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As a matter of fact, such regulation probably would be entirely impracticable; for the competitive rates on different roads must be the same; and, owing to the differences in density of traffic and operating expenses, no two roads charging the same rates could be made to earn the same percentages on their valuations.

194. The "Railway-Value" of Land23

It is manifest that an attempt to estimate what would be the actual cost of acquiring the right of way if the railroad were not there is to indulge in mere speculation. The railroad has long been established; to it have been linked the activities of agriculture, industry, and trade. Communities have long been dependent upon its service, and their growth and development have been conditioned upon the facilities it has provided. The uses of property in the communities which it serves are to a large degree determined by it. The values of property along its line largely depend upon its existence. It is an integral part of the communal life. The assumption of its non-existence, and at the same time that the values that rest upon it remain unchanged, is impossible and cannot be entertained. The conditions of ownership of the property and the amounts which would have to be paid in acquiring the right of way, supposing the railroad to be removed, are wholly beyond reach of any process of rational determination. The cost-of-reproduction method is of service in ascertaining the present value of the plant, when it is reasonably applied and when the cost of reproducing the property may be ascertained with a proper degree of certainty. But it does not justify the acceptance of results which depend upon mere conjecture.

The question is whether, in determining the fair present value of the property of the railroad company as a basis of its charges to the public, it is entitled to a valuation of its right of way not only in excess of the amount invested in it, but also in excess of the market value of contiguous and similarly situated property. For the purpose of making rates, is its land devoted to the public use to be treated (irrespective of improvements) not only as increasing in value by reason of the activities and general prosperity of the community, but as constantly outstripping in this increase all neighboring lands of like character, devoted to other uses? If rates laid by competent authority, state or national, are otherwise just and

23

Adapted from the opinion of the court in Simpson v. Shepard, 33 Supreme Court Reporter 761 (1913). This is the well-known "Minnesota Rate Case."

reasonable, are they to be held to be unconstitutional and void because they do not permit a return upon an increment so calculated? It is clear that in ascertaining the present value we are not limited to the consideration of the amount of the actual investment. If that has been reckless or improvident, 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 recognition of its fair value if it be more than its cost. The property is held in private ownership, 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. But still it is property employed in a public calling, subject to governmental regulation, and while, under the guise of such regulation, it may not be confiscated, it is equally true that there is attached to its use the condition that charges to the public shall not be unreasonable. And where the inquiry is as to the fair value of the property, in order to determine the reasonableness of the return allowed by the ratemaking power, it is not admissible to attribute to the property owned by the carriers a speculative increment of value, over the amount invested in it and beyond the value of similar property owned by others, solely by reason of the fact that it is used in the public service. That would be to disregard the essential conditions. of the public use, and to make the public use destructive of the public right.

The increase sought for "railway value" in these cases is an increment over all outlays of the carrier and over the values of similar land in the vicinity. It is an increment which cannot be referred to any known criterion, but must rest on a mere expression of judgment which finds no proper test or standard in the transactions of the business world.

Assuming that the company is entitled to a reasonable share in the general prosperity of the communities which it serves, and thus to attribute to its property an increase in value, still the increase so allowed, apart from any improvements it may make, cannot properly extend beyond the fair average of the normal market value of land in the vicinity having a similar character. Otherwise we enter the realm of mere conjecture. We therefore hold that it was error to base the estimates of value of the right of way, yards, and terminals upon the so-called "railway value" of the property. The company would certainly have no ground of complaint if it were allowed a value for these lands equal to the fair average market value of similar land in the vicinity.

F. GOVERNMENT OWNERSHIP OF RAILROADS

195. The Drift toward Government Ownership24

BY FRANK HAIGH DIXON

We have reached a point in the regulation of railways where competition in rates to any great degree is hardly probable. Economists have frequently demonstrated the undesirability of encouraging competition between industries subject to the law of increasing returns, and particularly between railways which have such enormous fixed plants in relation to the business done. Regulation has been substituted for competition as a public safeguard. But this principle of regulation has now been carried so far that the ratefixing power has virtually been taken out of the hands of the railways and transferred to the Interstate Commerce Commission. Rates are rapidly becoming hardened at the maximum point fixed by the Commission, and competition, at least among parallel railways, has largely disappeared.

But the statement is frequently made that even though competition in rates is ended, railways should be prevented from agreements with one another in order that the public may enjoy the benefits of competitive service. But what, it may be asked, is an improvement in service but a reduction in rates? And why may not the practice of rebating be pursued in this manner even more successfully than by the more crude method of returning a part of the freight money?

In fact, in the knotty problems with which the Commission has wrestled, such as elevator allowances, transit privileges, the absorption of switching charges, the spotting of cars, there is a clear recognition of the fact that these services are fundamentally problems of rates, that they must be adjusted by the regulating body, that they must be uniform and non-discriminatory, and that they must be filed as rates are filed for public inspection and criticism.

It is the pressure of competitive service that has driven the railroads into the impossible position which some of them now occupy where they are absorbing terminal services of such an expensive character that they are left with scarcely enough of the total rate to pay operating expenses; where the industrial plants are receiving from the railways a portion of the freight rate for the privilege of hauling their own cars about their own yards, with their own locomotives. Free storage, free loading and unloading,

"Adapted from "The Economic Significance of Interlocking Directorates in Railway Finance," in the Journal of Political Economy, XXII, 952-954 (1914).

free collection and delivery, refrigerator service, milling in transit, prompt and abundant provision of cars, preferred services in the matter of speed; all of these practices and many more have resulted in discriminations and have depleted the revenues of the roads. Reduced to their lowest terms these are all questions of rates, if not of rebates. From this tangle of inconsistent and unprofitable relations into which the railways have been forced by the pressure of competition, they can be extricated only with the aid of the Interstate Commerce Commission.

There seems to me to be but one outcome. Before long the Commission will be compelled to regulate service quite as rigidly as it does rates. All the power necessary to do so is already theirs by statute, and they have already in many individual cases made significant rulings that involve problems of service.

When that day comes, and it is not far in the future, when the Commission assumes as complete control of service as it has already done of rates, it will then be of little or no public concern whether parallel and competing railways are or are not interlocked. That every evil of a monopoly character would then be done away with for good and all I do not assert. That would be placing too low an estimate on the ingenuity of the financial juggler. But the public advantages of co-operation on the part of the large railway systems so decidedly outweigh any remote disadvantages that there seems. no justification for a prevention of interlocking relationships. Such close co-operation will work, not to the restraining of trade unreasonably, but rather to its liberation, for it will permit the execution of co-operative plans for relief in many situations that are now wastefully handled. It will permit the application of principles of scientific economic railway operation to the railway system as a whole.

It is a curious myopia that persists among the American people and demands competition between these great industries to the certain burdening of them ultimately with its inevitable costs. Yet with this prejudice against combination lodged in the breasts of the people, the movement of events as expressed in legislation has been steadily away from reliance upon the efficacy of competition and in the direction of more and more rigid regulation. That it will stop short of government ownership does not seem at all clear.

196. Government Ownership as a Refuge25

President W. W. Finley,26 in his thoughtful and suggestive address before the New York Traffic Club, made one remark which "Adapted from an editorial in the Railway World, March 13, 1908. 20The late president of the Southern Railway.

we earnestly commend to the attention of railway stockholders and officials. After showing that the growth of the transportation system of the country must further its continued economic development, and that the present tendencies of public regulation, if allowed to go on, would be to cripple private enterprise, he said: "I do not believe that the sentiment of a majority of the people of the United States is favorable to governmental ownership, but I do believe that if some of the more extreme legislation already enacted is supplemented along the lines now proposed, the ultimate result must be to break down the system of private ownership."

Government ownership of railroads, long regarded as the dream of the impractical radical, is rapidly looming into view as an impending change far-reaching and fundamental in the structure of our economic life. Government ownership of railroads is the inevitable consequence of the present system of regulation which is developing into the scheme of irresponsible public management by boards and commissions which will "practically leave little to the owners of the property but the privilege of providing the capital necessary for construction and operation, and liability for heavy damages and attorney's fees in every case of failure to maintain the required standard of service, and for penalties in amounts which might easily absorb a very large proportion of the gross earnings of a company rendering the most efficient service in its power."

We seriously question whether public ownership would not be better than the system of public regulation so graphically described by President Finley. True, it would seriously impair the efficiency of our transportation system. It would also make the railway policies of the country a matter of serious controversy. But, with its disadvantages, it would be an improvement on the present system of regulation.

There is, however, another side to the picture. Under government ownership, the stockholders and creditors of the railways would exchange their holdings for government bonds, and they would be sufficiently influential to protect themselves from any serious injustice in the terms of exchange. They would then turn over the management of the railroads to the government officials, freeing their long-endangered capital for entrance into safer lines. of employment and leaving the country to struggle with a set of "problems" far more serious and difficult than even the tariff and currency questions.

railway companies resist They will suffer no damrelied on to protect their

Why should the owners of American the trend toward government ownership? age in the transfer. The courts can be rights. They will be freed from further worry and annoyance. To

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