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 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.

E. THE RAILROADS IN WAR TIME

188. The Beginning of Federal Control22

Probably the most far-reaching action with reference to transportation taken by public authority in a generation or more has been the President's proclamation on December 26, directing the practical transfer of the railroads of the country to government control. The course thus determined upon follows the publication of the findings of the Interstate Commerce Commission on December 5, wherein it is set forth, in reply to the roads' plea for higher rates, that such higher rates would not materially assist their present condition. From the standpoint of the government three principal reasons are seen for the taking over of the lines:

1. The avoidance of obstructions to transportation due to the routing and division of freight, intended to give a fair share to each line in a given territory.

2. The abolition of preferences to given shippers and kinds of freight, and the centralization of control over priority in shipment.

3. The practical termination of rate controversies and labor discussions as between private individuals and the placing of the roads on a semi-military basis.

The railroads themselves have received the announcement of the President's action with much greater equanimity than could have been expected. They undoubtedly see in the step the following advantages:

1. Assurance of a moderate if not generous income in a period of great uncertainty and difficulty, during which they have been

22 Adapted from "Washington Notes," Journal of Political Economy, XXVI (1918), 91.

caught between the upper and nether millstones of fixed rates and advancing costs and wages.

Termination of the danger that threatened them from the continually maturing obligations which ordinarily they would have little trouble in refinancing, but which, under existing conditions, can scarcely be provided for on any basis.

3. Provision of means for betterment and improvement at a time when such provision can be had practically only through government orders designed to place such requirements ahead of those of private

concerns.

Due to recognition of these considerations, investors who had previously regarded the situation with the utmost pessimism have shown much greater confidence and enthusiasm with respect to railroad securities, as is indicated by a rise of from five to ten points in general values.

189. The Policy of the Railroad Administration23

BY WILLIAM G. MC ADOO

The policy of the United States Railroad Administration has been informed and shaped by a desire to accomplish the following purposes, which are named in what I conceive to be the order of their importance:

First, the winning of the war, which includes the prompt movement of the men and the material that the government requires. To this everything else must be subordinated.

Second, the service of the public, which is the purpose for which the railways were built and given the privileges accorded them. This implies the maintenance and improvement of the railroad properties so that adequate transportation facilities will be provided at the lowest cost, the object of the government being to furnish service rather than to make money.

Third, the promotion of a spirit of sympathy and a better understanding between the administration of the railways and their two million employees, as well as their one hundred million patrons, which latter class includes every individual in the nation, since transportation has become a prime and universal necessity of civilized existence. Fourth, the application of sound economies, including: The elimination of superfluous expenditures.

The payment of a fair and living wage for services rendered and

a just and prompt compensation for injuries received.

23 Adapted from "Doings of the United States Railroad Administration." Statement by the Director-General on June 15, 1918.

The purchase of material and equipment at the lowest prices consistent with a reasonable, but not an excessive, profit to the producer. The adoption of standardized equipment and the introduction of approved devices that will save life and labor.

The routing of freight and passenger traffic with due regard to the fact that a straight line is the shortest distance between two points. The intensive employment of all equipment and a careful record and scientific study of the results obtained, with a view to determining the comparative efficiency secured.

The development of this policy will, of course, require time. The task to which the Railroad Administration has addressed itself is an immense one. It is as yet too early to judge of the results obtained, but I believe that great progress has been made toward the goal of our ideals. All those who have had a share in this great work, including especially the members of my staff and the officers and employees of the railways, have shown intelligence, public spirit, loyalty, and enthusiasm in dealing with problems that have already been solved and in attacking those that still await solution.

With their continued co-operation I feel assured of a future in which the lessons of our accumulating experience will be effectively employed to humanize the science of railroading and negative the idea that corporations have no souls.

190. The Results of Federal Control24

BY J. MAURICE CLARK

I. Finance. The three most important financial acts of the new Railroad Administration in its first half-year were: (1) the allotment of nearly a billion dollars for betterments and extensions, (2) increases in wages which are expected to amount to $300,000,000 in 1918, and (3) sweeping increases in freight and passenger rates.

The total amount allowed for capital expenditures for 1918 was $937,961,318, while proposed outlays amounting to over a third more were eliminated in the final revision. Of this sum, only eighteen millions go to extensions, the rest being fairly evenly divided between the two heads of equipment, and additions and betterments to existing plant. The result should be to enable the roads to cut down their expense of conducting transportation, which have been unduly swollen by the past season's congestion of freight. The funds for these plant outlays come partly from the surpluses of the roads

24 Adapted from a selection in Clark, Hamilton and Moulton, Readings in the Economics of War, pp. 358-59. Copyright by the University of Chicago,

themselves and partly from the "revolving fund" of $500,000,000 appropriated by act of Congress.

The advances in wages were based on the report of a wage commission, with minor changes, and the largest percentage of increase goes to those receiving the lowest wages. The increases are calculated from the wages of December, 1915, and since that time the roads themselves have increased wages more, in some cases, than the McAdoo order increases them, especially in the higher grades of work, where the men are strongly organized. The Adamson eight-hour law has undoubtedly had the effect of raising wages. The advances were made retroactive, taking effect January 1, 1918, though the order was issued May 26. The wage question is of course always open to further adjustment.

The increase in rates and fares was made for the purpose of meeting extraordinary increases in operating expenses, estimated at from $830,000,000 to $860,000,000 for 1918, including the rise in wages. Freight rates were ordered increased by 25 per cent, except so far as specific increases were ordered for particular commodities, such as coal, coke, and iron ores. The same order levels state rates up to the interstate basis and cancels all export and import rates, thus putting an end to the practice of charging less for the same haul on goods that are going abroad or coming from abroad than on domestic freight. Passenger fares are increased to 3 cents per mile, or 31⁄2 cents in Pullmans (in addition to the Pullman charge), and commutation fares are raised 10 per cent. These new rates should yield enormous increases in operating revenues over the $3,824,419,739 earned by the roads in 1917. There is little danger that the roads will suffer serious loss by reason of any shrinkage of traffic resulting from the increased charges. Passenger fares may prove high enough to discourage unnecessary travel, but the administration appears quite ready to take advantage of this opportunity to reduce passenger schedules and free the roads for the more essential-and more profitable-movement of freight.

2. Operation. It was a black time when the federal administration took over the roads, so far as operation was concerned. The lines were congested to the point of breakdown, and blizzards and severe cold (which cuts down the ability of locomotives to make steam) furnished the finishing touches. The traffic became so thoroughly blocked that in the first month of federal control the eastern lines did not move enough freight to pay their operating expenses.

The priority system permitted the yards to fill up with more freight than could be hauled, and one of the first acts of the new administration was to put in its place a policy of embargoing traffic