come, the general business of the common carrier inevitably falls off. Even if it should raise its rates very considerably, it would be difficult for it to maintain its regular dividends; and it is doubtful whether it ought to do so, and increase thereby the general distress. This may be pressed too far, and perhaps the point is overstated by those who insist that a railroad cannot say: When times are prosperous and dividends large, we win, when times are hard and business dull, the public must lose.94 The business of the carrier cannot but be affected by the state of commerce in the country at large. It is, perhaps, true that, with good times and rising prices, the value of the property of a public service company increases with other values; and consequently it may justify higher earnings. And, if the carrier must suffer to a certain extent with others in bad times, he ought be allowed to recoup himself to some extent in prosperous times. Promoters and proprietors of roads have looked to the future, as they had a right to do, and as they were induced to do by the solicitation of the various communities through which they run, and by various encouragements offered by the State.95

§ 323. More than current rates of interest not secured.

It is a disputed question whether more than the current rate of interest upon enterprises of similar character can be secured to bondholders. In the case of Steenerson v. Great Northern Railway Company 96 the court answered the question in the negative, as this further extract from

94 See Mathews v. Board of Corp. Comm., 106 Fed. 7.

As the rates of defendants ought not to be fixed altogether with respect to the recent years of prosperity, so neither should they be established upon the basis of this year of adverse conditions. City of Spokane v. N. P. Ry., 15 I. C. C. 376.

95 See Metropolitan T. Co. v.

Houston & T. C. Ry., 90 Fed. 683.

Because the revenues of a carrier are high during a period of general prosperity, rates should not be reduced; the periods when it operated almost at a loss should be considered. Florida Fruit & Vegetable Ass'n v. A. C. L. R. R., 17 I. C. C. 552. 96 69 Minn. 353, 72 N. W. 713.

the radical opinion of Mr. Justice Canty will show: "A railroad company is not entitled to a greater income during the acute stages of a panic because rates of interest are temporarily higher during such times. Permanent investments do not, as a general rule, bring higher rates of income during such times. It would rather seem from these quotations that 4 1-2 per cent per annum was in 1894 a very reasonable rate of interest on such railroad bonds, and that 6 and 7 per cent per annum was grossly excessive and unreasonable. If the railway company has made what turns out to be a bad bargain by issuing its bonds for 6 and 7 per cent interest per annum, that should be its misfortune, and not the misfortune of the public. As before stated, neither the State nor the public has either directly or indirectly guaranteed that rates of interest and rates of income would not fall, to the detriment of the railway company." 97

§ 324. How interest payable is considered.

It is very common, and not unnatural, to speak of interest payable upon bonded indebtedness as fixed charge, and therefore one of the items in making up the total of annual expenditures. Thus Mr. Justice Brewer speaks of it in the well-known case of Chicago and Northwestern Railway Company v. Dey: 98 "The fixed charges are the interest on the bonds. This must be paid, for otherwise foreclosure would follow, and the interest of the mortgagor swept out of existence. The property of the stockholders cannot be destroyed any more than the property of the bondholders. Each has a fixed and vested interest, which cannot be taken away. I know that often the stockholder and the bondholder are regarded and spoken of as having but a single interest; but the law recognizes a clear dis

97 When bond issues do not represent actual investment in the enterprise, interest upon such bonds is not protected. Smyth v. Ames, 169 U. S. 466, 42 L. ed. 819, 18 Sup. Ct. 418.

98 35 Fed. 866, 1 L. R. A. 744. Cited with approval in Southern Pacific Co. v. Railroad Commrs., 78 Fed. 236.

tinction. A mortgage on a railroad creates the same rights in mortgagor and mortgagee as a mortgage on my homestead. The legislature cannot destroy my property in my homestead simply because it is mortgaged, neither can it destroy the stockholders' property because the railroad is mortgaged. It cannot interfere with a contract between the company mortgagor and the mortgagee, or reduce the stipulated rate of interest; and so, unless that stipulated interest is paid, foreclosure of course follows, and the mortgagors' rights, the property of the stockholders, are swept away." But as a matter of fact, the real situation is that a public service company must produce a certain amount of net income, discovered by deducting the gross annual expenses from the gross income; and that net income must be enough to pay all security holders their rate of return, to the bondholder his stipulated interest, to the stockholder his fair dividend. And according to modern constitutional law, both have the same protection, and both are subject to the same mischances.99

§ 325. Profits divided not operating expense.

Profits must be paid, if at all, out of net income, and are in no sense operating expenses. "It seems to us very clear that in estimating the operating expenses of a railway stock dividends cannot be included. They are no part of the cost of operation. Nor should they be included, under any of the authorities, when ascertaining the reasonableness of a rate tariff. This is in no manner denying the defendant's right to earn sufficient to pay its operating expenses, interest upon its bona fide bonded indebtedness, and a proper dividend upon its lawfully issued stock shares or value of the investment." 1 Upon appeal to the Supreme Court of the United States this language of the Minnesota court was affirmed: "In prov

"Smyth v. Ames, 169 U. S. 466, 42 L. ed. 819, 18 Sup. Ct. 418.

See Steenerson v. Gt. Northern Ry., 69 Minn. 353, 72 N. W. 713.

1 State ex. rel. v. Minneapolis & St. L. R. R. Co., 80 Minn. 191, 83 N. W. 60.

ing that the cost of transporting all merchandise exceeded the rate fixed by the commission on this coal, the interest upon bonds and dividends upon stock were included in operating expenses. The propriety of the first is at least doubtful, the impropriety of the second is plain. We do not intend, however, to intimate that the road is not entitled to something more than operating expenses.

§ 326. Consolidation of interest and dividends.

In last analysis it will be agreed the company serving the public is entitled to a fair return upon its proper capital, otherwise, as it is held, the owners of that property are virtually being deprived of it without due process of law. This would seem to mean that they are entitled to what rate of profit is considered fair to all concerned, having in mind the character of the business upon that amount of the property devoted to public use that is represented by a valuation which is thought proper under all the circumstances. That is, upon property valued at, say, $10,000,000, the owners are entitled to earn a profit, if they can get it, of say, $800,000 per annum. If it is a corporation which has issued stock to the whole amount, it could properly pay 8 per cent dividends. But suppose it has outstanding $5,000,000, 6 per cent bonds, can it not pay 10 per cent dividends on its remaining $5,000,000, stock? It is submitted that it would not seem to be any concern of the State how it distributes the $800,000. At all events, the Commission has pointed out that in determining what will be reasonable rates for the future, it may properly consider that, under the rates in effect, a large surplus has been accumulated in the past; but it should not fix rates unduly low for the purpose of distributing that surplus to the public. An advance is not necessarily unreasonable, even though for years a carrier

2 Minneapolis & S. L. R. R. Co. v. Minnesota, 186 U. S. 257, 46 L. ed. 1151, 22 Sup. Ct. 900.

3

3 Spokane v. N. R. Ry., 15 I. C. C.

376.

has regularly paid interest on the total bonded debt, and recently paid dividends on its stock."

$327. Reductions ruinous only to certain companies.

A difficult question arises where, although there has been a drastic reduction of rates, certain companies are in so strong a position that their earnings are not cut below the minimum of fair profit, while with other companies the reductions will not only wipe out all profits whatsoever, but compel them to conduct their business at a loss. Whenever this is brought to the attention of the court, their attitude must be that they are dealing only with the case in hand, their sole function being to determine in the particular case before them whether this legislation will virtually confiscate the business property of this complainant. The consequence follows inevitably that, while the rates imposed may be found unreasonable, and therefore not enforceable as to some of the roads in the State, this does not necessarily render them unreasonable and unenforceable as to other roads doing business in the State." In considering the reasonableness of a whole schedule of rates the Commission may well at the outset make inquiry as to the general financial condition of the defendant railroad." But it is almost axiomatic that rates cannot be made so as to give high earnings to poorly placed and indifferently operated roads without making the charges extortionate.

§ 328. Creating a fund for payment of uniform dividends. A further suggestion has been made, which deserves consideration, that a railroad company, or any public service company, ought to be allowed to set aside in prosSt. Louis & S. F. R. R. v. Hadley, 168 Fed. 317.

Cady Lumber Co. v. M. P. Ry., 19 I. C. C. 460.

6

7 R. R. Commission of Nevada v. N. C. O. Ry., 22 I. C. C. 205.

8 Advances on Rates, Western Case, 20 I. C. C. 307.