Pittsburg dispatch. [volume] (Pittsburg [Pa.]) 1880-1923, 1891-01-30
CAPITAL STOCK AND EARNINGS.

Since the accession of the Farmers AL
lance to political power in several of the
Western States there is much agitation in
railroad circles. Bills are before the Legis-
latures in the Alliance States to regulate
railroad rates, and some of them shave very
close. The Railroad Commissioners OF Kan
sas and Minnesota have protested against
some of the more sweeping measures on the
ground that the roads have actually cost
more than is generally supposed. In fixing
rates the Commissioners take into account
the expenditure OF service and the cost of
property used, allowing q fair return for the
capital invested. The grangers, in this
view OF the matter, propose official investi-
CATION of the cost OF the roads.
1t is argued, however. by the railroad
people that they should be allowed returns
on capital invested in betterments, even
when such betterments are paid for from the
income of the road. This raises a very
serious question in equity. Of course, it
has been customary with very profitable
corporations to issue stock from time to
time for the value of any Improvements
paid for out of the revenues of the company.
This increase OF capital, it is contended, is
not water but properly issued stock. In the
case of railroad or telegraph. enjoying the
right of eminent domain, this claimed right
is doubtful. 1t must be admitted that if
the company pays no dividends and uses all
its earnings for construction and equip
ment, it is entitled to an increase in capital
equal to a fair return on the original invest
meGt. But if the total of earnings invested
in such manner amounts to more than fair
rate of interest, the public is entitled to the
benefit of the excess.
These corporations are given public fran
chises and rights for the public good. They
are supposed and expected to get fair re-
turn from their capital invested, something
more than the legal or current rate of inter-
est on idle capital. But, if they issue capt.
tai stock for earnings reinvested, beyond the
allowance mentioned, subsequent dividends
will be equal to compounded interest on the
excess, in addition to the interest On the
original capital invested. This is not con-
templated by the laws governing such en-
terprises, When it is decreed that rates
shall be fair and equitable, it is assumed
that causes leading to earnings in excess of
fair return on the invested capital shall
be followed by reduction of rates.
If the issue of capital stock in amount
equal to invested earnings is proper, then it
would be to the advantage of very profit
able railroad to reinvest all of its earnings
until the net receipts would no longer pay
more than the current rate of interest on the
amount of its capital stock. Ii its earning
capacity was at first equal to IS per cent on
the original investment the point of bal
ance would be reached when the CAPITAL
stock had been increased to about three
times the original amount, one-half of which
be invested profits in excess of interest.
The Alliance men will hardly be able, by
any Investigations. to discover the exact,
legitimate cost of the railroads in the West.
But they may approximate the outlay and
hx rates based on the average of such ap-
Proclamation. This will give the advantage
to roads the construction of " hich has been
cheapest, and while it may do injustice to
some, will offer a premium on construction
without inside contract jobs.