1.500 
 
 5. Injuries to persons 108 
 
 6. Other maintenance of way and structure expenses 536 
 
 7. Maintaining joint tracks, yards and other facilities Dr. .681 
 
 8. Maintaining joint tracks, yards and other facilities Cr. 1.494 
 
 Total maintenance of way and structures 25.753 
 
 Maintenance of Equipment 
 
 9. Superintendence of equipment 974 
 
 10. Locomotives repairs 6.230 
 
 *Roads having earnings between $100,000 and $1,000,000 an- 
 nually. 
 
222 VALUATION AND RATES 
 
 Per Cent 
 of Total 
 
 Item Operating 
 
 No. Expense 
 
 11. Cars repairs 7.331 
 
 12. Floating equipment repairs 036 
 
 13. Work equipment repairs 197 
 
 14. Equipment renewals 483 
 
 15. Equipment depreciation 3.786 
 
 16. Injuries to persons 068 
 
 17. Other maintenance of equipment expense 631 
 
 18. Maintaining joint equipment at terminals Dr 037 
 
 19. Maintaining joint equipment at terminals Cr 059 
 
 Total maintenance of equipment 19.714 
 
 Traffic 
 20. Traffic expenses 2.317 
 
 Transportation 
 
 21. Superintendence and dispatching trains 2.138 
 
 22. Station service 7.340 
 
 23. Yard enginemen 908 
 
 24. Other yard employees 1.637 
 
 25. Fuel for yard locomotives 1.303 
 
 26. All other yard expenses 419 
 
 27. Operating joint yards and terminals Dr 1.265 
 
 28. Operating joint yards and terminals Cr 971 
 
 29. Road enginemen and motormen 5.949 
 
 30. Fuel for road locomotives 11.196 
 
 31. Other road locomotive supplies and expenses 2.979 
 
 32. Road trainmen 6.640 
 
 33. Train supplies and expenses 1.114 
 
 34. Injuries to persons 1.091 
 
 35. Loss and damage 648 
 
 36. Other casualties 668 
 
 37. All other transportation expenses 1.557 
 
 38. Operating joint tracks and facilities Dr 472 
 
 39. Operating joint tracks and facilities Cr 750 
 
 Total transportation 45.603 
 
 General Expenses 
 
 40. Administration 5.529 
 
 41. Insurance 674 
 
 42. Other general expenses 535 
 
 43. General administration, joint tracks, yards, and ter- 
 
 minals Dr 034 
 
 44. General administration, joint tracks, yards, and ter- 
 
 minals Cr 159 
 
 Total general expenses 6.613 
 
RATES 223 
 
 Fixed Operating Expense 
 
 An examination of the 117 items into which Oper- 
 ating Expense is divided in the first table will show 
 that some of the items are not affected at all by the 
 amount of traffic carried, some are directly pro- 
 portional to it, and some are only partly affected. 
 If we analyze the effect which traffic has on each 
 item, we will be able to say definitely what part of 
 the expense is dependent on the volume of traffic 
 and what other part is independent of it, or, in other 
 words, there are certain fixed expenses which would 
 be incurred whether the volume of traffic moved was 
 100,000 or 1,000,000 tons per mile of line. 
 
 Maintenance of Way Expense 
 
 The American Railway Engineering Association, 
 composed of engineers engaged in the construction 
 and maintenance of railways, have investigated 
 thoroughly what factors have an effect on the op- 
 erating expense of maintaining the roadway and 
 structures. 
 
 The committee of the association investigating this 
 special matter reported that of the 23 items of main- 
 tenance of way expense, 7 were affected by the vol- 
 ume of the traffic and the balance were not. The 
 items affected are Superintendence, Ties, Rails, 
 Other Track Material (rail fastenings, switches, 
 etc.), Roadway and Track (principally section 
 labor) , Buildings, Tools and Supplies. 
 
 The maintenance expense on account of ties is due 
 to two causes decay and mechanical wear. The 
 amount due to mechanical wear is proportional to 
 the volume of the tonnage of the trains: Using the 
 average volume of tonnage for all "Large Roads" 
 for 1914 and the factors for determining mainte- 
 nance expense due to mechanical wear, as found by 
 the association named, the average cost of mainte- 
 
224 VALUATION AND KATES 
 
 nance of ties due to age and decay is 80%, and for 
 maintenance caused by the traffic, 20%.** 
 
 The operating expense on account of rails is due 
 to corrosion, and wear from train operation. The 
 effect of corrosion on expense is very small and the 
 whole expense of rail maintenance may be charged 
 against the traffic. The same is true of "Other Track 
 Material." 
 
 Using the factors determined by the engineering 
 association before referred to, 50% of the expense 
 of Superintendence, Roadway and Track and Road- 
 way Tools and supplies are due to the volume of 
 traffic. 
 
 Maintenance cost of buildings is not appre- 
 iably affected by volume of traffic. It is evi- 
 dent that the cost of maintenance for such items as 
 Removal of Snow, Bridges and Culverts, Telegraph 
 and Telephone, Grade Crossings, Fences and Cattle 
 Guards, and the balance of the 23 items in this class 
 are not affected at all by the volume of traffic, the 
 expense being the same whether 1 or 10 trains per 
 day are operated. 
 
 We can now show what portion of maintenance of 
 way expense is affected by the traffic and the balance 
 is a fixed operating expense which is incurred inde- 
 pendently of the volume of traffic carried. 
 
 Percentage 
 of Total 
 
 Per Cent Percentage Operating 
 
 Item Affect- of Total Expense 
 
 No. Item. ed by Operating Due to 
 
 Traffic. Expense* Traffic. 
 
 1 Superintendence 50% 0.977 0.488 
 
 3 Ties 20% 3.074 0.615 
 
 4 Rails 100% 0.875 0.875 
 
 5 Other Track Material . 100% 0.987 0.987 
 
 **This will vary with roads of different traffic density and dif- 
 fering class of ties. 
 
 *Average for all large roads of the country as shown by a 
 preceding table. 
 
RATES 225 
 
 6 Roadway and Track.. 50% 6.846 3.423 
 18 Road-way Tools and 
 
 Supplies 50% 0.249 .125 
 
 Percentage of Total 
 Operating Expense 
 due to Traffic 6.513 
 
 The total for all items of maintenance of way ex- 
 pense is 18.866, as shown by a preceding table, which 
 determines the fact that 66% of all maintenance of 
 way expense is a fixed expense ( &.& ) an( * that 
 only 34% of it is due to the volume of traffic. This 
 is of very great importance in connection with rate- 
 making; its application will be shown later. 
 
 Maintenance of Equipment Expense 
 
 Continuing the analysis of the next class of Op- 
 erating expense items, Maintenance of Equipment, 
 we find that all of the operating expense items are 
 dependent on the volume of traffic moved, except 
 a part of the expense of repairs, renewals, and de- 
 preciation of locomotives (items 25-27) f, passenger- 
 train cars (31-35), freight-train cars (34-36), and 
 work equipment (43-45). 
 
 A careful analysis of these items of repairs, re- 
 newals, and depreciation of equipment was made by 
 Wellington* from the records of several large rail- 
 road systems. He found that the cost of painting 
 and other work on locomotives, which is due to age, 
 weather, and other conditions not dependent on 
 traffic, was 7% of the maintenance cost. 
 
 About 50% of the cost of passenger car repairs is 
 for painting and other items which are due to age 
 
 fThese numbers refer to the Item Number in the table show- 
 ing- the classification of items of operating expense. 
 
 * "Economic Theory of Railroad Location," by A. M. Welling- 
 ton, C. E. 
 
226 VALUATION AND RATES 
 
 and not therefore dependent on volume of traffic. 
 A large part of the expense of maintaining freight 
 and work cars is due to painting and to the 
 decay of the wood of which they are largely con- 
 structed. If we take 30% of the maintenance cost 
 as due to age, and therefore independent of the 
 traffic, we will be very near the truth. 
 Tabulating this data we have: 
 
 Percentage 
 
 Percent- Per- of Total 
 , age not centage Operating 
 
 Affect- of Total Expense 
 
 Item ed by Operating not due 
 
 No. Item. Traffic Expense to Traffic 
 
 25-27 Steam Locomotives ... 7% 9.342 0.654 
 
 31-33 Passenger-Train Cars. 50% 1.871 0.936 
 
 34-36 Freight-Train Cars... 30% 11.111 3.333 
 
 43-45 Work Equipment 30% 0.335 0.101 
 
 Percentage of Total Expense not due to 
 
 Traffic 5.024 
 
 Dividing this 5.024 by 24.311, the total for all 
 items of equipment operating expense, we have 
 20.7% (say, 20%) of the total maintenance of equip- 
 ment expense due to other causes than the traffic. 
 
 Expense of Conducting Transportation 
 
 Of the 45 items of expense due to Conducting 
 Transportation all except 14 are directly affected by 
 an increase in volume of traffic. 
 
 On such items as the wages of enginemen, train- 
 men, switchmen, fuel, water, and lubricants for lo- 
 comotives, which make up the larger part of trans- 
 portation expense, an increase in volume of traffic 
 increases the expense almost in direct proportion. 
 On the 14 items, however, certain portions of the 
 expense will be incurred independent of the volume 
 of traffic moving. 
 
RATES 227 
 
 The percentages used in the following are ap- 
 proximations only, as an accurate division of the 
 expense can not be made between the fixed expense 
 and that varying with the traffic. Such approxima- 
 tions are, however, very near the truth and will 
 answer every purpose for which the data is to be 
 employed. 
 
 Superintendence of transportation (item 61) is 
 only partly increased by increased volume of traffic 
 that is, there is a certain amount of supervision 
 needed whether the traffic density is 2 million tons 
 per mile of line or four million. The same is true 
 of Dispatcher's forces (62), as there might be a 
 considerable addition in volume of traffic (and 
 therefore number of trains) without increasing the 
 force employed. 
 
 Station employees' (63) expense is made up in 
 greater part of salaries and expenses at smaller sta- 
 tions. Considerable increases of traffic would not 
 affect such expense. The expense at terminal sta- 
 tions where many laborers are employed varies 
 more nearly with the traffic but does not increase 
 in direct proportion to it, as certain employees, such 
 as the agent and the larger part of his office force, 
 must be retained irrespective of the volume of busi- 
 ness. 
 
 If we say that for Superintendence, Dispatching, 
 Coal and Ore Docks, and Station Employees, 75% 
 of the expense is not affected by increases in the 
 volume of traffic, we are very near the truth. Such 
 items as switch tenders (69), signalmen, crossing 
 flagmen, drawbridge operation (90-92), and repairs 
 of telegraph line (94) are entirely independent of 
 the traffic. 
 
 The Enginehouse expense for yard (72) and road 
 engines (81) are not directly proportional to traffic 
 as a considerable part of the organization must be 
 employed irrespective of volume of traffic, say 25%. 
 
228 
 
 VALUATION AND RATES 
 
 Tabulating this data, for the purpose of obtaining 
 the proportion of fixed expense, we have: 
 
 Percent- 
 age not 
 Affect- 
 ed by 
 No. Item Traffic 
 
 61 Supt. of Transportation 75% 
 
 62 Dispatching trains 75 
 
 63 Station Employees 75 
 
 65 Coal & Ore Docks 75 
 
 66 Station Supplies and 
 
 Expenses 75 
 
 69 Yard Switch & Signal 
 
 Tenders 100 
 
 72 Enginehouse Expenses 
 
 (yard) 25 
 
 81 Enginehouse Expenses 
 
 (road) 25 
 
 89 Train Supplies & Ex- 
 
 penses 25 
 
 90 Signal Operation 100 
 
 91 Crossing Flagmen & 
 
 Gatemen 100 
 
 92 Drawbridge Operation. 100 
 94 Telegraph & Telephone 
 
 (line repairs) 100 
 
 97 Stationery & Printing. . 50 
 
 Percentage of 
 
 Per- Total Oper- 
 
 centage ating ex- 
 
 of Total pense not 
 
 Operating Affected 
 
 Expense by Traffic 
 
 1.256% 0.942 
 0.845 0.634 
 
 6.886 
 0.176 
 
 5.165 
 0.132 
 
 0.574 0.431 
 0.213 0.213 
 
 0.524 
 1,729 
 
 1.843 
 0.532 
 
 0.360 
 0.049 
 
 0.296 
 0.425 
 
 0.131 
 0.432 
 
 0.461 
 0.532 
 
 0.360 
 0.049 
 
 0.296 
 0.212 
 
 Percentage of Total Operating Expense 
 not affected by the Volume of Traffic. 9.990 
 
 Dividing this 9.990 by 50.192 the total for all 
 transportation expense, we have 20% of the trans- 
 portation expense which is independent of the vol- 
 ume of traffic moved and 80% which is dependent on 
 the traffic. 
 
 Traffic Expense and General Expense are not ap- 
 preciably affected by the addition of a very consid- 
 
RATES 
 
 229 
 
 erable volume of traffic and we may therefore as- 
 sume all of these expenses to be fixed expenses. 
 
 Total Operating Expenses 
 
 Recapitulating the foregoing data, we may now 
 
 tabulate to show what part of total operating ex- 
 pense is fixed and what part is dependent on the 
 volume of traffic moved. 
 
 Percentage Percentage 
 
 of Total of Total Percent- 
 Operating Operating age of 
 Expense Expense Total 
 
 Class of Ex- Affected not Affected Oper- 
 
 penditure by Volume by Volume ating 
 
 of Traffic. of Traffic. Expense. 
 
 Maintenance of Way 6.513 12.353 18.866 
 
 Maintenance of Equipment. 19.287 5.024 24.311 
 
 Traffic None 2.914 2.914 
 
 Transportation 40.202 9.990 50.192 
 
 General . None 3.717 3.717 
 
 Fixed Operating Expense . 66.002 
 
 33.998 
 
 100.000 
 
 This table shows that 34% of all operating ex- 
 pense is a fixed expense, and is incurred whether the 
 volume of traffic is very light or very heavy. 
 
 These figures apply to very considerable differ- 
 ences in volume of traffic. In the case of slight ad- 
 ditions in volume of traffic, as a part of a car or the 
 adding of one or even several cars to the average 
 local freight train, the additional expense of opera- 
 tion on account of additional traffic is hardly ap- 
 preciable. 
 
 Analysis Sufficiently Accurate for Practical Purposes 
 
 It may be objected to this form of analysis, that 
 it is not scientifically accurate, in that it involves a 
 division of certain items of expense on an arbitrary 
 basis on such items as superintendence, salaries of 
 station agents, effect of different classes of trains on 
 
230 VALUATION AND RATES 
 
 maintenance expense and other items of a like na- 
 ture. 
 
 It is true that there is room for some difference 
 of opinion as to the percentages to be assigned to 
 these various items of expense, particularly when 
 average statistics for the whole country are used as 
 a basis of analysis. Making due allowance for the 
 personal equation, however, there is not room for 
 serious variation in results obtained by various 
 estimators. 
 
 The foregoing analysis is made for the purpose of 
 establishing the probable minimum percentage of 
 total expense which is a fixed expense and if that 
 be established, with reasonable accuracy, it will as- 
 sist in the consideration of many rate questions which 
 are not otherwise readily understood. In the estab- 
 lishment of the minimum rate that is allowable, the 
 fixed operating expense must be known approxi- 
 mately, to avoid making rates below actual cost of 
 service. An illustration showing the necessity for 
 and the application of this data is given in following 
 pages. 
 
 Effect of Traffic Density on Operating Expense 
 
 If our deduction in regard to the fixed expense 
 is correct, then the operating expense, per unit of 
 traffic, must be less as the volume of traffic increases, 
 because out of every dollar spent 34 cents is fixed, 
 whether the volume is one million traffic units per 
 mile of line or six million units, although the actual 
 amount of money spent per mile of line for operating 
 expense in maintaining the road and equipment and 
 conducting transportation will be very much greater 
 on the road of great traffic density. 
 
 To test the accuracy of these deductions, the fol- 
 lowing table was prepared from the operating sta- 
 tistics of the Interstate Commerce Commission for 
 
RATES 231 
 
 the year 1913. The roads shown in the table were 
 selected on the basis of difference in traffic densities 
 to show the application of the principle. 
 
 The traffic density of the Illinois Central is very 
 near the average for all Class I roads in the United 
 States. The Pennsylvania has the largest revenue 
 from traffic per mile of line and the greatest traffic 
 density of any large system in the country. The 
 Manistee & North-Eastern is a short road in Michi- 
 gan, operating 190 miles of line with least traffic 
 density. 
 
 The "Traffic Units per Mile of Line" in the fol- 
 lowing table is the sum of the freight ton-miles and 
 the passenger-miles per mile of line. The expense 
 per Unit of Traffic is the quotient obtained by divid- 
 ing the total operating expense per mile by the 
 Traffic Units per mile, which affords a fair means of 
 comparison. 
 
 Total Operating Expenses Per Traffic Unit Roads 
 of Different Traffic Density 
 
 Total Traffic Total 
 
 Operating Units Operating 
 
 Expense Per Mile Expense 
 
 Railroad Per Mile of Line, Per Unit 
 
 of Line. Thousands. of Traffic. 
 
 Pennsylvania Railroad $33,800 6,160 .549 Cents 
 
 Central Railroad of New Jersey. 24,700 4,228 .584 
 
 Illinois Central 10,690 1,710 .625 
 
 Louisville & Nashville 9,150 1,260 .726 
 
 Atchison, Topeka & Santa Fe... 7,770 904 .859 
 
 Atlantic Coast Line 5,350 528 1.013 
 
 Manistee & North-Eastern 2,170 174 1.246 
 
 Comparing the roads of greatest and least traffic 
 density the Pennsylvania spent practically 15% 
 times as much per mile for operating expense as the 
 Manistee & North-Eastern, but the operating ex- 
 pense per unit of traffic on the Pennsylvania was only 
 44% of the expense on the Manistee & North-Eastern 
 or less than one-half as much. 
 
232 
 
 VALUATION AND RATES 
 
 In order to see what the rate of decrease is with, 
 increasing traffic density, we may construct a dia- 
 gram by platting the figures of this table. 
 
 882888S8S 
 Total Operating Expense 
 
 The diagram shows that the operating cost per 
 unit of traffic increases very rapidly when the num- 
 ber of traffic units per mile of road falls below 1,- 
 
RATES 233 
 
 750,000, which is the average density of all Class I 
 roads in the United States. 
 
 The operating cost per unit of traffic decreases 
 very slowly when the number of traffic units per mile 
 exceeds 1,750,000. 
 
 An important connection between the facts shown 
 on the diagram and practical rate-making is, that on 
 branch and main lines of secondary importance, 
 having a traffic density less than the average, the 
 rates per ton and per passenger mile must be larger 
 than on the roads having a greater traffic density 
 than the average, if such lines are to earn net out 
 of their revenues in the same ratio as lines of average 
 or greater traffic density. This is a most important 
 principle of rate construction. 
 
 Physical Factors Affecting Operating Expense 
 
 The actual operating expense per ton-mile varies 
 widely with differing physical characteristics. This 
 applies particularly to the condition of a road as to 
 its controlling grades. 
 
 A Mikado engine with a tractive power of 49,000 
 pounds can haul a train of about 4,080 tons up a 
 0.3% grade. Deducting the weight of cars and en- 
 gine, it can haul 2,585 tons of freight. The same en- 
 gine will haul 572 tons of freight up a 2% grade. 
 The cost of operating either train is practically the 
 same, but the cost of hauling per ton, on account of 
 the grade, is about 4% times greater on the stiff 2% 
 than on the 0.3% grade. 
 
 The cost of operating over curved track is much 
 greater than on straight track, due principally to 
 increased cost of repairs of equipment. For each 
 degree of curvature it is usual among engineers to 
 estimate that the annual operating expense is in- 
 creased 95 cents per train. 
 
 It is not unusual in a rough country to find 50 de- 
 grees of curvature per mile of line and in moun- 
 
234 VALUATION AND RATES 
 
 tainous country, two or three times as much. The 
 increase in operating expense, annually per mile, on 
 a line operating 30 trains, with 50 degrees of curva- 
 ture per mile over that of straight line operation is 
 95 cents by 50 degrees by 30 trains, or $1,425. 
 
 Often freight rates in one locality are compared 
 with rates in another on a ton-mile basis. Unless the 
 physical factors of the two different operations are 
 stated, such comparisons are absolutely worthless 
 and misleading. One operation may be conducted 
 on a railroad located in a flat plains country over 
 straight tracks and very light grades; the other, on 
 a railroad located over a range of mountains with a 
 very tortuous line and the stiff est of mountain grades. 
 
 A comparison of the operating features of two 
 typical lines, in connection with the statistics of ac- 
 tual operation, will serve to illustrate the effect of 
 the physical factors on operating expense. 
 
 Operating Expense Denver & Rio Grande 
 v. Virginian 
 
 The Denver & Rio Grande Railroad extends from 
 Denver, Colorado, to Ogden, Utah, with numerous 
 branches, some of wjiich reach into northern New 
 Mexico. For practically all of its length it is built 
 through the Rocky Mountains, the rough topography 
 of the country necessitating much curvature and stiff 
 mountain grades. 
 
 The Virginian Railway extends from the seaboard 
 at Norfolk, Virginia, through the coal fields of West 
 Virginia, to within a few miles of Charleston, West 
 Virginia. While for much of the distance it is lo- 
 cated in the Allegheny Mountains, it has easy curves 
 and very light grades. Its principal traffic is the 
 hauling of coal from the West Virginia fields to tide- 
 water, its traffic in the opposite direction being quite 
 small, comparatively. 
 
RATES 235 
 
 In consequence the grades "favor the traffic," that 
 is, the haul, generally, is a "down-hill" haul from 
 the mountains to tide-water. The traffic is compar- 
 atively dense the freight ton-miles per mile of line 
 being 3,174,000 which, in connection with the ad- 
 vantage of light grades and easy curves makes the 
 operating condition particularly favorable from an 
 economic standpoint. 
 
 The following statistics from the Interstate Com- 
 merce Commission Reports of 1913, show the effect 
 of these differing physical characteristics on operat- 
 ing expenses and net earnings. The figures are con- 
 fined to freight traffic except as to the first and last 
 items : 
 
 Denver & 
 Items. Rio Grande. Virginian. 
 
 Operating Expenses per train -mile $2.067 $1.965 
 
 Average tons per train 305 1,330 
 
 Revenue per ton-mile 1.04 cts 0.34 cts 
 
 Revenue per train-mile $2.87 $3.409 
 
 Average Operating Cost per Traffic Unit.. 0.96 cts 0.21 cts 
 
 The effect of the favorable grade condition is at 
 once apparent from the first two items of the table. 
 The Virginian hauls 4.3 times as much freight in its 
 average train, and at an expense of 10 cents per 
 train-mile less. In spite of the fact that the Denver 
 & Rio Grande receives a revenue per ton-mile three 
 times that of the other road, its revenue per train- 
 mile is about 15% less. Taking both freight and 
 passenger traffic into account the operating expense 
 per traffic unit on the Denver & Rio Grande is 4.6 
 times greater than on the Virginian. 
 
 This comparison is between two roads, one of 
 which has particularly unfavorable operating condi- 
 tions and the other very favorable conditions, and 
 they were selected for comparison for that reason. 
 The same differences apply in varying degree quite 
 
236 VALUATION AND RATES 
 
 generally, however, in two broad divisions of all rail- 
 roads, viz., the main trunk lines carrying a very 
 heavy traffic and the branch and less important main 
 lines which "feed" them. 
 
 The increased density of traffic has made it eco- 
 nomical to reconstruct these main arteries of traffic, 
 reducing the controlling grades and improving the 
 operating conditions generally, as described in detail 
 in the chapter on "Construction and Re-Construc- 
 tion." In consequence, their operating expenses are 
 relatively very low, not only on account of dense 
 traffic but are still further lowered by the favorable 
 physical characteristics of curvature and grades. 
 
 Neither of these favorable conditions apply gen- 
 erally to other than these main trunk lines, and this 
 fact should always be borne in mind in considering 
 rates applying over main lines of minor importance, 
 and branch lines. What would be a fair rate, giving 
 a return ample to cover all charges and expenses if 
 applied to a busy main line, might well be ill-advised 
 or even confiscatory if applied to a line of lighter 
 traffic density and unfavorable operating conditions 
 as to grade and curvature. 
 
 Terminal Expense 
 
 The cost of transportation is not directly propor- 
 tional to distance for several reasons. The cost of 
 the service involves two factors, viz., the cost of haul- 
 ing from point of origin to destination and the cost of 
 handling at both points. 
 
 When either of the terminal points is a large com- 
 mercial or industrial center, these terminal charges 
 (cost of handling) are a very considerable percent- 
 age of the whole cost, not only on account of labor 
 involved in the handling of freight, but of the in- 
 terest charges on the huge sums of money invested 
 in terminal facilities. At Chicago and New York, 
 
RATES 237 
 
 these terminal charges are generally considered to 
 be three cents per 100 pounds, or sixty cents per ton. 
 
 On a shipment of sixth-class freight between these 
 two points, the charge is at the rate of 26.3 cents 
 per 100 pounds. The terminal charges of 6 cents 
 are almost 23% of the whole charge, and this, too, 
 when the haul is estimated at 920 miles. On the 
 average haul for the Central and Eastern States, 
 which is very much shorter, the terminal cost is a 
 very much larger percentage of the total cost. 
 
 Satistics* in regard to the operation of 30 freight- 
 houses showed a value of property employed of 
 $12,000,000, and an average station expense of 
 $166,000 per month. 
 
 Allowing for interest and depreciation on the 
 value of the property employed, the total cost per 
 ton for handling the freight was : 
 
 Cents. 
 
 Interest and Depreciation 28.6 
 
 Station Force and Shifting Cars. 41.5 
 
 Cost per Ton 70.1 
 
 The costs varied from 44 cents per ton for a 
 Baltimore freight house to 98 cents per ton for one 
 in Chicago. This cost is simply for the handling of 
 the freight at the freight house and does not in- 
 clude such items of overhead expense as general 
 supervision and other general expense. 
 
 These terminal expenses on that class of traffic 
 which must be handled through freight houses are 
 higher than on carload traffic handled on team 
 tracks, and the carload traffic handled directly on 
 the industrial tracks costs less than that on team 
 tracks. These differences in terminal expense are 
 
 *From "Economics of Railway Operation," by M. L. Byers, C. E. 
 
238 VALUATION AND RATES 
 
 reflected in the rates charged for various classes 
 of service. 
 
 It is not possible to make a comparison from 
 the Interstate Commerce Commission statistics of 
 various roads having different length of average 
 haul, for the purpose of determining the net effect 
 of distance on operating expense, as the cost of op- 
 eration varies with the character of traffic moved, 
 as well as with the distance, and there are other 
 difficulties in the way of making satisfactory com- 
 parisons. 
 
 Apportionment of Expense Between Various 
 Classes of Traffic 
 
 It is not possible to divide operating expense 
 between different items of traffic accurately. It is 
 not possible to make a division even into the two 
 broad classes of freight and passenger traffic on all 
 items of expense, except on an arbitrary basis. 
 
 An examination of the 117 items into which op- 
 erating expense is divided by the Interstate Com- 
 merce Commission classification as given in a pre- 
 ceding table will show that this is true. 
 
 In the expense of maintaining the track (items 
 2 to 6), it is known that a passenger train increases 
 the expense of maintenance more, per ton of train, 
 than a freight train. The American Railway Engi- 
 neers' Association estimates that a passenger car 
 increases cost of maintenance per ton of car twice 
 as much as per ton of freight car; a freight engine 
 twice as much per ton as per ton of freight car ; 
 and a passenger engine four times as much per ton 
 as per ton of freight car. This is probably as near 
 the truth as it is possible to get. 
 
 As to some other items of Maintenance of Way 
 expense the division must be made on an arbitrary 
 basis, such as the respective earnings or train mile- 
 age of the freight and passenger traffic. 
 
RATES 239 
 
 As to most items of Maintenance of Equipment, a 
 division between passenger and freight equipment 
 expenses can be made, and as to Transportation ex- 
 pense, most of the items of expense can be divided 
 between passenger and freight service. There are 
 many items, however, that can only be divided by 
 making arbitrary assumptions. 
 
 It is evident that it costs a railroad more to han- 
 dle and haul a ton of silk hats or millinery than it 
 does a ton of coal, but when we come to investigate 
 exactly how much more we find ourselves unable to 
 do so because a division of the 117 items of expense 
 cannot be made. Some operating expenses are af- 
 fected by the hats that are not affected by the coal, 
 and vice versa. The same is true of all items of 
 traffic.** 
 
 One reason why rates for various items of traffic 
 cannot be made strictly on the basis of cost of serv- 
 ice is, that an accurate apportionment of expenses 
 among the various items of traffic is not possible, 
 and, therefore, the respective costs cannot be defi- 
 nitely determined. 
 
 Many complications would be encountered in ap- 
 plying strictly a cost of service basis to rates. Rates 
 must be fixed in advance of performing the service 
 of transportation. We have seen from the fore- 
 going discussion that the cost per unit of traffic 
 varies widely with its volume. Therefore, it is only 
 after rates are in effect that the cost of service may 
 be known. 
 
 If the rate has been fixed at $1 per ton on the as- 
 sumption that 1,000 tons are to move, and only 
 
 **While it is not possible to obtain the cost with exactitude, 
 for each item of traffic, it is possible to approximate closely the 
 relative costs of broad divisions or classes of the traffic as, Prod- 
 ucts of Mines, of Animals, of Forests, etc., by a proper analysis 
 of the operating statistics of particular divisions of a railroad, 
 when these are available. This is discussed more fully in the 
 following pages of this chapter, under the head of Importance of 
 Cost Data. 
 
240 VALUATION AND RATES 
 
 100 tons move, the rate will be insufficient to cover 
 cost; if 10,000 tons move, the cost will be materially 
 less and the rate too high. 
 
 Cost of Service Principles 
 
 On the basis of these facts we may summarize as 
 follows : 
 
 (1) That Capital Charges per unit of traffic 
 decrease very rapidly as traffic increases. Up to the 
 point where the capacity of the facilities are 
 reached, capital charges do not increase at all with 
 an increase in volume of traffic. 
 
 (2) It is a fair statement, as to average condi- 
 tions, that at least 34% of Total Operating Expense 
 is a fixed expense which will be incurred irrespective 
 of the volume of traffic. 
 
 (3) On account of the fixed operating expense, 
 the operating cost per unit of traffic decreases as, 
 traffic density increases. Such unit cost increases 
 very rapidly as the traffic density falls below the 
 average for the whole country; it decreases slowly 
 as traffic density rises above the average. See dia- 
 gram "Operating Cost per Traffic Unit," page 232. 
 
 (4) That as operating cost can not be accu- 
 rately apportioned among different items of traffic, 
 it is not possible to make rates which are based 
 strictly on cost of service. 
 
 (5) That cost of service can not be known in 
 advance of the actual transportation of any par- 
 ticular item of traffic, as such cost depends on the 
 volume of traffic moved. It is only after the rate 
 has been made that the volume of the traffic can 
 be known. 
 
 Application of Principles 
 
 In some situations cost of service may mean 
 either one of two possible costs, viz., (1) A cost 
 
RATES 241 
 
 which includes a full proportion of the fixed in- 
 terest charges and total operating expense; (2) or 
 the additional cost which the transportation would 
 add to existing total operating expense. 
 
 Suppose a road which had not previously car- 
 ried a certain class of traffic were called upon to 
 make a rate for performing such a service. Must 
 it charge a rate made up of a percentage of fixed 
 charges and operating expenses apportioned on the 
 relation which the proposed tonnage bears to the 
 total tonnage carried, or, inasmuch as fixed charges 
 on capital and 34% of operating expense remain 
 the same whether the service is performed or not, 
 is the cost to be taken as the additional cost of per- 
 forming the service? 
 
 Let us take for illustration an actual case where 
 the proposed addition of traffic was large and con- 
 stituted an important part of the traffic of the road. 
 
 The Cairo division of the C. C. C. & St. L. Ry. 
 traverses the coal fields of Southern Illinois. Prior 
 to the reconstruction of its line and the construc- 
 tion of the Chicago, Indiana & Southern (which is 
 under the same control) from Danville to Chicago, 
 it hauled no coal from these fields into Chicago. 
 After the construction work had been completed, 
 it entered the coal carrying business into Chicago. 
 The tonnage of this coal business is very large in 
 the aggregate being measured by trains. 
 
 The distance from the Harrisburg mines to Chi- 
 cago is 320 miles; on the reconstructed lines the 
 grades are light,** which permits the hauling of 
 long trains economically. 
 
 The established rate on coal by other lines be- 
 tween the same coal fields and Chicago was $1 per 
 ton, which with the distance of 320 miles gave a 
 revenue of 0.312 cents per ton-mile. The average 
 
 ** Ratio of vertical rise to horizontal distance small. 
 
242 VALUATION AND RATES 
 
 revenue for the whole C. C. C. & St. L. Railway 
 System was 0.543 cents per ton-mile, in 1914. 
 
 The average cost per ton-mile of freight (esti- 
 mated by assuming that the total operating ex- 
 pense should be divided on the basis of freight and 
 passenger earnings) was 0.394 cents per ton-mile. 
 Apportioning the fixed charge interest and rentals 
 on the same basis, gave 0.093 cents per ton-mile 
 for this item. The total cost then was 0.394 cents 
 operating expense plus 0.093 cents fixed charge, 
 which equaled 0.487 cent per ton-mile. 
 
 That is, if the full proportion of fixed interest 
 charge and of total operating expense were charged 
 against the traffic, on the basis of tonnage, the cost 
 of performing the service would exceed the rev- 
 enue by: 
 
 Cost 0.487 cents 
 
 Revenue 0.312 cents 
 
 Loss 0.175 cents 
 
 On the 320-mile haul there would be, on this 
 basis of estimating, a loss of 56 cents on every ton 
 hauled. 
 
 But this method of estimating cost does not take 
 into account two important related facts, viz., the 
 0.093 cents per ton-mile for fixed interest and rental 
 charges and 34% of the total operating expense 
 the Fixed Operating Expense had to be paid 
 whether the coal was carried or not. 
 
 If only the additional cost of hauling the coal was 
 considered, the cost per ton-mile was 0.260 cents 
 that is 66% of the total operating expense, which 
 was 0.394 cents per ton-mile. On this basis, there 
 was a profit** of 16.64 cents per ton of coal hauled, 
 thus: 
 
 **This illustration is used only for the purpose of showing two 
 possible methods of estimating- cost. It must not be regarded as 
 
RATES 243 
 
 Revenue per ton-mile 0.312 cents 
 
 Actual additional cost 0.260 cents 
 
 Profit per ton-mile 0.052 cents 
 
 0.052 cents profit per ton-mile x 320 miles= 16.64 
 cents per ton profit. 
 
 Equal Mileage Rates 
 
 Equal mileage rates, if applied to all commodities 
 alike, would have no relation whatever to cost of 
 service. Each item of traffic has its own cost, re- 
 sulting from the conditions attending its transporta- 
 tion. When all factors entering into the cost are 
 taken into account, it costs more to move a ton of 
 fresh meat 1,000 miles than it does to move a fon 
 of salt as usually shipped the same distance. 
 
 For any given commodity, equal rates for equal 
 distances in all cases would not be based on cost of 
 service. That is, it may cost more to haul a ton of 
 lumber 100 miles on one road, or under certain com- 
 mercial conditions, than it does to haul a ton of 
 lumber 100 miles on another road, or under other 
 commercial conditions. 
 
 There are two objections to a system of rates based 
 on equal rates for equal mileages for a given com- 
 modity, viz ; Physical and Commercial. To illustrate 
 the Physical: 
 
 The statistics of the relative operating cost on 
 the Virginian Railway and the Denver & Rio 
 Grande, heretofore given, show that the average 
 cost of transportation per unit of traffic is 4.6 times 
 
 showing the actual cost of hauling coal. What the illustration 
 indicates is, that if the operating cost of moving the coal per 
 ton-mile is the same as the average cost per ton-mile for moving 
 all commodities, the actual out-of-pocket-expense incurred in 
 moving it is not greater than that shown. The interest on the 
 cost and depreciation of the additional equipment, which would 
 be required for such a large addition to traffic as that assumed, 
 would of course have to be deducted from the net profit shown. 
 
244 VALUATION AND RATES 
 
 greater on the one than the other. Equal mileage 
 rates applied to those two roads would evidently 
 bear no relation to cost of service. 
 
 These differences in practical operating conditions 
 are not confined to comparisons between lines lo- 
 cated in greater part in a coastal plain and lines in 
 mountainous regions. They exist very generally in 
 all parts of the country. 
 
 The Paducah Division of the Illinois Central Rail- 
 road crosses the Ozark Hills in Southern Illinois. Its 
 grades are steep and the traffic of the line is light, 
 consisting principally of ties, piles, poles, and some 
 coal. Its maximum train consists of twelve loaded 
 cars with a total lading of about 300 tons or less. At 
 the steepest grade on the line the train is broken up, 
 only six cars being taken over this grade at one time, 
 the engine returning for the remaining six cars. 
 
 The Virginian Railway operating between the 
 West Virginia coal fields and the Atlantic ports car- 
 ries an average of 1,330 tons per train. Evidently 
 equal mileage rates, that is, the same rates per ton 
 per mile for hauling coal on the two roads, would 
 not be equitable. 
 
 The generally accepted view that certain rates for 
 transporting any given commodity on one line as 
 compared with rates on the same commodity carried 
 over other lines, where the mileage is the same and 
 the rates higher are in consequence unfair, fails to 
 take into account the wide differences in the physical 
 characteristics of two roads, particularly as to 
 grades. 
 
 As to the commercial feature, statistics heretofore 
 shown, and the discussion following them, clearly in- 
 dicate that fixed charges and fixed expenses are 
 distributed over a greater volume of traffic on busy 
 trunk lines than on branch or main lines of secondary 
 importance. To base the rate on the mileage, using 
 
RATES 245 
 
 the same figure per ton-mile when hauled over a 
 line of light traffic, where the cost per unit of traffic 
 is high, as when hauled over a line of maximum 
 traffic density, where the cost per unit of traffic is 
 low, would place the rates on anything but a cost of 
 service basis. 
 
 The "Chicago, Burlington & Quincy Railroad be- 
 tween Alliance, Nebr., and Sheridan, Wyo., 330 
 miles, traverses a barren country very thinly settled, 
 with no cities and no industry of importance on its 
 line; between Chicago and Charlton, Iowa, 334 
 miles, its line is crowded with trains, as it passes 
 through a rich agricultural and manufacturing dis- 
 trict, producing much traffic and in addition carries 
 a very large through business to points beyond in 
 both directions. Evidently if the rate for hauling a 
 ton of merchandise from Charlton to Chicago were 
 applied to a ton of merchandise hauled from Alliance 
 to Sheridan it would not be on a cost of service basis 
 although the distances are practically the same. 
 
 It is hardly necessary to state that rates on a 
 wholesale business may with justice be lower per 
 unit of traffic than on retail business, as the cost of 
 doing business is less. The principle finds universal 
 application in the commercial world. The purchaser 
 who buys coal by the car pays less per pound than 
 the one who buys by the bag; the lawyer pays more 
 for his paper bought by the ream than the printer 
 who buys by the ton, although both the coal and the 
 paper are of identical character in each case. 
 
 Finally, rates much lower than normal rates may 
 be exceptionally profitable on particular commodities 
 (as shown by the example of the Cleveland, Cincin- 
 nati, Chicago & St. Louis) without doing injustice to 
 other commodities paying normal rates. 
 
 Speaking generally, rates must be based on the 
 mileage, and they are so based usually. However, an 
 
246 VALUATION AND KATES 
 
 examination of rate tariffs shows in some instances 
 that on the same articles for the same distance, over 
 the same rails, the rates compared with each other 
 are as 7 mills per ton-mile is to 10 mills per ton-mile. 
 Taken in connection with the statement that gen- 
 erally speaking rates are based on mileage, such 
 rates need explanation and the basis on which they 
 have actually been fixed must be studied more 
 closely. 
 
 The present rate structure is the result of econom- 
 ical development and commercial progress; an 
 adapting of rates to changing business conditions 
 and to competition with other forms of transporta- 
 tion; an adjustment between commodities and com- 
 munities, between wholesale and retail business, be- 
 tween long hauls and short hauls. 
 
 It could not have been constructed at the begin- 
 ning of the railroad era. To understand it, a study 
 of its historical development is necessary. 
 
 Historical Development of Rates 
 English 
 
 The first railways were built in England to carry 
 coal and other mine products; these carried neither 
 merchandise nor passengers. The first passenger 
 line was opened for traffic in 1830 and although 
 promoted to carry freight, the passenger crowded 
 the freight traffic from the line for some years. 
 
 In 1842, after other lines had been constructed, 
 the average earnings consisted of 75% from passen- 
 ger and 25% from freight traffic; on the main trunk 
 lines only 15% of the total was derived from freight 
 traffic. In the early fifties the earnings were divided 
 51% freight, 43% passenger and 6% from other 
 sources. 
 
 The first passenger traffic represented customers 
 taken from the stage coaches. They paid railroad 
 fares averaging 4 cents per mile, first class; in the 
 
RATES 247 
 
 beginning, the third class passenger traffic was in- 
 significant. The number of passengers carried in 
 1842 was eighteen million. In 1902, the passengers 
 carried were one and one-half billion, at an average 
 fare of 1 cent per mile one-fourth of the original 
 fare. Nearly 90% traveled third class and about 
 one hundred and eighty million traveled first class. 
 
 The first class traffic had therefore increased to 
 ten times the volume of the 1842 traffic, but the rate 
 had remained practically the same; the low third 
 class fares had developed a traffic which did not 
 exist at all during the early days of operation. 
 
 In view of the greater economy, convenience, 
 safety and speed of railroad travel, it was inevitable 
 that all of the then existing passenger business 
 should come at once to the railroads. As canals and 
 coasting vessels were available for cheap transporta- 
 tion, freight traffic was a different proposition. 
 Further, the first locomotives were small and inef- 
 ficient, the expenses large for operating them and 
 the tracks of the railroad were fully employed by 
 the passenger traffic. Under these conditions there 
 was no motive for attempting to attract freight 
 traffic from the cheaper existing facilities of trans- 
 portation. 
 
 As the number of lines increased, competition be- 
 tween the various companies necessitated the con- 
 struction of branch and other lines to occupy the 
 territory tributary to their main lines. Such lines 
 necessarily had less traffic density than the main 
 lines and the new capital needed new business over 
 which to spread increased capital charges. 
 
 To attract the existing traffic from canals, sea 
 vessels and other routes and that class of traffic that 
 could not otherwise move at all, the rates on freight 
 traffic were reduced. 
 
 The freight traffic of these railroads began with 
 a small volume of high class traffic carried at high 
 
248 VALUATION AND RATES 
 
 rates and was taken principally from the stage lines. 
 The constant tendency has been to increase the 
 volume of traffic by lower rates, taking lower classes 
 of traffic successively. 
 
 The increase in volume has come from previously 
 existing systems of transportation as turnpike, 
 canal and the sea and from newly created traffic 
 which the railroad itself has made possible. As the 
 traffic increased, the rates have come down and the 
 lower rates have in turn operated to further increase 
 the traffic. The process has been continued to the 
 point where the railroads have got all the traffic 
 they can afford to take that is, when the cost of 
 handling the lowest class of traffic is but little less 
 than the earnings from it.* 
 
 Development of American Rates 
 
 The experience of the English roads has been re- 
 peated in the United States and the development 
 has been generally along the same lines. The freight 
 traffic is much the more important part of the whole 
 traffic in the United States, while it is of practically 
 equal importance on English railroads. 
 
 In 1826 Josiah Quincy, as related in his diary, 
 traveled from Boston to Washington by stage, the 
 trip requiring eight days. 
 
 In 1832, at the beginning of the era of railroad 
 construction, the stage coaches made the trip from 
 New York to Boston, 195 miles, with no stops for 
 rest, in 41 hours and charged a fare of $11.00. The 
 trip could be made by steamer from New York to 
 Providence in 1822 in 23 hours and thence by stage 
 to Boston, 44 miles, in 5 hours, the fare for the stage 
 
 *The historical facts contained in the foregoing recital of Eng- 
 lish railroad development are based on information taken from 
 "The Elements of Railway Economics," by W. M. Acworth, Clar- 
 endon Press, Oxford, 1905. 
 
RATES 249 
 
 journey being $3.00. There were as many as twenty- 
 five stage coaches running daily between these two 
 latter points. 
 
 In 1836 the stage journey between New York and 
 Philadelphia, 92 miles, consumed 14 hours and the 
 fare was $6.00. In 1831 the stage journey between 
 Philadelphia and Pittsburgh (348 miles by rail), 
 could be made by the fastest mail stages in two and 
 one-half days, by the ordinary passenger stages in 
 four days. In 1837 the stage journey between Pitts- 
 burgh and Erie, Pa., stage distance 128 miles, re- 
 quired 46 hours without rest for sleep. 
 
 In the earlier period, between 1820 and 1830, it 
 required more than three weeks to travel from New 
 York to St. Louis, six days from Cincinnati and four 
 and one-half days from Louisville. During the war 
 of 1812, when the Atlantic ports were blockaded by 
 the British Navy, the cost of transporting goods from 
 Boston to Charleston, S. C., by wagons, was 40 cents 
 a pound or $800 per ton.** 
 
 It is hardly necessary to state that under the con- 
 dition existing at the time, the new railroads, very 
 soon after their opening, drew all of the traffic from 
 the stage coaches and wagons with which they com- 
 peted. The last of the stages disappeared in 1850 
 as a consequence of railroad competition. 
 
 Railroad Competition with Erie Canal 
 
 The competition of the railroads with the canals, 
 the most efficient existing means of transportation 
 when railroad construction began, is illustrated by 
 the rate history of the New York Central Railroad 
 and the Erie Canal, with which it competed for 
 freight traffic between the Seaboard and the Great 
 Lakes. 
 
 ** These historical facts are taken from a paper by Mr. Sey- 
 mour Dunbar, appearing in the "Railway Library" for 1914. 
 
250 VALUATION AND RATES 
 
 The Erie Canal, completed in 1825, connects the 
 Hudson River with Lake Erie at Buffalo. The New 
 York Central Railroad practically parallels the Hud- 
 son River and the Erie Canal for the whole distance. 
 It was completed in 1842, though at that time it was 
 owned by fourteen independent companies. In 1853, 
 Vanderbilt bought up these independent companies, 
 amalgamating their separate holdings into one sys- 
 tem, whose length from New York to Buffalo was 
 438 miles. 
 
 Between 1825 and 1853, the canal rates were re- 
 duced so that the tolls in effect were only about one- 
 third of the original charges. Even with this very 
 radical reduction in rates, the canal paid the State 
 of New York, which owned it, an annual profit of 
 50% on its original capital. 
 
 To draw the freight traffic from the canal, the 
 railroad put in low rates. The traffic came with the 
 lowered rate, and as the expenses and charges were 
 spread over a greater volume of traffic, reduced the 
 unit cost ; rates were again reduced and traffic there- 
 by further increased. 
 
 This reciprocal process went on until the canal 
 traffic practically disappeared, although in the mean- 
 time the State had abolished all tolls and assumed 
 all cost of maintenance of the canal to encourage 
 canal traffic. The State is now expending more than 
 one hundred million dollars in enlarging the canal, 
 in the hope of restoring competition between rail 
 and water carriers. 
 
 The railroad however is moving a traffic which is 
 much greater than the old canal could have moved, 
 and the average rate for moving it is less than 20% 
 of the original rates. 
 
 The effect of these low rates on the grain states 
 of the middle West has been enormous, in shortening 
 the time required for their development. 
 
RATES 251 
 
 Rates Reduced to Stimulate Traffic 
 
 It is to be noted, however, both as to English and 
 American rates, that while the average rate has 
 come down, by reason of the lower class of com- 
 modities which have been added to the volume of 
 traffic from time to time, the rates on high class 
 traffic have not decreased in proportion, and not at 
 all in some instances. It is probable that rates on 
 millinery, silks, clocks, imported cigars and like 
 commodities are quite as high now as they ever were. 
 
 The reduction from original rates were made to 
 stimulate traffic. A low rate on limestone, ore, sand 
 or coal, or a low passenger fare, has been made on 
 the principle that there will be a greater net profit 
 on a large business done on a small margin, than on 
 a small business done on a large margin, or of no 
 business at all, as to some commodities. 
 
 There are some classes of traffic which are not 
 stimulated by low rates; no amount of practicable 
 reduction would increase their consumption, and in 
 consequence, the amount of traffic to be moved on 
 account of them. 
 
 A reduction in the rate on shoes from Boston to 
 Kansas City would not cause one more pair of shoes 
 to be sold there. The whole rate is an insignificant 
 percentage of the retail value of the shoes. Low 
 rates on packing house products from Kansas City 
 to Boston, however, have enabled the packers to 
 widen their markets, to sell more of their products, 
 and hence to increase the volume of railroad traffic. 
 The rates on such products, when moved long 
 distances, are a considerable percentage of their sell- 
 ing price. 
 
 A reduction of 10 cents per ton in a coal rate will 
 enable the miner to ship coal perhaps 30 miles 
 further in every direction from his mine. His trib- 
 utary area market will thereby be greatly in- 
 
252 VALUATION AND RATES 
 
 creased, and in consequence the volume of railroad 
 traffic. 
 
 A railroad is justified in reducing the rates when 
 the traffic will be stimulated thereby, but it is not 
 when the reduction serves to reduce its revenue per 
 unit of traffic, without any corresponding increase in 
 the volume. 
 
 Reduction in the rates on high class traffic have 
 only been made to meet competition. While the rate 
 may be an insignificant portion of the value of the 
 commodity, and the shipper able to pay a larger 
 rate, he ,will pay no more than he must. If the rate 
 from Boston to Seattle on iron and steel articles, 
 when shipped by vessel through the Panama Canal 
 is only 75% of that charged when shipped over a 
 railroad, a large part of the business will go through 
 the Canal. If the railroads move the traffic, their 
 charge can only be the rate via the Canal plus what- 
 ever the additional safety, speed and regular service 
 of the railroad is worth to the shipper. 
 
 Summary of Historical Development 
 
 The historical development of rates may be sum- 
 marized by saying, that the highest rates now cur- 
 rent were made in the early history of railroads and 
 apply on traffic taken away from the stage coaches. 
 That by repeated reductions in rates the railways 
 have acquired traffic: (1) From undeveloped terri- 
 tories and from districts distant from their markets. 
 The grain traffic from the undeveloped territories of 
 the Middle West and Northwestern States to the At- 
 lantic seaports, is an excellent example of this class 
 of business. 
 
 (2) In commodities of lowest commercial value. 
 The traffic in such commodities as coal, ore, lime- 
 stone, sand and ice, is one created entirely by the 
 railroads. Before the railroad era, coal was used 
 
RATES 253 
 
 only at the shaft or in favorable situations where its 
 transportation by water was possible. 
 
 (3) In competition with existing systems of 
 transportation. The New York Central Railroad and 
 Erie Canal is an illustration of this class of traffic. 
 
 The principles upon which this traffic has been 
 acquired are : 
 
 (1) That the greater the volume of traffic, the 
 less the cost per unit to transport it, therefore reduc- 
 tions in rates which increase traffic are warranted. 
 
 (2) That the rates for any class of traffic must 
 not be so high as to stop it from moving, EXCEPT, 
 that the rate shall never be so low that it does not 
 cover the additional cost incurred in dealing with the 
 particular traffic under consideration. 
 
 In regard to the first principle, a rate which would 
 not be profitable on an existing volume of 1,000 tons 
 of traffic might be very remunerative on 10,000 tons. 
 
 The second principle sets the limit for the highest 
 and lowest rates. The maximum rate is fixed by the 
 ability of the commodity to pay and the minimum 
 by the actual out-of-pocket expense incurred in per- 
 forming the transportation, plus the smallest of 
 profits. 
 
 In the application of these principles to a schedule 
 of rates, consideration must be given to the rela- 
 tion of the rates charged on articles competing with 
 or which may be substituted for each other ; that the 
 rate per mile must decrease as the distance increases 
 and that the rates per ton must decrease as the 
 weight of shipment increases. 
 
 Rate-Making Not an Exact Science 
 
 To the most superficial observer, however, it is ap- 
 parent from a reading of the historical development 
 of rates or from a study of the principles upon which 
 the rate structure has been based, that it is not pos- 
 
254 VALUATION AND RATES 
 
 sible to say that any particular rate is in itself rea- 
 sonable that is that 100 cents per ton is the exact 
 amount that should be charged for hauling a ton 320 
 miles and prove that 99 cents or 101 cents is not as 
 fair as the 100 cents charged. 
 
 Any rate is the resultant of many different causes 
 and considerations; cost of service, value of service, 
 competition between transportation systems, adjust- 
 ment with rates on other articles with which it com- 
 petes and many other things. 
 
 Establishing a schedule of railroad rates, like fix- 
 ing rates of taxation, requires a method combining 
 both art and science. The exact values to be attached 
 to some factors having a most important bearing on 
 rates, are not susceptible of definite mathematical 
 analysis. 
 
 Importance of Cost Data 
 
 It must be remembered in connection with the 
 foregoing, that while the exact cost of service can 
 not be stated with scientific accuracy, it is entirely 
 possible to do much better than merely guess at 
 what the costs of carriage as to certain commodities 
 actually are. 
 
 In estimating the cost of production of any plant, 
 whether it be an industrial or a transportation plant, 
 in which more than a single article is manufac- 
 tured or over which more than one class of traffic 
 is carried, it is necessary to make a division of that 
 portion of total expenditure which applies to the 
 operation of the plant as a whole and which can not 
 be divided among the various articles produced or 
 commodities carried, specifically such items as in- 
 terest on invested capital, overhead charges, super- 
 intendence and general expenses are the ones re- 
 ferred to. 
 
 In making a division of such expenses among the 
 articles produced or transported, it is obvious that 
 
RATES 255 
 
 some basis, which will be more or less arbitrary, 
 must be used. While such a basis must of necessity 
 be arbitrary and hence not susceptible of a strictly 
 scientific analysis, it may still be substantially ac- 
 curate and sufficient for practical purposes, if intelli- 
 gently applied. 
 
 Analogy Between Railroads' and Packers' Cost 
 
 Transportation costs are not essentially different 
 from those of most other lines of business in which 
 more than one article of commerce is produced. The 
 packer buys a steer at a certain price per pound on 
 the hoof, but that is the only cost of his manufac- 
 tured product that he may state with accuracy. 
 
 The products manufactured from the steer are, 
 meats of various classification, hide for leather, 
 horns and bones for buttons, hair, soap, fertilizer 
 and numerous other commodities. The packer can 
 not say exactly what part of the cost of the steer 
 is to be apportioned to the meat and what part to 
 the hide, bones or soap. 
 
 When he comes to place a selling price on the 
 various commodities produced from the steer, how- 
 ever, he must apportion its cost among them all, if 
 he is to know even approximately what it has cost 
 him to produce the commodities which he sells. 
 
 The fact that his business, primarily, is that of 
 producing meat, and that these other commodities 
 are by-products, does not relieve him of this neces- 
 sity for apportioning cost. Railroads were con- 
 structed, primarily, to carry passengers and high 
 class freight which had been previously carried by 
 stage coaches. The carrying of other commodities 
 in the beginning was, in a way, a by-product of 
 transportation, which has since become much the 
 larger part of the business. 
 
256 VALUATION AND RATES 
 
 Engineers' Method of Analysis Applied to Traffic 
 
 Railroad engineers, charged with the maintenance 
 of operated roads and the construction of new and 
 reconstruction of old ones, have analyzed operating 
 expenses for the purpose of ascertaining what effect 
 such physical factors as distance, curvature and 
 grades have on such expenses. 
 
 All that is claimed by them for their method of 
 analysis is, that it shows that the effect of certain 
 changes in the physical operating conditions of a 
 road will reduce operating expense by an amount 
 not less than a certain stated minimum and not more 
 than a certain stated maximum, the actual reduction 
 being certainly between the maximum and the min- 
 imum, however. 
 
 For all practical purposes this method of analysis 
 works very well, and the values for the various phy- 
 sical factors mentioned are universally used in 
 American railway practice, in determining the ad- 
 visability of reconstructing older roads and in com- 
 paring the desirability of adopting any one of vari- 
 ous possible lines in the construction of new roads. 
 The decisions based on these analyses, involve the 
 expenditure of millions of dollars annually. 
 
 The analyses of the engineers apply to the phy- 
 sical factors of operation and not to traffic. There is 
 no good reason, however, why analysis of operating 
 expense along the same general line should not be 
 used to ascertain certain cost factors which apply to 
 various classes of traffic. To develop such factors 
 will require special study and analysis of operating 
 expense statistics as at present classified and, in ad- 
 dition perhaps, the making of a further division or 
 other classification of operating expense with par- 
 ticular reference to traffic conditions. 
 
RATES 257 
 
 Relative Cost of Certain Commodities 
 
 Evidently the task of ascertaining cost factors, 
 separately, for each commodity transported, is too 
 large to be practicable, but those applying to certain 
 general divisions of traffic as, Products of Mines; of 
 Forests; of Animals; of Manufactures and Farms, 
 or to particular commodities such as Grain, Coal and 
 Live Stock, may be determined, within reasonable 
 limits, without an unreasonable amount of labor or 
 expense. 
 
 The relative costs of handling traffic through 
 freight houses and on team and industrial tracks 
 may certainly be studied further with profit. 
 
 Relative Cost on Main and Branch Lines 
 
 The relative cost of transportation on branch and 
 secondary main lines, on the one hand, and on main 
 lines of maximum traffic density, on the other, is 
 one particular feature that certainly needs investi- 
 gation. The low rates now charged for transpor- 
 tation service over lines carrying light traffic, must 
 in many instances be below cost of service. 
 
 The fact that under present conditions short local 
 lines can be profitably operated only under excep- 
 tionally favorable circumstances, warrants the sus- 
 picion that many such lines which are part of the 
 larger systems are operated at a loss. 
 
 If this is true, it can be shown by a proper analysis 
 of existing operating records or the necessary sta- 
 tistics may be obtained and on a proper presenta- 
 tion of them these confiscatory rates can be elim- 
 inated. 
 
 Operating Expense Not Heretofore Analyzed in 
 Relation to Traffic 
 
 In this connection, attention is directed to the 
 fact that operating expenses have heretofore been 
 
258 VALUATION AND RATES 
 
 classified and studied for the purpose of maintaining 
 operating efficiency with the minimum possible ex- 
 penditure. Meantime the rates charged for trans- 
 portation have been radically reduced. In making 
 such reductions, traffic officials have had no accurate 
 data to guide them. It is conceivable that under 
 these conditions, some rates may have been, un- 
 knowingly, reduced below the actual cost of per- 
 forming the service for which the rate is charged 
 in fact is would be strange indeed if this had not 
 happened in many instances. 
 
 Commercial, Legal and Economical Factors of Rates 
 
 Determination of the proper rate involves the 
 consideration of three classes of factors, viz : Com- 
 mercial, Legal and Economical. 
 
 The traffic official will consider the rate from a 
 commercial point of view, adjusting it to the needs 
 of the shippers. 
 
 The lawyer will investigate to determine whether 
 or not the rate so established discriminates between 
 various classes of shippers or between shippers in 
 various localities. 
 
 Neither of them, however, have had any training 
 or experience as a basis on which to form a judg- 
 ment as to whether the rate is properly adjusted to 
 cost of service, which is an economical problem 
 whose solution would seem to belong properly to 
 the engineer. 
 
 That is, there must be a Traffic Engineer, with 
 practical operating experience and a general knowl- 
 edge of traffic matters acting with the traffic official 
 and the lawyer in order that the interest of the rail- 
 road be properly safeguarded. 
 
 The necessity for more accurate data as to abso- 
 lute or relative cost of transportation is very ap- 
 parent at hearings before the State and Interstate 
 
RATES 259 
 
 Commerce Commissions when the fairness of a rate 
 is being investigated. 
 
 The writer believes that while many of the Com- 
 missions exaggerate the importance of cost of ser- 
 vice as compared with the value of service, the fact 
 remains that under present conditions, the railroads' 
 position at such hearings could in many cases be 
 materially strengthened by cost data more reliable 
 than has yet been developed. 
 
 Cost Data More Important in Near Future 
 
 The least consideration of existing conditions will 
 show the necessity for the study and analysis of the 
 relation of expense to traffic here suggested. The 
 importance of the subject is likely to be increased, 
 rather than diminished, by events which may be rea- 
 sonably anticipated. 
 
 The whole industrial and commercial interest of 
 the country is preparing for a largely increased ex- 
 port of manufactured and other products. It is in- 
 evitable that industries located at interior points and 
 those located nearer the sea ports will soon be in 
 keen competition with each other for a portion of 
 this export trade. 
 
 . The transportation charges on the raw material 
 from the interior to industries near the coast, and 
 on manufactured products from the interior to it, 
 will often be a very large factor in this industrial 
 competition. In consequence, much pressure will 
 be brought to bear upon the carriers for reductions 
 in rates on the export traffic and the margin of profit 
 in transporting it will necessarily be narrow. 
 
 Without information, within reasonably definite 
 limits, as to the actual or relative cost of transport- 
 ing various classes of traffic, the carriers are in dan- 
 ger of either reducing their rates too much, in com- 
 petition with each other for the traffic, or on the 
 
260 VALUATION AND RATES 
 
 other hand, not making concessions to some indus- 
 tries sufficient in amount to allow them to market 
 their products at a profit and still leave a profit for 
 the carrier. 
 
 That is to say, with the margin of profit very nar- 
 row, definite information as to actual or relative cost 
 is absolutely essential in conducting the business eco- 
 nomically, with profit and justice to the carrier and 
 the shipper. 
 
 Nothing said in this discussion of the necessity for 
 more accurate data as to cost of service, detracts 
 from the force of the statement heretofore made, 
 that rates cannot be based strictly on cost of service. 
 
 Cost of service is only one of many elements to be 
 considered in making rates. It is however a limiting 
 factor in all rates, from the fact that no rate can be 
 justly made which does not cover the actual out-of- 
 pocket expense incurred in performing the service 
 for which the rate is charged. 
 
 Any rate which does not cover such expense is 
 fundamentally wrong and unjust, in that the other 
 items of traffic transported must bear a burden of 
 cost not justly attaching to them if any portion of 
 the traffic is carried at a loss. 
 
 Value of Service Basis** 
 
 This euphonious title is a substitute for the much 
 abused "What the traffic will bear." To the general 
 public it has heretofore meant a method of extortion, 
 while it is in fact a principle of moderation. It is 
 based on equality of sacrifice by those who pay the 
 rates ; on equitable concessions by the stronger to the 
 weaker members of a community. Freight of high 
 value and traffic near its market is made to average 
 
 **This article is suggested in large part by the discussion of 
 the same subject in "Elements of Railway Economics," by W. M. 
 Acworth. 
 
RATES 261 
 
 up rates with bulky freight of low value and traffic 
 distant from its market. Under this system there are 
 three general classes of rates: 
 
 (1) Those which apply to traffic, which either 
 through being bulky and of low value or which 
 requires long hauls to bring it to market, is unable 
 to bear high rates. The rates are just far enough 
 above the actual additional expense incident to 
 handling the traffic to furnish a small profit, no part 
 of the interest and other fixed charges or fixed op- 
 erating expense being included in the rate. 
 
 (2) Those applying to medium class traffic, the 
 rates including actual expense and a proportionate 
 part of fixed charges and fixed operating expense. 
 
 (3) Those applying to high class traffic goods 
 of large value and to traffic near its market, the 
 rates including actual expense and a larger part of 
 fixed charges and fixed operating expense. 
 
 Justification of Value of Service Basis 
 
 What effect do such rates have on the interests of 
 those most concerned the railroad, the public and 
 the shipper of high class traffic? 
 
 It will be noted that even on the lowest class of 
 traffic there is still a profit to the railroad, however 
 small it may be, and that all business contributes 
 something toward the expenses of the railroad. 
 
 It is beneficial to the public, because traffic in 
 many commodities that it needs is made possible 
 which could not move if it were compelled to pay the 
 actual expense and its full share of fixed charges and 
 fixed expenses. 
 
 It is in the interest of the high class traffic, be- 
 cause any amount paid by the lowest class of traffic, 
 in addition to the actual additional cost its movement 
 involves, helps pay the general expenses of the rail- 
 
262 VALUATION AND RATES 
 
 road, which the high class traffic would otherwise 
 have to pay unaided. 
 
 Argument of the First Interstate Commerce 
 Commission 
 
 In the beginning of their investigation in 1887 the 
 Interstate Commerce Commission was compelled to 
 consider the question of whether rates based on what 
 the traffic would bear value of service rather than 
 on cost, were fair and equitable. The Chairman of 
 the Commission at that time was the great constitu- 
 tional lawyer, Judge Cooley. The conclusion of the 
 Commission, as published in the first annual report, 
 is expressed in the following: 
 
 "It was very early in the history of railroads per- 
 ceived that, if these agencies of commerce (rail- 
 roads) were to accomplish the greatest practicable 
 good, the charges for the transportation of different 
 articles of freight could not be apportioned among 
 such articles by reference to the cost of transporting 
 them severally ; for this, if the apportionment of cost 
 were possible, would restrict within very narrow 
 limits the commerce in articles whose bulk or weight 
 was large as compared with their value. 
 
 "On the system of apportioning the charges strictly 
 to the cost, some kinds of commerce, which have 
 been very useful to the country, and have tended 
 greatly to bring its different sections into more inti- 
 mate business and social relations, could never have 
 grown to any considerable magnitude, and in some 
 cases could not have existed at all, for the simple 
 reason that the value at the place of delivery would 
 not equal the purchase price with the transportation 
 (cost) added. 
 
 "The traffic would thus be precluded, because the 
 charge for carriage would be greater than it could 
 bear. On the other hand, the rates for the carriage 
 
RATES 263 
 
 of articles which within small bulk or weight con- 
 centrate great value would, on that system of rate- 
 making be absurdly low when compared to the value 
 of the articles, and perhaps not less so when the com- 
 parison was with the value of the service in trans- 
 porting them. 
 
 "It was, therefore, seen not to be unjust to appor- 
 tion the whole cost of service among all the articles 
 transported upon a basis that should consider the 
 relative value of the service more than the relative 
 cost of carriage. 
 
 "Such method of apportionment would be best for 
 the country, because it would enlarge commerce and 
 extend communication ; it would be best for the rail- 
 road, because it would build up a large business ; and 
 it would not be unjust to property owners, who 
 would thus be made to pay in some proportion to 
 benefit received. 
 
 "Such a system of rate-making would in principle 
 approximate taxation; the value of the article 
 carried being the most important element in deter- 
 mining what shall be paid upon it. 
 
 "To take each class of freight by itself, and meas- 
 ure the reasonableness of charges by reference to the 
 cost of transporting that particular class, though it 
 might seem abstractedly just, would neither be prac- 
 ticable for the carriers nor consistent with the public 
 interest. 
 
 "The public interest is best served when the rates 
 are so apportioned as to encourage the largest prac- 
 ticable exchange of products between different sec- 
 tions of our country and with foreign countries ; and 
 this can only be done by making value an important 
 consideration, and by placing upon the higher classes 
 of freight some share of the burden that on a rela- 
 tively equal apportionment, if service alone were 
 considered, would fall upon those of less value. 
 
264 VALUATION AND RATES 
 
 "With this method of arranging tariffs little fault 
 is found, and perhaps none at all by persons who 
 consider the subject from the standpoint of public 
 interest." 
 
 Analogies in Commercial and Other Pursuits 
 
 As heretofore shown in the article on Importance 
 of Cost Data, it is not always possible to say which 
 part of the selling price of any commodity is cost 
 and which part is profit. As it reaches the retail 
 merchant however, it has for him a definite cost. 
 
 Merchants' Rates 
 
 Suppose a suit of clothes costs the retail merchant 
 $15. If he offered this at $20 he would receive his 
 cost and what would be considered a fair profit. But 
 if he can sell for $25 he will not sell for $20, simply 
 because the latter represents cost plus a profit at a 
 certain per cent. 
 
 He will base his price on the value of the clothes 
 to the purchaser, not on the cost to himself. If near 
 the end of the season he finds himself over-stocked, 
 he will reduce his price to say $18 and while the 
 profit is less, still it is a profit; if he can only sell 
 at $12, he will do so, on the principle that a small 
 loss is better than a total one. 
 
 The groceryman sells common sugar, in a paper 
 bag, at the narrowest margin of profit, and loaf 
 sugar, in a box, at a much greater profit, although 
 the latter sale costs him less to make than the former. 
 He sells tomatoes, packed in cans, at a smaller profit 
 than he does asparagus tips or imported French peas, 
 packed in cans, but his cost of selling is the same in 
 either case. 
 
 The tobacconist sells a five cent package of smok- 
 ing tobacco at an infinitessimal profit, and an im- 
 
RATES 265 
 
 ported cigar at a good round one, although his cost 
 of service is the same. 
 
 The business of the clothier, groceryman and to- 
 bacconist is on a value of service basis, in the main 
 not on cost of service, except that the profits from 
 all of their customers together, must furnish enough 
 money to pay all of their business expenses and 
 charges and a fair profit for their services. The ap- 
 portionment of the expenses, charges and profits 
 among their customers is made on the basis of their 
 respective abilities to pay. 
 
 The clothier does no injustice to the man who pays 
 $25 for his suit, when he sells the same kind of suits 
 later at $18 or $12 to other customers. If he were 
 unable to reduce his loss by selling for $12, or to 
 make his smaller profit on the $18 sale, evidently all 
 other customers must pay more for what they buy, 
 because the business, as a whole, must pay all ex- 
 penses, charges and profits and these latter sales at 
 lower prices reduce the losses or increase the profit 
 to some extent. 
 
 Professional Rates 
 
 A broker in selling securities, charges a percentage 
 of the value of securities, not for the labor involved, 
 for it is much the same whether one or a hundred 
 shares are sold. If his customers all bought one 
 share only he could not live. 
 
 A doctor charges on the basis of the ability of his 
 patient to pay one price to the poor man and a 
 higher one to the wealthy, although the work and 
 the skill are the same in both instances. The law- 
 yer's fees are based largely on the values and the 
 importance of the issue involved when he writes his 
 opinion or defends his client. 
 
 All of these brokers and professional men base 
 their charges on value, not on cost of service, and 
 they seek to average their charges so that the return 
 
266 VALUATION AND RATES 
 
 from all of them will give an adequate remuneration 
 to themselves and not bear heavily on any one class 
 of their clients. 
 
 It is not unfair to the wealthy man that the doctor 
 charges the poor man less, for if the doctor did not 
 receive some part of his income from the poor man 
 he must evidently collect more from the wealthy 
 
 one to obtain an adequate income. 
 
 i 
 .1 
 Rates Charged for Electric Current 
 
 The supplying of electric current is practically 
 a monopoly under public control. The charges per 
 unit for its use vary more widely than railroad rates. 
 
 In the earlier history of the business, lighting rates 
 were fixed with reference to the rates charged for 
 illuminating gas, so that the new industry might 
 compete for the business of supplying light, which 
 had been monopolized by the gas companies for a 
 long period of time. 
 
 The rates for supplying electric current for power 
 purposes were, and still are, made on such a basis 
 as to induce the users of steam and gasoline power 
 plants to substitute electrical current and appliances 
 for them. 
 
 At the present time 1916 the lighting rates in 
 Chicago are: 
 
 First 30 hours of maximum demand per month 10 cents per 
 Kilo-watt-hour. 
 
 Next 30 hours of maximum demand per month, 5 cents per 
 Kilo -watt-hour. 
 
 All in excess of above, 3 cents per Kilo -watt- hour. 
 
 The Commonwealth-Edison Company state, that 
 the general average paid for lighting, in the city as a 
 whole, is approximately 6 cents per kilo-watt-hour. 
 
 The rates for power current vary from 0.8 cents 
 to 6 cents per kilo-watt-hour, depending on the 
 amount of current used and the condition attending 
 
RATES 267 
 
 its use. The current for the motor used for cleaning 
 hats at the shoe-shining stand will usually cost about 
 6 cents per k-w-h; the current for the immense ce- 
 ment plant, which uses maximum power 24 hours 
 per day, costs about 0.8 cents per k-w-h. 
 
 It will be noted that these rates are based on both 
 the cost and the value of the service, the latter being 
 the controlling factor, and that they are lower for 
 wholesale than for retail use, although the cost of 
 current production is the same. 
 
 Production of electric current involves large cap- 
 ital cost for machinery and transmission systems. 
 The plant and force must be able to supply the maxi- 
 mum demand for current. This maximum demand 
 for lighting lasts only for about three hours of the 
 day; for the balance of the time the larger part of 
 the plant is idle, with large fixed charges, operating 
 expense and depreciation going on constantly. 
 
 If power consumers can be induced to use current 
 by the lower price, the additional cost per unit to the 
 company of producing the additional current is 
 small, compared with the cost of producing a unit 
 for lighting only, particularly as the use of current 
 for power does not occur at the same time as the 
 maximum load required for lighting. Even if the 
 profit per unit on the power current is small, it helps 
 pay the general expenses of the company. 
 
 This lower rate is not made possible at the ex- 
 pense of the user of light current at a higher rate, 
 but in fact reduces his rate. The constant and sub- 
 stantial reductions in all rates which have actually 
 been put in eifect and which are next shown, prove 
 the soundness of the reasoning. 
 
 The following statement shows the average 
 prices paid for electric current for lighting purpose 
 for various periods: 
 
268 VALUATION AND KATES 
 
 18961897 Per Kilo-Watt-Hour 19.5 cents 
 
 18981904 " 13.33 cents 
 
 1905 " 12.00 cents 
 
 1914 " 6.00 cents 
 
 This data shows that the cost of lighting to con- 
 sumers has been reduced 69% in about 20 years, 
 largely through the application of this principle of 
 rate-making. In the last six years, it has also served 
 to reduce the average cost to the users of power 
 current by percentages varying from 36% to 
 43.7%.** 
 
 These reductions approximate those which have 
 been made in railroad rates, between the inception of 
 the railroad enterprises and the present, through the 
 application of the same principle. 
 
 As in the other cases cited, the total receipts from 
 all sources must pay all charges and expenses plus a 
 profit, but the rates are based mainly on value of 
 service and not on cost, for the cost of producing 
 the current used for various purposes is the same 
 and the rates vary with class of service. 
 
 Canal and Turnpike Rates 
 
 The canal and turnpike tolls have always been 
 based on ability to pay. Tolls are charges for the 
 use of the canal or road and do not include the serv- 
 ice of transportation over them. 
 
 It costs such companies no more to allow a ton of 
 apples to be hauled than a ton of stone or any other 
 commodity passing over or through their facilities, 
 and yet they have always differentiated between 
 commodities. 
 
 An old tariff of the Sheffield Canal in England 
 provided for a rate of 4 cents per ton on turnips and 
 potatoes and 8 cents on onions, apples, peas and 
 
 **Data in regard to rates furnished by the Commonwealth- 
 Edison Co. of Chicago. 
 
RATES 269 
 
 beans; for pig iron 6 cents per ton and for bar, rod 
 or rolled iron 8 cents; for "green groceries" 8 cents 
 per ton and for "dry groceries and all kinds of manu- 
 factured goods" 10 cents. 
 
 Rates of Taxation 
 
 The foregoing are analogies with methods used in 
 commercial lines of business. The community as a 
 whole, acting in its corporate capacity, follows the 
 same method in taxation. All taxation of real estate 
 and improvements is based on the value of the prop- 
 erty. 
 
 The owner of a building costing $20,000, built on 
 a lot with a 50 foot frontage, gets no more service 
 for his taxes than an owner of a building costing 
 $3,000 built on a lot with the same street frontage. 
 
 The cost of policing, fire protection, street mainte- 
 nance and all other work and things required, for 
 which taxation is laid on the property, is the same 
 in one case as in the other. 
 
 So too with the income tax of the Government 
 and the inheritance tax of the State. The large in- 
 come and the large inheritance are taxed at a higher 
 rate than the moderate ones and the small ones are 
 not taxed at all. 
 
 That is, taxes are based on equality of burden or 
 sacrifice of the citizens. The laborer, clerk or me- 
 chanic, who has only a narrow margin between in- 
 come and living expense is not asked to pay even a 
 small portion of his small margin; the large income 
 and the estate of the capitalist are well able to pay 
 a differential rate over that of the moderately well- 
 to-do merchant. 
 
 In all taxes laid on real estate, improvements, in- 
 comes, or inheritance, this principle of equality of 
 burden or sacrifice is applied in fixing the rate. 
 
270 VALUATION AND BATES 
 
 Charging what the traffic will bear, or basing the 
 rate on the value of the service to the user or on his 
 ability to pay, is not peculiar, then, to railroads. It 
 applies in all commercial lines, professional fees, the 
 charges of other public service corporations and to 
 rates of taxation that is it prevails in all business 
 life and public service. 
 
 Classification 
 
 The foregoing discussion shows that the traffic as 
 a whole pays the expenses, fixed charges and profits 
 as a whole; that each separate item of traffic pays 
 such portion of that whole as it is able to pay.* 
 
 The apportionment between the different items 
 can only be an approximate one at the best, but it 
 seeks to distribute the burden equitably. 
 
 Boots and shoes, new, are first class ; old worn-out 
 shoes, third class in less than carload lots, and fifth 
 class in carload lots. It evidently costs the railroad 
 company as much to haul the same weight of old 
 shoes packed in boxes as it does new shoes packed 
 in boxes, but if it charged as much for the service 
 little traffic would move. 
 
 It is also evident that old shoes shipped in cars, 
 loaded by consignor and unloaded by consignee and 
 forwarded under one bill of lading, will cost the rail- 
 road company less per 100 Ibs. than a few boxes of 
 old shoes weighing several hundred pounds, for- 
 warded by various consignors and hence billed sepa- 
 rately and loaded and unloaded at the cost of the 
 railroad. 
 
 The third class rate on old shoes as referred to the 
 first class rate on new shoes is based on value of serv- 
 ice; the fifth class rate on carload lots of old shoes 
 
 *In this connection, it must be remembered that the phrase 
 "Can pay" or "ability" to pay is modified by "what the traffic will 
 consent to pay" as illustrated in following pages. 
 
RATES 271 
 
 as referred to the first class rate on less than carload 
 lots of new shoes, is based on a combination of value 
 of service and cost of service. 
 
 The ores of Gold, Silver, Copper and Lead, in 
 sacks, boxes or barrels, when the value exceeds one 
 dollar per pound are classified at double first class; 
 when value does not exceed 40 cents per pound, first 
 class; when value is between 5 and 40 cents per 
 pound, second class ; when 5 cents or less, third class. 
 Iron ore, similarly packed is classified fourth class. 
 
 These classifications are based on the value of the 
 commodity and the increased liability of the railroad 
 in case of loss in transportation or by theft. 
 
 Paint, in glass or earthenware, packed in barrels, 
 is classified first class ; in pails or metal cans packed 
 in barrels, third class; in bulk, in barrels, fourth 
 class. These classifications are based on value of 
 commodity and the liability of the railroad to loss on 
 account of breakage in transportation. 
 
 Stove Ovens, knocked down, flat and crated, are 
 classified third class; when not knocked down, but 
 crated, first class. These classifications are based 
 on the difference of space required in the car per 
 unit of weight, on account of the manner of packing, 
 which affects the cost of service of the railroad. 
 
 To summarize this, Classification, is based in some 
 cases on value of service, in others on cost of service, 
 in still others by a combination of the two. The value 
 of the commodity, the liability to loss through theft 
 or breakage in transportation or handling, and the 
 ratio between space occupied and weight, are all 
 factors entering into classification and hence in the 
 charge made for performing the transportation 
 service. 
 
 Methods of Rate-Making 
 
 Many of the states have established through their 
 commissions what are known as a mileage scale of 
 
272 VALUATION AND RATES 
 
 railroad rates and in some cases independent classi- 
 fications as well. As different classifications are ap- 
 plicable in different states, comparisons between the 
 rate schedules as a whole can not be made usually, 
 but must be confined to individual commodities. 
 There are certain general principles however under- 
 lying the construction of all of these scales. 
 
 The following table shows the rates for distances, 
 10 to 500 miles, and the rate per ton-mile as well, 
 on first class merchandise and on carload shipments, 
 as provided in the mileage distance scale established 
 by the Illinois Commission. 
 
 Illinois Mileage Distance Scale ** 
 
 Merchandise, Merchandise, Carloads, Carloads, 
 
 1st Class, 1st Class, 6th Class, 6th Class, 
 
 Rates per Rates Rates per 
 
 ton-mile. per ton. ton-mile. 
 
 24 cents $1.02 10.2 cents 
 
 6 " 2.34 2.3 " 
 
 3.9 " 3.04 1.5 " 
 
 3.0 " 3.40 1.13 " 
 
 2.4 " 3.82 0.95 " 
 
 2.0 " 4.10 0.82 " 
 
 **The entire scale is not shown; only enough, and in such form 
 as will illustrate the principles of rate-making involved in its 
 construction. 
 
 The rates per ton increase with the distance, but 
 not nearly as fast. Comparing the rates in the sec- 
 ond column (Merchandise, 1st class) for 10 and 400 
 miles, it will be seen that while the distance is 40 
 times as great, the rate is just 4 times that is the 
 rate has increased only one-tenth as fast as the dis- 
 tance, so that the rate per ton-mile is only one-tenth 
 as much at the greater as at the smaller distance. 
 
 Comparing the rates for 10 and 500 miles in the 
 fourth column (6th class, carload shipments), it will 
 be seen that while the distance is 50 times as great, 
 the rate is just 4 times the rate has increased 
 only one-twelfth as fast as the distance, so that the 
 
RATES 273 
 
 :ate per ton-mile is only one-twelfth as much at the 
 greater as at the smaller distance. 
 
 While these exact ratios of distance to rate do not 
 exist as to all Mileage Scales, the same principle is 
 used in constructing all State and Railroad Associa- 
 tion scales. 
 
 The explanation for the decrease in the rate per 
 ton mile as distance increases is found in the follow- 
 ing facts: 
 
 (1) The terminal charges are included in the 
 rate, and are the same regardless of the distance. 
 This explains the large decrease in cost per ton- 
 mile between 10 and 100 miles. On short hauls the 
 terminal charge is a large proportion of the whole 
 rate; in the case of a 10 mile haul perhaps 50% of 
 it*, on a 100 mile haul 20%, on 500 mile haul, 12%. 
 
 (2) The greater the distance hauled, the less per 
 ton-mile cost to haul it. That is 10 tons hauled 20 
 miles, making 200 ton miles, costs more than 1 ton 
 hauled 200 miles, although the total ton-miles are 
 the same in each case. 
 
 The reasons, broadly, are that long hauls get more 
 mileage out of engines, cars and train crews; the 
 engines and cars are more nearly loaded to capacity ; 
 the line more continuously utilized and the delays 
 occasioned by loading and unloading at short inter- 
 vals are avoided.** 
 
 (3) Traffic becomes less able to bear the rate as 
 distance increases, as it (the rate) becomes a larger 
 proportion of the value of the commodity trans- 
 ported. In the case of coal, limestone, sand and 
 such commodities, this factor applies at compara- 
 tively short distances as the rate is a large portion 
 of the selling price ; in the case of Boots and Shoes 
 
 *On basis of 3 cents per hundred, or 60 cents per ton, at each 
 terminal. 
 
 **This is another way of saying that "through" freight costs 
 less to transport than "local" freight. 
 
274 
 
 VALUATION AND RATES 
 
 or Millinery, it scarcely limits the distance of 
 shipment at all, the percentage that the rate charged 
 per ton bears to the value per ton of Shoes or Mil- 
 linery being small even for the longest distances. 
 
 Percentage and Differential Method of Rate 
 Construction 
 
 More than 50% of the total railroad traffic of the 
 United States is moved within an area known as Cen- 
 tral Freight Association, Trunk Line and New Eng- 
 
 ** 
 
 land territories. The small accompanying map 
 indicates in a general way, the boundaries of these 
 traffic territories. 
 
 **The map shows the territories between which the rates 
 apply. The boundary of Central Freight Association territory in 
 north-western Illinois, is not exactly as shown on the map, the 
 rates applying to points west of the western boundary of this 
 Association's territory. This has no significance so far as this 
 discussion is concerned, the term Central Freight Association as 
 used herein being intended to cover the territory as indicated on 
 the map. 
 
RATES 275 
 
 The rates applying between Central Freight As- 
 sociation territory, on the one hand, and Trunk Line 
 New England territories, on the other, are made 
 by what may be termed the Percentage and Differ- 
 ential Method of rate-making, which is next de- 
 scribed. (This discussion does not refer to rates be- 
 tween two points, both of which are in Central 
 Freight or both of which are in the Eastern terri- 
 tories, but to rates between two points, one of which 
 is in Central Freight and the other in the Eastern 
 territories.) 
 
 Base Rate 
 
 The rates from Chicago to New York are the base 
 or unit rates and are termed 100 per cent rates. 
 The rates between all points in the Central States 
 and the City of New York are some percentage of 
 this rate, varying from 60% to 120%. 
 
 At the time the method was adopted, the Chicago- 
 New York rates were : 
 
 100 PER CENT RATES 
 
 Classes 123456 
 Rates in Cents per 100 Ibs 75 65 50 35 30 25 
 
 Percentage Groups 
 
 The distance from Chicago to New York was taken 
 at 920 miles and the terminal charges as 3 cents 
 at each of the termini or a total of 6 cents. A de- 
 duction of 6 cents for terminal charges was first 
 made from the 6th class rate of 25 cents, leaving 
 19 cents as the amount allowed for hauling a dis- 
 ance of 920 miles or at the rate of 0.0206 cents per 
 mile per 100 Ibs.** 
 
 For other points in the territory, the rates were 
 fixed at a percentage of the rate from Chicago to 
 
 **Rate per ton -mile 4.12 mills. 
 
276 VALUATION AND RATES 
 
 New York, the points taking rates higher or lower 
 as they were more or less distant* from New York, 
 than was Chicago. The factor of 0.0206 cents mul- 
 tiplied by its distance from New York, plus 6 
 cents for terminal charges, established the rate for 
 any point. The percentage which the rate so estab- 
 lished bore to the base rate of 25 cents, determined 
 the percentage of the Chicago-New York rates 
 which the particular point would take. 
 
 When first put into effect, these rates applied only 
 to competitive and junction points, the rates to 
 points intermediate being made by adding the rate 
 from the nearest junction to the through rate of the 
 junction point. Finally these intermediate points 
 were grouped, with the junctions taking the same 
 rates, and these have been termed Percentage 
 Groups. 
 
 The following will serve to illustrate the manner 
 of arriving at the rates to these various percentage 
 groups. 
 
 Fort Wayne, Ind., is in the 90% Group. Muncie 
 is the basing point for that group and is 798 miles 
 from New York. Its rate then is : 
 
 798 miles x 0.0206 cents per mile = 16.44 cents 
 Add terminal charges.. 6.00 cents 
 
 Rate from Muncie to New York. , : 22.44 cents 
 
 22.44 cents-^-25 cents, base rate,=89.76 per cent, 
 or using the rule for disposing of fractions, in which 
 a fraction exceeding one-half is considered a full 
 per cent, we have 90%, and all points in that group 
 take a rate to New York of 90% of the Chicago-New 
 York rate. 
 
 This placed the rates between all groups in the 
 Central states and New York City on a strict mileage 
 
 *Measured by the shortest route "worked or workable." 
 
RATES 277 
 
 basis in the beginning, but certain conditions have 
 caused these to be altered in a few situations, as 
 will be shown later. 
 
 Differentials 
 
 The rates between Central States points and other 
 Atlantic sea ports than New York, were made cer- 
 tain differentials over or under the rate from the 
 same points to New York. 
 
 These differentials are: 
 
 FROM Central States EASTBOUND 
 
 TO Deduct from Chicago-New York rate 
 
 Classes 123456 
 
 Baltimore, Md. Cents per 100 Ibs. 333333 
 Philadelphia, Pa. Cents per 100 Ibs. 222222 
 
 Add to Chicago-New York rate 
 Boston, Mass. Cents per 100 Ibs. 765432 
 
 TO Central States WESTBOUND 
 
 FROM Deduct from Chicago -New York rate 
 
 Classes 123456 
 
 Baltimore, Md. Cents per 100 Ibs. 8 83 3 3 3 
 Philadelphia, Pa. Cents per 100 Ibs. 6 6 2,2 2 2 
 Boston, Mass. Same as New York-Chicago rate- 
 
 The following table shows the mileage from Chi- 
 cago to these various Atlantic sea-ports : 
 
 Miles 
 
 Chicago to Boston , 1006 
 
 " New York** Basing distance ... 920 
 
 " Philadelphia 823 
 
 " Baltimore 782 
 
 Note the differences between the basing distance 
 Chicago to New York of 920 miles and the three 
 other points: 
 
 Miles 
 
 Chicago to Boston exceeds basing distance. . . 86 
 
 Philadelphia less than basing dist. 97 
 
 " Baltimore less than basing dstance 138 
 
 **Actual short-line distance is now 912 miles. 
 
278 VALUATION AND RATES 
 
 Multiplying these differences by the rate per 100 
 Ibs. charged for hauling between Chicago and New 
 York, which is 0.0206 cents per mile, we have- 
 Boston 86 miles x 0.0206 cents = 1.77* cents more 
 than New York. 
 
 Philadelphia 97 Miles x 0.0206 cents = 1.998* 
 cents less than New York. 
 
 Baltimore 138 miles x 0.0206 cents = 2.843* cents 
 less than New York. 
 
 It will be seen that the Boston, Philadelphia and 
 Baltimore differentials, 6th class," Eastbound, are 
 based strictly on distance. 
 
 The differentials from Philadelphia and Baltimore 
 to Chicago, 6th class, Westbound, are based on the 
 distances also. The rates from Boston to Chicago 
 Westbound are not based on the distance, the rates 
 being the same as from New York, although the 
 distance is 86 miles greater. 
 
 The differentials on the four lowest classes be- 
 tween Philadelphia and Baltimore on the one hand, 
 and Chicago on the other, are the same both east and 
 west bound ; on the first and second classes they are 
 between Baltimore and Chicago 3 cents east and 8 
 cents westbound lower than the Chicago-New York 
 rates; between Philadelphia and Chicago 2 cents 
 east and 6 cents westbound lower than Chicago-New 
 York rates. 
 
 To understand these apparently arbitrary differ- 
 entials, the difference in the character of traffic east 
 and westbound and the historical development of 
 the rates must be taken into account.** 
 
 *The rule for disposition of fractions makes these 2-2 and 3 
 cents respectively. 
 
 **The rates covering the movement of this traffic are, on the 
 whole, lower than any similar schedule of rates in the country. 
 Only the large volume of traffic and the relatively long average 
 haul make them possible. 
 
KATES 279 
 
 \ 
 Competition Between Atlantic Sea Ports 
 
 Boston, New York, Philadelphia and Baltimore, 
 all important sea ports, became commercial rivals 
 as transportation facilities extended further from 
 the Atlantic Ocean. The State of New York had 
 constructed the Erie Canal, connecting the port of 
 New York with the Great Lakes. This lead the State 
 of Pennsylvania to project the "State Line of Public 
 Works" (a railroad) to connect Philadelphia with 
 the territory west of the Allegheny Mountains. 
 Maryland interests constructed the Baltimore and 
 Ohio to connect Baltimore with the Ohio River. 
 
 In the earlier railroad development the main trunk 
 lines of railroads constructed west from the Atlantic 
 ports were (1) What is now the New York Central, 
 built along the Hudson River and across the central 
 part of the state from the port of New York to Buf- 
 falo; (2) What is now the Erie, constructed from 
 the port of New York across the extreme southern 
 part of the State to the Lakes; (3) The Pennsylvania 
 Railroad, extending from Philadelphia to Pitts- 
 burgh; (4) the Baltimore and Ohio Railroad ex- 
 tending from Baltimore to Parkersburg. Boston had 
 no independent trunk line of its own to the west, 
 but was served by the Boston and Albany Railroad, 
 which connected it with the New York Central at 
 Albany. 
 
 Western Gateways 
 
 Buffalo, Pittsburgh and Parkersburg were the 
 western termini of these main lines and from each 
 of these points railroads radiated in all directions, 
 extending across Ohio, Michigan, Indiana and Illi- 
 nois. These in turn were crossed by the north and 
 south railroads, constructed to connect the Great 
 Lakes with the Ohio River. 
 
 Water transportation and favorable geographical 
 position had, even before the days of the railroad, 
 
280 VALUATION AND RATES 
 
 made Chicago the gateway to the West and North- 
 west; St. Louis the gate to the West and Southwest 
 and Cincinnati to the South. These three gateways 
 were the natural goals of the main trunk lines first 
 mentioned. These lines competed in carrying man- 
 ufactured products and merchandise west from the 
 rival districts they served in the east, and grain, and 
 packing house products and raw materials from the 
 Central States to the eastern districts and the four 
 Atlantic sea-ports. 
 
 Ruinous Competition 
 
 The competition between these trunk lines, 
 backed by the business interests of the communi- 
 ties they served, was bitter and resulted -in ruin- 
 ously low rates, rebating, and all of the attendant 
 evils. Rate schedules meant little, the actual rates 
 being chaotic. 
 
 Baltimore and Philadelphia contended for lower 
 rates than New York and Boston on the ground of 
 shorter distance. The necessities of commercial 
 competition impelled the commercial interests of 
 these two former ports to contest this position to 
 the utmost. The conflict was carried on for many 
 years, until in 1877, the arrangement outlined was 
 adopted as a compromise. 
 
 Commercial Factors Affecting Differential Basis 
 
 The argument for the arrangement of differentials 
 adopted would be about as follows : 
 
 New York was the money center of the country 
 and had the best harbor on the Atlantic coast, 
 which had brought to it the larger part of the im- 
 port and export business of the country. If Phila- 
 delphia and Baltimore were placed on the same rate 
 basis they could not hope to maintain their commer- 
 
RATES 281 
 
 cial position, so that differential rates were with 
 these two ports a matter of business life and death. 
 
 There was the further consideration of abstract 
 justice in being entitled to a lower rate on account 
 of shorter distance. As they had railroad systems 
 of their own, whose interests were identical with 
 commercial interests, they were in position to fight 
 indefinitely, even to the extent of conducting the 
 transportation at a loss. 
 
 Boston had no independent through line to the 
 west and made the best trade the circumstances 
 would allow. The rates westbound were the same 
 as New York on all classes and only 2 and 3 cents 
 higher than her other competitors on the four lowest 
 classes. The freight rate on Classes 1 and 2 was 
 not a controlling factor in marketing such products 
 as the rates were but a small percentage of the value 
 of the commodities embraced in those classes. 
 
 The eastbound shipments were practically con- 
 fined to raw material or other low class commodities 
 taking 6th class or some lower commodity rate. It 
 was of little practical consequence to Boston there- 
 fore that its 1st class rate from Chicago eastbound 
 was 10 cents higher than to Baltimore and 9 cents 
 higher than to Philadelphia. On the commodities 
 which actually moved in large volume eastbound, 
 her rates were only 2 cents per 100 Ibs. higher than 
 the New York rate and 5 cents higher than the low- 
 est rate. 
 
 Rates to Interior Eastern Points 
 
 The Grand Trunk reaches both Boston and Port- 
 land, Maine. The distance from Chicago to the 
 latter, by this road, is less than to Boston. Points 
 in Connecticut are less distant from Chicago than 
 Boston. The distance from Chicago to all interior 
 points on main lines in New England is less than 
 to the Atlantic ports. On this account all of New 
 
282 VALUATION AND RATES 
 
 England is on the same rate basis that applies to 
 Boston.* 
 
 The rates to interior points in the Eastern territory, 
 like Albany, Rochester, Syracuse and Utica, are 
 based on the percentage their distance bears to the 
 Chicago-New York basing distance of 920 miles. For 
 some points located on branch lines in eastern terri- 
 tory certain arbitraries are added to the rates apply- 
 ing to the points on the main line at which the 
 branch lines connect. 
 
 The rates applying to Baltimore and Philadelphia 
 are carried very considerable distances inland. For 
 instance Altoona, Pa., takes Baltimore rates and 
 Wilkesbarre, Pa., takes Philadelphia rates. 
 
 Arbitraries in Western Groups 
 
 In the Percentage Groups of the Central States, 
 there are several instances where specific (instead 
 of percentage) differences above or below the rates 
 from another basing point are used in making rates. 
 Many years of controversy and much expensive com- 
 petition between the manufacturers and railroads 
 interested, has resulted in making rates to the east 
 from the Mahoning and Shenango Valleys (Youngs- 
 town District) 2 cents higher, Cleveland 3 cents 
 higher and the Johnstown District 1V2 cents lower 
 than the rates from Pittsburgh. 
 
 Adjustment of Rates Maintained 
 
 It will be observed from this, that the rates be- 
 tween eastern and Central States territory are auto- 
 matically raised or lowered as the basic rate be- 
 tween Chicago and New York is raised or lowered. 
 In the recent advance of rates between these terri- 
 
 *On some branch lines, arbitraries are added for local haul 
 from the junction. 
 
RATES 283 
 
 tories the same relative differences in rates from 
 different groups was maintained as had existed prior 
 to such advance. When the 5% increase was 
 granted by the Interstate Commerce Commission, the 
 existing basing rate was advanced to 
 
 100 Per Cent Rates 
 
 Classes 123456 
 Rates in Cents per 100 Ibs 78.8 68.3 52.5 36.8 31.5 26.3 
 
 The rates to the other Atlantic seaboard points 
 were made the same differentials above and below 
 these basing rates as were in effect before and the 
 percentage group rates were all advanced 5% au- 
 tomatically by advancing the base rate. > 
 
 Principles Involved in Percentage and Differential 
 
 Rates 
 
 The reasoning upon which these percentages rates 
 are based may be summarized as follows : 
 
 Broadly the rates are based on mileage, modified 
 by commercial conditions, character of traffic and 
 competition, a*nd also by cost of service and the ap- 
 plication of the principle of equitable concession. 
 
 The New England States must be relieved from 
 the strict application of a mileage basis on west* 
 bound traffic in order to market the products of their 
 mills and factories. 
 
 On the lower classes of westbound traffic, on which 
 the transportation charge is an important percentage 
 of the selling value, they are only required to pay 3 
 cents more per 100 Ibs. than their most favorably 
 situated competitor; on the higher class traffic, on 
 which the transportation charges are not an import- 
 ant part of selling value, they pay 8 cents per 100 
 Ibs. more. They are able to force this concession 
 because their railroads originate this business and 
 are thus in position to influence rates. 
 
284 VALUATION AND RATES 
 
 On eastbound business the rates are 5 cents more 
 on the lowest class and 10 cents more on the higher 
 class because (1) the movement eastbound is con- 
 fined largely to low class traffic and (2) as they have 
 no through line of their own extending into origin 
 territory, they are not in position to enforce so great 
 a concession as on traffic in the opposite direction. 
 
 The distance from Milwaukee and the west bank 
 Lake Michigan ports as far north as Menominee in 
 Upper Michigan, are greater by all-rail lines than 
 the distance from Chicago to all eastern points 265 
 miles in the case of the last named point or 129% of 
 the Chicago-New York basing distance. 
 
 The rates however are the same from Menominee 
 as from Chicago, because certain lines operate car 
 ferries 80 miles across Lake Michigan and there is 
 water competition as far east as Buffalo. The all- 
 rail routes must meet the competition of Across 
 Lake Lines and lake vessels and rates based on rail- 
 road mileage cannot, therefore, be applied to these 
 west bank Lake Michigan points. 
 
 Rates on traffic to points on branch lines in East- 
 ern territory are made usually by a combination of 
 the main line rate plus the local rate from junction 
 to destination. This gives a higher rate per ton-mile 
 than the main line ton-mile rate figured for the entire 
 distance. The greater cost of service on lines of 
 light traffic, as heretofore explained, fully justifies 
 the application of higher rates on such traffic. 
 
 Justification of Eastern Grouping 
 
 In the formation of some of the groups, particu- 
 larly the Philadelphia and Baltimore groups, the 
 Baltimore and Philadelphia rates have been carried 
 for considerable distances inland 190 miles in the 
 case of the Baltimore Group. As the rates to the 
 seaboard points are based on actual distances**, it 
 
RATES 285 
 
 gives higher rates per ton-mile to interior than to 
 the Seaboard points. 
 
 Such rates are based on the principle of equitable 
 concession in part and on lack of competition at the 
 interior points. If the rates to Baltimore were made 
 on a strictly mileage basis at the same rate per ton- 
 mile as applied to the first interior point .located just 
 inside of the western boundary of the Baltimore 
 group, the rate would be so high that competitors in 
 Philadelphia, New York and Boston would take 
 away the greater part of the business of Baltimore 
 and to that extent decrease the amount of traffic car- 
 ried to or from the Baltimore Group. 
 
 If the traffic were decreased, the rates at the in- 
 terior point must be increased, as charges and ex- 
 penses would have to be spread over a lessened 
 traffic. That is Baltimore's commercial position 
 would be practically destroyed and no benefit would 
 accrue to the interior point. 
 
 So long as there is a profit in the Baltimore busi- 
 ness at all (remembering that it is a competitive 
 point), no injustice is done the interior point by 
 charging it a higher rate per ton-mile, as the profit 
 on the Baltimore business, however small, pays a 
 part of the fixed expense and fixed charge which 
 the interior points must pay unassisted if no Balti- 
 more business is done. 
 
 Traffic is less able to bear the rate as distance in- 
 creases, as heretofore explained, and it is equitable 
 that the point nearer the market should bear a pro- 
 portionately greater burden than traffic distant 
 therefrom. This statement of course is made on the 
 supposition that the rate to the interior point is rea- 
 sonable per se. 
 
 It is, as a matter of fact, very low, being 7.7 mills 
 
 **It must be remembered that the rate per ton -mile is very 
 low, however. 
 
286 VALUATION AND RATES 
 
 per ton-mile on sixth class traffic. As compared with 
 rates to intermediate points in other districts than 
 those governed by these Percentage rates, it is re- 
 markably low. The fact that it is based on a higher 
 rate per ton-mile than the ton-mile rate to Baltimore 
 is not proof that it is unfair. 
 
 As to practically all of the rates in effect between 
 Central States and Eastern Territory the long and 
 short haul provision of the Commerce Act has not 
 been violated. 
 
 Competition Reduces Value of Railroad Service 
 
 There is a certain traffic so circumstanced, that a 
 portion of the value of service rendered it by a rail- 
 road is decreased on account of the availability of 
 other systems of transportation. Evidently if a 
 steamboat line offers a merchant in St. Louis a rate 
 of 32 cents per 100 Ibs. on a shipment to Paducah, 
 Ky., the value of service of the railroad company is 
 not 40 cents per 100 Ibs., although it would be if no 
 water transportation were available. But the St. 
 Louis merchant, whatever his ability to pay, will pay 
 no more than he must. 
 
 A manufacturer shipping strawboard from La- 
 fayette, Ind., to points on the east bank of Lake 
 Michigan will not pay the C. C. C. & St. L. Ry. a rate 
 based on its mileage, say to Benton Harbor, when 
 he can ship over the Chicago, Indianapolis & Louis- 
 ville Railway at a rate based on a much shorter mile- 
 age. 
 
 If the Chicago, Indianapolis & Louisville Railway 
 were not in operation, the mileage rate of the C. C. 
 C. & St. L. Ry. would be considered fair, but the 
 value of the service to the shipping manufacturer is 
 no greater than the cost of shipping by the shorter 
 route. That is, the construction of the Chicago, In- 
 dianapolis & Louisville Railway, as to certain north- 
 
RATES 287 
 
 bound shipments from Lafayette, reduced the value 
 of service of the C. C. C. & St. L. Ry. from that point. 
 
 There are two general conditions of competition 
 which affect and prevent the application of rates 
 based strictly on mileage or cost of service, viz: (1) 
 On traffic between two points served by more than 
 one road, one of which is shorter than the other 
 that is where one has a direct and the other a cir- 
 cuitous route. (2) On traffic between two points 
 served by both railroad and water transportation in 
 whole or in part. 
 
 Making rates for such traffic involves at times 
 charging less for a longer than a shorter haul, when 
 the latter is included within the former. The follow- 
 ing discussion relates to the economic principles in- 
 volved in such rates. 
 
 \ 
 
 Circuitous Routes 
 
 The discussion of this subject will be aided by an 
 illustration of an actual rate situation: 
 
 The distance from Lafayette, Ind., to Benton Har- 
 bor, Mich, (see map), by the Chicago, Indianapolis 
 & Louisville Railway and the Pere Marquette Rail- 
 road, jointly, is 122 miles; the distance between the 
 same two points by the C. C. C. & St. L. Ry. is 265 
 miles. 
 
 There is a considerable traffic from Lafayette to 
 Michigan points in various manufactured products 
 taking sixth class or lower rates. In order to facili- 
 tate the following discussion, the sixth class rates 
 will be used. 
 
 The following table shows the present sixth class 
 rates and distances from Lafayette and other points 
 to Benton Harbor. 
 
Wild 
 San jererre 
 
 4 - VJBelfJst^ 5-<N^J? oJMlsha^a 
 )t?8 ' fc^^ \feoutfiBenc 
 
 ^- ^ 
 'Jorth Judsou 4 ' 
 
 Mondn BooneN 
 
 Hoovei 
 
 ^^^ 
 
 ^Trimmer! VNL * 
 
 ^fe c "' 
 
RATES 289 
 
 DISTANCES AND RATES TO BENTON HARBOR 
 
 Distance Rate in cts. v 
 FROM Miles per 100 Ibs. 
 
 Lafayette via C. I. & L.-P. M 122 8.9 
 
 Lafayette via C. C. C. & St. L 265 8.9 
 
 Indianapolis via C. C. C. & St. L. .200 9.5 
 
 Marion via C. C. C. & St. L 131 8.9 
 
 Traffic moved by the C. C. C. & St. L. Ry. from 
 Lafayette to Benton Harbor passes through In- 
 dianapolis and Marion. The distance from Lafayette 
 to Benton Harbor is 65 miles greater and the rate 
 0.6 cents per 100 Ibs. less than the rate from In- 
 dianapolis to Benton Harbor ; in fact the rate on the 
 last 134 miles (that is after passing Marion) of the 
 C. C. C. & St. L. up to Lafayette is greater by 0.6 
 cent per 100 Ibs. than the Lafayette rate. 
 
 On a ton-mile basis, the rates from the several 
 points to Benton Harbor are : 
 
 Cents per ton-mile. 
 
 Lafayette via C. I. & L.-P. M 1.46 
 
 Lafayette via C. C. C. & St. L 0.67 
 
 Indianapolis 0.95 
 
 Marion 1.36 
 
 The table shows that on the same commodities, 
 moved over the same tracks, a rate of 0.67 cents per 
 ton-mile is charged on traffic from Lafayette to Ben- 
 ton Harbor moving through Indianapolis, while traf- 
 fic originating at Indianapolis sent to the same desti- 
 nation, is charged a rate of 0.95 cents per ton-mile. 
 Can such rates be justified? 
 
 Effect of Rates on Various Interests 
 
 There are three interests to consider: the In- 
 dianapolis shippers, the Public and the Railroad 
 Company. A comparison of the rate from Indianap- 
 olis with those from Lafayette (by the shorter line) 
 
290 VALUATION AND RATES 
 
 and Marion shows a ton-mile rate less from Indianap- 
 olis than from the last two points, which is normal 
 as the distance hauled is longer. 
 
 On the basis of the standard mileage scale* ap- 
 plying in this territory, the rates per ton-mile on 
 sixth class trafficTfrom these several points to Benton 
 Harbor would be 
 
 Cents per ton-mile. 
 
 Lafayette via C. I. & L.-P. M 1.46 
 
 Lafayette via C. C. C. & St. L 0.84 
 
 Indianapolis 1.00 
 
 Marion 1.36 
 
 It will be seen from this table, that the rates from 
 Indianapolis to Benton Harbor are 0.05 cents per ton- 
 mile less than the average rate per ton-mile for this 
 distance in this territory. 
 
 So far as the rate from Indianapolis itself is con- 
 cerned, then, it seems fair by comparison and the 
 Indianapolis shipper has no just cause for complaint. 
 
 As to the railroad company, considered as addi- 
 tional business, the traffic is moved at a profit, though 
 much below the normal profit.** If all of its sixth 
 class business from stations between Lafayette and 
 Benton Harbor were hauled at rates per ton-mile as 
 low as this rate from Lafayette to Benton Harbor, its 
 transportation would involve a loss. Or, if the sixth 
 class traffic between Lafayette and Benton Harbor 
 were charged its full proportion of the fixed charges 
 and fixed expense, on the basis of tonnage, the 
 transaction would show a loss. As such charges and 
 expenses are incurred whether the business is done 
 or not, the transaction is as a matter of fact profita- 
 
 *Central Freight Association mileage scale. 
 
 **The fixed charge for interest and 34 per cent of operating 
 expense which is fixed, will not be included in cost when the 
 rate is to be made on the basis of out-of-pocket expense. 
 
RATES 291 
 
 ble and in consequence justified from the standpoint 
 of cost to the railroad. 
 
 It is in the interest of the public that as many dif- 
 ferent transportation routes as possible be available r 
 for even if no reduction in rate may be obtained 
 thereby, the service is improved by competition. 
 
 N. 
 
 Principles Involved in Rates Over Circuitous Routes 
 
 The principles involved in the making of such 
 rates are: 
 
 (1) When the traffic between two given points 
 may be carried over two or more routes, the shorter 
 route will determine the rate, and in consequence 
 the longer route must perform its service at less 
 revenue per ton-mile than the normal charge for its 
 traffic as a whole. 
 
 The limiting factor in the application of this prin- 
 ciple is, that the revenue received from the traffic 
 must in all cases exceed the actual additional cost 
 which its movement involves, in order that the traffic 
 as a whole shall not bear the burden of a particular 
 service performed at a loss. 
 
 (2) If in the application of the first principle, 
 rates from intermediate points to the same destina- 
 tion are higher than from the more distant point, 
 such a fact is not in itself proof that the rates from 
 intermediate points are unfair. 
 
 The fairness of the rate from the intermediate 
 points should be determined by comparison with 
 other points similarly situated and the normal rate 
 for the territory as a whole. If such comparison 
 shows the rate to be fair in itself, the fact that the 
 carrier performs a more costly service at another 
 point for a smaller compensation, works no injustice 
 to the intermediate point, and the carrier should not 
 be deprived of the profit, however small, of doing 
 the additional business, nor the terminal point of the 
 
292 VALUATION AND RATES 
 
 benefit which it obtains through such competitive 
 service. 
 
 Water Competition 
 
 Competition between water and rail systems of 
 transportation affects rates in certain territories very 
 materially. The most important instances from the 
 standpoint of volume of traffic are : 
 
 Between points on large navigable rivers, such as 
 the Ohio and Mississippi. 
 
 Between points situated on the Great Lakes and 
 
 Between points both of which are sea ports and 
 but the traffic between which is moved by a combina- 
 tion lake and rail route. 
 
 Between points both of which are sea ports and 
 between points one of which is a sea port and the 
 other an inland point which may be served by an all- 
 rail route or a combination water and rail route. 
 
 So far as economic principles are concerned, they 
 are much the same in either of these three circum- 
 stances. Illustrations of River, Lake and Ocean com- 
 petitive rates will be given to show the basis and 
 reasoning upon which they rest. 
 
 Fundamental Differences Between Rail and Water 
 Transportation 
 
 There are certain fundamental differences in the 
 economics of railroad and water transportation to 
 which attention should be called before going into 
 the discussion. 
 
 A railroad must construct a roadway, furnish 
 equipment, maintain both of them and operate trains 
 to move the traffic. Its rate schedule as a whole 
 must pay the fixed charges (interest) on the cost of 
 roadway and equipment, the cost of maintaining 
 them and the cost of conducting the transportation. 
 
 River, Lake and Ocean lines of transportation fur- 
 nish the vessel (equipment) and maintain and op- 
 
RATES 293 
 
 erate it. Their rate schedules as a whole must pay 
 interest on the cost of the vessel and cost of main- 
 taining and operating it, and in addition wharfage 
 or dockage for receiving and discharging freight. 
 
 Nature has furnished the roadway in greater part 
 and the government has improved it by constructing 
 locks and harbors and dredging shallow channels, 
 which it also maintains at the expense of the country 
 as a whole. That is, water-born traffic bears no 
 
 rviver competition 
 
 The largest river traffic in this country is that car- 
 ried by the Ohio and Mississippi Rivers, and cities 
 and towns located on or near these streams usually 
 enjoy lower transportation rates than those not so 
 favorably situated. 
 
 Railroads connecting two points, both of which are 
 on navigable streams, have to meet competition from 
 water transportation as to the terminals, while to 
 points intermediate thereto there is no such competi- 
 tion. The traffic between Cincinnati and other Ohio 
 
 "The tolls for the use of the Panama Canal is one exception 
 to this general statement. 
 
292 VALUATION AND RATES 
 
 benefit which it obtains through such competitive 
 service. 
 
 Water Competition 
 
 Competition between water and rail systems of 
 transportation affects rates in certain territories very 
 materially. The most important instances from the 
 standpoint of volume of traffic are : 
 
 Between points on large navigable rivers, such as 
 the Ohio and Mississippi. 
 
 Errata 
 
 The third paragraph under the caption "Water 
 Competition" on page 292 should read: 
 
 Between points situated on the Great Lakes and 
 between points neither of which are on the Lakes 
 but the traffic between which is moved by a combina- 
 tion lake and rail route. 
 
 Transportation 
 
 There are certain fundamental differences in the 
 economics of railroad and water transportation to 
 which attention should be called before going into 
 the discussion. 
 
 A railroad must construct a roadway, furnish 
 equipment, maintain both of them and operate trains 
 to move the traffic. Its rate schedule as a whole 
 must pay the fixed charges (interest) on the cost of 
 roadway and equipment, the cost of maintaining 
 them and the cost of conducting the transportation. 
 
 River, Lake and Ocean lines of transportation fur- 
 nish the vessel (equipment) and maintain and op- 
 
RATES 293 
 
 erate it. Their rate schedules as a whole must pay 
 interest on the cost of the vessel and cost of main- 
 taming and operating it, and in addition wharfage 
 or dockage for receiving and discharging freight. 
 
 Nature has furnished the roadway in greater part 
 and the government has improved it by constructing 
 locks and harbors and dredging shallow channels, 
 which it also maintains at the expense of the country 
 as a whole. That is, water-born traffic bears no 
 burden* of interest on the cost of constructing or of 
 operating expense in maintaining a roadway, while 
 the railroad traffic does, and in consequence the 
 former has an advantage in cheapness over railroad 
 traffic. 
 
 On the other hand, the service of the railroads is 
 superior to that of water routes in speed, safety and 
 regularity. Ice in the rivers and lakes causes prac- 
 tically total suspension of water transportation dur- 
 ing the winter months, as to the greater part of 
 water traffic five months in the case of the Great 
 Lakes and storms and accidents at sea are incident 
 to ocean-born traffic, causing delays and affecting 
 the safety of the transportation. 
 
 River Competition 
 
 The largest river traffic in this country is that car- 
 ried by the Ohio and Mississippi Rivers, and cities 
 and towns located on or near these streams usually 
 enjoy lower transportation rates than those not so 
 favorably situated. 
 
 Railroads connecting two points, both of which are 
 on navigable streams, have to meet competition from 
 water transportation as to the terminals, while to 
 points intermediate thereto there is no such competi- 
 tion. The traffic between Cincinnati and other Ohio 
 
 *The tolls for the use of the Panama Canal is one exception 
 to this general statement. 
 
294 VALUATION AND RATES 
 
 River Crossings and New Orleans, and other Missis- 
 sippi River points is very important. The rates to 
 intermediate points, from the Ohio River Crossings 
 are higher than to the terminal Mississippi River 
 points. 
 
 . Rates Between St. Louis and Paducah, Ky. 
 
 The following illustration of this class of rates is 
 given on account of its simplicity. 
 
 The Illinois Central Railroad operates a line be- 
 tween St. Louis on the Mississippi River and Padueah, 
 Ky., on the Ohio River. A line of steamboats op- 
 erates regularly between the same points. The dis- 
 tance and rates between St. Louis and several points 
 
RATES 295 
 
 on the Illinois Central line are shown by the follow- 
 ing table : 
 
 FROM St. Louis 
 
 First class 
 Miles Rates 
 
 TO Cents per 100 Ibs. 
 
 Marion, 111 113 33.9 
 
 Parker, 111 128 35.9 
 
 Metropolis, 111. . . 160 36.0 
 
 Brookport, 111 166 36.0 
 
 Paducah, Ky 171 36.0 
 
 Paducah rate in effect for comparative purposes.34.0 
 
 The rate to Paducah includes a transfer charge at 
 the Ohio River of 2 cents, which should be deducted 
 from the actual rate in effect for the purpose of com- 
 parison with rates based on distance. 
 
 It will be seen from the table, that the charge for 
 moving the same commodity over the same rails is 
 practically the same for a distance of 171 miles as 
 for a distance of 113 miles and that it is nearly 2 
 cents less than the rate to Parker, whose distance 
 from St. Louis is 43 miles less. 
 
 The normal rate to Paducah, on the basis of the 
 Illinois distance scale, plus the transfer charge at 
 the Ohio River, would be 40.9 cents. To meet the 
 river competition, the railroad rate has been made 
 12% less than the normal rate. 
 
 But the rates to the intermediate points are fair, 
 being on the same basis as all other points in the 
 State of Illinois where the conditions are the same. 
 Paducah, and the other rivers points, enjoy the lower 
 rate by reason of natural advantages, which the rail- 
 road is not called upon to adjust. On the basis of 
 value of service, the fact that water competition is 
 available at Paducah has reduced the value of the 
 service rendered by the railroad at Paducah. 
 
296 VALUATION AND RATES 
 
 If the railroad were compelled to place Paducan 
 and Marion on the basis prescribed by the Illinois 
 distance scale, it could get none, or only a small part, 
 of the business at Paducah, as the river rate is lower 
 than the distance scale rate. What benefit would 
 Marion derive from the fact that the railroad could 
 get none of the Paducah business? 
 
 If, in order to get the Paducah business, the rates 
 to all intermediate points between St. Louis and Pa- 
 ducah were reduced 12% below the rates prescribed 
 by the Illinois distance scale (the same percentage 
 the Paducah rate has been reduced to meet the com- 
 petition), such rates would be below the normal 
 rates of the territory and below the cost of service, 
 which condition would force the railroad to forego 
 the Paducah business. 
 
 The conditions are much the same as those attend- 
 ing that portion of the Lafayette-Benton Harbor 
 traffic which is moved over a circuitous route, viz: 
 that the rates to the intermediate points being fair, 
 as compared with rates in the same territory between 
 points similarly situated, no injustice is done the in- 
 termediate point because an equal or greater service 
 has been performed for a terminal competitive point 
 at a lower rate. 
 
 As to this feature of natural advantages, men- 
 tioned above, a paragraph in the decision of the In- 
 terstate Commerce Commission, in Baltimore Cham- 
 ber of Commerce vs. Baltimore & Ohio Railroad 
 I. C. C. Reports Vol. XXII, page 603, is interesting: 
 
 "It is not within the power of this Commission to 
 equalize economic conditions or to place one market 
 in a position to compete on equal terms with another 
 market as against natural advantages. * * * 
 The requirements of the law are, that transportation 
 rates must be reasonable and must not be unjustly 
 discriminatory or give undue preference." 
 
RATES 297 
 
 Ohio-Mississippi River Coal Traffic 
 
 The railroads can not usually meet water competi- 
 tion as to certain traffic of considerable volume be- 
 tween points located directly on the large navigable 
 rivers. Coal from the Pittsburgh district to all 
 points on the Ohio and Mississippi Rivers is deliv- 
 ered by barge at perhaps lower costs for transporta- 
 tion per ton-mile than any other traffic in the world. 
 
 Immense fleets of barges are floated down during 
 the freshets in the Ohio River, one tow-boat and 
 crew handling as much as 25,000 tons in one fleet. 
 The government engineers have reported the cost* 
 of such transportation to be: 
 
 Pittsburgh to Louisville present freshet system 
 empty barges returned to Pittsburgh, 0.76 mills per 
 ton-mile. 
 
 Pittsburgh to New Orleans present freshet sys- 
 tem empty barges not returned, but including their 
 cost in the cost of transportation, 0.68 mills per ton- 
 mile. 
 
 The estimated cost, after the completion of the 
 improvements in the Ohio River, now under con- 
 struction, which will give a minimum depth of water 
 of nine feet, is 0.4 mills per ton-mile from Pittsburgh 
 to both Louisville and New Orleans. 
 
 This does not mean that the railroads can not ship 
 coal into Louisville and New Orleans, for as a matter 
 of fact, they do so in large quantities. At the present 
 time, on account of the shallow channel in the upper 
 Ohio River, the coal can come from Pittsburgh only 
 when that river is at flood heights, which occurs 
 usually once a year and lasts for a short time only. 
 
 So far as the railroads are concerned however, 
 their tonnage into the points located on the river is 
 reduced by whatever tonnage the coal mines located 
 
 * Engineering News, February 17, 1910. 
 
298 VALUATION AND RATES 
 
 on the river are able to ship by barge, and their rates 
 per ton-mile on coal shipped to these river points, ex- 
 cept where coal mines are located near such points, 
 are necessarily low, in order to compete with the 
 river-born coal carried at such low rates. 
 
 Lake Competition 
 
 A very large portion of Lake commerce consists of 
 iron ore shipped from Minnesota and Upper Mich- 
 igan to ports at the foot of Lake Michigan and on the 
 south and east shores of Lake Erie. The vessels 
 carrying this traffic return with coal cargoes for 
 north and northwest territories. 
 
 The railroads, on the larger part of this traffic, ob- 
 tain hauls to and from interior points to the Lakes. 
 Practically none of it, however, is moved by rail en- 
 tirely from point of origin to destination. 
 
 It is an instance of water transportation being so 
 much cheaper than rail transportation, that the rail- 
 roads can not carry the traffic in competition except 
 at a loss, having to abandon a large traffic to a 
 cheaper system of transportation on account of the 
 natural advantages attached to it. 
 
 The conditions surrounding this traffic are pecu- 
 liarly favorable to water transportation. The volume 
 is very great and justifies large expenditures for 
 plants for economically loading and unloading at 
 points where transfer from railroad to vessel or ves- 
 sel to railroad is required, and in addition the vessels 
 are fully loaded with ore from the mines in the North 
 and Northwest and with coal from the east for the 
 North and Northwest, in returning. 
 
 To a limited extent, the same is true of the traffic 
 in lumber from northern to eastern lake ports. Rates 
 on lumber, via Lake from Ashland Bay ports (near 
 Duluth), to Lake Erie ports, as far east as Buffalo 
 and Tonawanda, are 7.5 cents per 100 Ibs., while 
 
RATES 299 
 
 the rail rate from the same ports to Buffalo is 24 
 cents per 100 Ibs. During the season of open navi- 
 gation on the Lakes, such lumber will of course move 
 only by Lake routes. 
 
 On traffic shipped via rail and lake routes between 
 the lake ports of Chicago, Milwaukee, Manitowoc, 
 Wis., and Gladstone, Mich., on the one hand, and 
 New York, on the other, the rates are lower than all- 
 rail rates by the following amounts: 
 
 Classes 123456 
 
 East Bound Cents per 100 Ibs. 12 10 7 5 4 4 
 West Bound Cents per 100 Ibs. 13 11 9 5 5 4 
 
 Between these lake ports and the other Atlantic 
 sea-ports the same differentials apply as in all-rail 
 traffic. The rates to points in Illinois such as Peoria, 
 Joliet, Streator and St. Louis, Mo., St. Paul, Duluth 
 and Upper Michigan points, Cleveland, Detroit and 
 Lake Erie points, are adjusted in relation to each 
 other, the rates being made by deducting certain 
 arbitraries from all-rail rates, as in the case between 
 Chicago and New York stated above. 
 
 The effect of lake competition on all-rail traffic 
 between eastern and western territories has been 
 minimized for some years past by the fact that the 
 railroad companies have maintained Lake lines op- 
 erated in connection with their own systems of rails. 
 
 The Interstate Commerce Commission have or- 
 dered the discontinuance of this practice and it will 
 be interesting to note what effect this will have on 
 Rail-and-Lake rates. Inasmuch as the railroads own 
 large dock frontage at all important lake ports, and 
 as all frontage is fully occupied at many of them, and 
 of the further fact that the lake carrier, for most of 
 the traffic is between two rail carriers, it is doubtful 
 if the enforced abandonment of lake traffic by the 
 railroads will affect rail and lake rates radically. 
 
300 VALUATION AND RATES 
 
 Principle of Natural Advantages 
 
 The differentials allowed rail and lake traffic, be- 
 low the all-rail rates, is simply a recognition of the 
 principle that the presence of competition of cheaper 
 transportation takes away a portion of the value of 
 railroad service. That is, railroads in certain situa- 
 tions must make concessions in rates, and in some 
 instances forego the transportation of certain traffic 
 altogether, on account of natural conditions, just as 
 intermediate points must pay higher freight rates 
 than points more advantageously situated as to trans- 
 portation facilities. The principle of natural advan- 
 tages works both ways, "sauce for the goose is sauce 
 for the gander." 
 
 Ocean Competition 
 
 The movement of traffic between sea ports is very 
 generally by water routes, as to the greater part of 
 the tonnage, as it is in river and lake traffic. The 
 traffic by ocean and rail is practically the same as 
 that of lake and rail just described. 
 
 The traffic between the Atlantic and Pacific Sea- 
 board is however, a very important exception, and 
 consideration of the Trans-Continental railroad rates, 
 in connection with the water rates, will be profitable 
 in any discussion of rate economics, as some factors 
 of rate making are involved which do not appear in 
 the previous discussion. 
 
 In the following discussion, reference should be 
 made to the maps, "Territorial Groupings for Trans- 
 Continental Rates" and "Map of Zones" for an un- 
 derstanding of the text. The facts next stated are 
 taken from Interstate Commerce Commission Reports 
 Volume XXXII, Pages 612-658, and Volume XXI, 
 Page 425. 
 
 Various trans-continental carriers prior to Feb- 
 ruary 11, 1911, filed with the Commission applica- 
 
RATES 
 
 301 
 
302 VALUATION AND RATES 
 
 tions for relief from the Fourth Section (Long and 
 Short Haul Section of the Commerce Act) as to rates 
 on commodities from eastern territories to Pacific 
 Coast terminals and intermediate points. The appli- 
 cations asked authority to continue the then current 
 practice of making commodity rates to the Pacific 
 Coast lower than to intermediate points. The car- 
 riers sought to show that all commodity rates from 
 all territory of origin were influenced by the compe- 
 tition of water-and-rail carriers operating from the 
 east coast of the United States by water to the Isth- 
 mus of Tehuantipec, by rail across the isthmus and 
 thence by water to the Pacific Coast. 
 
 For the purpose of discussing the situation in dis- 
 posing of these cases, the Commission divided the 
 United States into the five zones shown on the map. 
 
 The decision of the Commission stated the reason- 
 ing upon which it was based as follows* : 
 
 Competition Must Be Reasonably Possible** 
 
 (1) "Looking at this whole situation and endeav- 
 oring to justly consider the interests of all parties 
 affected, including the carriers, we are of the opinion 
 that from Zone 1, no higher charge can justly be 
 made to any intermediate point than to a more dis- 
 tant point. 
 
 "The eastern limit of this territory is approxi- 
 mately 1,500 miles from the Atlantic seaboard, al- 
 most midway between the Pacific and Atlantic 
 oceans. No traffic has ever been, and none probably 
 ever will be transported from this section to the At- 
 lantic coast and thence by water to the Pacific Coast. 
 Giving full weight to the effect of competition of all 
 
 I. C. C. Vol. 21. Page 425 City of Spokane vs. N. P. R. R. 
 
 **Headings are the author's. 
 
 **Blackface type used in the text shows the emphasis of the 
 author of this book. This is to be remembered in reading quota- 
 tions from opinions of the Commission. 
 
RATES 303 
 
 kinds, we can find no justification for a system of 
 rates which maintains from this territory a higher 
 charge to any interior points than is made to the 
 coast." 
 
 "With respect to territory embraced in Zone 2 the 
 case stands somewhat different. This zone com- 
 prises the Mississippi Valley and a considerable por- 
 tion of the great manufacturing area of the west. 
 It lies 400 miles nearer the Atlantic seaboard, with 
 which it is connected, in part at least, by lines of rail- 
 road affording the cheapest transportation service 
 in any part of the country. Still there never has 
 been and there probably never will be in the future 
 any considerable movement of traffic from this ter- 
 ritory to the Pacific Coast by way of the Atlantic 
 seaboard. 
 
 "We are of the opinion that rates from this terri- 
 tory to intermediate points may properly exceed by 
 not more than 7 per cent rates from the same points 
 of origin to Pacific Coast terminals. 
 
 "From Zone 3 there is still greater possibility of 
 actual transportation competition on business des- 
 tined to Pacific Coast points, although from this sec- 
 tion hitherto the actual movement has been only oc- 
 casional. 
 
 "We are of the opinion, that from points of origin 
 in this territory, rates to intermediate points may 
 properly exceed those to terminal points by not more 
 than 15 per cent. 
 
 "In the past the actual movement from eastern 
 points of origin to Pacific coast terminals has been 
 mainly confined to Zone 4, and even in this zone the 
 greater part of the traffic has originated in or near 
 the seaboard itself. 
 
 "The force of water competition is greatest at New 
 York and gradually diminishes as the distance from 
 New York increases, but we are of the opinion that 
 
304 VALUATION AND RATES 
 
 this entire territory may properly be treated as a 
 single group, and that rates from points of origin 
 within its limits to intermediate points may properly 
 exceed those to terminal points by not more than 
 25 per cent. 
 
 "No" opinion is expressed at this time as to Zone 5, 
 since rates from that territory are not involved in 
 these proceedings. 
 
 Basis of Application for Relief From Fourth 
 Section** 
 
 The carriers in July, 1914, asked for a further 
 hearing concerning certain commodities enumerated 
 in a schedule (designated "C")* it being their pur- 
 pose to show that "as to these rates conditions justify 
 a greater degree of relief than is afforded under the 
 original order." 
 
 (2) It was asserted by the petitioners: 
 
 1. "That the commodities named originate in 
 large volume on the Atlantic Seabord. 
 
 2. "That these commodities are adapted to water 
 transportation, and in fact move in considerable 
 quantities from the Atlantic seaboard to the Pacific 
 coast by water. 
 
 3. "That the rates made by the water carriers 
 on these commodities are extremely low and necessi- 
 tate correspondingly low rates by the rail carriers 
 from eastern seaboard territory. 
 
 4. "That the low rate so imposed from the eastern 
 seaboard to the Pacific coast necessitate correspond- 
 ingly low rates from the Buffalo, Detroit, Chicago, 
 
 "*Fourth section of Commerce Act, which forbids charging 
 more for a short haul than for a longer one the shorter being 
 included within the longer. 
 
 *Schedule "C" contains a list of about 2,000 items which are 
 shown as an appendix to the decision of the commission. 
 
RATES 305 
 
 St. Louis, and Missouri River territories; (a) in order 
 to permit the rail movement of traffic from these 
 points to the Pacific coast in competition with the 
 same or similar commodities moving from the At- 
 lantic seaboard; (b) in order to comply with the 
 requirements of the fourth section which prohibits 
 carriers from making a greater charge from inter- 
 mediate points than from more distant points, the 
 more distant points in this case being located at or 
 near the Atlantic seaboard. 
 
 5. "That since the opening of the Panama Canal 
 the water carriers have materially reduced their 
 rates, shortened the time for transportation, in- 
 creased the frequency of their sailings, and materi- 
 ally added both to their tonnage capacity and to 
 the actual tonnage obtained. 
 
 "The shipping interests of the intermountain ter- 
 ritory oppose the application for further relief, some 
 upon the ground that the relief afforded by Fourth 
 Section Order No. 124 is sufficient; others upon the 
 ground that the carriers have not proposed any new 
 basis of rates to the intermediate points, the present 
 rates to which they allege to be unreasonable and 
 unjustly discriminatory. 
 
 Shippers Support Application of the Railroads 
 
 The application is supported by shipping interests 
 in Chicago, Duluth, Minneapolis, St. Paul, St. Louis, 
 and the Missouri River cities, upon the ground that, 
 if further relief be not afforded to the carriers upon 
 this traffic, the present policy of the carriers of main- 
 taining rates from intermediate territory to the Paci- 
 fic Coast no higher than from the Atlantic seaboard 
 will be defeated and the business built up by these 
 interior shipping interests with purchasers upon the 
 Pacific Coast will be diverted to the advantage of 
 industries near the Atlantic seaboard. * * * " 
 
306 
 
 VALUATION AND RATES 
 
RATES 307 
 
 In connection with the third allegation of the car- 
 riers, the following table shows for certain commod- 
 ities, sea rates prior to the opening of the Panama 
 Canal, sea rates subsequent to such opening, the all- 
 rail rate then in effect, the proposed all-rail rate, and 
 the tonnage moved by sea and rail lines from Terri- 
 tories A and B, as shown on map "Territorial Group- 
 ings for Transcontinental Traffic." 
 
 The table shows that the proposed all-rail rate 
 was materially higher than the ocean rate in nearly 
 every instance, the difference being so great as to 
 turn a large percentage of the traffic to boat lines. 
 They could not have been materially higher from 
 Territories A and B if the rail lines were to retain 
 any considerable percentage of the traffic. This es- 
 tablishes the third allegation of the carriers. 
 
 Low Rates From Sea-board Necessitate Low Rates 
 From Interior Points 
 
 As to the fourth allegation, that the low rates from 
 the eastern seaboard to the Pacific Coast necessitate 
 correspondingly low rates from Buffalo, Detroit, Chi- 
 cago, St. Louis and Missouri River territories, the 
 argument of the Commission is: 
 
 (3) "The carriers are not asking authority to 
 make lower rates from the Atlantic seaboard than 
 from intermediate points, for the very obvious reason 
 that were the rates so adjusted the Pacific Coast 
 would soon be supplying itself from the Atlantic sea- 
 board with many of the articles which are at present 
 shipped from the interior territory. * * * 
 
 What interest would be served by lower rates from 
 the eastern seaboard to the Pacific Coast than from 
 Chicago? Clearly not the carriers' interests. Any 
 such adjustment of rates would be altogether ad- 
 verse to the interests of the carriers and would 
 almost inevitably result in their hauling much freight 
 
308 
 
 VALUATION AND RATES 
 
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RATES 309 
 
 from the seaboard to the Pacific Coast which they 
 now haul from intermediate points such as Chicago, 
 a shorter distance, at a less expense. 
 
 "The same policy would result also in serious in- 
 jury to many of the industries located at interior 
 points which have, under equal rates, built up a 
 large and profitable business on the Pacific Coast. 
 Many articles are produced and manufactured both 
 in the interior and on the Atlantic seaboard. 
 
 "Only a certain quantity of these manufactured 
 articles can at present be consumed on the Pacific 
 Coast. Any rate adjustment that tends to stimulate 
 the movement of these articles from the Atlantic 
 seaboard will to the same extent decrease the move- 
 ment from Chicago and other intermediate points. 
 
 "It is clear that the carriers' interest, and the inter- 
 ests of the major part of the public served, lie in the 
 direction of the maintenance of rates from the inter- 
 mediate points no higher than from the Atlantic 
 coast. The intent of the fourth section and the aim 
 of the Commission in enforcing its provisions is to 
 reduce discriminations, not to augment them. Dis- 
 criminations of vast importance against intermediate 
 points of origin would be created by the establish- 
 ment of lower rates from the Atlantic seaboard to 
 the Pacific coast than from intermediate points." 
 
 j 
 
 Grouping of Origin Territory Different for Competi- 
 tive and Non-Competitive Destination Territory 
 
 "Fourth Section Order No. 124 recognized the ex- 
 istence of a wide blanket of rates, as to points of 
 origin, extending from the Missouri River to the At- 
 lantic Ocean on traffic to the Pacific Coast, while it 
 did not provide for such blanketing of rates to points 
 in the intermediate territory. The order has the 
 effect of bringing about lower rates to this territory 
 from the Missouri River and Chicago than from Pitts- 
 
310 VALUATION AND RATES 
 
 burgh and the Atlantic seaboard. ***** 
 "New York can not justly claim, that because Chi- 
 cago is given the same rate as New York to the Pa- 
 cific Coast, New York should be given the same rate 
 as Chicago to the intermediate points. The claim 
 that New York should be permitted to land freight 
 at Salt Lake City, Reno or Phoenix at the same rate 
 as Chicago is no more justified than the claim that 
 New York should be permitted to land freight at 
 Omaha, Kansas City, or Minneapolis at the same 
 rate as Chicago." 
 
 "Upon the whole record, we are of the opinion 
 that these carriers are justified in the maintenance 
 of a blanket as to points of origin on rates to the 
 Pacific Coast, and that this practice carries with it 
 no necessity or obligation of blanketing the same 
 territory of origin in establishing rates to interme- 
 diate points." 
 
 "This intermountain territory should be distin- 
 guished from that territory lying along the Pacific 
 Coast, approximately 200 miles in width, to which 
 rates from the east have been or may be arrived at 
 by adding to the terminal rates either local rates or 
 arbitraries proportional thereto from the terminals 
 to the destinations." 
 
 Low Railroad Rates on Competitive Traffic Justified 
 
 (4) "As we view it, the Panama Canal is to be 
 one of the agencies of transportation between the 
 east and the west, but not necessarily the sole carrier 
 
 of the coast-to-coast business. If the railroads are 
 able to make such rates from the Atlantic seaboard 
 to the Pacific Coast as will hold to their lines some 
 portion of this traffic with profit to themselves, they 
 should be permitted so to do. 
 
 "The acceptance of this traffic will add something 
 to their net revenues, and to that extent decrease, 
 
RATES 311 
 
 and not increase, the burden that must be borne by 
 other traffic. It will also give the shippers at the 
 coast points the benefits of an additional and com- 
 petitive service." 
 
 "We are of the opinion that these carriers should 
 be permitted to compete for this long-distance traffic 
 so long as it may be secured at rates which clearly 
 cover the out-of-pocket cost." 
 
 Low Terminal Rates Not Unjust to Intermediate 
 Points 
 
 (5) "The fact that rates to the terminals are un- 
 usually low does not justify the maintenance of rates 
 to intermediate points that are unreasonably high, 
 but a lower rate to the terminal being fixed of neces- 
 sity, rates to intermediate points, which are higher, 
 do not necessarily unjustly discriminate against these 
 points." ***** 
 
 (6) "Were the carriers required to observe the 
 percentages named in the original order * * * they 
 would be confronted with the alternative of either 
 reducing the rates to intermediate points to a level 
 that would result in great reductions in revenue, or 
 continuing rates to the Pacific Coast ports which are 
 not low enough to allow the traffic to move by the 
 all-rail lines. In that event their choice would be 
 governed by the relative attractiveness of the re- 
 spective tonnages involved. 
 
 "The very great reductions in their revenue to 
 intermediate points, brought about by an attempt 
 on their part to meet the water competitive rates at 
 the terminals, would in many instances cause their 
 retirement from the terminal traffic and its total 
 abandonment to the water carriers. Such a course 
 of action would not benefit the intermediate points 
 of destination in the least and would result in serious 
 injury to many intermediate points of origin." 
 
312 VALUATION AND RATES 
 
 Competition Is Beneficial Not to Be 
 Diminished 
 
 "The relief afforded from the fourth section should 
 be sufficient in each instance to permit the carriers 
 to continue to compete for the terminal traffic so 
 long as it may be secured at rates that are sufficient 
 to yield a revenue in excess of operating cost. 
 
 "The maximum of public benefit from the fourth 
 section will result from the enforcement of condi- 
 tions that will tend to preserve and promote, and 
 not to diminish or retard competition. 
 
 "Looking at the country as a whole, but more es- 
 pecially at the great producing and consuming areas 
 in the interior, it is believed that what is herein 
 proposed will best accomplish that end under pre- 
 vailing conditions." 
 
 Principles Involved in Transcontinental Rates 
 
 The following principles relating to rates may 
 be stated as the basis of the opinion of the Com- 
 mission in this case : 
 
 (a) Competition must be reasonably possible, 
 not merely theoretical, to justify the relief from the 
 fourth section. 
 
 That the extent of the relief to be granted must 
 be determined on the basis of possibility of actual 
 competition being greater at points where com- 
 petition is most acute and less as circumstances tend 
 to equalize the conditions of competition. (Quota- 
 tion 1) 
 
 (b) Commerce and industries heretofore built 
 upon existing rates are entitled to consideration in 
 determining the fair adjustment between rates ap- 
 plying from competitive points of production. 
 Rates should be at least no higher on comeptitive 
 traffic from interior points of production, on which 
 shorter hauls to points of destination are involved, 
 
BATES 313 
 
 than rates from more distant coast points of pro- 
 duction. 
 
 The grouping of points of origin on traffic des- 
 tined to competitive territory carries with it no ob- 
 ligation to maintain the same grouping of traffic 
 destined to intermediate non-competitive territory. 
 (Quotation 3) 
 
 (c) Railroads should be allowed to reduce their 
 rates to such an extent as will enable them to com- 
 pete with other systems of transportation, if such 
 rates exceed the out-of-pocket expense incurred in 
 performing the service. Such a policy tends to de- 
 crease rates on other traffic, and secures to some 
 points additional and competitive service. (Quota- 
 tion 4) 
 
 (d) Low rates to competitive terminal points do 
 not justify unreasonably high rates to intermediate 
 points, but a low rate to a terminal, fixed by the 
 necessities of competition, -does not necessarily dis- 
 criminate against the intermediate non-competitive 
 point. (Quotation 5) 
 
 (e) To reduce rates to intermediate points 
 of destination to the same basis as terminal points 
 would in many instances cause the retirement of 
 railroads from competitive terminal traffic. Such 
 action would not benefit the intermediate points of 
 destination and would result in injury to many in- 
 termediate points of origin. The maximum public 
 benefit results from increased and not from dimin- 
 ished or retarded competition. (Quotation 6) 
 
 (f) In some instances discriminations are una- 
 voidable. They are not necessarily unjust. 
 
 Principles Applicable Generally 
 
 The principles here stated apply not only to these 
 Transcontinental rates which are most important 
 but to all rate situations in which transportation 
 
314 VALUATION AND RATES 
 
 charges must be made less for performing the 
 same service in some instances than in others. They 
 apply in the case of traffic carried by circuitous 
 routes and that moved in competition with other 
 systems of transportation in all of the so-called 
 "long and short haul" rates. 
 
 Relation of Valuation to Rates 
 
 Many prominent railroad officials have stated at 
 various hearings as to the fairness of existing or 
 proposed rates, that rates bear no relation to the 
 value or the capitalization of the property used for 
 transportation purposes. Many prominent men in 
 public life, writers of books and magazine articles, 
 editors and others, have stoutly maintained that all 
 rates should be based on a fair return on the actual 
 physical value of the property used in performing 
 the transportation for which the charge is made, 
 plus the cost of performing the service. 
 
 What is the true relation between the value or 
 capital of a railroad and its rates; between cost of 
 service and rates? 
 
 The rate schedule, as a whole, should be such 
 that the total income shall not be less than the cost 
 of operating and maintaining the property and give 
 in addition a fair return on the value of the property 
 employed. 
 
 The valuation will not definitely fix the proper 
 general level of rates. It will merely establish 
 a line, below which the general level of the rates 
 may not go an irreducible level, below which rates 
 would be confiscatory. 
 
 The rate of return on value will be greater for 
 some roads than for others. It is not humanly pos- 
 sible to adjust rates in such a way that each road 
 in the country shall earn exactly the same return 
 on its valuation as every other road. 
 
BATES 315 
 
 If the weakest road is allowed a fair return on 
 its value, then evidently the strongest road will 
 earn more than a bare living, for if the strongest 
 road is allowed to earn only a bare living the 
 weakest road will be confiscated. 
 
 This alone is the application of valuation to rates. 
 
 As to the adjustment of rates in detail between 
 commodities or localities, the valuation is not ap- 
 plicable, as such adjustment must always be based 
 on the many conditions attending any particular sit- 
 uation not on any single condition or circumstance 
 alone as the previous discussion in this chapter 
 clearly shows. 
 
 Relation of Cost of Service to Rates 
 
 The relation between cost of service and rates 
 is, that the minimum rates shall be high enough in 
 every instance to pay something more than the 
 out-of-pocket expense incurred in performing the 
 service for which the rate is charged. Cost of serv- 
 ice must be considered in making every rate. 
 
 Cost of service, as applied to particular rates 
 like valuation as applied to the rate schedule as a 
 whole establishes the irreducible minimum below 
 which a rate must not be made. If any commodity 
 is carried at a rate which does not cover the cost 
 of service, all other commodities transported are 
 made to pay the loss thereby incurred a burden 
 not justly attaching to them. 
 
 Aside from this limiting feature, cost of service 
 is only one element of many which are to be con- 
 sidered in determining rates. 
 
 Illustration Chicago-New York Traffic 
 
 Consideration of the actual conditions which sur- 
 round transportation will make this clear. As an 
 illustration, let us consider the freight traffic be- 
 
316 VALUATION AND RATES 
 
 tween Chicago and New York. The following tab- 
 ulation shows some of the characteristics of the 
 principal lines which move this traffic: 
 
 Number of Traffic** 
 
 Distance, Main Line Density 
 
 Railroad Miles Tracks (System 
 
 (generally) average) 
 
 Pennsylvania R. R I 908 4 5.91 
 
 Pennsylvania Co J 2 4.74 
 
 Wabash 1 936 1 1.47 
 
 D. L. & W J 2 4.84 
 
 New York Central I 978 4 3.36 
 
 L. S. & M. S J 2 3.67 
 
 Grand Trunk | 983 2 2.83 
 
 Lehigh Valley J 2 3.81 
 
 Erie \ 998 2 3.53 
 
 Chicago & Erie J 2 3.93 
 
 Baltimore & Ohio 1047 2 3.18 
 
 **Traffic units, in millions, per mile of line ton-miles plus 
 passenger-miles. 
 
 The freight rates by all of these lines between 
 Chicago and New York are the same. The distance, 
 value and density of traffic and operating conditions 
 of these several railroads vary widely. All things 
 considered, it is probable that the New York Cen- 
 tral or Pennsylvania can move this traffic at less 
 cost per unit than any of the other lines, and that 
 it will cost the Baltimore & Ohio more than any 
 other of the lines on account of greater distance. 
 
 Suppose we attempt to base the rate between 
 Chicago and New York on the cost of service. Shall 
 we use the New York Central Line or the Baltimore 
 & Ohio line as a basis? If we use the former, some 
 of the other roads must abandon the traffic as their 
 costs per unit would be much higher than that used 
 in determining the rate. 
 
 The physical value per mile of line of the New 
 York Central or Pennsylvania is the maximum, the 
 
RATES 317 
 
 Wabash-D. L. & W. joint line the minimum. Which 
 valuation is to be used? 
 
 The New York Central in part is six-track, four- 
 track, three-track and double-track. How many of 
 the six tracks may be properly apportioned to the 
 Chicago-New York traffic in arriving at the value 
 of the facilities used in carrying it? 
 
 The density of traffic is a maximum on the lines 
 of the Pennsylvania and New York Central between 
 the two points; it is the minimum on the Wabash 
 and the Grand Trunk. As the cost of moving any 
 particular traffic varies with its volume, the cost of 
 service per unit will be higher on the Wabash and 
 Grand Trunk than on the Pennsylvania and New 
 York Central. Which is to be used as a basis for 
 determining rates, the roads of maximum or mini- 
 mum traffic density? 
 
 The impossibility of using valuation and cost of 
 service in determining the fairness of rates, to any 
 greater extent than that hereinbefore stated, is ap- 
 parent whenever an attempt is made to apply them 
 to competitive, commercial and physical conditions 
 that actually exist. 
 
 Same Condition Applies to All Traffic 
 
 This is true not only as to those railroads con- 
 necting large centers of traffic, but applies to prac- 
 tically all railroad business. There are few points 
 in this country which produce or receive consider- 
 able traffic that are not served by more than one 
 railroad. 
 
 But even in those instances where traffic origi- 
 nates at points served by one road only, the com- 
 modities they produce compete with like commodi- 
 ties produced on other roads, as they are sold in 
 competition in common markets, so that commercial 
 factors, and not value of property employed, or cost 
 
318 VALUATION AND RATES 
 
 of service, must usually be employed in determining 
 the rate, as in the case of direct competition between 
 one or more railroads. 
 
 Conclusion 
 
 Rates are the resultant of many factors; cost of 
 service, value of service, relation of cost of service 
 to the selling price of the commodity, the nature 
 and extent of risk of damage and loss involved, 
 competition between railroads, between railroads 
 and other systems of transportation, between com- 
 modities, between localities, and many other cir- 
 cumstances and conditions. 
 
 No public authority in this country has ever at- 
 tempted to prescribe a schedule of rates based 
 strictly on the value of the property and the cost 
 of service. Such a rate schedule would wreck the 
 business and industrial organization of the whole 
 country. 
 
RATE REGULATION 
 Limitation of Regulating Authority 
 
 Some fundamental facts pertaining to rate regu- 
 lation have evidently not been given proper consider- 
 ation by some writers discussing the subject. There 
 is no question that regulation of the rates of a com- 
 mon carrier is necessary and in the interest of both 
 the public and the railroads. On the other hand, 
 legislative authority to prescribe rates may not be 
 arbitrarily exercised. 
 
 It is also to be remembered that a railroad com- 
 pany has the title and ownership of its property to 
 the same extent that any other property owner has 
 and does not hold it for the use or benefit of the 
 public in the relation of trustee to principal. 
 
 The Supreme Court of the United States has held 
 repeatedly that, while public authority has power 
 to regulate the use of railroad property, it is not 
 the owner, nor has it any equity in it and, subject 
 to the limitation that rates shall not be unjust and 
 discriminatory, the railroads may manage their busi- 
 ness as individuals or other non-public business cor- 
 porations. 
 
 Return to Be Based on Value of Railroad 
 Property 
 
 Railroad investments, like other investments, are 
 subject to risk. There is no assurance of profit at 
 the inception of the enterprise, and if badly con- 
 ceived the loss is incurred by the investor. It is no 
 more than just, then, that the investor should be 
 rewarded in the measure which his foresight and 
 
320 VALUATION AND RATES 
 
 business judgment justifies and in proportion to the 
 element of risk he assumes, as investors in other 
 enterprises are. The public does not underwrite 
 the losses of a railroad; neither can it, through leg- 
 islative authority, take away the just rewards of a 
 well-conceived enterprise. 
 
 In the Minnesota Rate Case, Justice Hughes, of 
 the United States Supreme Court, said:* 
 
 "It is clear that in ascertaining the pres- 
 ent value we are not limited to the consid- 
 eration of the amount of the actual invest- 
 ment. If this has been reckless or improvi- 
 dent, losses may be sustained which the 
 community does not underwrite^ As the 
 company may not be protected in its actual 
 investment, if the value of its property be 
 plainly less, so the making of a just return 
 for the use of the property involves the rec- 
 ognition of its fair value if it be more than 
 its cost. 
 
 "The property is held in private owner- 
 ship and it is that property, and not the 
 original cost of it, of which the owner may 
 not be deprived without due process of 
 law." 
 
 Earnings May Not Be Confiscated 
 
 In the matter of prescribing rates by public au- 
 thority, in which it was contended that the pre- 
 scription was merely regulation, Justice Brewer, of 
 the United States Supreme Court, said: 
 
 "The equal protection of the laws the 
 spirit of common justice forbids that one 
 
 *Blackface type in the text shows the emphasis of the author 
 of this book. This is to be remembered in reading: quotations 
 from other books and legal opinions. 
 
RATE REGULATION 321 
 
 class should by law be compelled to suffer 
 loss that others may gain. If the state 
 were to seek to acquire title to these roads, 
 under its power of eminent domain, is there 
 any doubt that constitutional provisions 
 would require the payment to the corpora- 
 tion of just compensation, that compensa- 
 tion being the value of the property as it 
 stood in the markets of the world, and not 
 as prescribed by an act of the legislature? 
 Is it any less a departure from the obliga- 
 tions of justice to seek to take not the 
 title, but the use for the public benefit at 
 less than its market value?" 
 
 "Property invested in railroads is as 
 much protected from public appropriation 
 as any other. If taken for public uses, 
 its value must be paid for. Constitutional 
 guarantees, to this extent, are explicit; and 
 in such condemnation proceedings no in- 
 quiry is permitted as to how the owners 
 have acquired the property, provided only 
 it be legally held by them. * * * * 
 
 "These propositions in respect to con- 
 demnation proceedings are so well settled 
 that no one ever questions them. The same 
 general ideas must enter into and control 
 legislation of the kind before us. The 
 value of the property cannot be destroyed 
 by legislation depriving the owner of ad- 
 equate compensation. 
 
 "Now, if the public was seeking to take 
 title to the railroad by condemnation, the 
 present value of the property, and not the 
 cost, is that which (it) would have to pay." 
 
322 VALUATION AND RATES 
 
 These, and many other decisions of the Supreme 
 Court of the United States make it very clear that 
 the earnings of a railroad are not subject to legis- 
 lative control, but that rate regulation is limited to 
 preventing unjust and discriminatory rates. If fair 
 and undiscriminatory rates produce large net earn- 
 ings for a particular railroad, such earnings cannot 
 be legally confiscated by legislative authority any 
 more than the property itself. 
 
 These decisions emphasize also that the railroads 
 are entitled to a return on the full value of their 
 property not on its cost not on the value less the 
 value of land grants or other public grants of aid 
 or money, given to promote otherwise impossible en- 
 terprises. These decisions effectually dispose of 
 the many fantastic propositions advanced from vari- 
 ous sources, which would have railroad property set 
 apart and considered as something different from 
 other property. 
 
 Fair Return on Value 
 
 The term, fair return on value of property em- 
 ployed, has often been used in this and preceding 
 chapters of this book and in all court decisions and 
 discussions relating to railroad rates. It is a matter 
 having a most important bearing on the subject of 
 rates, and a statement of some conditions surround- 
 ing investments in railroad property, and their re- 
 lation to a fair return on value of property em- 
 ployed, is essential to an understanding of the sub- 
 ject. 
 
 Return Can Not Be Uniform 
 
 As indicated in the illustration of the different 
 lines moving traffic between Chicago and New York, 
 in the chapter on rates, it is not possible to so adjust 
 rates that there shall be a uniform return to all 
 roads alike on value of property employed. It is 
 
RATE REGULATION 323 
 
 inevitable that some roads must earn a larger re- 
 turn on such value than others. In consequence, the 
 fair return for any particular railroad must be de- 
 termined by consideration of the conditions sur- 
 rounding it. 
 
 Rate of Return Based on Security Afforded 
 the Investment 
 
 In all lines of business, the rate of return on 
 money invested depends on the margin of security 
 afforded it. When this margin is wide, the re- 
 turn is small ; when there is an element of risk, the 
 return is larger, and the degree of risk determines 
 how much larger the return must be as compared 
 with investments in which there is practically no 
 risk. 
 
 Government bonds of the United States pay 2 ^5 
 and 3 per cent interest; City of Chicago and New 
 York bonds pay 4 or 4^ per cent interest; smaller 
 municipalities pay 5, 6 and 7 per cent interest. All 
 of these bonds have a wide margin of security, as 
 the bonds are a lien on physical property or revenue. 
 
 The net earnings on the capital and surplus of 
 national banks for several years has averaged be- 
 tween 8% and 10 per cent; many industrial corpo- 
 rations average from 7 to 10 per cent, and the more 
 prosperous ones much more. 
 
 Large Element of Risk in Railroad 
 Investment 
 
 As compared with banking or the business of the 
 average industrial corporation, the business of the 
 average railroad may be said to involve much more 
 risk. When the business of banks and industries 
 begins to shrink, railroads are the first to feel its 
 effect. The ordinary manufacturer or business man 
 may curtail his expenses in much greater measure 
 during a period of depression than a railroad, as 
 
324 VALUATION AND RATES 
 
 all of its large fixed charges and rentals and at 
 least 34 per cent of its operating expense are en- 
 tirely independent of its traffic and hence of its 
 revenue. 
 
 As to the original investors, the very large ele- 
 ment of risk involved on account of contingencies of 
 construction and the uncertainty of traffic estimates 
 has been heretofore shown.** It would seem fair 
 that the return on railroad value should be very 
 much larger than the returns in other lines of 
 business in which the element of risk enters to a 
 much smaller extent. 
 
 Effect of Fair Return on Development 
 
 This is a matter which will have a very large in- 
 fluence on the future extensions of railroads in those 
 portions of the country which are sparsely settled 
 and whose development at the present time is being 
 retarded through lack of needed transportation fa- 
 cilities. 
 
 There are still large areas, of great potential 
 wealth, in the West, North-West and South- West, 
 which cannot develop materially until they are pro- 
 vided with transportation. Construction in such ter- 
 ritories will involve a repetition practically of the 
 experience met in the earlier periods of railroad 
 building which has been sketched in the chapters 
 on Promotion and Construction. 
 
 The seven to ten year period following the con- 
 struction of such lines will in most cases result in 
 net losses from operation, rather than profits, with 
 a very large probability of defaulted interest on 
 bonds. The recent contracts between the Canadian 
 Government and the Grand Trunk Railway empha- 
 size the truth of this statement. 
 
 Only in exceptionally favorable situations can 
 
 **In Chapter on Promotion. 
 
RATE REGULATION 325 
 
 investors be interested in such enterprises unless 
 the fairly anticipated ultimate returns shall be very 
 much larger than from well secured conservative in- 
 vestments. Why should an investor take the risk 
 involved in railroad construction and operation un- 
 less the return is large, when an investment in a 
 solid banking or industrial enterprise promises a 
 practically assured and equivalent return? 
 
 The need for developing railroads is not confined 
 to the far western territory. Scattered through the 
 Central and Southern States, in smaller areas, are 
 local resources such as mineral and timber and iso- 
 lated agricultural districts, the proper development 
 of which requires the building of only a few miles 
 of branch lines. 
 
 Under existing conditions the chance of raising 
 the money to pay for the construction of such lines 
 is not promising enough to warrant the expense of 
 making the survey necessary to gather the data for 
 presentation to investors. Such construction has 
 generally been abandoned, practically none of it 
 having been done since 1907. 
 
 In the interest of the country as a whole the de- 
 velopment of such resources should be undertaken. 
 Development of those here mentioned cannot pro- 
 ceed under existing conditions. The necessity for 
 making investment in railroads attractive, in order 
 to stimulate their construction, is just as essential 
 now as it was in the earlier period of larger devel- 
 opment. 
 
 Rate regulation, directed toward the curtailment 
 of what by some classes has been termed the ex- 
 cessive profits of the most prosperous railroad sys- 
 tems, has resulted in a condition making it impos- 
 sible to construct less promising enterprises which 
 are necessary to normal development and growth in 
 some wide territories and many localities. 
 
326 VALUATION AND RATES 
 
 Fair Return on the Atchison, Topeka 
 & Santa Fe 
 
 In his testimony before the Interstate Commerce 
 Commission, at a hearing on the proposed increase 
 of rates in Western Territory, Mr. E. P. Ripley, 
 President of the Atchison, Topeka & Santa Fe, tes- 
 tified on the subject of fair return as follows: 
 
 Question: "Do you want to make a statement 
 as to what you think the Santa Fe should earn in 
 order to have money to pay adequately its stock- 
 holders, to make the improvements necessary, to 
 borrow money, to have the credit to borrow at low 
 rates, and to serve the public to the fullest proper 
 capacity?" 
 
 Mr. Ripley: "That, of course, is a matter of 
 judgment. That would vary with different roads. 
 So far as the Santa Fe is concerned, I think we 
 ought to earn double what we pay in dividends at 
 least. For instance, if we pay 6% in dividends, I 
 think we ought to earn 12% on our stock, if not 
 more; certainly not less than that." 
 
 Return to Provide for Unproductive 
 Improvements 
 
 There is one class of railroad improvement and 
 betterment which should be provided for under this 
 "fair return on value" as applied to rate regulation. 
 Passenger stations, track elevations in cities, the 
 elimination of grade crossings where the safety of 
 the public and operation demand it, electrification in 
 densely populated areas when the public comfort 
 and health require it, and other like improvements 
 which do not in themselves add to net earnings but 
 increase capital charges, should be considered in 
 determining the fair return. Such improvements 
 should, at least in part, be paid for by the present 
 
RATE REGULATION 327 
 
 generation, through current rates, and not be taken 
 into the capital account to stand forever as a fixed 
 charge against transportation. 
 
 Experience has shown that many such improve- 
 ments, particularly depots, which were considered 
 permanent improvements when constructed, have, 
 through increased traffic and other causes, become 
 inadequate and require the destruction of the old 
 and construction of new facilities. Public authority 
 and public sentiment have ample power to compel 
 such improvements, and the rate-regulating au- 
 thority should certainly recognize the necessity of 
 providing for them without taxing the future unduly. 
 
 Not Possible to Earn Fair Return in Some 
 Instances 
 
 There are certain railroad properties, however, 
 which cannot expect, on account of commercial 
 conditions, to earn a fair return on the value of 
 their property. Many of our present terminal and 
 belt railroads were constructed when the now large 
 cities were much smaller and land values were only 
 a small percentage of present values. Industrial 
 development has enormously enhanced the value of 
 real estate used by the railroads serving these larger 
 cities. 
 
 If rates were fixed on the basis of producing a 
 fair return on the value of property used, they would 
 be so high as to decrease largely, and, as to many 
 industries, actually stop the flow of traffic. Com- 
 petition between industries would force some of 
 them out of localities where high-priced facilities 
 required excessive terminal charges into other lo- 
 calities. 
 
 Some recent valuations of properties of this class 
 of railroads show that this condition is an actual 
 one and not theoretical; in fact, it is encountered 
 
328 VALUATION AND RATES 
 
 in the valuation of all terminal properties at impor- 
 tant traffic centers. 
 
 Cost of Terminals to Be Spread Over 
 System 
 
 Where such costly terminal, belt and switching 
 facilities belong directly to a large system, their cost 
 may properly be spread over the whole system, as 
 they serve the system as a whole to a large extent. 
 The terminal charges may then be adjusted so that 
 they will not be prohibitive. As to independently 
 owned terminal and belt line railroads, whose cost 
 cannot be spread over a large system mileage, the 
 return on value of property used cannot be realized, 
 as the rates necessary to produce it would be pro- 
 hibitive commercially. 
 
 Decreased Market Price of Railroad Securities 
 
 The following statement shows the dividend pay^ 
 ment and the quotation for the stock of several of 
 the highest class railroad properties for a period of 
 six years. 
 
 It will be noted that the roads shown have a com- 
 paratively high, uniform and well-sustained divi- 
 dend record. The stock quotations for the whole 
 list show an average decrease in selling price of 
 about 25% in six years. That is, although paying 
 generally the same rate of interest now as six years 
 ago, these securities are only worth 75% as much 
 now as then. They are the issues of the best man- 
 aged of railroad properties, with long-sustained divi- 
 dend records. 
 
 Either the buying power of money has been en- 
 hanced or this class of securities is looked upon 
 with less favor now than formerly that is, the re- 
 turn on railroad investment is not as well assured 
 now as formerly. * The following conditions will serve 
 
 *Or other investments yield larger returns. 
 
RATE REGULATION 
 
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330 VALUATION AND RATES 
 
 to show the basis on which this judgment of the 
 value of railroad securities rests. 
 
 Increased Operating Expenses 
 
 For many years there has been a steady increase 
 in railroad operating expense. The table showing 
 the rate of compensation paid railroad employees in 
 various periods explains in large part the increased 
 cost of operation. The materials used by the rail- 
 roads to the greatest extent, such as steel, coal, lum- 
 ber, and ties, show at least no tendency toward a 
 lower level of prices. Heavier engines and cars de- 
 mand larger rail sections, and hence more tonnage 
 per mile and a higher grade of material (Open- 
 hearth steel at $2 per ton above Bessemer), and 
 they therefore add something more to the increase. 
 
 Railway Employees 
 Classification and Wages 
 
 Class of Increase in , Average Daily Wage \ 
 
 Employees. 10 yrs. 1914 1913. 1912. 1911. 1904. 
 
 General officers 38# 
 
 $16.06 
 
 $15.67 
 
 $14.62 
 
 $14.82 
 
 $11.61 
 
 Other officers 7# 
 
 6.48 
 
 6.44 
 
 6.42 
 
 6.36 
 
 6.07 
 
 General office clerks 14# 
 
 2.54 
 
 2.51 
 
 2.50 
 
 2.49 
 
 2.22 
 
 Station agents 20# 
 
 2.33 
 
 2.28 
 
 2.22 
 
 2.19 
 
 1.93 
 
 Other station men 18# 
 
 1.98 
 
 1.96 
 
 1.89 
 
 1.89 
 
 1.69 
 
 Enginemen 28# 
 
 5.24 
 
 5.20 
 
 5.02 
 
 4.81 
 
 4.10 
 
 Firemen 37# 
 
 3.22 
 
 3.13 
 
 3.03 
 
 2.95 
 
 2.35 
 
 Conductors 28# 
 
 4.47 
 
 4.39 
 
 4.30 
 
 4.18 
 
 3.50 
 
 Other trainmen 36 
 
 3.09 
 
 3.04 
 
 2.97 
 
 2.89 
 
 2.27 
 
 Machinists 25# 
 
 3.27 
 
 3.26 
 
 3.21 
 
 3.14 
 
 2.61 
 
 Carpenters 17# 
 
 2.66 
 
 2.63 
 
 2.86 
 
 2.54 
 
 2.26 
 
 Other shopmen 24# 
 
 2.36 
 
 2.31 
 
 2.24 
 
 2.24 
 
 1.91 
 
 Section foremen 24# 
 
 2.20 
 
 2.14 
 
 2.09 
 
 2.07 
 
 1.78 
 
 Other trackmen 19# 
 
 1.59 
 
 1.58 
 
 1.50 
 
 1.50 
 
 1.33 
 
 Switch tenders, crossing 
 
 
 
 
 
 
 tenders, and watch- 
 
 
 
 
 
 
 men None 
 
 1.71 
 
 1.70 
 
 1.70 
 
 1.74 
 
 1.77 
 
 Telegraph operators and 
 
 
 
 
 
 
 dispatchers 20# 
 
 2.56 
 
 2.52 
 
 2.47 
 
 2.44 
 
 2.15 
 
 Employees Floating 
 
 
 
 
 
 
 equipment 8# 
 
 2.35 
 
 2.37 
 
 2.37 
 
 2.34 
 
 2.17 
 
 All other employees and 
 
 
 
 
 
 
 laborers 20 
 
 2.20 
 
 2.15 
 
 2.10 
 
 2.08 
 
 1.82 
 
RATE REGULATION 331 
 
 This table shows a yearly increase in the average daily com- 
 pensation of all classes of employees except switch tenders. The 
 increases in the ten-year period are shown by percentages of the 
 1904 wages. 
 
 During the period between 1908 and 1915 there 
 has been an increase in revenue per mile of railroad 
 but such increase has not been in proportion to the 
 increased operating expense, as the following table 
 shows : 
 
 ** 
 Years. 
 
 1907-8 . . . 
 
 Ratio of Exp< 
 
 Operating 
 Revenue per 
 Mile of Line. 
 
 .$10,613 
 
 snse to Revenue 
 
 Operating Ratio of 
 Expense per Expense 
 Mile of Line. to Revenue. 
 
 $7,394 69.67% 
 6,933 66.12 
 7,712 66.24 
 7,954 68.63 
 8,066 69.28 
 8,842 69.40 
 8,834 72.22 
 8,207 70.50 
 
 1908-9 . . . 
 
 . . 10,486 
 
 1909-10. . . 
 
 . . 11,650 
 
 1910-11 . . 
 
 . . 11,588 
 
 1911-12. . . 
 
 . . 11,646 
 
 1912-13. . . 
 
 . . 12,746 
 
 1913-14 . 
 
 . 12,232 
 
 1914-15. 
 
 11,623 
 
 **Bureau of Railway News and Statistics Leaflet, No. 32. 
 
 Decrease of Return on Invested Capital 
 
 The following statement shows the relation of Net 
 Earnings to Capital employed. The effect of the in- 
 creased ratio of operating expense to revenue is 
 shown by the decreased return on capital invested 
 this latter being the real gauge of the financial 
 condition of the railroads : 
 
332 VALUATION AND RATES 
 
 -Ratio of Net Earnings to Capital 
 
 Years c 
 1906-7 . . 
 
 Net Operating 
 Income per Mile 
 f Line Operated 
 
 $3,547 
 
 Capital per 
 Mile 
 Owned 
 
 $58 298 
 
 Percentage of 
 Net Earnings 
 to Capital 
 
 5 74% 
 
 1907-8 . . . 
 
 . . 2,877 
 
 57,201 
 
 5.03 
 
 1908-9 . . . 
 
 . . 3,188 
 
 59,259 
 
 5.38 
 
 1909-10. . . 
 
 . . 3,508 
 
 62,657 
 
 5.59 
 
 1910-11. . . 
 
 . . 3,143 
 
 63,944 
 
 4 93 
 
 1911-12. . . 
 
 . . 3,044 
 
 63,535 
 
 4.79 
 
 1912-13. . . 
 
 3,384 
 
 65,851 
 
 5.15 
 
 1913-14. . . 
 
 . . 2,829 
 
 *65,500 
 
 4.32 
 
 1914-15. 
 
 2,874 
 
 *65,850 
 
 4.36 
 
 **Bureau of Railway News and Satistics, Leaflet No. 32. 
 * Official figures not yet available. 
 
 This table shows that the earnings of capital in- 
 vested in the year 1914-15 were only 76% of the 
 earnings on capital in the year 1906-7. This com- 
 parison is between a year below normal and one 
 above, but the table shows the bad financial condi- 
 tion generally, for a period extending over eight 
 years. 
 
 Margin Between Profit and Loss Too Narrow 
 
 There is no question that the margin between 
 profit and loss is much too narrow to allow the rail- 
 roads to develop along normal lines, or to make 
 their securities attractive to a discriminating in- 
 vestor. 
 
 A very considerable percentage of the entire rail- 
 road mileage of the country is being administered by 
 receivers. While some of the railroad trouble has 
 been caused by mismanagement, that reason alone 
 will not account for the impoverished condition of 
 railroads, which, as indicated by these tables, is 
 
RATE REGULATION 333 
 
 general. It applies to long-established, well-man- 
 aged properties which are still out of court. Im- 
 proving business will improve the present condition 
 somewhat, but the trouble is fundamental too nar- 
 row a margin of profit for a safe business propo- 
 sition. 
 
 The net earnings of railroads must be increased 
 if they are to be maintained in a safe, healthful 
 business condition, capable of producing econom- 
 ically the service which the business of the country 
 demands and of expanding as its business grows. 
 
 Three Possible Ways of Increasing Net 
 Earnings 
 
 There are three ways of increasing net earnings: 
 
 (1) Increasing income by increasing rates. 
 
 (2) Decreasing operating expense. 
 
 (3) Decreasing fixed charges. 
 
 Increasing Rates 
 
 As a general proposition, increasing rates, as to a 
 large part of the low class traffic, will tend to de- 
 crease traffic density and hence the unit cost of mov- 
 ing the traffic. The discussion in the chapter on rates 
 shows that the enormous railroad traffic of the coun- 
 try has been developed by the application of very 
 low freight rates. 
 
 Increased Rates on Particular Classes of Traffic 
 and Certain Commodities 
 
 For this reason radical horizontal increases of 
 rates are to be avoided if the necessary increase in 
 revenue can he obtained in a less obectionable way. 
 
 Increases of rates on particular classes of traffic and 
 certain commodities which move in large volume 
 are justified on several grounds. The following are 
 
334 VALUATION AND RATES 
 
 examples of commodities and traffic to which this 
 statement refers. 
 
 The rates on grain, carload lots, are probably 
 below the actual cost of service in some instances. 
 The average receipts in the Eastern District for 1914 
 were 4.03 mills per ton-mile with an average haul 
 of 350 miles. The actual revenue on export grain 
 hauled over the New York Central from Chicago 
 to New York is 2.8 mills per ton-mile, which in- 
 cludes the cost of handling at both terminals. The 
 cost for hauling between terminals is very low in- 
 deed. 
 
 The average rate on bituminous coal, carloads, 
 for the same district, is 4.15 mills per ton-mile with 
 an average haul of 129 miles. Some of the coal 
 rates must certainly be unremunerative if this is the 
 average rate on so short a haul. 
 
 The rates for transportation over branch lines and 
 main lines of secondary importance are on the same 
 general level in some instances as the rates applying 
 on main lines of dense traffic, although the unit 
 cost of transportation is certainly higher. 
 
 On a proper analysis of cost, rates on such com- 
 modities and on such traffic as the branch line traffic 
 can probably be shown to be below the cost of serv- 
 ice in some instances and disproportionately low on 
 all of them when value of commodity and cost of 
 service one or both are considered. 
 
 The rates on live stock and packing-house prod- 
 ucts, considering the class of transportation service 
 required must be very near or below cost and are 
 certainly disproportionately low when compared 
 with the rates on other commodities of less value. 
 If the relative cost of transportation of these com- 
 modities could be shown in comparison with that 
 of other classes, increases in rates could probably be 
 justified. The rates on such commodities should not 
 
RATE REGULATION 335 
 
 be based solely on class or cost of service, but the 
 value of the service also should have consideration. 
 If the investigation of cost of service recom- 
 mended in the article on Importance of Cost Data 
 in the chapter on rates is made in a thorough and 
 exhaustive manner, an increase in the rates on such 
 commodities, which move in large volume, could be 
 justified before the Commissions or the Courts and 
 should result in increased earnings of a considerable 
 amount in the aggregate. 
 
 Decreasing Operating Expense 
 
 The railroads for the past few years from 1907 
 to 1915 have practiced every possible economy in 
 the operation and maintenance of their properties. 
 Of the total maintenance of way expense, 66% is 
 independent of the volume of traffic carried repairs 
 and replacements must be made whether many or 
 few trains are operated. 
 
 The decreasing expenditure for maintenance of 
 way and structures of the last few years shows that 
 some of this operating economy has been affected 
 by deferred maintenance that must be made good 
 later. This is not real economy at all, but has been 
 forced on some roads by radically decreased net 
 earnings. 
 
 Further reductions in operating expenses cannot 
 therefore be reasonably expected under existing 
 conditions, the tendency being toward higher labor 
 costs and, if not higher, certainly not lower costs 
 for supplies required in railroad operation and 
 maintenance. 
 
 If certain existing restrictions on railroad opera- 
 tion are removed there is a feasible way of reducing 
 operating expenses somewhat. 
 
 Between all large traffic centers, as to both freight 
 and passenger traffic, there are several competing 
 
336 VALUATION AND RATES 
 
 lines of railroads. In some instances one system has 
 its own line extending from one to the other, and 
 in others the through line will be operated jointly 
 by two or more systems of railroads. 
 
 j r een Chicago and New York there are four 
 sytst' operating their own through lines and many 
 joint iix ,s, made up by the combination of two or 
 more systems. Between Chicago and St. Paul-Min- 
 neapolis, six systems operate their own lines; be- 
 tween Chicago and St. Louis there are five through 
 lines; and the same is true between all traffic cen- 
 ters of much less importance than these, all over 
 the country. 
 
 Operating Economics That Might Be Effected 
 by Unified Ownership 
 
 If the six lines operated between Chicago and St. 
 Paul were all owned by one company, the method 
 of operation would be different, and more eco- 
 nomical, than under the present six managements. 
 The Chicago, Burlington & Quincy and the Chicago, 
 Milwaukee & St. Paul have short lines and for much 
 the greater part of the way they have water grades. 
 The Chicago and North Western has the shorter line 
 but heavier, though not excessive grades. 
 
 Evidently, through freight traffic can be carried 
 at less unit cost on the Chicago, Burlington & Quincy 
 and the Chicago, Milwaukee & St. Paul than by the 
 other four roads. If the through freight traffic were 
 concentrated on these two lines, practically all of 
 their through freight trains would be filled up to the 
 capacity of the engines, and the whole through 
 freight traffic would be hauled in fewer trains, 
 with fewer train crews, and hence at less expense. 
 
 The same is true as to the passenger traffic. Two 
 or three of the lines would be found able to carry 
 the through passenger traffic at less cost than the 
 
RATE REGULATION 337 
 
 others, and such traffic would be diverted to them. 
 There would then be two or three through lines mov- 
 ing through passenger trains, carrying something 
 near their capacity, instead of five lines*, movir'x 
 more trains, many of which are carrying car r fy 
 partly filled, which is the present conditions 'J' r 
 There is a further advantage in such an &> *nge- 
 ment, in that during periods of maximum traffic 
 movements the lines not ordinarily employed for the 
 through traffic would be utilized to move the surplus. 
 This would avoid the necessity of contructing addi- 
 tional tracks and other facilities which would be 
 required if one of the lines secured more than its 
 share of the traffic. 
 
 Pooling 
 
 All of the advantages which would accrue if the 
 six systems were under one management may be 
 realized if the passenger and freight traffic could be 
 pooled. This is forbidden by law and is repugnant 
 to present public sentiment, and yet a little consid- 
 eration will show it to be in the public interest, as 
 well as that of the railroads. 
 
 Some abuses grew out of the former money and 
 traffic pools, and they might occur again unless such 
 arrangements were made under proper supervision. 
 At the time pooling was forbidden by law the In- 
 terstate Commerce Commission did not have its pres- 
 ent power of supervision and regulation. 
 
 Nothing is clearer today than that competition in 
 rates between railroads is practically impossible, 
 and not in the interest of the public. A long-con- 
 tinued and expensive experience has proven to the 
 business interests of the country that such compe- 
 tition is not desirable from their standpoint. The 
 only practicable competition is in service, and the 
 plan herein suggested could be made to give much 
 
 *One of the six lines does not operate through passenger trains. 
 
338 VALUATION AND RATES 
 
 better service than existing conditions admit, be- 
 cause equipment as well as the other facilities could 
 be pooled. 
 
 Inasmuch as the Interstate Commerce Commission 
 has, or can be vested with, power to regulate and 
 supervise railroad pooling of freight and passenger 
 business to such an extent that the old abuses may be 
 prevented, there is no valid reason why such an ar- 
 rangement as here suggested should not be made. It 
 would reduce somewhat the otherwise necessary and 
 substantial increases in rates and improve the serv- 
 ice, both of which are substantial advantages for 
 the public; it would reduce the cost of service 
 through more economical operating conditions and 
 utilizing more fully existing transportation facilities, 
 both of which should enable the railroads to in- 
 crease somewhat their net earnings. 
 
 It is to be understood that the pooling here sug- 
 gested is not an alternative plan a substitute for 
 the readjustment of rates heretofore discussed. The 
 argument is that the necessary increase of rates, 
 which must be made in any event, need not be so 
 radical if operating expense may be reduced some- 
 what by pooling. 
 
 Decreasing Fixed Charges 
 
 The third method of increasing net earnings is 
 by decreasing fixed charges. The constant demand 
 for improvements, all of which are charged to cap- 
 ital account, increases fixed railroad charges. The 
 only way that such charges can be reduced, then, 
 is to reduce the rate of interest paid on the funded 
 debt of the railroads. 
 
 As already shown as to stocks and as current quo- 
 tations on bonds show, the actual rate of interest 
 under present conditions is much more likely to in- 
 crease than to become less. The only remaining 
 
RATE REGULATION 339 
 
 way, then, of reducing the rate of interest is by in- 
 creasing the security of the bonds, and public own- 
 ership of the properties is the only feasible way 
 in which that additional security may be obtained. 
 
 The government, on its issue of bonds providing 
 for the payment of the cost of constructing the 
 Panama Canal, pays 3%. The entire national debt, 
 however, exclusive of this issue is but little more 
 than one billion dollars. If it acquired the rail- 
 roads of the country, its debt would be increased by 
 between 17 and 20 billion dollars. No country in 
 the world at the present time owes such a debt, and 
 it could only be conjectural to say what interest 
 would be demanded on such a huge sum. 
 
 Government ownership of railroads does not nec- 
 essarily mean government operation of them. Some 
 such plan as that under which the subway system 
 of rapid transit in New York City is worked is pos- 
 sible. The city constructs and owns the subways, 
 the operation being conducted by an operating com- 
 pany leasing the property from the city. 
 
 The plan in effect lends the credit of the city in 
 constructing the transportation facilities, but avoids 
 the necessity of municipal operation with its many 
 attendant evils. 
 
 The time may come when this last exedient must 
 be adopted on economical grounds the writer hopes 
 most sincerely that it may never come but as be- 
 tween government ownership, on the one hand, and 
 pooling in connection with the readjustment of ex- 
 isting rates, on the other, the latter is certainly less 
 objectionable. 
 
 Present conditions cannot continue indefinitely. 
 Some expedient for increasing net earnings must 
 be adopted within the next few years if our rail- 
 roads are to be economically maintained, efficiently 
 operated and extended to properly develop the nat- 
 ural resources of all parts of the country. 
 
OUTLINE 
 
 HISTORICAL Pages 9-22 
 
 Early conditions 9 Development of steam railroads 10 Early 
 rates 11. 
 
 Development in United States 13 First railways 13 Fundamental 
 conditions 14 Basis for financing 15 Foreign investments 16 
 Causes of increased construction 18. 
 
 Character of Railroads 20 Military 21 Political 21 Commer- 
 cial 22. 
 
 PROMOTION Pages 23-65 
 
 Classification 23 Time factor in development 24 Investors' 
 risk 26 Charter 27 Surveys and Estimates 30 Estimating 
 Traffic 38. 
 
 Real Estate 47 Options and franchises 49 Elements of cost and 
 damage 50 Relative importance 57. 
 
 Securing capital 58 Cost of and Risk in promotion 60 Summary 
 63. 
 
 CONSTRUCTION -RECONSTRUCTION Pages 66-113 
 
 Engineering 66 Expedients for reducing construction cost 69. 
 
 Estimates of construction cost 76 Additions to original cost 76 
 Contingencies 79. 
 
 Organization 82 Financial difficulties in early operation 85. 
 
 Effect of combination on traffic density 88 Effect of traffic density 
 on operating expense 90. 
 
 Reconstruction 97 Change in character of roads 98 Estimate of 
 cost 107 Increased capitalization 107 Constant reconstruc- 
 tion 109. 
 
 Summary 110. 
 
CAPITALIZATION Pages 114-136 
 
 Functions of railroads 114 Stockholders 115 Early financing 116. 
 
 Bonds 117 State aid 118 Ratio of stocks and bonds 119 Capital- 
 ization of U. S. railroads 119. 
 
 Combination 120 Holding securities of other roads 122 Holding 
 companies 124. 
 
 Reconstruction 126 Readjustment 127 Reorganization 128 Com- 
 missions and discounts 132. 
 
 Summary 133 Capitalization of 50 important roads 135. 
 
 VALUATION Pages 137-211 
 
 General purposes 137 Capitalization Valuation Rates 139. 
 
 Federal Valuation Act 142 
 
 Commission's reasons for demanding valuation 142 Securities 
 commission 143 Senate committee 144 Duties of commis- 
 sion 145 Provisions of the act 146. 
 
 Original Cost 148. 
 
 Cost of Reproduction New 149 
 
 Assumptions 150 Three railroad periods 154. 
 
 Overhead Charges 156 Engineering 156 Contingencies 157 In- 
 terest 158 Actual allowances 160. 
 
 Reproduction New Less Depreciation 161. 
 
 Appreciation 163 Embankments 163 Excavations 164 Bal- 
 last 165. 
 
 Depreciation 166 Ties 166 Rails 167 Buildings, structures 
 and equipment 170 Obsolesence and inadequacy 171 Not 
 deductible from capital 171 Treatment of depreciation 
 172 Analogy 173 Importance of depreciation method 176 
 Fallacy in deducting depreciation 176 Ruinous effect on 
 railroad credit 177 Reasonable interpretation of depre- 
 ciation clause of act 178 Necessity for depreciation fund 
 questionable 178 Actual allowances 179. 
 
 Unit Prices 182. 
 
 Land Values 184 
 
 Original cost 185 Present value 185 Cost in excess of pres- 
 ent value 186 Method of establishing present value 187 
 Necessity as to time and location 188 Adjustment of land 
 boundaries 190 Fallacies in former valuations 193 Adjust- 
 ment of boundaries essential to consideration of reproduction 
 194 Fair basis for valuation of land 195 Land not used for 
 railroad purposes 196. 
 
 Intangible Values 197 
 
 Good Will 198 Going Value 200 Development Cost 205. 
 Miscellaneous Provisions of the Valuation Act 207. 
 Conclusions 208. 
 
RATES Pages 212-318 
 
 Cost of Service 212 
 
 Capitalization 213 Relation of traffic to operating expense 215 
 I. C. C. tables 218 Fixed operating expense 223 Operating 
 expense per traffic unit 230 Physical factors 233 Terminal 
 expense 236 Apportionment of expense 238 Summary and 
 application of principles 240 Equal mileage rates 243. 
 
 Historical Development of Rates 246 English 246 American 248 
 Summary 252 Rate-making not a science 253. 
 
 Importance of Cost Data 254 Analogy 255 Engineers' method 256 
 Relative costs 257 Lack of data 257 Commercial, Legal 
 and Economical factors 258. 
 
 Value of Service 260 Justification 2611. C. C. argument 262 
 Analogies 264. 
 
 Classification 270. 
 
 Methods of Rate- making 271 Mileage distance scales 272 Per- 
 centage and Differential method 274. 
 
 Long and Short Haul Rates 286 Competition reduces value of 
 service 286 Circuitous routes 287 Differences in rail and 
 water transportation 292 River competition 293 Lake com- 
 petition 298 Ocean competition 300 Transcontinental rates 
 300 Principles involved in transcontinental rates 312. 
 
 Relation of Valuation to Rates 314. 
 Relation of Cost of Service to Rates 315. 
 
 RATE REGULATION Pages 319-339 
 Limitation of Regulating Authority 319. 
 
 Fair Return on Value 322 Not uniform 322 Element of risk 323 
 Effect on development of country 324 On A., T. & St. P. 326 
 Unproductive improvements 326 Not possible to earn fair 
 return in all cases 327. 
 
 Decreased price of railroad securities 328 Increased operating ex- 
 pense 330 Decreased return on capital 331 Margin between 
 profit and loss small 332. 
 
 Three Methods of Increasing Net Earnings 333 Increasing rates 
 333 Decreasing operating expense 335 Possible economies 
 336 Pooling 337 Decreasing fixed charges 338. 
 
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