investment by the stockholders it can make no difference that money earned by the corporation, and in a position to be distributed by a dividend among its stockholders, was used to pay for improvements and stock issued in lieu of cash to the stockholders. It is not necessary that the money should first be paid to the stockholder and then returned by him in payment for new stock issued to him. The net earnings, in equity, belonged to him, and stock issued to him in lieu of the money so used that belonged to him was issued for value, and represents an actual investment by the holder."

§ 1096. Securities issued upon reorganization.

A complication frequently met is that the operating company is the result of the consolidation of several previous companies or the reorganization of a previous corporation. In many actual cases both reorganization and consolidation are to be found so many times at various stages of the corporate history of the given concern that the outstanding issues tell little or nothing of real investment now devoted to the public service. A reorganization may mean an increase in the nominal capitalization to placate certain interests or it may mean drastic elision of securities that represented actual investment. A consolidation similarly may mean increase or decrease in nominal capitalization. Obviously when a holding company is utilized there is a duplication of stock issues, at the very least. And when the consolidation is effected by buying the former properties outright an inflated price is usually paid. When in any of these ways the actual property is buried beneath corporate finance, little respect is to be paid to the outstanding issues as such, but the question should be as to the real values underlying

1 See Chicago Union Traction

Co. v. Chicago, 199 Ill. 579, 65
N. E. 470 (1902).

all these. It has been held, however, that whenever the capitalization of the present company is the result of some arrangement with the State by which the securities then issued may be said to have been approved, the State may not later be heard to question the values thus practically validated.1

§ 1097. State scrutiny of the issue of securities.

Of late years there has been an increasing tendency for the State to control this matter from the outset, by giving to the regulating commission the power to pass upon the issue of securities by public service corporations, and to scrutinize the arrangements under which these are paid for. Massachusetts which led the way in this direction went so far as to require not only authorization from the commission for new issues, but required further that all such issues should be paid for upon a cash basis at the market price. But very recently it has been seen that this legislation is too exacting, and the commission now has power to fix a somewhat lower price at which the new securities may be distributed if it believes that the conditions require it. Under the New York legislation, to take another type, the State is principally concerned in seeing to the application of the funds derived from new issues, whether in refunding obligations already incurred or in constructing new works. To judge from the decisions thus far rendered, the question of what expenditures are a proper basis for permanent capitalization is the principal problem. This general sort of stock regulation is however not confined to these two States, but has spread

'See Willcox v. Consolidated Gas Co., 212 U. S. 19, 53 L. ed. 382, 29 Sup. Ct. 192 (1909).

'Power to pass upon the issue of securities may constitutionally be given to the commissions.

Minnesota.-State ex rel. v. Gt. Northern R. R. Co., 100 Minn. 445, 111 N. W. 289 (1907).

Wisconsin.-State ex rel. v. Railroad Commission, 137 Wis. 80, 117 N. W. 846 (1908).

rapidly over the country. The results to be expected from it are in the end a great simplification of the problem of regulation, as under it the outstanding securities will gradually come to be at least the prima facie measure of the real investment devoted to public service upon which it may ultimately be conceded a proper return is due. What would be needed to bring this condition about immediately would be physical valuation of the present properties and an entire revision of the present holdings upon that basis.

§ 1098. Existing capitalization hardly excessive.

The only way in which investments in public service corporations could be jeopardized by any solution of the present problem which has been proposed, would be by proof that the outstanding capitalization is excessive; but although this has been loudly claimed, the claim can probably not be supported. Various theories for determining capitalization have been suggested which as has been seen, may be analyzed into four-the actual investment, the nominal outstanding capitalization, the actual present value, and the cost of reproduction. The law has not as yet made any invidious choice among these, but has considered them all with respect. The Constitution, as its interpretation has been settled by the Supreme Court, secures to the companies the opportunity for a fair return on the actual present value of the property; if hampered improperly in getting this it is said that their property is taken without due process of law. In respect to this test the commission has pointed out that the pres

1 As to the attitude of the courts in revision of the action of the commissions under such legislation, see: New York.-People ex rel. Delaware & H. R. R. Co. v. Stevens, 197 N. Y. 1, 90 N. E. 60 (1909).

Texas.-United States & M. T. Co. v. Delaware W. Const. Co. (Tex. Civ. App.), 112 S. W. 447 (1908).

ent value is certainly as great as the reproduction value, and that the outstanding capitalization is little if at all greater than this is at the present time. It is true that there are outstanding many billions of securities which did not represent any original cash investment, in other words, "watered stock." But the probabilities are that when the enormous increase in the value of the rights of way and terminal facilities, together with the immense expenditures in improving trackage, roadbeds, grades and structures out of current earnings are all considered, the real value of railroad securities even may be as great as the face value of the securities.

Topic C. Present Value as the Constitutional Basis

§ 1099. Protection of present values.

The leading case on this point on the constitutional side of this problem is Smyth v. Ames.1 This was a suit to test the constitutionality of certain statutes regulating railroad rates. In the course of this opinion Mr. Justice Harlan said: "We hold that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And in order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and were to be given such weight as may be just and right in each case. We do not say that there

1 169 U. S. 466, 42 L. ed. 819, 18 Sup. Ct. 419 (1898).

may not be other matters to be regarded in estimating the value of the property. What the company is entitled to ask is a fair return upon the value of that which it employs for the public convenience."

§ 1100. Original cost as affecting present value.

It follows from the rule just recited that present value may be shown to be less than actual cost. The true inquiry in constitutional cases is the present value of the plant, and the evidence should be directed to that issue. Without some proof as to that the case must fail. But this does not mean that evidence as to original cost is to

1 By the prevalent law the present value may be the basis of rate regulation by legislative process,

etc.

United States.-Reagan v. Farmers' Loan & Trust Co., 154 U. S. 362, 38 L. ed. 1014, 14 Sup. Ct. 1047 (1894); San Diego Land & T. Co. v. National City, 174 U. S. 739, 43 L. ed. 1154, 19 Sup. Ct. 804 (1899); San Diego, L. & T. Co. v. Jasper, 189 U. S. 439, 47 L. ed. 892, 23 Sup. Ct. 571 (1903); Stanislaus Co. v. San Joaquin & K. R. C. & I. Co., 192 U. S. 201, 48 L. ed. 406, 24 Sup. Ct. 241 (1903); Cleveland Gaslight Co. v. Cleveland, 71 Fed. 610 (1891); Atlantic & P. Ry. v. U. S., 76 Fed. 186 (1896); Northern Pac. Ry. v. Keyes, 91 Fed. 47 (1898); Spring Valley Waterworks v. San Francisco, 124 Fed. 574 (1903). See Southern Pac. Ry. v. Railroad Commissioners, 78 Fed. 236 (1896); Cumberland Tel. & Tel. Co. v. Railroad Comm., 156 Fed. 823 (1907); Southern Pacific R. R. Co. v. Bartine, 170 Fed. 725 (1909); St. Louis & S. F. Ry. Co. v. Hadley, 168 Fed. 317 (1909); Missouri, K.

& T. Ry. Co. v. Love, 177 Fed. 493 (1910).

California.-Spring Valley Waterworks v. San Francisco, 82 Cal. 286, 23 Pac. 910 (1890); Redlands, L. & C. D. Water Co. v. Redlands, 121 Cal. 365, 53 Pac. 843 (1898).

Indiana.-Chicago, I. & L. Ry. Co. v. Railroad Commission, 39 Ind. App. 358, 79 N. E. 520 (1907).

Iowa.-Cedar Rapids Co. v. Cedar Rapids, 118 Ia. 234, 91 N. W. 1081 (1902).

Maine.-Kennebec Water Dist. v. Waterville, 97 Me. 185, 54 Atl. 6, 60 L. R. A. 856 (1902); Brunswick & T. W. Dist. v. Maine Water Co., 99 Me. 371, 59 Atl. 537 (1904). Minnesota. Steenerson v. Gt. Northern Ry., 69 Minn. 353, 72 N. W. 713 (1897); State ex rel. v. Minneapolis & St. L. Ry., 80 Minn. 191, 83 N. W. 60 (1900).

West Virginia.-Coal & Coke Ry. Co. v. Conley (W. Va.), 67 S. E. 613 (1910).

2 See particularly State v. Minneapolis & St. L. Ry. 80 Minn. 191, 83 N. W. 60 (1900).