property to which the company has no title should be included, and certain other property to which the company has title should be excluded. It may well be that the actual investment on the part of the company that is entitled to consideration, regardless of mere title or possession. Take the case of grade separations, for example, should any difference be made between expenditures for a bridge over the right of way belonging to the railroad and the raised approaches on the public highway. If the company has had to stand the whole cost, it should have a return on all; if it has had to pay only 50%, should it have a return on more? At all events, one can no longer feel safe in maintaining that all property devoted to public service must always be protected, without stopping to reason why. The truth of the matter, whether we like it or not, is that such property is held at the disposal of the public on such terms as the public thinks fair. Topic C. Outstanding Capitalization § 262. Capitalization outstanding. If stock is issued for no real consideration, or for more than the actual consideration received, it clearly cannot be taken as any indication of the capital. This was vigorously said by Mr. Justice Harlan in the leading case of Smyth v. Ames: 66 "It cannot, therefore, be admitted that a railroad corporation maintaining a highway under the authority of the State may fix its rates with a view solely to its own interests, and ignore the rights of the public. The rights of the public would be ignored if rates for the transportation of persons or property on a railroad are exacted without reference to the fair value of the property used for the public or the fair value of the services rendered, but in order simply that the corporation may meet operating expenses, pay the interest on its 66 Smyth v. Ames, 169 U. S. 466, 42 L. ed. 819, 18 Sup. Ct. 418. And see particularly the language of Mr. Justice Moody in Knoxville v. Knoxville Water Co., 212 U. S. 1, 53 L. ed. 371, 29 Sup. Ct. 148. obligations, and declare a dividend to stockholders. If a railroad corporation has bonded its property for an amount that exceeds its fair value, or if its capitalization is largely fictitious, it may not impose upon the public the burden of such increased rates as may be required for the purpose of realizing profits upon such excessive valuation or fictitious capitalization; and the apparent value of the property and franchises used by the corporation, as represented by its stocks, bonds, and obligations, is not alone to be considered when determining the rates that may be reasonably charged." 67 § 263. Nominal capitalization. Little if any weight, therefore, is to be attached to the nominal capitalization of the company, even although these shares may now be in the hands of innocent holders. For these holders purchased with imputed knowledge of the public service law by which the State may reduce the rates without unconstitutionality to a point where they will yield no more than a fair return upon actual values. The rule that nominal capitalization is inconclusive in a question as to the validity of a reduction of rates is put strongly in another case 68 before the Commission, where Commissioner Prouty said: "The mere capital account of a railroad does not furnish a conclusive basis by which to adjust the amount of its earnings, for the reason, among others, that the capitalization of the railroads of the United States does not represent the actual amount of money invested in the properties, nor the actual value of the properties themselves from any standpoint. There is a continual temptation to increase the liabilities of a railroad company without any corresponding increase in actual value. Whatever of wastefulness or mismanagement there 67 There may, therefore, be values which are not represented by capitalization. In re Advances in Rates, Western Case, 20 I. C. C. 307. Cost of construction as measure of rate. National Lumber Exporters' Asso. v. St. L., I. M. & S. Ry., 28 I. C. C. 215. 68 Grain Shippers' Assn. v. Illinois C. Ry., 8 I. C. C. Rep. 158. property to which the company has no title should be included, and certain other property to which the company has title should be excluded. It may well be that the actual investment on the part of the company that is entitled to consideration, regardless of mere title or possession. Take the case of grade separations, for example, should any difference be made between expenditures for a bridge over the right of way belonging to the railroad and the raised approaches on the public highway. If the company has had to stand the whole cost, it should have a return on all; if it has had to pay only 50%, should it have a return on more? At all events, one can no longer feel safe in maintaining that all property devoted to public service must always be protected, without stopping to reason why. The truth of the matter, whether we like it or not, is that such property is held at the disposal of the public on such terms as the public thinks fair. Topic C. Outstanding Capitalization § 262. Capitalization outstanding. If stock is issued for no real consideration, or for more than the actual consideration received, it clearly cannot be taken as any indication of the capital. This was vigorously said by Mr. Justice Harlan in the leading case of Smyth v. Ames: 66 "It cannot, therefore, be admitted that a railroad corporation maintaining a highway under the authority of the State may fix its rates with a view solely to its own interests, and ignore the rights of the public. The rights of the public would be ignored if rates for the transportation of persons or property on a railroad are exacted without reference to the fair value of the property used for the public or the fair value of the services rendered, but in order simply that the corporation may meet operating expenses, pay the interest on its 66 Smyth v. Ames, 169 U. S. 466, 42 L. ed. 819, 18 Sup. Ct. 418. And see particularly the language of Mr. Justice Moody in Knoxville v. Knoxville Water Co., 212 U. S. 1, 53 L. ed. 371, 29 Sup. Ct. 148. obligations, and declare a dividend to stockholders. If a railroad corporation has bonded its property for an amount that exceeds its fair value, or if its capitalization is largely fictitious, it may not impose upon the public the burden of such increased rates as may be required for the purpose of realizing profits upon such excessive valuation or fictitious capitalization; and the apparent value of the property and franchises used by the corporation, as represented by its stocks, bonds, and obligations, is not alone to be considered when determining the rates that may be reasonably charged." 67 § 263. Nominal capitalization. Little if any weight, therefore, is to be attached to the nominal capitalization of the company, even although these shares may now be in the hands of innocent holders. For these holders purchased with imputed knowledge of the public service law by which the State may reduce the rates without unconstitutionality to a point where they will yield no more than a fair return upon actual values. The rule that nominal capitalization is inconclusive in a question as to the validity of a reduction of rates is put strongly in another case 68 before the Commission, where Commissioner Prouty said: "The mere capital account of a railroad does not furnish a conclusive basis by which to adjust the amount of its earnings, for the reason, among others, that the capitalization of the railroads of the United States does not represent the actual amount of money invested in the properties, nor the actual value of the properties themselves from any standpoint. There is a continual temptation to increase the liabilities of a railroad company without any corresponding increase in actual value. Whatever of wastefulness or mismanagement there 67 There may, therefore, be values which are not represented by capitalization. In re Advances in Rates, Western Case, 20 I. C. C. 307. Cost of construction as measure of rate. National Lumber Exporters' Asso. v. St. L., I. M. & S. Ry., 28 I. C. C. 215. 68 Grain Shippers' Assn. v. Illinois C. Ry., 8 I. C. C. Rep. 158. may have been in the construction or antecedent history of the railroad, whatever of jobbery or of thievery, even, is apt to find its way into the capital account until it is eliminated by some process of reorganization. In the reorganization itself, the capitalization has no relation ordinarily to the actual value of the property, but is made to depend upon the convenience or even the whim of those who manipulate the reorganization scheme. To make the capital account of our railroads the measure of their legitimate earnings would place, as a rule, the corporation which has been honestly managed from the outset under enormous disadvantages." 69 § 264. Stock issues often deceptive. Those who examine into these questions even in the most superficial manner are soon convinced of one thing, and that is that the outstanding stock issues do not necessarily constitute a proper basis for the capital charge. This contention was well disposed of by the Commission in a proceeding respecting certain rates of the Southern Railway; 70 a part of his opinion follows: "The Southern Railway shows that in the year 1899 it earned nothing upon its $120,000,000 of common stock, and urges that any order of this Commission which depletes the revenues of that company deprives the owners of this stock of their property without due process of law. This common stock was issued as a part of a reorganization scheme under which the Southern Railway Company came into existence. It does not appear that the persons to whom this stock was originally issued ever paid one dollar in actual value for it. It simply appears that the stock is outstanding. This is not enough. Something more is needed when a claim of this kind is set up than the mere fact of the existence and amount of capitalization. It does 69 Capitalization cannot be accepted as representing value. In re Advances in Rates, Western Case, 20 I. C. C. 307. 70 Danville v. Southern Ry., 8 I. C. C. Rep. 409. |