private cars should be controlled by the Commission at least to the same extent as the rates of transportation.

VALUATION OF RAILWAYS.

Among the subjects which deserve the attention of the Congress is the need of a trustworthy valuation of railway property. As such a valuation, on the theory and by the methods about to be suggested, would require the aid of suitable legislation, it may be appropriate to discuss the matter briefly in the present report.

There are two leading reasons why an authoritative valuation of railroad property is of increasing importance. In the first place, the judicial rules for the determination of reasonable rates for freight and passenger traffic, so far as those rules have been laid down in the decisions of the courts, include and lay stress upon the fair value of the roads whose rates are the subject of complaint. It is not necessary to refer to the cases in which this view finds expression, nor to explain why the "rule of cost" applies in a limited degree only to the reasonableness of transportation charges; it is sufficient for the present purpose to state that no tribunal upon which the duty may be imposed, whether legislative, administrative, or judicial, can pass a satisfactory judgment upon the reasonableness of railway rates without taking into account the value of railway property. This is so not only because of the nature of the question involved, but especially for the reason that the courts have held in numerous cases that an enforced rate so low as to deprive the carrier of its property, that is, broadly speaking, the right to a reasonable return therefrom, is repugnant to the Constitution. Various other matters, such as the proper adjustment of schedules, the relative justice of particular rates, the similarity or dissimilarity of conditions, and the like, must of course be regarded by those who undertake to frame or administer laws relating to railway charges; but underlying and connected with all such considerations is the idea that the just rate is one which gives a reasonable return upon the fair value of the property dedicated to the service of public transportation. In this view, when the subject is fully comprehended, it is perhaps not too much to say that provision should be made by the Congress for a trustworthy and authoritative valuation of railway property.

Another reason for such a valuation is scarcely less important. Closely connected with the question of reasonable railway rates stands the question of reasonable railway taxation. The general fact relative to railway taxation in this country is that the value of corporate property, real and personal, is made the basis of public contributions. Some few States tax railways on the basis of earnings, but there is no tendency for this practice to become general. The situation may be read from the following table, which shows the amount of taxes paid

by the railways of each State, as also the character of the laws according to which such payments are determined.

Analysis of taxes, by States and Territories, showing the basis of payments according to the various laws under which railways are taxed.

Analysis of taxes, by States and Territories, showing the basis of payments according to the various laus under which railways are taxed-Continued.

Ad valorem tax.

On the value of

real and

personal

valuation On stock,
based on bonds,
earnings, loans, etc.

property.

dividends,

dividends. operated, laneous.

or some erty owned, revenue, physical not used in quality of operation, property and miscel- Govern

United

States

ment.

or other

or on

results of

privilege.

2 This analysis does not include $1,279,145 taxes, as follows: $1,234,939 internal revenue not localized by States and Territories, $37,570 paid in Dominion of Canada, and $6,636, unclassified.

From the above statement it appears that out of a total of $54,465,437 paid as taxes during the year ending June 30, 1902, $37,336,673 were paid on the value of real and personal property. To this should be added the amount paid on property owned by railways not used in the operations of the road, which, for the most part, is taxed locally and on the basis of valuation. It should also be observed, in order to obtain the full measure of the extent to which ad valorem taxation of railway property is followed in this country, that the State of Michigan appears for the last time in the report of 1902 as paying taxes on the basis of gross earnings, and, further, that the State of Wisconsin is at present considering the question of making some use of the valuation of railway properties for the purpose of assessment.

The result of railway taxation fails to show that degree of uniformity which one might reasonably expect in view of the general uniformity of method. So striking is the divergence in these results that it may not be inappropriate to insert a table giving the amount of taxes paid by railways in each State, reduced to a mileage basis.

Summary showing taxes and assessments of the railways in the United States, by States and Territories, for the year ending June 30, 1902.

1 Excludes $1, 234, 939 taxes, internal revenue, United States Government, not localized by States and Territories, and $37,570 taxes, reported by carriers as paid in the Dominion of Canada.

It would be wholly outside the purpose of this report to consider the general question of railway taxation. That subject lies within the jurisdiction of the States. When, however, it is recognized that railway taxes amount to between 4 and 5 per cent of the aggregate of operating expenses, and that on this account a reasonable charge upon interstate traffic may be affected by the manner in which the States administer their taxing laws, it may well be claimed that the valuation of railway properties becomes a matter of Federal concern.

It may be proper to add a word relative to the plans that may be pursued. Of the various methods of valuing railway property the one which seems the most reliable involves a complete and detailed inventory of both physical and nonphysical values. The other methods which come into competition with the inventory method are, first, the acceptance of the book items "Cost of road" and "Cost of equipment," and such other items as appear on the assets side of the balance sheet, as standing for the value of railway property; or, second, the acceptance of the market price of railway obligations as a measure of that value.

No one acquainted with the practice of American railway accounting, so far as the balance sheet is concerned, can maintain for a moment that the bookkeeping statement of cost is a correct indication of present values. There is no guarantee that the amounts entered as “Cost of road" and "Cost of equipment" represent the capital originally put into the enterprise, and in. the few cases where the cost originally charged on the balance sheet is a measure of the capital invested, the radical fluctuations in the price of material and labor during the past thirty or forty years would render such a statement useless for determining present values. The aggregate of the assets of railways on June 30, 1902, as reported to this Commission, was $14,270,301,564. No one can for a moment say, even after making allowance for duplication of items on account of intercorporate relations, that the railways of the United States should be valued at this figure. The balance sheet on its asset side is practically useless for the purpose of valuation. The only plan which has thus far received the qualified approval of the courts is what is known as the "stock and bond plan”—that is to say, the valuation of corporate properties on the basis of the market quotation of their securities. Much may be said in favor of this method of valuation and much also against it. Passing over minor considerations, two considerations suggest themselves which point to the inadvisability of placing exclusive reliance upon the stock and bond plan of valuation.

In the first place, what is sometimes called the rule of the Supreme Court for the valuation of railway property-that is to say, the acceptance of the judgment of the market in the price it pays for stocks and bonds as a measure of value-is a rule of nearly thirty years' standing, and much of the pertinency which it may have had between 1870 and 1880 is largely set aside by the conditions under which the great properties are now organized and operated. The purchase of individuals for permanent investment is of small account compared with the purchase by syndicates for consolidation and control, and when it is recognized that the considerations which influence syndicates of capital in purchasing stocks and bonds differ widely from the considerations which influence an individual in determining the price he can afford to pay for an investment, it must be conceded that the market price of railway stocks and railway bonds is by no means a correct measure of the cash value of railways, as that phrase is commonly used and as it is defined in statutory law.

The second reason why this rule fails to satisfy the requirements of a just valuation is that the great majority of railway stocks and rail way bonds are not bought and sold upon the market. Two years ago this Commission, in response to a resolution of the Senate, undertook to make a valuation of railway securities on the basis of the market