Island Company, which the latter corporation secured in exchange for its own stock. The Chicago, Rock Island & Pacific Railroad Company, using this Rock Island Company stock in combination with two issues of collateral trust bonds, has purchased over 93 per cent of the stock of the Chicago, Rock Island & Pacific Railway Company, and nearly 60 per cent (practically the entire common stock issue) of the St. Louis & San Francisco Railroad Company stock, the stocks of these two latter corporations being deposited as security for the collateral trust bonds.

It should be noted further that the Chicago, Rock Island & Pacific Railway Company owned on June 30, 1907, 48 per cent of the stock of the Chicago & Alton Railway; that the St. Louis & San Francisco Railroad Company owned over 821 per cent of the stock (excluding treasury holdings) of the Chicago & Eastern Illinois Railroad Company, and that this latter corporation owned 60 per cent of the stock of the Evansville & Terre Haute Railroad Company.

The voting right of securities is also pertinent. Holders of the preferred stock of the Rock Island Company have the right, to the exclusion of holders of the common stock, to choose a majority of the board of directors, such right to be surrendered only with the consent of two-thirds of the preferred stockholders. Furthermore, the amount of preferred stock can not be increased, except upon affirmative vote of the holders of two-thirds of the entire preferred and two-thirds of the entire common stock. It therefore appears that a majority of the preferred stock of the Rock Island Company, or say $25,000,000 out of a total of $49,000,000 of preferred stock of that corporation, dominates the situation and controls the vast network of railroad lines comprised in the Rock Island System.

Another striking instance of consolidated control through the medium of a holding company is that of the Atlantic Coast Line Company, of Connecticut, organized in 1889 for the purpose of consolidating under one ownership a series of southern roads along the Atlantic Coast. This corporation, with a capitalization on June 30, 1906, of only $10,500,000 of stock and $13,000,000 of certificates of indebtedness, owned over 50 per cent of the stock of the Atlantic Coast Line Railroad Company. The significance of this holding becomes clearer when it is observed that on June 30, 1907, the Atlantic Coast Line Railroad Company owned $30,600,000 out of $60,000,000, or 51 per cent, of the stock of the Louisville & Nashville Railroad Company, and that the latter corporation, jointly with the Southern Railway Company, owned 88 per cent. of the stock of the Chicago, Indianapolis & Louisville Railroad Company, and leased jointly with the Atlantic Coast Line Railroad Company the railroad properties of the Georgia Railroad & Banking Company. This holding com

pany, with a comparatively small capitalization, which represents still less of actual investment, probably not more than $5,000,000, is in virtual control of a railway system over 11,000 miles in length.

It is not intended to discuss the economic justification of such holding companies, if indeed they can be justified from that point of view. The significant fact for the consideration of Congress is that companies of this class deny the jurisdiction of Federal supervision under the law, a contention which, if admitted and carried to its logical result, would exclude many important financial questions which affect public interests from the supervisory control of the Commission. It is the purpose of the Commission to bring this question to judicial determination, but in order to arrive speedily at some practical conclusion, to the end that the work undertaken be not further embarrassed, it is respectfully submitted that the act to regulate commerce be amended so as to make clear the responsibilities and the rights of the Commission as regards holding companies.

On July 10, 1907, this Commission issued an order prescribing a form for monthly report of earnings and expenses, and required of each and every carrier subject to Federal jurisdiction to file such report for the month of July, 1907, and for each month thereafter. This has been done by most of the carriers, and the Commission anticipates no difficulty in securing monthly statements from all. It has not seemed wise to press this matter, nor to begin the public use of the monthly statements, until there had been opportunity to observe the result of the new system of accounts as reflected in the July, August, and September accounts. Every change in method of business procedure must be granted a period for adjustment, and the Commission has followed, in the matter of monthly reports, its uniform practice in all similar matters, namely, to allow ample time for a thorough understanding of the new conditions and rules before making public use of the facts reported under them.

The success of monthly statements of earnings and expenses is largely dependent upon the fact that, being made in compliance with an order of the Commission, they will be rendered by all carriers and rendered according to uniform rules of accounting. Assuming the accounts of the carriers to be properly supervised by the board special examiners for which the law provides, the publication of these monthly reports will tend to steady commercial conditions and to narrow the margin of speculative dealings. Moreover, the publication from month to month of the aggregate revenues and expenses of railways will reflect more clearly than could be done in any other way the changes that are taking place in general business conditions. Beginning with the month of July, 1908, these monthly reports of operating revenues and operating expenses will be made public.

BOARD OF SPECIAL EXAMINERS.

The twentieth section of the act to regulate commerce, as amended, makes provision for the employment of "special agents or examiners, who shall have authority under the order of the Commission to inspect and examine any and all accounts, records, and memoranda kept by the carriers." This is recognized as an important provision of the law. The examination contemplated will enable the Commission to enforce conformity to the rules of accounting that have been prescribed, and to ascertain whether or not the net revenues accruing from operation, or the profit and loss which appears on the balance sheet, as published by the carriers and reported to the Federal and State Governments, are correctly stated. This is a result of paramount interest to every investor in railway securities, as well as to the public at large, for the reason that it tends to give greater stability to commercial conditions and greater security to railway investments. Such an examination as is contemplated by the law will also furnish added security to the shipper, in that it will disclose unlawful practices in case such practices exist. The influence of a board of special examiners for railway accounts will, in many respects, be similar to that which follows the examination of national banks by the agents of the Comptroller of the Currency.

The Commission fully appreciates the purpose of Congress in making provision for a thorough and systematic examination of railway accounts, and has already taken steps for the organization of a bureau to have this matter in charge. It is not possible at present to say how extensive an organization will be necessary to realize the aims which Congress held in view, but there can be no doubt that a large force of trained experts must be employed.

VALUATION OF RAILWAY PROPERTY.

Reference has been made in previous reports to the importance of a physical valuation of railway properties. The considerations submitted in favor of such a valuation need not be repeated at this time. It may, however, be proper to call attention to the fact that the introduction into operating expenses of a set of depreciation accounts brings prominently into view an added necessity for an inventory of railway property. The chief purpose of the depreciation accounts is to protect the investor against the depletion of his property by an understatement of the cost of maintenance, and to protect the public against the maintenance of unduly high rates by charging improvements to cost of transportation. These accounts, which serve so important a purpose, require for their proper and safe administration complete and accurate information relative to the value of the property to which they apply, and this information can only be secured by a formal appraisal embracing all classes of railway property.

Yet another reason may be submitted. Before the close of the present fiscal year the Commission will be in position to prescribe a standard form of balance sheet. The purpose of a balance sheet is to disclose the financial standing of a corporation, and this it does by placing in parallel columns a statement of assets and of liabilities. But in the case of railway companies the Commission is unable to test the accuracy of the assets reported, and there is no feasible means of providing such a test other than by a detailed inventory of the property which the assets represent. If Congress designed, by the provision which it made for a prescribed system of accounts, that the Commission should do what lies in its power to guarantee the sound financing of railways, the making of an inventory appraisal of railway property can not longer be delayed.

From whatever point of view this question of valuation be regarded, whether of reasonable capitalization, of a reasonable schedule of rates, of effective administration of the depreciation accounts, or of the correct interpretation of the balance sheet, one is forced to conclude that an authoritative valuation of railway property is the next important step in the development of governmental supervision over railway administration.

The Commission can not emphasize too strongly the significance of the supervisory work which, upon the authority conferred by the twelfth section of the act to regulate commerce as amended, has assumed such large proportions; and believing as it does that a comprehensive, systematic, and authoritative valuation of railway property is essential for the successful development of this work, as well as for other purposes named, it does not hesitate to submit to Congress a formal recommendation for the enactment of a law under which such a valuation can be made.

STATISTICS OF RAILWAYS.

MONTHLY REPORTS.

The following is a statement of earnings and expenses of railways for the months of July, August, September, and October:

Monthly statement of revenues and expenses.

PRELIMINARY REPORT ON THE INCOME AND EXPENDITURES OF RAILWAYS

FOR THE YEAR ENDING JUNE 30, 1907.

The Commission has published annually, since 1892, a brief report presenting in a condensed form an income account statement for the operating railways in the United States. The preliminary report for the last fiscal year ending June 30, 1907, includes returns received by November 29 for 894 railway companies, representing an operated mileage of 225,584.30 miles, or, presumably, more than 99 per cent of the mileage that will be covered by the final report on railway statistics for the year.

This advanced report shows that the gross earnings of the roads it covers for the year 1907 were $2,585,913,002. In this amount are included as earnings from passenger service, $683,980,921, or 26.45 per cent; as earnings from the freight service, $1,826,209,111, or 70.62 per cent, and as miscellaneous earnings, $75,722,970, or 2.93 per cent. The gross earnings for 1907 averaged $11,463 per mile. This average exceeds the like average for any prior year since the Commission was organized. The gross earnings of the railways as given in the final report for the year ending June 30, 1906, were $2,325,765,167, representing an average of $10,460 on 222,340.30 miles of line operated. The operating expenses of the roads covered by the 1907 preliminary report were $1,746,097,122, being equivalent to $7,740 per mile. The ratio of operating expenses to earnings was 67.52 per cent. The like ratio for the year 1906 was 66.08 per cent. According to the report under consideration, the net earnings of the roads for the year ending June 30, 1907, were $839,815,880, or $3,723 per mile, and the net earnings for the corresponding roads for the year 1906 were $787,420,827.