to raise the largest amount of revenue with the least burden possible on the consumer. This, again, can be determined only after a very careful study of relative industrial conditions.

Even more important, however, from the point of view of the revenue principle, is the fact that, where it is intended to raise revenue by imposing duties on a large number of articles rather than on a few non-competing articles, it is impossible to make any accurate estimate of what the revenues will be, until a study has been made of relative prices and costs as a basis for determining how far imports would be increased or decreased by changes in duties.

172. The Impossibility of Ascertaining Costs 38

BY H. PARKER WILLIS

The case against the cost-of-production theory as a regulator of tariff duties may be summed up in a series of propositions somewhat as follows:

1. In practice the ascertainment of costs is impossible. No board of commission has the power to demand cost statements from manufacturers or producers; and if it had, it could not secure truthful statements. Moreover, there is no way of obtaining statements of any kind from foreigners.

2. Even if all manufacturers both here and abroad were willing to throw open their books in an absolutely honest and impartial way to an all-powerful commission, it would be of little service. This is because cost accounting is not generally practiced by producers and because, where it is practiced, there is no general agreement as to the treatment of different elements of cost.

3. If there were a perfect system of cost accounting installed upon a uniform basis in every plant manufacturing a given article. throughout the world, knowledge of comparative costs would still be of little service, since costs in every country would have to be known before any conclusions could be arrived at as to what tariff rate was needed to protect a given country against the competition of others.

4.

If all these facts were known for every country, the difficulty would be about as great as it was previously if the data were to be used for the establishment of tariff rates. This is because costs of production vary as widely within a given country as they do between different countries. Unless it were known whether a duty were to be imposed for the purpose of equalizing costs as 38 Adapted from an article in the Journal of Political Economy, XIX, 374-376 (1911).

between the best, the poorest, or the average establishments in the several countries, the information about costs would be useless as a basis of tariff duties.

Even with knowledge on all of the points already enumerated, and with a clear-cut intention on the point indicated above, the cost analysis would still be inadequate because of the fact that many commodities are produced in groups, or as by-products of one another, so that to utilize the general cost analysis as a basis for tariff rates, it would be necessary to know the manufacturer's intention with reference to the fixing of prices. It would further be necessary to know that the manufacturer had no disposition to establish "export prices" at rates lower than those that would be dictated by his costs of production.

6. If all of the foregoing factors were known, including positive data regarding the intention of the manufacturer in regard to the establishment of prices, there would still remain the ques tion whether this information about costs, which is necessarily stated in terms of money, would have any real significance of a permanent economic character. Money costs do not correspond in all cases to real costs as measured by sacrifice of labor and capital. It may be true that a given country can produce much more cheaply than another, yet it does not follow that it will so produce, since its cost advantage in some other line may be so much greater as to dictate its devoting its attention almost exclusively to that line.

For all these reasons, the conclusion must be reached that cost of production is both practically impossible and theoretically unsound as a basis for the establishment of tariff duties.

VII

THE PROBLEM OF RAILWAY REGULATION

In a machine system continental in extent and embracing a varied host of correlated industrial activities the railroad occupies a position of strategic importance. Through it the vast and intricate gear of "the industrial machine" is made to "engage." Its rates, by influencing costs and prices, perform important services in the organization and direction of industry. It is inevitable, therefore, that we should have “a railroad problem" which three considerations impel the public to keep alive. First, the railroad is an industrial unit of large size; and in a country steeped in the conventions of competition, the giant is always under suspicion. Second, the business tends to be monopolistic; and to monopoly the public imputes not only horns and forked tail. but a capacious maw as well. Third, it is an instrument possessed of great powers of industrial control; for through its "manipulation" of rates it can cause industry to flourish or fade; it can give to industrial development a "natural" or an untoward direction. These considerations have caused the problem to wear a constant freshness which comes from its varied and neverending sequel.

When "railroads were new" our people were thoroughly imbued with individualism. Firmly convinced were they that one should have what he earned, and that he earned "what he got." They were satisfied that in competition the public possessed an adequate safeguard. They did not hesitate to pronounce "regulation" "meddlesome interference" and to characterize the almost unthinkable proposal of government ownership as "socialistic." But they had no adequate conception of the nature of the railroad industry. They did not see that railway economy requires monopoly; that the proper performance of its services requires the business to be endowed with public powers; that costs of particular services cannot be isolated to do duty as bases for particular rates; and that "normally the industry is in a stage of increasing returns."

These economic characteristics of the industry, quite in opposition to popular theory, have determined our policy in dealing with it. We have found that attempts to fix rates by competition have resulted in alternate periods of high and low charges, in fluctuating dividends and prices of securities, in speculation and "railroad wrecking," in unpredictable items of future cost, introducing elements of grave risk into every business enterprise. We have been confronted with abundant testimony of discriminations in favor of large shippers and particular localities; and have concluded that "unreasonable rates" were interfering with the "natural" course of development and were favoring monopoly. And more than once we have suspected that, because of its peculiar position, the railroad was inclined to charge too much. These observations we have translated into problems which, through the state, we have tried to solve.

A protracted and unpleasant experience has convinced us, slowly to be sure, that the problem cannot be solved in terms of competition. We have never been quite willing formally to renounce so efficacious an instrument of salvation; but, unconventionally at any rate, we have little by little quit trying to make the railroads compete.

Primarily, perhaps, because discrimination appeals to us as unjust, we have given our attention to the problem of preventing interference with the "natural" course of development. This problem is still in process of solution. The outlawing of rebates has brought forth an almost infinite variety

of ingenious substitutes. As these have been relegated to outer darkness their places have been taken by others. After many years of strenuous effort we have not as yet succeeded in ridding ourselves of this "evil." In fact, it seems that its extirpation can be achieved only by a careful supervision of such matters as billing, the collection of claims, the making of purchases, etc. At present many discriminations are concealed in differences in service. We are realizing this, and service is beginning to be standardized by governmental authority.

The problem of the railroad as a monopoly is also "in solution." The grant to the Interstate Commerce Commission of authority to set aside particular rates has grown into the power to prescribe whole schedules of rates. With this process has come many new "problems." To prescribe “reasonable rates," the Commission has had to know costs. To determine these, it has been compelled, with the assent of Congress, to prescribe uniform accounting systems. The problem has further involved a determination "of what the investment would bear." This has necessitated an evaluation of the railroad properties of the country, an undertaking that will not be completed for many years. The intention, underlying this appraisal, is to limit profits, by a limitation of rates, to a reasonable return. Recently, to quite different effect, the "eastern railroads" were granted permission to raise rates, their plea being one of insufficient profits. Together these things are indications of the development of a policy of limiting railroad dividends to a “fair figure" and of guaranteeing this modest income. In future it will most likely be found inexpedient to meet the exigencies of certain dividends from a changing economic environment by a manipulation of rates. It is, therefore, more than possible that an effort will be made to accomplish this object by breaking the nexus between dividends and earnings from particular properties. This can be done by the substitution of general for particular securities. Such a general policy involves necessarily a regulation of the investments of the railroad.

These implications of legislation and administration deserve more than passing notice. Our devotion to individualism is still strong; our faith in the efficacy of competition, even if shaken a bit, is still firm; we still refuse to discuss government ownership as a practical question. But despite all this, we have created a system of government regulation which involves supervising accounts, evaluating property, fixing rates, and standardizing service; which threatens supervision of expenditures and investments; and which tends to limit the railroad to a definite guaranteed return on its investment. Control is very rapidly passing into the hands of the state. The step to the formal assumption of management and ownership is but a short one. It can be accomplished by a simple substitution of government bonds for railroad securities. Are we destined to take it? If we do, will it be a simple matter of conscious choice? Or will it be a solution that has been forced upon us unwittingly through our attempt to solve isolated railroad problems one at a time?

Thus it has come about that one "railroad problem" after another has been "solved," only to leave a bigger and more difficult problem in its place. The question of government ownership is more intricate than any of its predecessors. If the state does take over the roads, what will be the net gain? Will we be better off than we now are? Will we be better off than we would have been had we never embarked on a course of regulation? If our railroads are socialized, what is the effect likely to be in the solution of our other problems, for instance that of monopoly? What influence is such a step likely to exert upon our theory of the relation of the state to industry and upon our fundamental "principles" and "concepts"? Are we thus for the last time dealing with the railroad problem in isolation, or is it likely to continue with us in ever-varied forms? Is government ownership a mere means of merging a particular problem in the larger problem of the socialization of industry? After government ownership-what?

A. THE FUNDAMENTAL FACTORS OF THE PROBLEM

173. The Extent of American Railway Interests1

BY I. LEO SHARFMAN

A discussion of the problems of railway regulation in the United States may well begin with a statement of the extent of the railway interests to be regulated. Some conception may be obtained of the magnitude of these railway interests by a consideration of the extent of mileage, the amount of equipment, the number of employees engaged in the service, the amount of outstanding securities representing capital invested, the number of passengers and tons of freight carried, the revenues accruing from the service, the expenditures involved in rendering it, and the earnings distributed annually as a result of railway enterprise. There are more than 250,000 miles of line in the United States, representing only single track mileage. If we include the length of second, third, and fourth tracks, and the mileage of yard tracks and sidings, the total mileage operated in the United States in 1910 was 351,767. The figures for equipment are equally stupendous. There were 58,947 locomotives and 2,290,331 cars devoted to the service rendered by American railways. The number of employees was 1,699,420-the largest number of wage-earners engaged in any single American industry with the exception of agriculture. The outstanding securities amounted to $18,417,132,238, representing an investment in railway transportation which is likewise second only to agriculture. The number of passengers carried during the year 1910, earning revenue for the railroads, was 971,683,199; the number of tons of freight carried during the same year, earning revenue for the railroads was, 1,849,900,101. If we take distance into consideration and determine the number of passengers and the number of tons of freight carried one mile, the figures become so large as to pass beyond human conception. The number of passengers carried one mile was 32,338,496,329, and the number of tons of freight carried one mile was 255,016,910,451. The revenues from operation amounted to $2,750,667,435; the operating expenditures were $1,822,630,433; and the earnings actually distributed as dividends during this single year amounted to $293,836,863. The immensity of these figures must be apparent to every one, and no further comment is necessary to indicate the vast extent of American railway interests.

'Adapted from an unpublished volume entitled Railway Regulation, soon to be published by the LaSalle Extension University.