amounts, either specifically or otherwise, before carrying the final cost of these so-called additions to, and betterments of, the road and equipment among the assets in the general balance sheet, and thereby avoid offsetting such payments by a rather obscure item on the liability side of the balance sheet as the accounting rules require.

An accounting system may be correct in theory, so far as operating expenses go, when it provides for operating, maintenance, replacement in kind, and depreciation charges, and requires all beyond these charges to be considered as an addition to or betterment of the property to be shown as a capital asset. Practically this is not the case, because it does not provide a reserve against shrinkages in tariff rates, the trend of which has always been in that direction; business depressions; increased taxes and other governmental charges; the greater cost of material and labor; or for contingencies based on sound business judgment and practices. Practical consideration of all these elements dictates that adequate charges to expenses for maintenance, operation, replacement and depreciation must be supplemented by the use of surplus income for such additions and betterments to the property, which do not materially increase the revenues of the railway, materially reduce its operating and maintenance expenses, or substantially add to the value of the property as a whole. Such expenditures should not enter into the balance sheet as part of the capital assets, but such part thereof as may be non-productive should be charged off to the total operating and maintenance expenses, before showing the net revenue from transportation operations; such charges to be clearly shown in the accounts so as not to impair the integrity of the operating statistics.

GOVERNMENTAL PURPOSES IN PROMULGATING UNIFORM ACCOUNTING.

The objects, so far as it is possible to ascertain them, sought to be accomplished by the Interstate Commerce Commission in promulgating a uniform statement of accounts were (1) to insure the statement of revenues and expenses of the railroads on a uniform and comprehensive basis, and by monthly reports, special reports and annual reports keep investors, railroad patrons, shippers, traders and the governmental authorities in possession of the facts; second, to exclude from operating expenses the cost of all additions and betterments and carry the same into the general balance sheet as part of the cost of the railway or its equipment and at the

same time insure the inclusion of all proper charges in operating expenses; third, to satisfy, amid the widespread discussion of rates and the general demand for a flat two-cent rate per mile for passenger traffic, the desire for a uniform system of accounting to compare and separate operating costs, the assumption being that after a reasonable return was paid upon the amount invested in the railroads, or upon a valuation thereof, railroads could be forced by legislative action to lower rates, and that the question of rates was inseparably connected with the cost of each service rendered; fourth, that the use of railroad bonds as security for the issue of emergency currency in time of stringency might be permitted, provided the Government were in possession of all of the facts regarding the railroads; fifth, to have the facts regarding railroad revenues and expenses stated in a uniform official method for use in the arbitration of labor disputes; sixth, so that the practice of governmental regulation through the agency of the Interstate Commerce Commission and uniform accounting directed by that Commission and enforced, if necessary, by periodical examinations by its agents and examiners, would lead to administrative supervision of the railroads as a business affecting the public interest, and for that reason should be controlled.

It is not clear to me just how that control can be justly and properly exercised without the responsibility attaching to ownership and without conflict with the powers as well as the constitutions and laws of the independent and sovereign states, under which the railroad corporations are created. To realize these objects would further require that, instead of following the constitutional method of reaching judicial conclusions respecting railroads through the courts of law, the Interstate Commerce Commission should be given judicial and inquisitorial, as well as administrative powers. Government by commission has not yet been sufficiently tested in America to enable one to speak with certainty of the results, nor have the Commissions yet reached the extent of the powers that will doubtless be conferred upon them, but whatever may be the final result-governmental control or administrative supervision, or whatever other term may be used-uniform accounting is here to stay, and the few creases that now exist in the structure will be ironed out in good time by the Interstate Commerce Commission and the railways, and no doubt the Commissions of the various states will concur in the final action.

THE A. B. C. OF RAILWAY CAPITALIZATION BY FRANK NAY,

Comptroller, Rock Island Lines.

FROM A PAPER CONTRIBUTED TO "THE GOVERNMENT ACCOUNTANT."

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"Most of the literature in regard to railroads," says Mr. Kirkman in his "Science of Railways, 'emanates from men unfamiliar with their affairs. It is, as a rule, severely critical. Men who have filled prominent railroad offices without being railroad men have also favored us. Their views are optimistic and afford food for demagogues only. Railway men have little leisure to devote to abstract thought. Moreover, the labor of correcting the misrepresentations of the class referred to is too Herculean a task to be undertaken lightly. Time alone is equal to this.

"What is needed in discussing railway questions of public concern is common honesty based on experience and knowledge of economic laws. Faithful portrayal is impossible otherwise."

Why the literature referred to by Mr. Kirkman should be so uniformly critical, it is difficult to understand. It is questionable if any other business enterprise now in existence has done so much for society as railroads. It is also questionable whether any other business enterprise has contributed so much to the enhancement of the value of property. Railroads have been constructed through waste portions of the earth where houses were few and far between, and land selling from one to five dollars per acre, and within a few years villages would spring up, farmers would move in, and the land would be selling from fifteen to twenty and twenty-five dollars per acre and upwards. If all the railroads in the United States should stop running for one week, widespread suffering would be the result.

Scarcely any man has wealth enough to pay for the construction of any considerable amount of railroad, and hence it is necessary that our Government authorize the corporations to be formed for the purpose of constructing, maintaining, and operating railroads. These corporations are formed under laws of the various states, and, with respect to rates on interstate traffic and detailed annual report requirements, are under the supervision of the Interstate Commerce Commission.

A certain amount of capital stock is authorized and a certain proportion is paid up in accordance with the laws of the state under which the corporation is formed. After the route is surveyed and the officers of the corporation are actually ready to begin the construction, the work of building the road is usually done by a contractor or a construction company which agrees to accept a certain number of shares of stock for each mile of road constructed and first mortgage bonds for certain amounts on each mile of road constructed, and these bonds and stock are usually issued by piece. meal, as fast as five or ten miles of road is built.

In this way the road costs the original corporation the par value of the stock and bonds. The construction company or contractor negotiates the sale of the bonds and stock in the open market, and if they sell at a premium, the profit is his, or if they sell at a discount, the loss is his, and must come out of the profit which he makes in the construction of the road.

Frequently railroads are built by railroad companies direct instead of employing a contractor, and then the money is usually advanced, and from time to time, as it is needed on certificates of the engineer in charge of the work and of the accounting officer showing the work done and the money expended, bonds are issued by the trustees of the mortgage and delivered to the railroad, which sells them in the open market to reimburse it for the money advanced for the construction of the road.

After a road has begun to be operated it is fashionable to consider it as completed; while, as a matter of fact, it is never completed. New sidetracks, new buildings, new machinery, new appliances, new bridges, interlocking plants, and all sorts of improvements are being made constantly from month to month, and hence the actual cost is not at all represented by the expenditure which has been made up to the time when the road is put into operation. For example, a certain railroad which was incorporated about fiftyfive years ago, is spending about three and a half million dollars per annum for additions, improvements, and betterments to the property. The reasons for such expenditures are to increase and improve existing facilities, provide better service, and to generally improve the means and appliances for handling business.

The par value of the bonds and stock issued and given to contractors, construction companies, or to the railroads which furnish the money to cover the cost of construction, constitute what is known as the capitalization of the road. To this is then added the par value of the bonds and stock that are subsequently issued for additions, improvements and betterments to the property. Frequently separate bonds are issued to cover purchase of equipment. Sometimes such bonds are called equipment bonds and at other times they are called car trust notes or certificates. In either case they are a first lien on the equipment until they are paid off.

Under the head of "Stock" there are two classes which are well known in the United States, namely, "common stock" and "preferred stock." Sometimes the voting power is in the common stock, and in such cases the preferred stock is virtually a mortgage on the property. In other cases the voting power is in both common and preferred stock, and usually in such cases the only difference between preferred stock and common stock is that the holders of preferred stock must receive a certain dividend before anything is paid on the common stock. As for example, 5 per cent preferred stock would mean that the holders of such preferred stock must receive 5 per cent per annum in dividends before anything is paid on the common stock. After 5 per cent is paid on the preferred stock the remaining income is applicable to the common stock, and if it is sufficient a dividend of 3 per cent may be declared by the board of directors on the common stock, or if the remaining income after paying 5 per cent on the preferred is sufficient to pay 7 per cent on the common stock, the directors may declare a dividend of 7 per cent on the common stock, and in that case the dividend on the common stock would be greater than the dividend on preferred stock.

The preferred stock may be either cumulative or non-cumulative. If cumulative it would mean that if for one year the income was sufficient to only pay 3 per cent on the 5 per cent preferred stock; the following year 7 per cent might be paid on the preferred stock if the income was sufficient, thus paying 5 per cent for the current year and the deficit of 2 per cent for the preceding year. If preferred stock is non-cumulative each year stands on its own basis, and if one year the income is not sufficient to pay the full 5 per cent no more than 5 per cent could be paid in any subsequent year.