system for the arms, another for the legs, and a third for the lungs, throat, and stomach to realize how defective the service rendered by a number of un-coordinated railways must be, and what a service the President has rendered to the country in putting these railways under the direction of a single head. But the analogy between the circulatory system of the body and our railway systems as it has been fails in another respect. Through the arteries and veins the blood cells move as they are required without relation to their identity. There is, so to speak, no change of cars or motive power. The blushing woman and the wounded man do not have to wait until some particular artery is cleared for the passage of a special sort of cell that travels only on a single route.

There are different species of cells, it is true, just as there are freight and passenger cars. Each species has a different function to perform, but when they are needed the cells best adapted for the work that is to be done are rushed along the shortest route to the point at which they are required. In other words, there is no exclusive designation of rolling stock and equipment for use on particular lines. They are all public highways over which any traffic may be moved by the shortest or most convenient route, subject only to such regulation as may be necessary to avoid collision or congestion. With our railways as they were this was made impossible by self-interest and competition. Transformed as they may be, under the authority given by the President, it is entirely possible that the railway tracks of the United States may become the roadways of the Nation, over which its traffic may be moved by the shortest or easiest routes, irrespective of their previous ownership or affiliation. Just here it is worth remarking that such a change would be a reversion to first principles.

From the earliest time the construction and maintenance of roads that were open to all has been one of the functions of government.

About one hundred years ago Congress committed itself to the policy of building post roads over which the stage-coaches and prairie schooners of those days should carry the traffic of the Nation. Two of these roads over the Alleghanies were completed and are in use to-day. Many more were planned, and would no doubt have been built if the railways had not superseded them. Of the first railways not a few were built by the States, and more probably would have been so built but for the eagerness of private capital to embark in a business that seemed to promise great profits.

The same idea of providing a public highway open to all for the transportation of freight and passengers obtained when the various States undertook to dig the canals that were to connect our lakes and rivers with the sea, and provide the transportation system of which De Witt Clinton dreamed. Through these canals any boat might travel irrespective of its ownership or the rate of freight charged, and the only function of the States was to see that there was no impediment to the traffic or discrimination in its treatment.

In its essence the principle thus applied is identical with the one that is embodied in the doctrine for which we are now fighting, viz.," the freedom of the seas," by which is meant the right of unobstructed transportation for neutral commerce in time of war and for all commerce when the world is at peace. That our insistence upon respect for this doctrine abroad should have made it possible for us to extend its application at home may be something more than a coincidence. In both cases the result will be to equalize opportunity and dispossess private interest from the enjoyment of peculiar privileges. For years the Nation has been considering whether this dispossession would be wise and just. The Inter-State Commerce Commis sion was formed, and for a time it was hoped that the control it was empowered to exercise might correct the evils of which both the carriers and the public complained. The result was, however, disappointing. Both the authority and the policy of the Commission were restrictive rather than constructive.

The Sherman Law, moreover, stood in the way and stopped all progress toward co-ordination by consolidation, combination, or pooling. Competition by rate-cutting or rebates was prevented, but competition in service continued; and the stronger roads, which could afford it, succeeded in obtaining a larger share of the traffic by the employment of solicitors, through

1

whom the obvious advantages of quick movement and convenient terminals were kept constantly before shippers. Meantime the cost of operation was increasing. Wages, coal, steel, oil, cars, engines, and everything else required in the running of a railway advanced rapidly. The Inter-State Commerce Commission grudgingly and tardily allowed a slight increase in freight rates, but it was not commensurate with the increase in expenses. Net earnings commenced to fall off, the credit of the railways became impaired, the capital required to buy new equipment, improve terminals, and build extensions could not be had, and our transportation facilities ceased to grow, while the business of the country was expanding rapidly.

This was the situation when the war broke out in 1914. The impulse that the European demand soon gave to American activity created a traffic that taxed the carrying capacity of the American railways to the limit by the end of 1916.

Their gross earnings were increasing, but expenses increased more rapidly; the net result was that they began to lose, the movement of traffic became difficult, great congestion resulted, and when we entered the war and undertook to create, equip, and move an army of one or two million men overseas, to build many new naval vessels and an enormous merchant marine, our transportation system broke down. The rest of the story is current history vividly impressed upon the public mind by the distress that has been caused by the coal shortage, which is largely, if not entirely, due to defective transportation.

It is not to the discredit of those who have hitherto managed the American railways that this condition should have come to exist. They were each of them heads of parts of an unco ordinated system. They were charged with a dual responsibility. They had one obligation to the public and another to the owners of the properties they managed. To make money for their shareholders and provide the service that was demanded seemed to be impossible. It is, for instance, generally admitted that, taken in its entirety, the passenger traffic on our American railways does not pay. It must nevertheless be maintained, and when a railway president found it necessary to take off passenger trains or to impose a freight embargo he was literally between the devil and the deep sea. Had he controlled another and a parallel road, he could have sent the through freight by that route, but under the system that prevailed he had no such option. The Railroads War Board that was brought in to being some months ago tried to mobilize the country's traffic on some such plan, but was not successful because every car-load of freight taken from one road and given to another meant a decrease in the earnings of one property and an increase in the revenue of a competitor.

As each member of the War Board was pledged to make as much money as he could for the owners of his property, and as the railway presidents who were not on the Board had a similar obligation, it was not to be expected that they would entirely disregard it. It is, in fact, doubtful whether they had the legal or moral right to do so.

To meet this emergency the President stepped in. Acting under the authority given him by Congress in the Act approved August 29, 1916, whereby he "is empowered in time of war to take possession of and assume control of any system or systems of transportation," he has put the railways of the United States under control of Mr. McAdoo, who is directed to enter upon negotiations with the several companies looking to agreements for just and reasonable compensation for the use of their prop erties on the basis of an annual guaranteed compensation above accruing depreciation and the maintenance of their properties equal to their average net incomes for the three-year period ending June 30, 1917. The result of these negotiations is to be reported to the President for such action as may be appropriate and lawful.

The lines italicized are a quotation from the President's Mes sage slightly paraphrased for brevity. They propose, it will be noticed, a basis upon which owners of the roads may be com pensated or upon which their properties may be leased, but the President has no power to conclude a lease that shall involve the Government in any financial liability. In this regard the proposed arrangement is subject to the confirmation of Congress before it can be made effective. This phase of the matter is emphasized because there are some whe assume that the

President has absolute authority, and that the roads are already leased upon the terms that he has suggested. This is not the case. The question will no doubt be actively debated in Congress, and up to this writing all that has been done is to put the railways under the direction of Mr McAdoo.

Mr. Wilson's action has, however, been so universally ap proved and his plans seem so fair that their adoption may be taken for granted.

Briefly, he proposes that the United States Government shall lease the railways for an annual payment of $947,267,472. This sum is their average "net operating income," as reported to the Inter-State Commerce Commission for the three years ending June 30, 1917.

Here are the figures for each year

The apparent decrease of mileage from 257,544 in 1916 to 230.906 in 1917 is due to the fact that some 26,000 miles of switching and terminal tracks were eliminated from the returns of 1917 for the first time. This, however, changes only the mileage figures and not the earnings.

"Net operating income" is what is left after operating expenses and taxes have been deducted from gross earnings. It is out of net operating income that dividends and interest payments are made. The account for the year ended June 30, 1917,

was as follows:

Gross earnings...
Operating expenses...

Operating income..
Less taxes...

Net operating income....

$3,824,419,739

2,581,838,511

$1,242,581,228 172,830,714 $1,069,750,514

From the President's proclamation and the accompanying statement it is clear that he intends that the railway properties shall be maintained in as good repair and as complete equipment as when they were taken over, and that the Government will stand any increase in taxation that may be imposed during the time that it may operate the roads, as the "net operating income" is the balance left after deducting taxes, as well as the other costs of doing business, such as wages, fuel, upkeep, etc. Out of the $947,267,472 which the railways will receive they will first pay the interest on their outstanding bonds, and any balance then remaining may be distributed as dividends on their stocks, but such dividends may not, seemingly, exceed the " ular dividends hitherto declared." Any surplus remaining after the payment of such regular dividends will presumably pass into the treasuries of the various corporations.

reg

On June 30, 1915, the railways of the United States had an aggregate funded debt of $12,133,064,357, and outstanding stock amounting to $8,994,894,721-a total of $21,127,959,078. Some of these securities were, however, intercorporate issues. That is, they were held by one railway corporation to insure its control of another. Therefore they are not all in the hands of investors, and it is estimated that they represent an actual investment in road and equipment of about $17,000,000,000. The market value of the securities which have been issued against this investment has not as yet been computed. At the prices current just before the President's announcement, it was probably much less than $17,000,000,000, on which sum the Government would appear to have guaranteed the roads 5.57 per cent per annum. This return, considering the hazard of the business and the enterprise required in its establishment, is certainly not excessive.

This rate will not, however, apply pro rata as to either investment or mileage. The roads that have been well managed in the past will receive their average net earnings for the last three years, and those which have spent a larger percentage of their gross receipts in conducting the business will get their average excess of "gross over expenses. To this extent all the roads will be the heritors of their past, but the great advantage of the arrangement for the owners of the properties is that their return is guaranteed while the Government operates the roads, and for that period, at least, there is no uncertainty in regard to the income they will receive.

2. Will Government operation outlast the war and become permanent?

An answer to the first question depends upon the reply that can be made to the second.

The end of the war is uncertain. It may come to-morrow. It may not come for years. If, when peace is re-established, the railway properties are to be handed back to their owners and we are to revert to the conditions that obtained prior to the President's proclamation and for some years previously, then the earnings now guaranteed do not materially increase the attractiveness of railway investments, and they should be sold rather than bought at present prices.

If, on the other hand, Government operation is to be permanent, railway stocks and bonds will become in effect, though not in fact, the obligations of the United States Government, and pass at once into the category of those investments whose market value is determined entirely by the interest they pay.

This statement will explain why I believe that Government operation of the railways has come to stay. It is manifestly to the interest of the public and the investors. The one will be better served, the other will be better paid; and even if it were possible at the end of one or two years to unscramble the syn thesized railway system that is now in process of construction, it would not be politically practicable, for nearly every one would oppose the disintegration.

Inasmuch, therefore, as many railway bonds and stocks are still selling upon a basis that will provide every one but the very rich (whose incomes are heavily taxed) with a higher return than they could obtain from non-taxable Government bonds, I conclude that the former will gradually advance to somewhere near the parity of "Governments" as the President's plan is developed by Mr. McAdoo and approved by Congress.

But in making this concluding statement I would not be understood as encouraging speculation in railway stocks as it is generally understood, that is, buying them on margin or with borrowed money. Speculation of that sort is never justifiable except for those who make a business of it, and they need no advice.

I feel, nevertheless, that the intelligent support of values is a present duty for all those who have or can save money to invest, and for them the purchase of railway securities selected with discrimination will, I believe, be profitable unless the war is to continue indefinitely and bankrupt the United States as well as the rest of the world.

Such purchases should, however, be made only after consultation with an expert. We employ a lawyer to look after our legal affairs, and the average man, I fear, knows less of the intricacies of corporate finance than he does of law. There are some railway companies which will receive less under the President's plan than they would probably have earned as independently operated corporations. The intrinsic value of their securities will not be increased, although their market value may be stabilized. Others will get more than they could have reasonably expected to earn for themselves, but their right to the distribution of increased dividends will not be clear until Congress has acted. For these and a great many other reasons, great circumspection and the advice of a specialist are desirable in the selection of investments. There is, moreover, no need for haste. Nathan Rothschild is said to have remarked that “ one need never hurry to the Stock Exchange," and it would be fatuous to assume that the President with all his power can settle over night a problem that has defied the statesmanship of American public men for twenty years or more. I believe that Mr. Wilson has acted wisely and that Congress will support him, but it is not to be expected that he will be unopposed or that his opposers will fail to make themselves heard, at least for a time.