Of course, the Commission's physical valuation is aimed at just this result, to determine just how inflated the book values of the carriers are. It has worked seven years at it and will require at least two more years to complete its enormous task. Certainly it cannot now do overnight what bids fair to require ten years in the doing simply by virtue of the enactment of a subsequent statute. Presumably the Commission has proceeded as expeditiously as is humanly possible with its physical valuation.

If a quick result regardless of the public weal were intended it would have been simple to accomplish by providing that the value should be based on the aggregate of the property investment accounts. Congress, of course, could not be persuaded to go so far and in protecting the public interest has interpolated provisions which seem to render the section impossible of execution, at least, until the physical valuation under Section 19-a is accomplished.

There is another phase of these provisions which should not be passed without consideration. The percentage that is to yield the fair return on the investment is to be predicated on the honest, efficient and economical management of every road. How can the Commission predicate any return on the honest, efficient and economical management of our railroads except to examine the aggregate of their financial records in the past when the Commission knows and the people know that all of our railroads were not honestly, efficiently and economically managed? How is the Commission to arrive at a deduction that will take care of the increased earnings that would have accrued had all of the roads been honestly, efficiently and economically managed? Of course, there is no way to arrive at such an approximation, and when so analyzed this provision seems ill-conceived.

If anyone is inclined to take exception to the statement that all of our railroads have not been honestly and economically managed in the past, let him examine the records in the investigations by the Commission into the financial affairs of the New York, New Haven & Hartford and into the Chicago, Rock Island & Pacific. And then let him estimate for himself how much other evidence of dishonesty and waste would be developed if a similar investigation were conducted into the affairs of every road in the land.

Human nature cannot be remade by legislation. Legislation can only curb the wrong tendencies or hold out inducements for the development of the good tendencies of human nature, it can go no further. Dishonesty, inefficiency and wastefulness are among the wrong tendencies of human nature. Any legislation which, in effect, encourages these tendencies is itself wrong in policy.

The declared purpose of this section is to overcome the results which

have accrued in the past from the operation of our roads as a whole, including the poorly managed as well as the efficiently managed ones, and guarantee a result warranted only by a uniformly honest, efficient and economical operation, by rates which shall be made high enough so that the deficits of the past will be no more. There can be but one result from legislation designed to accomplish the guaranty against deficits by increases. in rates, and that is the removal of all incentive for efficiency. Efficiency is born alone from a fear of failure. If legislation attempts to remove the possibility of failure in any degree, efficiency in direct ratio ceases to exist. Or, differently stated, such legislation encourages inefficiency and waste. and is itself wrong in principle.

If all the railroads had been honestly built and efficiently and economically managed, there would have been no railroad failures. Not one single railroad failure has ever been traced to low freight rates applied by regulating bodies. This is true because any such rates would, on appeal to the courts, have been declared confiscatory and beyond the constitutional powers of the regulating body. The failures have been the result of that competition which produces efficiency, honesty and economical management. In that struggle, as it has been in every other line of industry, the inefficient have failed. Why should the railroad blunders be condoned any more than the failures in other lines of business?

It would seem that the unwritten purpose running all through these provisions of Section 15-a is an intention to subsidize the railroads through the medium of freight rates to be initiated by the Commission that shall be higher than would otherwise be necessary or reasonable for the service performed. If there is any doubt that this is the intended effect, that doubt is resolved by paragraph 5, which frankly provides:

Inasmuch as it is impossible . . . to establish uniform rates upon competitive traffic which will adequately sustain all the carriers which are engaged in such traffic . . . without enabling some of such carriers to receive a net railway operating income substantially and unreasonably in excess of a fair return upon the value of their railway property held for and used in the service of transportation, it is hereby declared that any carrier which receives such an income so in excess of a fair return shall hold such part of the excess, as hereinafter prescribed, as trustee for, and shall pay it to the United States.

Subsidies are sums paid by a government to individuals and private corporations engaged in some quasi governmental operation, to make up any deficits incurred in such operations, so that same, in spite of the actual operating deficits, will be sufficiently profitable to keep the individuals or corporations interested in the operation. The sums paid as subsidies are paid out of the governmental treasury and fall as an equal burden on every taxpayer; to be warranted, the operation which is subsidized must be such that the public has an interest in its maintenance.

Whether or not the railroads should be subsidized is a matter outside the scope of this analysis, because Congress has already legislated affirmatively on the subject when it made this section a part of the act. The means which Congress has employed to accomplish this subsidy must, however, be examined to determine whether the burden is borne equally. If not, suggestions as to how the same end might be accomplished by other means which would distribute the burden of this subsidy equally among the taxpayers, would seem to be in order. With this thought as a guide the remaining provisions of this section will be discussed.

Paragraph 6 provides that of the excess above 6 per cent received by these more efficiently operated railroads, one-half shall be placed in a reserve account to be established and maintained by such carriers, while the other one-half shall be paid to the Commission. As to carriers that have accepted the terms under which the standard return was extended until September 1, 1920, this paragraph does not apply prior to that date.

Paragraph 7 provides that the reserve fund may be drawn on any succeeding years when the railway operating income for any year does. not equal 6 per cent, for the purpose of paying dividends or interest on its stocks, bonds or other securities, or rent for leased roads, "but such fund shall not be drawn upon for any other purpose."

Paragraph 8 permits any carrier, when its reserve fund reaches an amount equal to 5 per cent of its value, to appropriate the excess to any lawful purpose. Of course, the payment of any such excess as an extra dividend would be a lawful purpose. And it might be here noted that the impression that has been circulated in some circles that the effect of this section is to limit to 6 per cent the dividends, which might now be declared by any carrier, is inaccurate.

Paragraph 9 requires the Commission to prescribe rules and regulations governing the payment to it of the one-half of the excess due it under paragraph 6.

Paragraph 10 requires that the Commission shall administer the fund received by it under paragraph 6 as a contingent fund from which loans shall be made to railroads to meet expenditures for capital account or to refund maturing securities originally issued for capital account or to purchase transportation equipment and facilities and leasing the same to carriers. When it is remembered that, under paragraphs 2 and 3, the Commission, in fixing the rates that shall yield the fair return, must allow for the maintenance of way, structures and equipment and shall give due consideration to the needs of enlarging such facilities, it certainly seems that this contingent fund is a duplication. If the carriers in the first place are to have rates that will yield a return sufficient to cover these capital charges, why is this contingent fund necessary except as a governmental channel for disposing of one-half of the surplus which the excessive rates

are expected to yield? The force of this observation is further emphasized by the fact that another section of the Transportation Act (section 210) appropriates $300,000,000 for the same purpose as this contingent fund is created.

Paragraph 11 provides that carriers may apply to the Commission for loans from this fund.

Paragraph 12 provides how the Commission can make loans from this contingent fund.

Paragraph 13 provides that carriers may apply to lease equipment that the Commission is authorized in paragraph 15 to purchase.

Paragraph 14 provides how equipment shall be leased.

Paragraph 15 endows the Commission with the power to purchase and sell equipment.

Paragraph 16 provides for the making of rules and regulations by the Commission in the administration of loans and the leasing of equipment.

Paragraph 17 is important, since it specifically states that while any shipper is not precluded from the right to reparation in case of overcharges, unlawfully excessive or discriminatory rates, or rates excessive in their relation to other rates, no shipper shall be entitled to recover on the sole ground that any particular rate may reflect a proportion of excess income to be paid by the carrier to the Commission in the public interest under the provisions of this section.

Paragraph 18 is the last and is important because its purpose is somewhat obscure. It provides that any new line of railroad to be constructed may, on application, be exempted by the Commission for a period not to exceed ten years from the payment of any excess earned from such new construction over and above the fair return to be fixed pursuant to this section, on the sole condition that the construction be completed within a period to be designated by the Commission in its order granting the exemption.

From this examination of paragraphs 6 to 18 it is seen that there is nothing in this section to change the statement previously made that the subsidy is to be effected through the medium of rates higher than would otherwise be reasonable. Will these excessive rates fall an equal burden on the shippers who pay this tax? One illustration is sufficient to indicate how unevenly this subsidy tax will be distributed. Take two railroads in the same rate territory-a railroad with an operating ratio of 65 per cent and B railroad with an operating ratio of 75 per cent-and say the particular rate applicable via either is $1. The operating cost to A road under that rate is 65 cents and its profit is 35 cents, or 53.8 per cent, whereas the operating cost to B road is 75 cents and its profit is 25 cents, or 33% per cent, or a difference in percentage return between A road and B road of 20.5 per cent. Now, suppose the Commission, pursuant to this section,

increases this rate to $1.25; of course, the operating costs remain the same and the operating cost to A road is still 65 cents and its profit is now 60 cents, or 92.3 per cent, whereas the operating cost to B road is still 75 cents and its profit is now 50 cents, or 66 per cent, or a difference in percentage return of 25.7 per cent as against a difference in percentages, under the $1 rate, of 20.5 per cent. This shows with mathematical certainty how the shippers using A road pay more toward this subsidy than the shippers who use B road. Other instances of the inequalities of the burden of this subsidy will occur to those able to analyze such situations, but the illustration given should be very forceful, because the roads used. are prosperous roads competing in the same rate territory.

Aside from the matter of the equality of the burden, any subsidy, to be justified, must be in connection with some operation in the public interest. To be an operation in the public interest it must be an operation in which all the people have an interest. Certainly a successful system of railroads is in the public interest. In times of peace such a system of railroads is a commercial asset from which the entire people profit, and in time of war an absolute necessity as an indispensable part of the national offense or defense.

If the national system of railroads is of such a public importance, should not any subsidies be paid directly from the federal treasury? Instead of this elaborate scheme of exorbitant rates with an unnecessary and superfluous contingent fund provided to spend the surplus which those rates are expected to yield, would it not be better to provide simply that any road which shows an operating deficit or which shows a net operating revenue of less than 6 per cent for any fiscal year may make application to the Commission to have an investigation made of its operation for that year, and that the Commission shall thereupon enter into an investigation of such road to determine whether its management had been honest, efficient and economical, and what the fair value of property devoted to common carriers' purposes for the particular year should reasonably be; and giving consideration to matters of carrier competition, physical location of the road, financial history and all other facts and circumstances which might be deemed by it to be pertinent, the Commission shall decide what should have been a fair percentage of return upon the property to keep same self-sustaining, if the Commission is of opinion that it would be in the public interest to make the particular road in view of all the circumstances, self-sustaining; and that on the basis of such percentage of fair return as applied to the fair value of the property of such carrier devoted to common carriers' purposes, the Commission shall derive what amount should have been yielded on the year's operations as a net operating profit; that in the case of a deficit the Commission shall add to such sum the amount of the deficit in so far as it reflects a part of any sum necessary