New-York tribune., 1920-02-23

pend In larre measure on the ability
Of the roads to borrow.
The transportation act recognizes
this situation and has provided two
means Of meeting It,, which congress
expects will solve the problem ana
save the railroads.
The first is the continuation OF the
government guaranty. to the foads tor
six months, to give them time to reor-
panizo the busincss-which really
means to get an increase in rates that
will wipe out the deficit. This guar
anty is fat and perfectly solid. What
ever happens, no road will face bank-
ruptcy within that time, all payroils
s10o, 900, 900 revolving fund Will, as
nearly as can be estimated, almost
exactly meet the deficits and provide
tho standard return for that period.
II ia worth noting that the terms Of
tho act give the government little
the advantage of the roads. The guar
antv is for half the years total stand
ard return, but In fact, through the
test period, the roads earned fraction
more than half their total years in
come in the six months which the
Guaranty ou,n covers. so that the govern
ment stands to save about $7,00o,OO0
by the difference.
Real Test Six Months Later
IA is after the six months are over
from Septe ember on, that the roads
will have to stand, financially, on their
own feet. From that time on they will
have to find the money for their obliga-
tons themselves. The guaranty does
not provide for anything more than
operation and current maintenance, 80
that all real improvements, and even
all catching up on deficiencies, will
have to be made good in some way out
of the earnings after that date. 1t is
to conditions as they will be then that
investors are looking to find whether
they can safely and protitably lend the
roads tho hundreds of millions they
need.
The transportation act provides for
this, also, in its instructions to the
Interstate Commerce Commission to fix
rates 80 as to provide as nearly as
the actual value of the roads, with
permission to add one-half Of 1 per
cent for capital investments if the
commission sees fit. 1t also provides
a contingent fund of $500. 100000 which
may be loaned to the railroads to help
them get started. When the rates
have actually been raised, so that she
roads are paying 512 per cent proht
of course their credit will be vastly
strengthened, If it is not entirely re-
stored.
AS to their present credit, OF their
immediate ability to raise money, two
things stand in the way. The first is
that there is no guarantee that the
Interstate Commerce Commission will
make the increase in rates high enough
to insure this amount Of profit. 1t will
have to be rather a guessing contest
against uncertain conditions at best,
one which may or may not work out
the commissions intentions. There
which are being violently debated, the
biggest being the question of what
really is the value of the railroads, the
sum on which they are to earn their 51a
per cent. Certainly the enactment Of
the new rates will take many months,
and there will be months more before
it will be known how they work. Till
that time investors will still hold off.
Some Certain to Lag
The second obstacle to credit for
the railroads is that the transporta-
ton act does not guarantee anything
whatever-after the six months period
is over--to any individual road. 1t
whole. The law of averages makes it
certain that some roads will still be
below the standard earning power.
Which will they be and how much
| will they fall short? Investors will
have to have answers to these ques-
tions before they put any money into
new railway stocks (or bonds. This ap-
plies, of course, to the railway situa-
tion as whole Some roads are amply
able to stand on their own feet, or to
get credit, even on the present basis.
There is one form of credit which
the roads have been able to use even in
very stormy times-the issuing of
short term notes against new equip
ment, with mortgage on the equip
ment given as security Even this
small resource is doubtful now. The
roads owe the government nearly $780,
000 900 for such equipment, and this
bill is not to be funded by the govern
ment, but must be paid by the roads
through floating such notes. The total
sum is tiny compared to the roads
needs. Yet it has been decided at con-
fererces between officials of the rail
road administration and of the roads
that it will not be safe to issue these
notes in large amounts, but that they
must be doled out in parcels of $40 900, =
900 to 500 100000 at a time.
Must Use Old Equipment
SO that last little hope Of general
railroad credit is overloaded already
! by the Inheritance Of conditions from
the period of government opera tion.
The roads have no credit, they will
have none for many months, until the
new rate schedules are at work, and
what they will have then is problemat-
ical. This is why they will have TO
make the best use they can of their
present inadequate and worn out facili-
ties and why there is little hope Of i'm
provement in the railroad situation for
months, in spite Of the return to pri-
vate ownership.
Some of the outstanding features of
the freight rate situation, on which
the resstablishing of railroad credit
depends, will be discussed tomorrow.
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BJJDAPEST Feb 22--The rnurIa> ~