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Railroads, however, are in some respects public concerns. (Cf. Fetter, The Principles of Economics, p. 534 seq.) Railroads have been granted by charter or by franchise the right of eminent domain. This right is not enjoyed by private manufacturers.

The primary object of railroads is to benefit the community, and it was for that purpose that they were given material aid by the various state governments. Money and land were bestowed on them. They were granted privileges by states, cities, and towns, in the competition that existed, to secure the advantages of railroads. Bonds, bonuses, exemptions from taxes were granted by counties, townships, and cities.

The national government followed the same policy. It granted large tracts of public lands to the railroads. In 1850 a great strip of land from north to south in Illinois was given by the United States government to Illinois for the Illinois Central Railroad. In fourteen states, over ten million acres of land were given to the railroads. Between 1862 and 1871, the United States government aided the Pacific railroads by a grant of twenty square miles of land for every mile of track, and by a loan of $50,000,000.

Consequences of these Two Facts. There are certain consequences flowing from the fact that the railroads are at once private and public concerns.

As private concerns, the managers and owners of railroads are to be encouraged by the government in the carrying on of the railroad industry, just as other private concerns are encouraged. Special restrictions, unjust and overbearing, crippling and destructive of enterprise should no more be allowed in

regard to railroads than in other private concerns. The capital invested is entitled to a certain just remuneration for its use and for the risks run by the capitalists. Arbitrary and extreme measures that tend to impede and stultify the efforts of the able managers of railroad business, and cut off the returns due to their ability and shrewdness, will work injury not only to the few millionaire owners of the roads but to the thousands of poor and moderately wealthy, whose money is invested in railroad stocks and bonds.

As public concerns, the railroads owe a duty to the public, which must be superior to the duty owed to private stockholders and owners. Railroads must be looked on from a social, rather than from an individual, point of view, and they should not subordinate public interests to private gain. They should observe the conditions on which in most cases the special charters and franchises and great privileges were granted them. These conditions by implication, if not explicitly, guaranteed the rights of the public.

The main difficulty in this matter consists in harmonizing the consequences that arise from the twofold character possessed by the railroads, as private and public concerns. The effort to do so is being made to-day in this country.

There are the two extremes. Some hold that railroad corporations are merely private businesses similar in their private character to all other private manufacturing and productive enterprises. They contend that, just as any governmental intervention looking towards regulation or management of private industries would be considered an act of unwarranted tyranny and injustice, so also any effort of the government to meddle with railroad business or management must for similar reasons be condemned.

Others hold that railroads are purely public utilities that owe their existence to the beneficence of governments, which have conceded to them vast areas of land, valuable privileges and franchises, the undoubted property and prerogatives of the public. As public utilities, they owe their first duty to the

public. Since, however, they have come to be controlled by unscrupulous owners and directors, who seek only the increase of dividends and ignore the rights of the public, there has arisen imperative need that the government determine the limits of their power, regulate their management and service, and put an end to recognized abuses.

These two extremes will always have their defenders, yet the general public opinion is gradually sifting the matter, and there is being formed a view that lies midway between the two extremes and would reconcile both, safeguarding at once the rights of the railroads and of the public.

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Power of Railroad Managers. The outcry against the railroads seems to have a certain foundation when one considers the power that resides in the hands of the railroad managers.

They have power to affect prices by the traffic rates imposed on all classes of commodities. They may build up or destroy towns and cities, and even whole territories, by changing routes or by regulating the service of their roads. They may crush wholly the business of private individuals who may have incurred their enmity. They may enter into and take part in commercial wars that exist between rival interests and may support the one and destroy the other.

They maintain, it is claimed, lobbies in the federal legislature and in all the state legislatures, with the purpose of taking note of the legislative measures brought forward by these bodies, and they may by bribery and intimidation procure the passage of bills favorable to their interests and prevent the passage of laws inimical to them.

By the establishment of construction companies, whose heads may be the directors of the roads, the directors may find means of enriching themselves. Stockholders' interests are held to be paramount. Dividends must be paid, no matter how the money is got. Often the service of the road suffers, the wages of the employees are reduced, and the prices of service raised, in order to secure the means of paying the dividends.

If the manager of one road is powerful, how much more so

will he be if he can acquire other roads! Hence consolidation is sought. To-day five interests own 50 per cent of the railroads of the United States.

Overcapitalization. — Overcapitalization may be resorted to, with the result that prices will be raised and must be paid by the users of the railroad service.

Overcapitalization exists when the capital is arbitrarily raised to a figure over and above the actual and real value of the possessions of the railroads. For example, the franchise rights, rolling stock, stations, terminals, roads, etc., of a railroad company may be fairly worth twenty millions of dollars, and the capital should be fixed at that figure. But if the capital is raised to forty millions of dollars without any increase of property, by giving to the stockholders additional shares for which no actual money is paid, we should have a case of overcapitalization.

The profits of the road, which rightfully should pay dividends on the twenty millions of actual capital, must now pay dividends also on the fictitious twenty millions of capital that have been arbitrarily added to the real capital. Thus the profits will be consumed, and, if not sufficient under ordinary circumstances, they must be increased by exorbitant prices charged for the traffic service of the road.

In a discussion carried on in Congress in 1906, it was asserted that American railroads were overcapitalized to an enormous extent, and that thence arose the exorbitant charges for traffic against which the shippers were protesting.

The assertion was vigorously contradicted by defenders of the railroads. The agitation, however, brought about the introduction of a clause in the railroad bill that would allow the Interstate Commerce Commission to investigate the condition of the various railroads and to ascertain the fair value of the property of every railroad engaged in interstate commerce. The object of the bill, it was declared, was to conserve and protect, not to injure, the efficiency of the roads. The bill passed the House (May, 1910), but this particular clause of the bill calling for the

physical valuation of railroads was rejected by the Senate (June 1, 1910). Finally, on March 1, 1913, a bill providing for the physical valuation by the Interstate Commerce Commission of railroads, express companies, telegraph and telephone companies, such valuation to serve as a basis for rate regulation, was signed by the President and became a law.

The task is a huge one and difficult to perform in such a way as to obtain a satisfactory basis of evidence for the determination of equitable rates. The investigation will require a detailed examination of all the various real properties owned by the roads, and when to these items there are added the intangible franchise rights and opportunities of the roads, it will be clear how difficult it must be to arrive at definite figures in the final calculation of the value of the roads.

Railroad Charges. One of the most difficult problems in the railroad business is the calculation of the charges or rates to be made for railroad service. The difficulty consists in finding a common basis for all the individual services rendered. In determining the price of commodities, the basis taken is the cost of production. The price is brought more or less near the cost of production. No such basis exists for rates and charges in the railroad business.

It has been claimed that the cost of service might be taken as a basis for charges. This would not prove practicable, for it would be almost impossible to estimate the cost of service. At times, the preponderance of the freight-carrying business may be from terminal to terminal over long distances through freight; at times, it may be local. The changing conditions would be subject to no law, and yet the cost of service would vary according to these varying conditions.

The railroad expenses which the charges have to meet are the operating expenses and the interest to be paid on the capital invested. The interest is estimated to amount generally to 40 or 50 per cent of the total expenses. The operating expenses are divided under various heads, part of which will vary according to the amount of traffic, an item which can never be

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