The Washington herald., 1914-11-29
BOSTON BANKER
DISCUSSES RATE
John E. Oldham Says Read
justment Needed to Re-
establish Credit.
WIDER SAFETY MARGIN
Larger Revenue Would Draw Out
Capital and Thus Help y
Situation. .-
WIDER SAFETY MARGIN

At the convention a few days ago of
the Investment Bankers Association in
Philadelphia. some data were submitted
by John E. Oldham. a Boston banker,
which make an interesting addition to
the evidence in the per cent rate case
The close relationship between bond
prices and surplus earnings is established
by a comparison OF earnings OF nineteen
Of the strongest roads for the ten-year
period 19OO-l9O9 with the same figures for
1913. For the ten-year period the average
earnings available for capital. for every
800, 900 gross were Sc, ,SO0 or SIS per cent
on average capitalization Of $4,000. con-
trasted with $500. or 81 per cent on
Actual payments upon capital were equal
to So per cent in 1913 and per cent
for the earlier period.
1T may be Inferred" Mr.. Oldham says,
that the investors OF the $4,000 were
satisfied with per cent at that time
Q9O0-l9O9) and that. for actual purpose OF
distribution the railroads needed only
s27, 200. The existence OF the surplus.
however. was actually of the greatest
consequence. In order to attract inves-
tors it was necessary for the railroads to
show that investment in their bonds and
stocks meant safety of income. The only
way in which this could be demonstrated
was by proving the existence OF 4 mar
gin OF safety which the investor would
consider sufficient to meet contingencies.
In 1913, due to an increase in cost of
service. only partially offset by larger
"other income" the amount available for
distribution upon capital was only Sc, SO4
for each $4,000 gross, against $36,SOO in
the decade 19OO-l9C9. After payments upon
capitalization, the residue in 1913 was
equal to IL per cent on capital, compared
with Is per cent for the ten-year period.
While security holders were paid a lit
tie more on the face value of their Sc
curities, the margin over dividends was
not so large as formerly.
I'm the period of 1eOO-l9O9," Mr. Old
man continued, securities flowed freely
from the railroads to the ultimate inves-
tors. II this test is applied to 1913, it will
be found that this feature was lacking.
Instead OF being taken readily by in
vestors, 1t appears that investors showed
little enthusiasm for railroad securities.
Rate of Necessary Yield.
THE facts are plain that the yield
which investors required was consider
ably in excess in 1913 of what 1t was in
1s0O-1909 While the rate required had
advanced 1-2 to 3-4 per cent on bonds and
per cent to l 1-2 on stocks, the payment
by the railroads on their capitalization
had risen only from per cent to So per
cent, and it had been necessary to cnt
down the surplus from Is per cent to IL
per cent
1T has been suggested that under the
circumstances of the investment market.
6 10 per cent earned on capital in 1913 did
not offer the attraction to investors that
$50 did in the period 1sOo-lsO9. It has also
been suggested that in 1913 even 6S per
cent would not have been sufficient, but
even rs per cent or more might have
been required. The rate actually required
is not q matter for exact determination
in advance. The free entrance of cap
ital into the market for railroad securi-
ties will mark the point at which inves-
tors consider the readjustment to be ef-
fectiyo.
in noting the fact that these conclu-
sions are drawn from the position OF
only the best railroads, 1t must be re-
membered that the readjustment neces-
sary to re-establish credit for these roads
would still fail to give high credit to the
average roads. Hence, such a readjust-
ment must be regarded as a minimum
for the railroad situation in general"