The New York herald., 1920-01-04
SAYS "FAIR RETURN' FOR RAILS
SHOULD ATTRACT INVESTORS

Discussing the railroad situation the
Mechanics and Metals National Bank in
its January letter says
what Is really to the point In the
matter OF income return Is not what the
law thinks reasonable. bur what the
prospective investor thinks reasonable.
The law can keep the investor from get
ting a large return: II cannot compel him
to invest. After all, what constitutes a
fair return Is not question OF opinion.
but question of fact We must con-
slider or investigate the returns that
capital is getting in other lines and what
they. average, for only by knowing this
can we know what return will be suf-
iicient to attract capital to the railroads.
"The fair return dare not be rigid. a
figure drawn from the inner conscious
ness of government officials, but should
vary as the returns In general business
vary. For the capital already in the ra Il
roads il might be thought that legis-
lators could fix any return they chose. SO
ong as it was something more than
operating expenses. because capital al
-eady in cannot escape. and any return.
no matter how low, is better than no re-
turn at all. But II old capital is not
treated fairly new capital will not come
in. We must be fair 70 capital already
Invested. if not for the sake OF justice
itself, then for the sake of the effect of
'airness or the lack of 1t on the investors
we seek to attract.
Even II we were to take as a basis
for q fair return on railroad capital the
average yield received by capital in other
lines of industry, we could not make that
also q maximum return, unless we were
willing to make II at the same time q
minimum. But again. If we did this, there
would be the same yield on invested
capital, no matter where railroad was
located, no matter what improvements
were made upon 1t, no matter how superior
or how wretched the service, no matter
how severe the economies or how great
the extravagance.
If we are to have any hope whatever
Of encouraging efficiency and economy
We must put premium on the qualities
Of efficiency and economy and a penalty
on extravaganza and bad management, or
We must allow the natural premiums and
penalties to take their course. The Esch
bill, which was passed by the House dur
ing the autumn. recommended that the In.
terstate Commerce Commission fix rates
yielding a fair return upon the value OF
the property but did not attempt to fix
a figure. The original Cummins bill In
the Senate fixed the fair return at 5h
per cent, the commission being authorized
to increase this to six per cent. the addi-
tional half per cent to be used for non
productive Improvements.
Five and a half per cent Is not a COM
pelling rate Of return when it Is consid-
red that investors can purchase United
States government bond on a basis to
rield over per cent, and bonds such as
hose Of the British government In this
market to yield 6M per cent on long ma
.urities to over 10 per cent on short ma
.urities. But confining our attention to
railroad securities. let US ask what return
5ould be necessary to attract capital into
he railroads today. We find that first
srade underlying mortgage bonds are SELL
ng to yield from 5is to 81 per cent. first