the federal government that in working out the provisions of the twentieth section of the act the suggestions of the accounting officials of the various railroads of the country would be given due consideration, it was deemed advisable to designate a committee for the purpose of conferring not only with the representatives of the Interstate Commerce Commission, but to deal generally with state legislation as far as it directly affected railroad accounting features. For some time prior to the passage of the act there had been under consideration the question of appointing a committee to deal with so-called higher branches of accounting. In order that the interests of all the railroads should be protected, a committee of twenty-five was appointed, representing railroads from all sections of the country, thus bringing into existence your Committee on Corporate, Fiscal and General Accounts, and when assistance was solicited of the Association in connection with the twentieth section of the Hepburn Act, this was the committee asked to undertake the task. Only a few days elapsed when a call was issued for a meeting of the special committee, and pursuant to that call the first meeting was held at the Hotel Astor, New York City, on August 16, 1906, at which time the committee organized, was addressed by Professor Henry C. Adams, who had been designated by the Interstate Commerce Commission to consider for the commission the matter of accounts, records and memoranda to be kept by carriers subject to the provisions of the Interstate Commerce Act, and appointed a sub-committee to promptly begin the formulation of disbursement

accounts.

It is, of course, understood by all that the work which has been done by any of your committees in connection with the formulation of a new system of accounts has been merely in an advisory capacity with Professor Adams and a number of the most important innovations in our new system of accounts were originated by him.

The first work of your committee has in practically all cases been undertaken by a sub-committee, which during the first year of its work consisted of seven members, but during the last year has been composed of nine members. The work of the sub-committee has been unquestionably very burdensome and has required a greater portion of the time of the members of that committee than they could conveniently spare from the duties of the cor

porations which they represented. The various matters proposed by this sub-committee were submitted to the committee of twentyfive and the final work of that committee, so far as it has gone up to the present time, has been before you.

If there is a thought in the mind of any member of this Association that it is an easy matter to adopt a "uniform system of accounts" for railroad companies and have such uniform system exactly meet the views of every one, I am certain such member is not on the committee named nor has he ever attended one of their meetings. Members of this Association know how frequently a comparatively unimportant question in relation to the proper account to which an expenditure should be charged has caused a long discussion in the Association and so it has constantly been at the meetings of your committee, particularly so when principles which have stood for many years have been changed; and let me here state, that while there have been many instances in which Professor Adams has changed his views to conform to the suggestions of your committee, there have also been many cases in which, while the members of your committee have been practically agreed, after much debate, on certain wording or definitions, their recommendations have been either completely changed or materially altered to meet the views of Professor Adams. In a great majority of such instances Professor Adams, while expressing his opinion, has said-in fact, his practically uniform statement has been-that while he was willing to express his views, he did not desire to influence the committee in the matter.

The first work undertaken was the classification of operating expenses. To the end that a more clear-cut and accurate statement of the cost of conducting business as a common carrier could be shown, it was thought that all outside interests, such as stock yards, elevators, boat lines and other kindred operations, should be stated separately and apart from the operations of the railroad, so that in one clear statement there would be shown the cost of maintaining and operating the railroad as used for the transportation of freight and passengers. The Third Revised Issue of the Classification of Operating Expenses, as promulgated by the commission, was intended to cover the railroad operations, and, while materially changed from our former classification of disbursement accounts, is without doubt a great improvement in

many respects. The work is not perfect, but when it is considered that it was begun and ended within a year, it occurs to me that it reflects much credit on the sub-committee, which had first to make the suggestions to the committee of twenty-five; and particularly should the chairman of the committee, Mr. Plant, and the secretary, Mr. Phillips, receive praise for the vast amount of labor each was called upon to perform in connection with the reports of the work of the committee.

A matter which should not be lost sight of in connection with the classification is that it was designed to have as few compulsory primary accounts as would answer the purpose of furnishing the Interstate Commerce Commission the information they require, in addition to stating the various accounts desired by the representatives of railroads from different sections of the country, and that all carriers would be at liberty to keep any temporary or experimental accounts they desired. In consequence of this any of the accounts ordered to be used may be subdivided to suit the varying wishes of the officers of any carrier.

A particular feature which has been the subject of more or less controversy during the past year has been the question of depreciation on equipment and concerning this innovation there. has probably been more said and written than in relation to any other new departure. I believe that more or less of the objection to the item of depreciation on equipment arises from the fact that for years many of the ablest railroad executives in the country have gone ahead in a most careful way, taking care of their equipment in exactly the same way that any prudent business man would take care of his manufacturing establishment; that is, during times of prosperity and unusual business activity he would, from the profits of such a business period, renew his plant and machinery which might have been impaired during times of depression but which he was unable during such periods to properly maintain, and make such improvements that during future times of depression, which are sure to come, he would be in position to weather the storm by being able to continue his operations at a low cost by reason of the expenditures made during times of prosperity. From many standpoints it would seem that a common carrier should be permitted to adopt the same business rules as a manufacturer and that during unusually prosperous times a company should be permitted to purchase

additional new equipment to equalize that which had been worn out in times during which the company could not afford to make replacement and could further increase its efficiency in order to fortify itself against the periodical times of depression.

To depreciate is to lessen the value, and depreciation is the act of lessening or bringing down the price or value. The question as to whether or not there should be included in the operating expenses of a carrier an estimated amount which will lessen or bring down the value of its equipment is a principle, and whether the government in its supervisory capacity has the legal power to compel carriers to include in their operating expenses such amounts as, in the opinion of the respective carriers, will equal the lowering in value of its equipment due to wear and tear through constant use and the fact that even though properly maintained so far as repairs are concerned, it is yearly approaching the time when, for other reasons, it will no longer be considered serviceable, is a question which has received much attention by the legal departments of various carriers and may in the end be determined by the courts. That there is a certain depreciation of the equipment of a railroad seems indisputable, and, from a strictly accounting standpoint, if extra costs of operation for each fiscal year are to stand by themselves, it would appear that some item of depreciation should be taken into account each year and that carriers should charge to each year the depreciation which to the best of their respective beliefs occurs during that year and should not be permitted to take care in the operating expenses of a prosperous year of items they are unable to arrange for in years of business stagnation.

It would, therefore, seem that the interests of the owners and managers of a property are in direct conflict with the wishes of the government in respect to depreciation, and from the standpoint of each they are both correct, as one desires prudent, businesslike management and the other wishes to know the actual cost of operation year by year, neither increased nor lowered by a careful management, presumably for the purpose of regulating rates through the medium of a knowledge of actual cost.

The principle of including in operating expenses an amount for depreciation is an innovation which has come at a time of severe business depression and when railroad companies throughout the country generally were making vast expenditures for the

improvement of their properties, in consequence of which they needed many millions of dollars of new capital invested in them. In addition to the requirements of railroads, the commercial expansion had been such that the money ordinarily to be had for the use of railroads for bettering their properties and for the conduct of the general business of the country was not to be readily had and investors became unusually discriminating. The result was that under such conditions the new item called depreciation, which was in many cases a wholly additional amount, became alarming, particularly since business has fallen off and it has been necessary to curtail the expense of operation in every possible respect. Is it any wonder, then, that under the circumstances this particular item as been severely criticised?

I do not believe that if the business conditions had remained as prosperous during the past year as they had been for a few years previous, that the question of including in operating expenses an item for depreciation would have received the attention it has, provided the government makes no attempt to order that the account created by writing up depreciation shall be set aside in funds to be used only for specific purposes.

Is it not idle to argue that there is no such thing as depreciation? As, under government supervision, as at present ordered, latitude is given to the various carriers that they shall state, according to their best information, their own percentage of depreciation, it would seem eminently fair that carriers include in their accounts such rate of depreciation as is considered proper. It would appear to me that the latitude allowed in connection with the rate of depreciation is one of its strongest arguments, as it is the understanding that carriers may be permitted to make use of their experience in concluding as to the rate and it should be proper in times when a large proportion of equipment is idle for extended periods, such as we are now encountering, to reduce the rate of depreciation to a lower figure than is used in times of great business activity. This plan admits of a certain amount of flexibility in accounts, and if the government insists on a correct statement of costs of operation each year, that is about as much elasticity as can properly be accorded this important item.

As against including in operating expenses an amount for depreciation, the opposite of the charge being "Replacement Account," the argument has been advanced that a company might