ment in railway enterprises, neither cost, value nor capitalization can have any controlling bearing on the reasonableness of any particular charge for a specific service by any particular railway.

Every railway traffic official strives to obtain such an adjustment of each charge for a specific service as will result in the total charges for all services rendered by his company yielding a maximum of revenue. When he comes to the fixing of any specific charge, however, he finds that his discretion is limited very narrowly by economic forces entirely beyond his control. He must consider the competition of other carriers. He must consider the competition of producers in localities off of the line of his road who are marketing the same commodity in the same markets as the producers on his road. He must consider the competition of markets which are seeking to draw commodities produced along his line away from the markets which it serves. He must consider the competition of similar commodities which may possibly be used in substitution for the one affected by the specific charge under consideration. These competitive forces, and the necessity for so adjusting the charge as to encourage the movement of traffic, effectively fix a level above which he is powerless to advance the charge. He cannot give practical consideration to either the cost of the railway, its value, or its capitalization. If it were otherwise, and if, as seems to be believed in some quarters, transportation charges could be so adjusted as to yield a certain return on railway capital, every railway would be profitable to its owners and such a thing as a bankrupt railway company would be unknown, unless caused by dishonesty or mismanagement.

Transportation charges being controlled so largely by the competitive forces to which I have referred and by the necessity of keeping each charge below the maximum of the value of the service in order to insure the movement of traffic, it follows that the intelligent railway manager, having in view the ultimate interests of the property intrusted to his care, will seek so to adjust each specific charge that it will be reasonable as measured by the specific service. If, through faulty judgment or for any other cause, he shall err in the fixing of any specific charge, his error may be corrected by the machinery which the law has provided for the correction of any charge that may be unreasonable as measured by this standard.

When the specific charges of a railway company have been so - adjusted that each is reasonable, as measured by the service performed, and when that company abstains from any undue discrimination in charges or service between individuals, localities, or commodities, if, by reason of the poor location of the railway, high cost of construction, faulty management, or any other cause, the revenues derived from all of its charges are so small as to yield no net return on its capitalization, that is the misfortune of its owners. On the other hand, if by reason of the favorable location of the road, low cost of construction, efficiency of management, or any other cause, the net return to the owners of the property is substantial, that is their good fortune. They are entitled to the use and enjoyment of the whole of such net returns in the same measure as the farmer whose land is fertile and is favorably located is entitled to the use and enjoyment of all that he can make out of his farm by the most efficient management.

While it was not a case involving railway rates, I believe that the views announced by Justice Brewer of the Supreme Court, in Cotting v. Kansas City Stock Yards Company, lay down, in clear and unmistakable language, the rule which should be applied to the determination of the reasonableness of any railway charge. Speaking of a person who has devoted his property to a public use, Justice Brewer said:

"The state's regulation of his charges is not to be measured by the aggregate of his profits, determined by the volume of business, but by the question whether any particular charge to an individual dealing with him is, considering the service rendered, an unreasonable exaction. In other words, if he has a thousand transactions a day and his charges in each are but a reasonable. compensation for the benefit received by the party dealing with him, such charges do not become unreasonable because by reason of the multitude the aggregate of his profits is large. The question is not how much he makes out of his volume of business, but whether in each particular transaction the charge is an unreasonable exaction for the services rendered. He has a right to do business. He has a right to charge for each separate service that which is reasonable compensation therefor, and the legislature may not deny him such reasonable compensation, and may not interfere simply because out of the multitude of his transactions the amount of his profits is large."

In this case Justice Brewer clearly announces the rule which I believe should be applied to all questions affecting the reasonableness of railway charges. He clearly lays down the principle that the only question involved in the matter there under discussion was whether any particular charge for a specific service was an unreasonable exaction as measured by that service. He indicates. that the value of the service to the person for whom it is rendered must be the principal factor in determining the reasonableness of the charge. This rule eliminates from consideration, except as I shall hereafter explain, all questions of capitalization and of the value or cost of the property used in performing the service by declaring explicitly that "the legislature may not deny him such reasonable compensation, and may not interfere simply because out of the multitude of his transactions the amount of his profits is large. The application of this rule to privately owned railways, which I believe to be proper and will ultimately be done, clearly denies to government the right to place any limitation on the amount that may be earned on railway capital. It would invite the people of the United States to invest their money in the great and honorable business of transportation with the assurance that the properties they create will have the equal protection of the laws and will be surrounded by the same safeguards as are thrown around property in other forms. It would encourage those engaged in this business to strive constantly to make their service more efficient by the adoption of improved appliances and methods with the assurance that they will be permitted to reap the profits of their enterprise and skill.

Further, in a time of advancing commodity prices and labor costs, the fact that the whole body of its transportation charges fails to yield a fair and reasonable return on the capital invested in a railway is presumptive evidence that there has been such an increase in the cost of the service and in the value of the service as to require a readjustment of charges upon a higher average level. This is but another way of saying that rates must be reasonable for, and under the conditions and circumstances of, the service. In the changed conditions growing out of higher prices for everything else a higher price for railway transportation becomes reasonable.

Under such conditions it is to the public interest that such a readjustment should take place, for the primary interest of the

public in the railways is in adequacy of facilities and efficiency of service, and these can be provided, in a country with a constantly increasing volume of traffic, only when the average return on capital invested in railways bears such a relation to the returns on investments in other forms of property as to insure a constant flow of new capital into railway enterprises. In other words, the fair maintenance of the just credit of the railways is a circumstance which should be taken into consideration in determining the reasonableness of rates, not only in the interest of the railways, but in the interest of the public. In this connection, I think we may properly refer to the relation of the governmental policy of Germany to the wonderful industrial development that has marked the recent history of that country and is still in progress. It is not without significance that we find the highest court in the German empire saying:

"When in a branch of industry the prices of a product fall too low, and the successful conduct of the industry is endangered or becomes impossible, the crisis which sets in is detrimental, not merely to individuals, but to society as a whole. It is in the interests of the community, therefore, that inordinately low prices should not exist in any industry for a long time."

If this is true as to the prices of the products of any industry, I believe it is equally true of the charges of a railway, for transportation is a part of production, and, in our modern civilization, the prosperity of every industry and of every individual is affected, directly or indirectly, by transportation.

RETURN ON CAPITAL INVESTED IN
MANUFACTURES, AGRICULTURE
AND RAILROADS

By L. E. JOHNSON,

President Norfolk & Western Railway Company.

FROM ADDRESS BEFORE THE VIRGINIA STATE FARMERS' INSTITUTE, ROANOKE, JANUARY 12, 1911.

The statistics showing the revenue derived from capital invested in manufactures, agriculture, and railroads in the United States are, for the fiscal year ended June 30, 1905, as follows: