Evening journal., 1920-01-05

Of Ne
Referring TO the failure OF railroad ia
cilities to keep pace with the CROWN
transportation needs Of the country
the January letter Of The Mechanic
and Metal National Bank Of New Yor
SAYS:
A Fair Return" TO Investors.
There is one leading reason for this
Capital invested In the railroads ha
not in recent years been allowed a fai
return. Unless it is now allowed suci
return, the disproportion between tn
railroads and other industry viii be
come more dangerous as time goes On
Unfortunately, there is too much Of Z
tendency to think Of "a fair return II
an arbitrary way, as If 70 were some
+hing that could be decided upon mere
y by the sense Of fairness Of legisla-
e9rs or commissioners, instead Of by
economic conditions. Edgar r. Clark
of ,he Interstate Commerce Commits.
sion, said recently: "Some people come
before us and argue that per cent is
liberal enough. Others say that il ought
TO be more-6 orEor per cent
think that it would be simpler
II the law laid down ihe standard which
IL recognized rs reasonable
What is really go the point in the
matter Of income return Is not what
the law thinks reasonable, but what
the prospective investor thinks reason
able The law can keep the investor
from getting a large return; 10 cannot
compel him 10 invest AftcC an, what
constitutes fair return is not q cues
ti0n Of opinion, but a question Of fact.
We must consider 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 sufficient TO attract capi-
tai TO the railroads.
The "fair return" dare not be rigid,
figure drawn from TIE inner con-
seriousness Of government officials. but
should vary as the returns in general
business vary. For the capital already
ia the railroads, it might be thought
that legislators could fix any return
they chose, so long as il was something
more than operating expenses. because
capital already In cannot escape, and
any return, no matter how low. is bet
ter than no return at ALL But II old
capital is not treated fairly, new capi-
TAI will not come in. We must be fair
10 capital already invested. II not for
the sake Of justice itself. then for the
sake Of the effect Of fairness or the
lack OF it on the investors we seek to
attract.
Maximum and Minimum.
Even II we were 10 take az n basis
FOR a flair return" on railroad capital
the average yield received by capital
in other lines Of industry, we could not
make that also a maximum return. un-
less we were willing to make it at the
same time a minimum. But again. If
we did this, there would be the same
yield on invested capital no matter
where a railroad was located. no mat
ter what improvements were made
upon It, no matter how superior or
how wretched the service, no matter
how severe the economies or how great
the extravaganza.
II we are to have any hope whatever
OF encouraging efficiency and economy,
we must put a premium on the quail
ties Of efficiency and economy, and
penalty on extravaganza and bad man
agemen,. or we must allow the nat
ural premiums and penalties TO take
their course. The Esch bill, which was
passed by the House during the aut-
umn, recommended that the Interstate
Commerce Commission fix rates yield
ing "a fair return upon the value Of the
but did not attempt TO nx
D figure. The original Cummins bill in
the Senate fixed the fair return at 81
per cent, the commission being auth
orized to increase this TO per cent,
The additional half per cent. TO be used
FOR "nOn-prOductive' improvements.
Five and a half per cent. is not a
rate Of return when it is
considered that investors can purchase
/ United states government bond on a |
basis to yield over > per cent, and !
bonds such as those of the British gov
'rnment in this market to yield t-3 |
Der cent. on long maturities TO over 10 |
,er cent. on short maturities. But con- |
ming our attention TO railroad secur- I
les. let US ask what return would be /
TO attract capital into the |
today. We find that first
rade underlying mortgage bonds are
elling to yield from 5ls TO 81 per
ent.; first grade general mortgage
onds from 5lh to so per cent, first
rade junior bonds from 5% to 6h
er cent. II we turn from these 20 FIRST
rade short term issues we find these
ielding from TO ~ per cent. Turn
~ again from these fixed returns to
ields on the highest class Of railroad
locks. we find that the investor is not
smpted into Atchison or Pennsylvania
lr less than ~ per cent, nor into
linOis Central or Northwestern for
SIS than about per cent. These are
OF the returns being received by the
riginal holders, but the returns which
respective investors demand, because
ley can be Cbtalnable elsewhere.
either are they the returns on the
,cUrities Of weak roads. to compensate
lr risks, or even average returns. They
e the yields on bonds and stocks OF
Dads enjoying exceptionally high
edit.
king the Average Return.
1t IS obvious that in fixing the average J
terest to be received on railway capi- !
J. we must be guided not by the yields
wv being accepted by investors only ,
2 the best secured capital, but by ,
e average return demanded by all T
ilway capital. Part Of the high rates d
st cited, it is true, is owing 10 the :
ar that these yields will not be main I #
incd; if the roads were absolutely III
ne Of the return, the interest rate / II
manded would not be so high. But II
e returns necessary to attract capi- II
l are now higher than before the 4