By the report of the Armstrong committee to the Legislature on February 22d, the proxy campaigns of both the New York Life and Mutual Life Insurance Companies have now been halted in view of the virtual certainty that a special act will be passed postponing all insurance elections until November 15th and canceling all existing proxies. But this is only a postponement, and it will be a credulous policy-holder who believes that because the companies are not now to seek proxies before September 15th, they will be any the less ready to avail themselves of the entire agency organizations that were turned to the work during the first two months of this year, or to push without diminution of vigor the campaigns for the tickets they may name' on July 15th. Of course the policyholders, either individually or in the organizations now made possible by the compulsory publication of the policyholders' lists five months prior to elections, will have an even, or, perhaps, more than an even chance, inasmuch as they do not have to nominate until a month after the companies name their tickets. Thus policy-holders will have opportunity to profit by whatever criticism the administration nominees arouse; but that will not elect their own candidates if they do not see to it that their nominations are effectively supported, and it is all too well known to need emphasis here that delays of five or seven months in bringing about a crisis in a great public movement are as a rule more favorable to those who hope

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for an abatement of public interest than for those who are striving to keep it at a point where it can be employed to regulate and to punish. The Armstrong committee has given to all policy-holders a wonderful opportunity to exercise an effective voice" in the management of the companies by decreeing a general election of all trustees for the 15th of next November. The policy-holders of the New York and Mutual Life Insurance Companies may be sure that if they fail to profit by it, the companies will make no similar mistake.

To the other features of the committee's report a more extended discussion ought to be given than is possible within the scope of this article. Its comprehensiveness, and the grasp that its framers have demonstrated of their subject is sufficiently attested by the fact that the "Big Three" companies, against which particularly it is directed, have been utterly unable to find a basis for a general opposition that they themselves believe will be of the slightest avail before the Legislature. Instead, they have been filling such newspaper space as they can obtain by wails of the injustice that the report will do their agents, and of the impossibility of writing under its provisions anything like the volume of business that they have been putting on their books each year under the old régime.

It may not be amiss, therefore, to consider here very briefly this single feature of the Armstrong committee's report to see if it has not a fundamental bearing upon the question raised at the outset as to the final disposition of the assets of the "Big Three." It is apparent, of course, that whatever restrictions the great companies may be placed under as regards new business will not diminish existing assets unless by the very gradual process following a decision to stop writing new insurance entirely. The Equitable, Mutual, and New York Life, therefore, are all left to be dealt with as investing institutions having upwards of a billion and a quarter of dollars belonging to nearly

two millions of policy-holders the world over. The Armstrong committee, in its prohibition of stock and collateral trust bond investments and of syndicate operations of all kinds and in its demand that there be an annual accounting by which even existing deferred dividend policyholders may see what the companies are earning on the funds held in trust, has attempted to meet this situation as best it may, and, judging from the complaint of the companies against prohibition of stock and collateral trust bond investment, it has done a pretty good job. But the discussion of these things may be left for another writing. The fundamental part of the report, as meeting the problem of the future, is that which has to do with the limitation of new business and the prohibition of the deferred dividends.

Remembering now the way in which bigness appeals to the financier who wants a life insurance company for a club, it requires no great degree of imagination to picture what the new school of life insurance philanthropists think of the Armstrong committee's basic proposition that there is a point beyond which life insurance companies ought not to be allowed to grow, and that the "Big Three" have passed this point long ago. The most irritating thing about the committee's performance is that it has not attempted special legislation which might be attacked on constitutional or other grounds, but has taken up the simplest of all economic propositions. This is that in any life insurance company managed in the interest of its policy-holders, business which is put on the books by borrowing from surplus earnings in any year which otherwise would be distributable to policyholders already in the company, is not business that is worth having. "Let the new business pay for itself," is what the Armstrong committee recommends, and to this end it proposes that the cost of writing it shall be limited to that part of the first premiums applicable to expenses, which is known as the loading, plus the mortality gains of the first five years,

when investment expenses have been deducted. The committee would amend the reserve law so as to allow the companies to utilize these mortality savings, on the theory that in reckoning for the first five years of a policy, the per cent. of mortality is so far below the average for later years that the full reserve is not required.

The reasoning at this point may be gone into with some detail, because of the very common device employed by the larger companies to confuse the layman who seeks to question the expense of getting new business. The argument of the companies has been something like this: All business particularly the deferred dividend kind-contributes to the surplus, since the borrowings necessary to make up the excess of first year's expenses over first year's loadings are paid back out of renewals in later years; the surplus (in theory) belongs to the policy-holders; therefore all business contributes to the funds belonging to the policy-holders. The argument was very plausible, like many other insurance arguments, but it had one fundamental trouble. The proposition that the surplus belonged to the policy-holders was like that advanced to the small boy to whom an affectionate aunt at Christmas gave a beautiful vase. His parents put the vase on a high mantlepiece and told the boy that it was his but he could n't have it. It may not be carrying the parallel too far to say that under the old régime, Section 56 of the Insurance Law, which the Armstrong committe would now repeal, was the mantlepiece.

What the companies have failed absolutely to do has been to distinguish in their heart to heart talks with policyholders between general surplus, being the difference between general liabilities and assets; net surplus, being that part of the general surplus over and above the sum held as applicable to existing deferred dividend policies, and annual surplus, being that part of the premiums collected from policy-holders in excess of the amount required for the reserve and for all the

expenses of the company. What the Armstrong committee has done has been to point out that the general surplus, or net surplus, as the case may be, is approached through the annual surplus, and that in a mutual company, while a reasonable net surplus should be maintained against unforseen contingencies of the business, the balance of the unused portion of the premiums ought to be paid back to the policy-holders from whom it has been collected, not as a distribution of largesses by the beneficent managers, but as the refund of an overcharge for a commodity which the policy-holders have the right to get at its net cost.

Whether this repayment shall be made annually or at the expiration of a period of years, is a detail; the committee has declared for the annual distribution on the ground that the policy-holders have nothing to gain and disingenuous managements everything, by the other method. That does not affect the fundamental proposition that business which in any year is put on the books by borrowing from that year's surplus otherwise distributable to existing policy-holders, is written at their cost, regardless of whether it eventually contributes to the general surplus of the company, if on a deferred dividend basis, or to the net surplus, if deferred dividends are prohibited. And the excess cost is just as much an unnecessary expense as an extra $50,000 a year put on a President's salary by a finance committee that goes on a "you tickle me and I'll tickle you" basis.

But all this reasoning of the Armstrong committee means a system of insurance in which the size of a company is merely an incident and subject to certain economic limitations; and the size of surplus, or amount of assets depends, of course, upon the value of business carried. As a matter of theory, therefore, as well as of concrete conclusion, the new school of insurance philanthropists have reason to make such outcry as they may be able against the Armstrong committee's report.

And what is to be the result? If reform, genuine reform, is impossible from the inside, how can it be brought about from without? By such legislation as is now proposed? Yes, partly, but there is a variety of corporation lawyers of great ability who have built up their social station and their fortunes pari passu by devising means whereby laws intended to protect the people may be circumvented. And the greatest of these is Elihu Root. So we may conclude that laws will not do it alone. Is it to be by litigation? Yes, perhaps, but with a District-Attorney who has slumbered peacefully through twelve months of the worst revelations of corporate corruption that the country has ever seen, the people of New York county have not reason for overmuch hope from that quarter. Is it, then, to be through a policy-holders' movement ? Perhaps so, yet the best intended campaigns of this character have been brought to naught through failure of the public officials to act or through failure of the courts to extend their protection.

Yet legislators and prosecutors and judges are all creatures of the people and their sworn servants-in theory, at least, It remains, therefore, for the people the country over to say whether it shall be so in practice, and the series of explosions that have uprooted in the past twelve months the old life-insurance ring, thought to be so firmly intrenched that even the powers of Wall street would not openly attack it, furnishes an impressive lesson of what an outraged public opinion can do when it undertakes to compel attention of those who have long defied it. Mr. Ryan has some appreciation of this when he inveigled an ex-President of the United States to become the figurehead of his scheme for running the Equitable. Henry H. Rogers and George F. Baker and William Rockefeller and James Stillman, with all their armies and campfollowers seem to be thus far quite lacking in similar keenness of perception.

HARRY A. BULLOCK. MARCH 1, 1906. New York, N. Y.

IN

N THE early railway charters, both in England and America, the rates to be charged were carefully prescribed by legislative authority, just as was the case with the turnpike companies that preceded the railroads. In England and in many of our states maximum rates have been fixed by law for many years. The principle of regulation is thoroughly settled in our law; the right and the need for it are clearly manifest. The only questions relate to the extent of the regulation and the methods to be adopted.

The President and his supporters believe the best way is to enlarge the powers of the Interstate Commerce Commission so that it may fix a reasonable rate, or at least a maximum rate in place of one found, upon complaint and hearing, to be unjust, unreasonable, or discriminatory. They claim that the railways do not deal justly; take all they can get; discriminate unfairly between persons and places, etc., and that experience has abundantly shown that they cannot be trusted to make rates without strict control. The railroads say that it would not be fair to put the control of rates in a government board; that no such board could understand the special conditions in all parts of the country which enter so largely into rate-making; that the power to make rates is the essence of ownership in the case of railroads, and to transfer that power to a public board is practically to take the roads for public use without compensation; that railway managers have as much right to fix the price of the transportation they have to offer for sale as the storekeeper or manufacturer has to fix the price of the goods he offers in the market.

Both parties appear to be perfectly correct in their fundamental positions. If the railroads make the rates, the public

is not treated fairly. If a public board should make the rates, the railroads might not be treated fairly. There is some justification for this view in the history of the decisions of the Commission, though not nearly so much as the railroad attorneys allege. But it is clear that somebody must make the rates. And it is equally clear that there is no system of rate-making that will do perfect justice. I know of no railway minister or traffic manager in Europe or America who even dreams he knows of any method of ratemaking that will do justice all round under present industrial conditions. The post-office principle may ultimately be applied to diffuse the burden of distance over the whole community, but it is not practicable at present. If then a certain amount of injustice is unavoidable, and we must choose between injustice to a small group of stockholders, or to eighty millions of people, which alternative shall we accept? If there is no way to solve this problem that will not work injustice somewhere, shall it be to the little group of profit-makers or to the great public, the people of the United States ?

Besides this quantitative comparison there is a qualitative comparison that it still more weighty. Such injustice as may be done to the railways is merely a matter of diminished dividends on stocks, a very large part of which is water, while the false rates and unfair discriminations made by the railway managers not only affect property interests many times greater than railway stocks, but deny equal opportunity and undermine morals, manhood, government, civilization, and progress,-values far higher than any financial items whatever. Moreover, it is not unlikely that a board constituted somewhat differently from the present one might eliminate most of the errors

of the Interstate Commission as well as those of the railway managements. What are the causes at work in the case? The reason the Commission has made some injurious rulings is that they lack the thorough acquaintance with traffic conditions that the railway managers possess. And the reason the railway managers make rates that are contrary to public policy, is that they are more or less influenced by motives that are antagonistic to the public interest. The Commission is disinterested; it has no wish or personal interest leading to unfairness either to the railroads or the public; its motive is right, but its knowledge is imperfect. The railway traffic-managers, on the other hand, have a more perfect understanding of the transportation business, but their interest is not altogether in harmony with justice and the public good. Is it not possible to create a board that shall have the thorough knowledge of first-class railway experts, together with the high motives and unmixed interests of an honorable public commission or court, and so remove the chief causes that have worked injustice in the past ?*

The railroads say: "About 93 per cent. of the decisions of the Commission which have been passed upon by the courts have been held to be erroneous."+ This statement gives too strong an impression of the capacity of the Commission for mistakes. About 3,726 informal complaints have been made to the Commission, nearly all of which, perhaps 3,400, have been disposed of by correspondence or some mild form of arbitration; very many have been settled satisfactorily, some have been abandoned and some have crystallized into formal complaints. The total number of formal complaints has been 854. "From 1887 to October, 1904, the Commission rendered 297 decisions; some 43 suits were in*See pages 66-68 of The President's Railroad Policy, Ginn & Company, Boston.

† David Willcox, President of the Delaware and Hudson Railroad; Hearings Senate Committee on Interstate Commerce, 1905, page 3,644.

stituted to enforce the orders of the Commission and 34 of these were finally adjudicated." The Commission claims that 8 cases of excessive rates and unjust discrimination have been decided in its favor, while President Willcox says that the courts have sustained the Commission on the merits in only 3 cases. Mr. H. T. Newcomb who appeared before the Senate Committee as the representative of several railroads gives a table showing that in the circuit courts the Commission has been sustained 7 times and reversed 24 times, the circuit court of appeals has sustained the Commission 4 times and reversed it 11 times and the United States Supreme Court has partly sustained the Commission in one case and reversed it in 15.

was

On the facts as they stand we find: First, that about of the Commission's decisions have been right on the railroad's own showing. They only claim 32 reversals out of 170 orders-nearly all the rest have been accepted by the railroads or enforced upon them by the courts. Second, the reversals have been based on questions of law in respect to which the courts disagreed among themselves. Third, the points in respect to which the Commission has been overruled are very few. The decisions have gone in bunches. For instance, while the Alabama Midland long-and-short-haul case pending in the courts a number of other long-haul cases were decided by the Commission and when after several years the Supreme Court gave final judgment, a whole block of the Commission's rulings on this point were discredited and subsequent reversals were simply repetitions involving no new error. So the question of power to fix rates covers a cluster of cases all thrown down in reality by one ruling. And these two questions represent nearly the whole difference between the courts and the Commission. The 15 reversals in the Supreme Court do not mean 15 errors even in respect to legal points but only a very few errors, if Fourth, the higher court reversed the

any.