^ort|)tDe¿tern ?Míníber¿itp ILibrarp
Ctianfiíton. 3l(inoi¿
PRICE 25 CENTS.
PUBLIC OWNERSHIP
vs.
REGULATED
NATURAL MONOPOLIES
JUST FROM'^THE PRESS.
An Answer to the Great
Query of the Day,
how should the franchise
Question be Sehled?
"No Politics but the City's Good."
A BÖOK THAT Every Person .Should Study.
Ntmicipal Public Service ladostries
by
Allan ripueíy Foote,
Takoma Park, D. C.
' t.
(Member of the American Econii^c Association and of the American
Academy of Poiitififrand Sodal Science.)
CLOTH BOUND, T 2MO. 352 PAGES
PRICE, ONE DOLLAR
THE OTHER SIDE PUB. CO.,
;hicagc
126-132 Market Street, CHICAGO.
203 Broa^^NEW YORK CITY.
Public Ownership vs. Regulated
NATURAL MONOPOLIES
BY
allen ripley f^ote
TAKOMA ®ARK, DISTRICT OF COLUMBIA
AUTHOR OF
i1 Dtsctêssio» of the '^fonomic Principles Involved in ' ' The Law
of IncorfOrated^/tmpanies Operating Under Municipal
and of "Municipal Public
Service Industries"
Member of the d^mtrndcan Economic Association and of the
AtHertean Academy of Political and
Social Science
A PAPER SUBMITTED TO
THE LBAÇOE OF AMERICAN MUNICIPALITIES
AT'<^ THIRD ANNUAL CONVENTION
september 19-22, 1899
Syracuse, n. Y.
J**" VV ' 'ZW.'
COPVRIGHT V-
THE OTHER SIDE publishinJ*^'"-"*'^
1899
M
' i-, »fV. >■ .
CONTENTS.
3
CONTENTS.
PAGE
Importance of the Subject 5
Power and Responsibility of Action 6
Some Definitions 8
Capital Investments 8
Managers and Employes 9
Efficiency of Public and Private Agents lo
Classes in Interest ii
The Users' Interest 12
The Taxpayers' Interest 13
The Employes' Interest 13
Employes May Share in Profits 18
The Investors' Interest., 20
Factors of Cost 21
Interest a Factor of Cost 22
Interest a Factor of Cost in Taxpayers' Plants 24
Taxpayers vs. Bondholders 25
Interest a Factor of Cost in Users' Plants 26
Interest a Factor of Cost in Private Plants 28
Insurance Against Accidents a Factor of Cost 29
Municipal Taxes a Factor of Cost 31
State Taxes a Factor of Cost 32
Investment Insurance a Factor of Cost 33
Materials Used a Factor of Cost 37
Salaries and Wages Factors of Cost 38
Sundry Expenses Factors of Cost 39
Cost Statement 39
Public Plants—Price to Users 41
Cost Plus Provision for Eliminating Private Capital 41
4
CONTENTS
PAGE
Private Plants—Price to Users 43
Cost Pins Profit 43
Relative Efficiency Under Ideal Conditions 45
Administrative Conditions 45
Uniform Accounting and Auditing 47
Elimination of Competition 49
Perpetual Tenure 50
An Untaxed Grant 52
Ideal Franchise Conditions 53
Free Service Should Be Prohibited 54
Division of Surplus Profits 55
Requirements of a Correct System of Public Regulation.. 56
Unfair and Unscientific Statistical Comparisons 58
Short-Term Franchises 63
Final Elements of Price to Users 66
Price to Users—Public Plants 66
Price to Users—Private Plants ■ 66
The Nature of Profit 67
Standard for Determining Reasonable Profit 72
Initial Investment 77
The People Have Not Been Robbed 79
Who Caused Existing Evils? 85
Bad Advice 86
Who Opposes Public Regulation? 89
Vital Importance of Correct Public Regulation 93
Municipal, State and National Regulation 92
All Economic Benefits Secured for the People 93
The People's Opportunity Has Come 94
What City Will Grasp the Honor of Leading the World? 97
Resume 99
PUBLIC OWNERSHIP
vs.
REGULATED NATURAL MONOPOLIES.
IMPORTANCE OF THE SUBJECT.
Mr. President and Delegates of the League of
American Municipalities:—No subject that will re¬
ceive consideration during this, your thir-d convention,
no subject that has received attention at either of your
former conventions, is pregnant with as many possi¬
bilities for good or evil as this question of public policy
—which of two agents shall the people employ to sup¬
ply themselves with any of the entire group of services
technically known as public service industries? This
question involves much more than is apparent to a
superficial observer. It is vastly more important than
the people are aware. Upon its correct settlement de¬
pends the progressive development of the existing civil¬
ization. The settlement of this question ultimately
made will confirm or destroy existing ethical stand¬
ards founded upon present conceptions of the require-
5
INTEREST A FACTOR OF COST, 23
there is a dissenting opinion on this proposition I
am not informed regarding it. One of the strongest
advantages claimed for public ownership is that the
public, on account of its power of eminent domain
to mortgage the property of all taxpayers, offers such
ample security it secures capital at a lower rate of in¬
terest that can be obtained by private corporations,
and that, on account of this lower interest rate, public
cost is lower than private cost. This argument may
be valid in comparing an interest rate for a taxpayers'
plant with the interest rate of a private corporation
under existing conditions, but it cannot be valid in
comparing interest rates with interest rates for tax¬
payers' plants, users' plants and private plants owned
and operated under the rules of public regulation
which I have previously and now propose and ad¬
vocate.
M\' proposition is that interest in all cases, whether
of public or private ownership, shall be charged on the
entire investment at the rate paid by the public on its
bonds issued for the undertaking, or, in the case of
private ownership, at the lowest rate paid on its bonded
debt by the municipality in which the- industry is
located.
This rule gives public credit no advantage over pri-
\ ate credit. It is based on the theory that, under the
system of public regulation proposed, there will be no
24 INTEREST COST—TAXPAYERS' PLANTS.
difference in the rate of interest at which public and
private bonds can be placed in future transactions.
The hardship it will entail on private corporations will
pertain entirely to existing obligations.
INTEREST A FACTOR OF COST IN TAXPAYERS' PLANTS.
It is contended by rny opponents that it is unfair to
charge interest upon the entire investment, in the case
of taxpayers' plants, when a part of the investment,
or all of it, has been paid out of the proceeds of profits
or of taxation, and current interest is paid on only a
portion of the investment represented by outstanding
obligations. This objection is not well founded. In¬
terest is a payment for the use of capital. A public
service industry, by whomever owned and operated,
IS undertaken for the benefit of pubhc and private
users of the services it renders. All capital taken from
taxpayers for this purpose is socialized, not capital¬
ized. The taxpayer as an individual loses not only
the interest on his share of the investment, but he also
loses his principal as well. No dollar paid by a tax¬
payer on account of public ownership and operation
ever returns to him. In determining cost for the
purpose of fixing price to users, taxpayers as a class
are entitled to an interest charge on the entire invest¬
ment. If such a charge is not made and paid, the
result will be the taking of taxpayers' capital for the
TAXPAYERS VS. BONDHOLDERS. 25
benefit of users without compensation. This is for¬
bidden by the requirements of justice.
This interest charge should not be a mere matter
of bookkeeping. The payment of interest on tax-
payeis' investment should be made to the public treas¬
urer for the relief of taxation, as regularly as the pay¬
ment of interest on outstanding obligations is made to
public creditors. li_\ this means taxpayers will re¬
ceive for the use of their capital the indirect benefit
of a reduction in the amount to be raised by taxation
for general purposes.
• TAXl-AVERS vs. BONDHOLDERS.
No question is raised regarding the payment of in¬
terest on the part of the investment voluntarily made
by bondholders. By what rule of justice is a bond¬
holder's voluntary investment made more sacred than
the compulsory investment of a taxpayer ? Again, the
payment of interest to a bondholder goes directly to
the individual owning the investment, but in the case
of a taxpayer the interest payment can only go to his
class, it cannot search out and reach the pocket of the
taxpayer whose capital was originally impaired by the
amount of the tax he paid on account of the invest¬
ment. The ownership of capital, whether by bond¬
holder or by taxpayer, cannot justly be permitted to
aflfect the rules of finance or the laws requiring pay-
20 TAXPAYERS VS. BONDHOLDERS.
ment for its use. If any discrimination is permitted
it should be in favor of, not against the taxpayer, be¬
cause his investment is compulsory and without hope
of gain. It is not capitalized. He is given no trans¬
ferable certificate of stock. It is socialized and
ceases to be privately owned capital. The taxpayer's
capital is taken from him by the arbitrary power of
eminent domain and his property is mortgaged for the
security ôf the bondholders. .HI of the capital taken
from taxpayers and invested in public service indus¬
tries is confiscated. It never returns to them. The
nearest approach they can ever make to getting it back
is by means of payments made for the relief of general
taxation out of a fund created for the elimination of
private capital provided for this purpose by the per
cent included in price to users. When all trace of
private capital has been eliminated from the under¬
taking in this way, or as fast as it is so eliminated,
interest on the investment may justly cease.
INTEREST .\ FACTOR OF COST IN USERS' PLANTS.
In the case of a users' plant the entire initial invest¬
ment is made by voluntary investors—bondholders—
who take for security the property and franchises
used by the industry. The tran§action must be based
on legal requirements specifying that price to users
shall include all costs of ownership and operation plus
INTEREST COST—USERS' PLANTS. 27
a sufficient per cent to provide for the payment of the
principal and interest of bonds as specified. It may be
supposed that bonds of this class cannot be placed at
as low a rate of interest as bonds issued on the security
of taxpayers' property. Even if this be true this form
of public ownership is the only one that can be de¬
fended in conformity with the requirements of jus¬
tice. The plant is for the benefit of users. They
should pledge only that which is their own, the property
and the franchise used by the plant, and they should
pay all costs of ownership and operation, including
provision for capital charges involved in the payments
of interest and for the liquidation of investment. In
this way users" profit is socialized for the benefit of
users as a class, instead of being paid to investors for'
the gain of individuals.
Under a firmly established civil service system, and
a properly devised system of uniform aecounting and
state inspection, 1 believe long-termed bonds can be
placed on the security of users' plants at a rate of in¬
terest as low as that enjoyed by private corporations,
if not as low as that enjoyed by the munieipality. In
practical results this will place users" plants, as far
as the factor of interest is concerned, on an equality
with private corporations.
28 INTEREST COST—PRIVATE PLANTS.
INTERIiST A FACTOR OF COST IN PRIVATE PLANTS.
In tlie case of private plants it is necessary to sep¬
arate payment for use of capital from authorized profit,
so that each factor may be dealt with in its own right
and be properly allowed and accounted for. This
should always be done in all private business. If done
it will greath assist in the correct calculation of cost,
and will save many proprietors from the fatal effects
of self-deception in thinking they have made a certain
profit, when, in fact, they have secured only the interest
for the use of their capital, that they might have ob¬
tained without effort and held security for the pay¬
ment of interest and for the principal.
Users are not affected by the division of the interest
charge on investments in private plants between bond¬
holders and stockholders, ifondholders take no risks
and are free from responsibility for the successful oper¬
ation of the plant. Stockholders assume the risk and
the responsibilit}' for the sake of the profit they may
gain. They are entitled to the same pay for the use
of their capital as is paid to bondholders. If the rate
per cent allowed for interest charge, in determining
costs as a basis for fixing price to users, is the same
as the public is paying on its bonded debt, regardless
of the rate actually paid by the corporation, the margin
of advantage claimed for public ownership, on account
of its ability to borrow at a less rate of interest than
ACCIDKXT IXSUR.WCK A FACTOR OF COST. 29
a private corporation can, will be completely wiped out.
When the interest charge is equalized in this way all
complaint against the interest paid on corporation in¬
vestments must cease.
INSI K.\NCE AG.MNST ACCIDENTS A FACTOR OF COST.
It is claimed by public ownership advocates that an
advantage is gained by public ownership because it is
unnecessary to insure public property. This policy is
supported by the plea that a loss caused by an accident,
spread over the assessable value of all property, would
hardly cause a perceptible increase in the tax rate,
while the same loss assessed on the stockholders of a
corporation might place them in bankruptcy. This
plea is made in seeming ignorance of the fact that in
accounting for the transfer of some plants from public
to private ownership, the explanation is made that
the stations had been burned and on account of the
limit on indebtedness the public could not borrow more
capital with which to rebuild. Part of the debt that
swelled the amount up to the limit was undoubtedly
incurred on account of the destroyed plant. Had not
the desire to make a dazzling exhibit of the advantages
of public ownership dethroned prudence, a provision
would have been made for the payment of insurance.
The premiums would have been paid. The loss would
have been provided for and those communities would
30 ACCIDENT INSURANCE A FACI'OR OF COST.
to-day be enjoyinj;- all the lienefits of public o\vner.ship,
instead of having; returned to the embrace of corpora¬
tions.
Other instances might be given, where, for the
present benefit of an understated cost, no provision was
made for losses by accidents to persons and property.
The losses have come and the penalty now being paid
is shown in an abnormal expense account.
This plea that insurance is not required for pvtbiic
plants is as uncomplimentary to the judgment of those
who advance it as would be the plea of a member of
Congress that an item of $750,000 in an appropriation
bill was not worth debating, because it represented
a tax of only one cent per capita.
In any event the public should do as some large pro¬
prietors are doing, charge to expense account the
amount of an annual provision for insurance of all
kinds, withdraw the amount from the business and
invest it in a fund to be drawn upon to make good
any loss they may suffer. If this is done then the
charges for insurance in public and private accounts
will balance themselves and another apparent ad¬
vantage for public over private ownership will disap¬
pear, and the public will be a gainer by its. disappear¬
ance.
TAXES A FACTOR OF COST.
31
MUXICir.CL T.\XES A FACTOR OF COST.
In the case of private ownership, taxes paid to the
municipality arc unquestioned items of cost. When
property is transferred from private to public own¬
ership, taxation by the public owner "teases. This is
claimed by some as an advantage for public ownership,
but it is an advantage secured at the expense of tax¬
payers. ITie amount to be raised by taxation is not
decreased by reason of such transfer, therefore, the
remaining property must pay the tax formerly paid by
propertx that has been removed from the tax dupli¬
cates by transfer to public ownership.
The claim is made, however, that taxpayers secure
an indirect benefit through the unearned increments
of the value of their property, induced by improve¬
ments made by publicly owned and operated industries.
This benefit, it is claimed, is ample compensation for
their loss of taxes relinquished on public property
taken from private ownership, for the loss of their cap¬
ital, and loss of interest on their capital when it is
taken by taxation for investment in a public plant.
I'11 fortunately for this claim, it cannot be shown that
this increnient of value is an\ greater in the case of
public than in the case of private improvements, while
in thé latter case no taxes are relinquished, no taxes for
investment are paid, and no loss of interest on the cap¬
ital so taken is incurred. If taxpayers will examine
3^ TAXES A FACTOR OF COST.
these propositions close!} they must conclude that the
advantage claimed for public ownership by reason of
saving the taxes a private corporation would pay is
entirely the product of incorrect bookkeeping, not of
personal experience.
If the item of taxes relinquished is omitted in deter¬
mining cost for the purpose of fixing prices for users,
in the case of a taxpayers' plant, it will operate as a fine
on the taxpayer for having permitted his property to
be mortgaged to secure a public plant for the benefit of
users. The effect will be the same in the case of a
users' plant. Taxpayers will have to make good the
loss of taxes a private corporation would pay.
In all just comparisons between public and private
ownership, the item of municipal taxes will be included
in both statements and will balance each other. No
advantage for municipal ownership will then appear on
account of this item.
STATE TAXES A FACTOR OF COST.
In the matter of state taxation, a general transfer of
public service property from private to public owner¬
ship, and the relinquishment of all taxation for this
reason, may be attended with serious results for the
property remaining liable for state taxation. The
farmer should not have his taxes increased for the ben¬
efit of users of municipal services. The state should
INVESTMENT INSURANCE—COST FACTOR. 33
tax all property used for the purposes of public serv¬
ice industries equally, whether owned by the public or
private corporations. And, further, to provide for the
expenses of prescribing and auditing a uniform system
of public service accounts, public and private, and for
publishing an annual report of the same, the state
should levy a special tax on all such investments.
This item of state taxes must necessarily appear in
the statements of both public and privately owned in¬
dustries ; one will balance the other. No advantage for
public ownership will be found here.
INVESTMENT INSURANCE A FACTOR OF COST.
For the purpose of being more clearly understood I
have dropped the term "depreciation," and adopted the
term "investment insurance."
The theories and arguments advanced by some ad¬
vocates of municipal ownership regarding the facts
of depreciation and the functions of this account are
startling. They are put forward in seeming innocence
of the truth that an economic theory founded on a
fallacy cannot endure the test of experience.
Three causes are in continuous operation from the
day an investment is made in a public service plant
conspiring to impair its value. They are the destriic-
tivencss of natural elements, which eat away the life of
34 INN ESTMENT INSURANCE—COST FACTOR.
all constructions and equipments, whether idle or in
use ; the destructivcness of use and improvements, which
render replacements necessary beforé the life has been
exhausted liy natural and operating causes. Repairs
and replacements are the results of these causes. Cor¬
rect financiering requires that the value of an invest¬
ment shall be protected against impairment from these
causes. This can be done only by charging to current
expenses an annual amount as an insurance premium,
which must be set apart in a special fund to be drawn
upon as occasion may demand for the repairing, main¬
tenance and extensions of the plant, so that its present
value, estimated at east of duplieation, shall at all times
be equal to investment aeeount. In other words, an in¬
dustry should be so financed that investors can at any
time recover the entire amount of their investment.
The annual premium required for this purpose can
be calculated from the records of experience as closely
as can the premiums necessary for protection against
loss b)- fire or other accidents. A correct manage¬
ment of this account does not require its subdivision
and apportionment on different portions of the plant.
The entire investment is to be insured. The pre¬
mium should be calculated at a fixed rate per cent on
the entire investment. It should be charged annuallv
as an item of cost of ownership and operation. The
amount should be placed in an "Investment Insurance
INVESTMENT INSURANCE—COST FACTOR. 35
Fund," and should be drawn upon only as occasion
demands in behalf of the purposes for which the^
fund is created. As it is wise to make estimates fav¬
orable to the requirements of safety, in order that the
factor of error may be on the right side of the ac¬
count, it is unwise to underestimate the rate per cent
on the entire investment to be charged to current ex¬
pense and set aside in an Investment Insurance Fund.
When price to users is determined by cost, invest¬
ment insurance must be included as an item of cost.
The effect of this will be to equalize cost for users dur¬
ing the life of the plant. It will prevent the under¬
estimating of cost for users when the plant is new
and the forcing of an excessive cost on users when
the plant is old. If the principle is correct that no
generation should bind its successor, the principle is
also correct that present users should not be permitted
to rob future users through failure to pay their full
proportion for the life of the plant exhausted in their
service.
In making a liberal estimate for the annual cost
of investment insurance, the interests of the user'and
of the investor are identical. While an overestimate
may temporarily increase price to users, its final effect
will be to relatively reduce the price. If the invest¬
ment insurance fund is ample, it will provide for all
repairs, maintenance and minor constructions. Such
36 INVKSTMRNT INSURANCE—COST FACTOR.
payments must either be included in current expenses,
covered by the investment insurance fund, or charged
to investment. If there is not sufficient provision for
these purposes in the investment insurance fund, when
the surplus is charged to current expenses it will im¬
mediately increase cost. If the excess is charged to
investment account, cost and price will be permanently
increased because this account is the basis on which
interest, taxes and profits are computed. An under¬
estimate for investment insurance means a present
understatement of cost, to be followed by a future in¬
crease in current expenses, or in investment charges.
An overestimate means a present overstatement of
cost, to be followed by future diminishing cost in
current expenses, or in investment charges. The
overestimate will permit of replacements and ad¬
ditional construction, without increasing investment
account, thus increasing efficiency and output without
increasing investment charges. This will result in a
•growing service at a diminishing rate of cost per unit
and will make a decreasing price possible. It will
keep the investment account at par with the cost of
duplication, or below it, so that the investor can always
obtain the par value of his' investment, or, in other
words, get his money back without loss. It is as es¬
sential that this condition should exist in public as
in private accounts.
MATERIALS A FACTOR OF COST.
37
There is no reason in the nature of things why the
cost of investment insurance should not be as great
under public as under private ownership. In formu¬
lating rules for determining cost, the law should re¬
quire the same rate per cent on the entire investment
to be used in both cases. This will cause the item in
both sets of accounts to be in balance and no ad¬
vantage for or against pulilic ownership will result.
MATERIALS USED A FACTOR OF COST.
That materials used should be charged to current
expenses is unquestioned. There is, however, a wide
latitude for error in permitting accountants to exercise
their judgment in charging the cost of materials and
labor to current expenses, to investment insurance
fund or to investment account. Standards of com¬
parison and statements of cost cannot be reliable in the
absence of a uniform system of accounting carefully
examined and checked, devised, audited and made
compulsory on all public and privately owned and op¬
erated public service industries. Under such regula¬
tions the differences in cost for materials shown will
be caused by local conditions, judgment in buying
and economy in use.
If public officials and employes are really more effi¬
cient in these respects fas some claim) than corpora¬
tion managers and employes, public ownership will
38 SALARIES AND WAGES FACTORS OF COST.
show a decided advantage in comparison with private
ownership. The items of cost for materials used will
measure this advantage accurately.
SALARIES A.ND WALES FACTORS OF COST.
There can be no dispute over the proposition that
salaries and wages are items of cost. The point to
be safeguarded here is to make it certain that all pay¬
ments for salaries and wages are fully and correctly
charged. Large differences may be made in state¬
ments of costs by charging such payments to the wrong
account, and in the case of public plants, by charging
them to some other city department. Municipal own¬
ership advocates claim that private corporations pay
excessive salaries to their officials and underpay and
overwork their employes. A salary, whether paid to
a public officer or to a corporation manager, becomes
excessive only when it is out of proportion to the
service rendered. The larger the interests, and the
greater the responsibilit), the greater is the liability to
incur excessive expenses or losses through lack of dili¬
gence, energy, skill and executive abilitv. W hen all
costs are considered, a $20,000 man ma\ make a far
better showing than a $5,000 man. One of the dan¬
gers that beset public ownership is the liability to the
enforcement of a false economy throng!) intrusting the
management to inferior men, who w ill consent to fill
the offices for small salaries.
SUXDRY EXPENSES FACTORS OF COST. 39
The pay and hours of service for employes have been
sufficiently discussed elsewhere.
The only point to be insisted uron in regard to t4iis
item is that all payments for salaries and wages shall
be fully and properly charged. If the theories and
•representations of municipal ownership advocates are
correct, comparisons of accounts so kept will show a
decided gain in this item in favor of public ownership.
SU.XDRY EXPENSES FACTORS OF COST.
It may be possible, in devising a uniform system of
accounting, and formulating rules for determining
cost, to dispense with a miscellaneous expense ac¬
count. If this is not done, the rules must clearly
define what items may be entered in this account. As
all such expenses, if not entered in this account, must
be entered in some other expense account, its effect on
the final result in determining cost will be neutral.
The total of all expense accounts will be the same with
or without a miscellaneous expense account.
COST STATEMENT.
The foregoing analysis shows that cost is the sum of
the annual charges for :
1. Interest on total investment.
2. Insurance against loss b\- accidents.
3. Àlunicipal taxes.
40
COST STATEMENT.
4. State taxes. ,
5. Investment insurance.
6. Materials used.
7. Salaries and wages.
8. Sundry expenses.
If in the case of public plants users are to pay no
more than cost and taxpayers are to be protected from
making up deficits caused by selling services for less
than cost ; if selling price is to correctly apportion cost
betw een public and private users, so that no injustice is
to be doné to the one by the other; if in the case of
private plants price to public and private users is to be
determined by cost, plus an authorized profit, users and
taxpayers must unite in demanding that tlje law shall
define what items shall be included in cost ; that it shall
be made certain that all such items are fully and cor¬
rectly included in all statements of cost used as a basis
for price ; and that the administrators of all public
plants shall be prohibited from selling service for less
than cost.
^Vhen statements of cost for public and private
plants are made in strict conformity with an identical
rule, the question—which of two agents—political or
industrial corporations—shall the people employ to
supply themselves with any of the entire group of
services technically known as public service industries
—will be authoritatively answered. All real advan-
PUBLIC PLANTS—PRICE TO USERS. 41
tages of public ownership will be clearly stated
and certified by an impartial authority that must be
accepted as conclusive by all parties to the controversy,
PUBLIC PL.VNTS.
PRICE TO USERS—COST PLUS PROVISION FOR ELIMINAT¬
ING PRIVATE C.S.PITAL.
In the case of a taxpayers" or a users' plant, the ele¬
ment of private capital will not be extinguished so
long as there is a single dollar invested in the plant
voluntarih contributed by a bondholder, or paid un-
def compulsion by a taxpayer. The final result of pub¬
lic ownership should be the socialization of the capi¬
tal employed. Public ownership is ownership by all
of the people for the benefit of all of the people. Pri¬
vate ownership is ownership by individuals for the
benefit of individuals. Capital is primarily a creation
of individual effort. It cannot justly be taken from in¬
dividual ownership and transferred to public owner¬
ship without fair compensation. Public ownership
and operation of an industry cannot be undertaken
without making use of privately owned capital. This
capital must be obtained by compulsion from taxpay¬
ers, or by voluntar\ investment from bondholders. It
should never be taken without an agreement for its
rcpavment. In the case of bondholders this agree¬
ment is always specified in the mortgage. In the case
42 PUBLIC PLANTS—PRICE TO USERS.
of taxpayers it lias never been specified. Their capital
has been and always will he confiscated, so far as in¬
dividual experience goes. Every law authorizing the
taking of taxpa\ers' capital for investment in a public
plant, as in the case of authorization an issue of bonds,
should require that the price for services rendered to
public and private users shall include cost plus a suffi¬
cient provision for the repayment to the general fund
ot all sums collected by taxation, or the payment of the
bonds at maturity. T>y this process the private capi¬
ta! of the taxpayer and of the bondholder can he re¬
placed by private capital contributed b) users. If the
user pays no more for the service under these condi¬
tions thqn he would pay to private corporations, the
socialization of his capital is accomplished without in¬
justice to him, and as a final result he will be benefited
by the reduction in price that will occur when charges
in cost cease for interest on private capital, and in
price for the repayment of private capital. In brief,
users as a class desire to own public plants, because
they expect to make a gain for themselves by such
ownership and operation. In order to obtain these
benefits without injustice to others they must furnish
the capital and take the risks. If they cannot secure
the desired benefits in the manner indicated, they have
np moral right and should have no legal power to ob¬
tain them by confiscating the capital of taxpayers.
PKIX ATE PLANTS—PRICE TO USERS. 43
PRIVATE PEAXTS.
PKK E TO USERS COST PLUS PROFIT.
Every advocate of municipal ownership, whose opin¬
ions are worthy of respect, concedes that private capi¬
tal invested in public service industries is justly en¬
titled to a reasonable profit. The only point open for
debate is the questioii. What is a reasonable profit and
how shall it be determined? Reserving the answer to
this question for the moment, the inclusion of a reason¬
able profit with cost, to determine the price users ma)'
justly be required to pay private corporations for serv¬
ices rendered by tliem, is not a debatable propositiop.
Cost being determined in the case of private corpora¬
tions in identically the same way in which the law
should require that it shall be determined in the case
of public plants, and the profit added to cost to fix price
to users being conceded as reasonable, all cause of
complaint against prices charged by corporations will
be forever removed. Whether or not price to users
under these conditions will be less under public than
under private ownership depends entirely upon the
relative efficienc)' of the two agents.
If the efficiency of the two agents is equal, their cost
will be equal. If to this cost 5 per cent, on total in¬
vestment is added, in the case of a public plant, to
provide for the elimination of private capital, and 10
per cent, on total investment is added, in the case of a
44 PRIVATE PLANTS—PRICE TO USERS.
private plant, for a profit, the public price will be 5
per cent, less than the private price at the start, and
10 per cent, less as a final result. This statement is
made to illustrate the proposition, not as a concrete fact
realized by experience.
If the statements of the.advantages of public owner¬
ship, theoretical and obtained—made by those who
speak with greatest authority—are reliable, a public
price less tban private corporation price is certain to
be realized. Being sure of their results, they of all
others are expected to earnestly join in a demand for a
compulsory system of public accounting and auditing
that will create standards of comparison designed to
prove beyond the possibility of a doubt the relative effi¬
ciency of the two agents, one of which must be em¬
ployed by the people for the purpose of rendering the
public services they require. This is a duty of the most
sacred importance, because such a demonstration of
the superior efficiency of public ownership will inev¬
itably lead to the substitution of socialized for private
capital in all industries. It will establish socialism
and abolish competition. It will create public trust.s
and destroy self-employment. It will develop joint
ownership of all property by all of the people and de¬
stroy the right to own private property. Xo true friend
of the people can desire the adoption of a public pol¬
icy tending to these results without the guidance of
KEJ.ATIX'E EFFICIEXCV
45
an exact knowledge of the undispnted results of ex¬
perience.
REL.VnVK EFFICFENCY UNDER IDEAL CONDITIONS.
A mistake will be made if the relative efficiency of
public and private ownership is decided by the author¬
ity of comparisons made under existing conditions. I
have stated that, to determine the relative efficiency of
the two agents, fixed standards of comparison must be
established, and all conditions that may tend to in¬
crease the efficiency of the one or of the otheY must be
fully developed. The method of establishing, and the
character of fixed standards of comparison, has been
explained. I now take up the consideration of condi¬
tions that will tend to increase the efficiency of each
agent. A description of the ideal condition will enable
anyone to contrast it with the existing condition.
.\D.MINISTRATIVE CONDITIONS.
Sincere advocates of public ownership fear the dis¬
astrous effect of political administration. They state
with great emphasis that they see no hope for the
.success of public ownership unless its administration
is placed under the protection of "a thorough applica¬
tion of the merit system in appointments, promotions
and removals." The declaration is clearly made that
"nothing but financial disaster can be expected as the
result of the political control of such vast interests.
40 ADMINISTRATIVE CONDITIONS.
The Fourtli .\iimial Report, Public Lighting Com¬
mission ; City of Detroit, year ending June 30, 1899:
page 10, states:—
"To a strict adherence to the policy which assured
the working force of the Commission a tenure of posi¬
tion dependent solely upon good behavior and the s\ s-
tem of promotion in service according to. merit, which
has always prevailed, the success which has thus far
attended the administration of this department of the
city's government, is mostly due.
"The nature, as well as the regularity and exactness
required in the execution, of the duties of the regular
employes of the Commission places the public lighting
department in a situation distinct in many respects
from other departments of the public service. A de¬
parture from this policy would result in decreasing not
alone the uniform efficiency of the service, but also
seriously iuterferring with its economical administra¬
tion."
The permanent establishment of practical civil serv¬
ice regulations, sustained by an educated public opin¬
ion that will tolerate no backward step, is a condition
precedent. to the efficient administration of publiclv
owned and operated industries.
Sincere advocates of private ownership know that
the disastrous effects of a continual war of interests
between employes and employers must be eliminated
ADMIXISTRATIVE COXDITIONS. 47
from the problem if the superior efficiency of private
ownership in competition with public ownership is to
be established under the close-fitting conditions' that
will be enforced by a correct system of public regula¬
tion, identical for both interests. They know that the
solidarity of interests of employed and employer must
be removed from the domain of theory and established
as a concrete fact of experience, that the wastes and
destructions caused by suspicions, prejudices, discon¬
tent and open warfare must be displaced by co¬
operation for mutual benefit, giving to each a just
share of the profit created, if operation for profit under
private ownership is to continue.
A correct system of sharing profits with employes
is a condition precedent to the most efficient adminis¬
tration of privately owned and operaied industries.
The efficiency of civil service regulations in one case,
and of profit sharing in the other case, will be placed
in direct competition by a correct system of public
regulation. Whichever side fails to firmly establish
the full recpiirements of the ideal condition will be^the
loser.
U.XIFORM ACCOUXTrXO .\ND AUDITING.
A correct knowledge of details is vitally essential to
the efficient management and financing of any under¬
taking. Such knowledge increases in importance with
48 UNIFORM ACCOUNTING AND AUDITING.
tilt magnitude and complexity of the industry. No
one is so hopelessly mistaken as a person who is self-
deceived. Greater losses are caused by proprietors
and managers who do not know how to calculate cost
than by any other single, factor of uncertainty or error.
Add to this product of ignorance the results of de¬
liberately adopted policies to make reputation for
politicians, and boom stocks for speculators, and an
explanation is found for most of the discontent with
corporations, and for the misstatements contained in
municipal ownership literature.
By prescribing a correct system of uniform account¬
ing and auditing for public and private ownership and
operation of public service industries, the state will in
a measure institute or induce economies that are ob¬
tained in the domain of competitive industry through
the organization of trusts. The gains in efficiency by
each agent from the development of this condition will
be mutual. They will be realized by the public in im¬
proved administration in every department of govern¬
ment. They will be realized by corporation investors
in the increased permanency and steadiness of the mar¬
ket value of the stocks and bonds owned by them and
the lower rates of interest at which they can refund
their outstanding'bonds or secure new loans when oc¬
casion requires.
A correct and honestly enforced civil service system.
ELIMINATION OF COMPETITION. 49
on the one hand, and of profit-sharing on the other,
combined with a correct system of uniform account¬
ing, prescribed and audited by the state, will reduce the
rate of interest, and facilitate the securing of capital for
all public and privately owned public service indus¬
tries. This consideration should cause a demand for
the adoption of these regitlations from all users, tax¬
payers, employes and investors. To such a demand
no effective opposition can be imposed.
ELIMIN.VTION OF COMPETITION.
Another ideal condition that should be fully devel¬
oped and firmly established is found in the monopoly
character of the industry. A public school scholar
should be able to mathematically demonstrate the fact
that costs cannot be reduced by dividing service and
duplicating plants and administrative management. If
costs cannot be so reduced, but, on the contrary, are
increased by competition, ,then price to users under a
correct system of public regulation must inevitably be
increased by competition. This result is plainly seen
by every intelligent student of the subject. Without
e.xception all are agreed that public service industries
are natural monopolies and must be so recognized and
dealt with if the best results are to be obtained for the
benefit of users.
The elimination of competition is not to be confined
4
so ELIMINATfON OF COMPETITION.
to forbidding competition between private plants ; it
must include the elimination of competition, or the
dividing of an industry between public and private
ownership. If public is more efificient than private
ownership and operation, its margin of efficiency
should not be destroyed by dividing the service be¬
tween public and private users, a public plant serv¬
ing one and a private plant serving the other. In
every case where there is an existing private plant and
the people decide to own and operate the industry,
or any part of it, for their own account and benefit, to
avoid the evils of competition and the wastes caused
by duplications, the existing plant should be acquired
b\- the public and the entire industry should be social¬
ized.
The right assumed by the public, and the right
granted to a private corporation, to own and operate
a public service industry, should eliminate all possibility
of competition in, or of a division of, the service. The
right should include the entire municipality. It should
be all-inclusive and exclusive,
PERPETU.\L TENURE.
When power i.s granted to a municipality to become
the owner and operator of a public service industry it
is always granted without limitation as to time. Mu¬
nicipal ownership advocates plead eloquently for the
PERPETUAL TENURE. 51
application to private franchises of the principle that a
present has no right to bind a future generation. They
appear never to see that a future generation is bound
more effectively by granting a perpetual franchise to
a municipality than Ijy granting a similar franchise to
a private corporation. I claim that under a correct
.system of public regulation a grant of power to a
municipality to own and operate an industry should
always carry with it the right to sell or lease the same ;
so that the people may at any time review the action
committing them to such policy, and may exchange
the disadvantages of public ownership and operation
for the advantages of private ownership and operation
whenever they may become satisfied that such an ex¬
change will best serve the public welfare. On the
other hand, I claim that every franchise granted to a
private corporation should be subject to cancellation
by the-public at any time, on payment for the property
in use at the valuation shown by the investment ac¬
count. With these provisions in public and private
franchises no other limitation on the tenure of the
grant is desirable. If the adopted policy, be it public
or private ownership and operation, results in con-
tinuoush supplying users with the best obtainable
service at the lowest just price, no sound reason can be
given for changing that policy. It should stand un¬
changed as long as the need it supplies exists. But
52
AX UNTAXED GRANT.
tlie reverse of this is equally true. If the adopted
policy, be it public or private ownership and operation,,
fails to continuously supply users with the best ob¬
tainable service at the lowest just price, no sound rea¬
son can be given for continuing that policy. It should
be discontinued as soon as the facts are established by
comparative reports resulting from a system of pub¬
lic accounting and auditing, designed to establish cor¬
rect standards of comparison.
By adopting perpetual tenure, with the limitations
specified, private corporations will be relieved from
including in their costs an annual provision against
losses to be sustained in various ways by the expira¬
tion of their franchises. They will, in this respect, be
placed in position to compete on equal terms with pub¬
lic ownership and operation.
•W UNTAXED GRANT.
When power is granted to a municipality to own and
operate a public service industry, no mention is made
of compensation in any form for the right to exercise
the power granted. The compensation in this case
is clearly seen to be in the lower cost and price of
the service. This conditio'n, granted to a private cor¬
poration under a correct system of public regulation,
will result in exactly the same reduction in cost and
price in the one case as in the other.
IDEAL FRANXHISE CONDITIONS. 53
When price is based on cost, and a legal profit is
added to this cost, in conformit}- with the require¬
ments of a correctly tegulated natural monopoly, the
shareholders' interest is unaflfected by additions to "or
omissions from the item of municipal taxation. It
is the user and the taxpayer who is affected. If the
item is not properly financed one or the other of
these interests will suffer an injustice. One 'will
gain what the other loses.
IDE.\L FRA.VCHISE CONDITIONS.
To fully develop and firmly establish ideal franchise
conditions for public and private ownership and oper¬
ation, the grant of power should be :
(a) Inclusive of the entire municipality.
(b) Exclusive of all competition or division of
service.
(c) Untaxed and
(d) Perpetual in tenure.
Limited only by power to sell or lease if a public
plant, or to take possession of by the public, on pay¬
ment of the investment account, if a private plant, at
any time the reports of correctly kept and publicly
audited accounts shall show such changes of public
policy to be for the best interests of the general wel¬
fare.
54
FREE SER\ ICE PROHIBITED.
TREn: SERVICE SHOULD BE PROHIBITED.
The only way a service can be made free to a user
is to so arrange the financial scheme as to cause some¬
one else to pay for it. Lentil something can be pro¬
duced with nothing, free service without cost to some¬
one is impossible. In determining price based on cost,
the entire cost should be subdivided by the entire
service. Of the total amount of water pumped, all
tliat is used for public purposes should pay the same
share of cost as that used for jjrivate purposes. In
making such an adjustment the entire costs of install¬
ing and maintaining a plant for fire protection should
be carefully considered. Whatever the assessed cost
of pulilic service ma\ be, it should be collected by
taxation and paid to the credit of the .service fund as
rcgularh as private users pay their bills. The public
service having been fully paid for. no further permis¬
sion or power should be given to the administration
of an industry, public or private, to put its hands into
ta.xpayers' pockets to get more capital for any reason
or purpose whatever. In this way taxpayers will
know exactly what the public service is costing them,
and users will escape having any part of the cost of
public service included in the price they pay for their
own private service.
SURPLUS PROFITS.
55
DIVISION OF SURPLUS PROFITS.
It is not possible to calculate the income and costs of
a service, when fixing price to users, so accurately
that one will balance the other for a term of five years,
or even for one year. Allowance must be made for
a factor of error on both sides of the account. This
allowance should be intended to produce a surplus,
since a surplus can be easily divided, while a deficit can
never be collected from users who occasion it through
paying too little.
A surplus may result from many favoring condi¬
tions, but in the long run the condition most favorable
to the creation of a surplus is the assurance that every
brain engaged in planning and directing the work,
every eye intrusted in watching its operation, every
hand used in giving physical energy in its manipula¬
tion. ever} dollar supplying its "sinews of war," shall
share equitably in the surplus. This requirement in¬
cludes the municipal board of regulation and the city
council, as well as the employes and investors of the
private corporation. The two interests, public and
private, should share the surplus equally. This is the
final adjustment.
56
CORRECT REGULATION.
REQUIREMENTS OF A CORRECT SYSTEM OF PUBLIC REGU¬
LATION.
The requirements of a correct system of public regu¬
lation, to be prescribed and enforced by state laws,
may now be concisely stated as follows :
1. Civil service regulations for public and profit-
sharing regulations for private plants.
2. A uniform system of accounting, prescribed and
audited by the state, identical for both public and
private plants.
3. Rules for calculating the true and entire costs,
identical for both public and private plants.
4. The prohibition of all free service by public or
private plants.
5. Price to users public plants to be cost plus pro¬
vision for eliminating capital taken from taxpayers
or secured by sales of bonds.
Price to users private plants to be cost plus legal
profit.
6. Grants of power, public or private, to be in¬
clusive of the entire municipality, exclusive of right
of competition or division of service as to territory or
public and private service, and perpetual, with proper
provisions for a change of policy, either way, properly-
safeguarding all investments.
Under authority of such regulations, sustained by
proper state laws, if the people cannot command the
CORRECT REGULATION.
57
honesty and ability to regulate natural monopolies so
as to develop their highest degree of efficiency, and to
cause every advantage from favoring conditions to go
unimpaired directly to users, when they are owned
and operated by private corporations, they cannot do it
when owned and operated by the public. If the gov¬
ernment cannot regulate wisely—it cannot own and
operate economically.
Under the system of public regulation proposed
every legitimate advantage of public over private own¬
ership and operation will be fully developed and of¬
ficially certified. Every existing disadvantage of pri¬
vate ownership and operation will be removed and
every advantage will be fully developed and officially
certified. .Ml differences in the efficiency of the two
agents will be demonstrated by the facts of experience,
correctly ascertained, established beyond the ability
of intelligent questioning. With such information
available there will be no uncertainity as to the re¬
quirements of a correct public policy. With the re¬
moval of uncertainty the occupation of the boodling
alderman and of the speculative gambler will be gone.
The gains for the people, when compared with existing
conditions, will be more varied, far-reaching, and satis¬
factory than any now promised by the advocates of
municipal ownership.
Claims of advantages for public ownership, if they
58
UNFAIR AND UNSCIENTIFIC.
are to satisfy the well-inforined. must have a more
tangible basis than unfair or unscientific statistical
comparisons, an unintelligent use of the principle of in¬
surance, and gains made by simple changes in legisla¬
tive conditions. In such matters, in the absence of
information known to be correct, the people can be
easily misled by politicians bidding for votes, or by
speculators manipulating the market to "shear the
lambs." From these two classes, and their dupes, will
come the opposition to a correct system of public regu¬
lation for natural monopolies^ identical in all require¬
ments for public and private ownership.
UNF.MR .VND U.VSC lENTIFIC ST.VnSTICAL COM P.VRISONS.
Gentlemen temporarily responsible for the efficient
management of public plants must feel an overwhelming
sense of gratitude for the service rendered them by un¬
scientific economists who, having a theory to prove,
never permit statistical accuracy to spoil their story.
I have examined a recently issued volume under the
title of "Municipal Monopolies." (i) The most strik¬
ing feature of this book is the shown infallibility, and
the attested remarkable ability of those having charge
of municipally owned and operated industries. By
' "Municipal Monopolies,' by Edward "W. Bemis, T. Y
Crowell & Co., New York All page references in this paper,
not otherwise credited, are to this book.
UXFAIR AXD UXSCIEXTIFIC.
59
means of a system of unfair and unscientific statistical
comparisons tliese gentlemen are shown in every in¬
stance, in spite of the handicap of inexperience, lack of
technical knowledge, want of direct personal interest,
and the inflexibility of governmental management, to
have obtained results which, .if true, would at once
cause every corporation manager to be consumed with
envy. So convincingly is this proof presented, it can
hardly fail to cause these gentlemanly municipal offi¬
cials to ask themselves why they have been able to ad¬
minister these particular public iilants so much more
efficiently than they have any other public trust ? Why
they have managed them so much more efficiently than
similar private plants are managed by those who devote
their entire time and the best energies of their lives to
such management, and have their fortunes invested at
the risk of their management? Why they have been
able to manage public business so much more efficiently
than thej can manage their own private business?
This evidence must cause all persons who have the
ability to think analytically, to ask why managers pos¬
sessing such consummate ability are servmg the public
for little or no pay, while corporations are charged vvdth
paying enormous salaries for the management of
similar industries, and politicians are charged with
being in business '"for what there is in it for them?"
Politicians and communities who permit themselves
6o
UNFAIR AND UNSCIENTIFIC.
to be guided by such evidence must in due time pay the
inevitable penalty for actions based ôn error. The
most surprising thing about this book is its apparent
inability to teach its authors caution—to cause them
to earnestly seek some sound reason for believing such
results as they obtain by their statistical processes are
endowed with even a probability of being true. A
shade of doubt is cast over the infallibility of these
professors by the admission by one that "a criticism
should therefore be made upon those cities which
entered upon municipal electric lighting eight or ten
years ago." (See page 56.) Why? Turn back and
examine the literature of this subject written by these
same professors eight or ten years ago and you will
find that they were as certain then as they are now
that municipal ownership and operation was a cor¬
rect policy, that they were as impatient of delays
then as now, and that the very cities they now criticise
for adopting this policy then were induced to adopt
it by their teachings. What value can any intelligent
person place on statistical comparisons which make
and repeat the error of comparing a present reported
cost with a contract price paid years ago and ignor¬
ing the price at which the contract could have been
renewed when the public plant was installed? (See
pages 121, 269.) Worse still, what statistical value
can attach to an opinion that to compare present pub-
L'XKAIR AXD UNSCIEXTIFIC.
6i
lie cost with present private selling price is an error?
(See page 26g.) What value can statistical results
have, calculated by those who argue that the item of
taxes may be omitted altogether? (See pages 106,
-35 ) What must be thought of the intelligence of
statisticians who claim that "where a city is accumu¬
lating a sinking fund, or is paying its debt to this
amount annually, no additional provision is required
for a depreciation fund?" (See page 127.) Or "hav¬
ing reckoned depreciation at, say, 5 per cent as part
of the cost in a given year, both interest and depre¬
ciation must be reckoned the next \ ear at only 95 per
cent of the value of the plant the year before, unless
allowance must be made for new construction? In
other words, depreciation in a city plant should be
considered equivalent to a sinking fund, unless it is
spent directly for extensions, without the issuing of
additional bonds or requirement of extra taxes?"
(See pages 113, 212, 23/.)
A sinking fund is for the purpose of replacing the
capital invested obtained from one source with capital
obtained from another source. A depreciation is for
the purpose of insuring an investment against impair¬
ment. To represent that a dollar paid into one fund
makes the placing of a dollar in the other fund unneces¬
sary, or^that a dollar paid into depreciation fund re¬
duces the investment account, is a mistake so simple
02
UNFAIR AND UNSCIENTIFIC.
and glaring it cannot fail to place those responsible for
it under the burden of voluntary error.
.If the policy of public ownership is to stand the test
of experience and critical examination, its advantages
must have a better foundation than the ignoring of in¬
surance, taxes, depreciation, and general changes in
economic conditions. It is painful to see these educa¬
tors of public opinion arguing that it is good policy to
seize private capital by taxation to pay for the con¬
struction of a public plant, and at the same time giv¬
ing as a reason for not exacting an ample provision for
a depreciation fund the excuse that "taxpayers want to
reinvest their own money in their own way, and under
their own individual control." (See pages 115, 125,
272.) If it is so mitch more advantageous for taxpay¬
ers to invest this small per cent, of .their own njoney in
their own way and under their own control, than it is
to pay for an annual depreciation as it occurs, what
becomes of the argument that it is advantageous to
them to be deprived of the right to invest in their own
way the capital taken from them to construct public
plants ?
The fallacy of leaving the allowance for .depreciation
in taxpayers 'pockets to be called for when needed re¬
ceived its quietus in the municipal management of the
Philadelphia gasworks. Instead of setting apart a
necessary amount for depreciation every \ear. and
U\FAIR AND UNSCIENTIFIC. 63
thus creating a fund out of which disbursements for
repairs, betterments and minor constructions could be
paid, the amount was left in the pockets of the people
and a corresponding untrue showing of profits was
made. In the course of time, when it was necessary
to call for the depreciation fund which had been left
in the pockets of the people, it was found that the
people thought it was their own money. They had in¬
vested it in their own way under their own individual
control and no city council could be found willing to
commit suicide by calling for it through an increase of
taxation, the only way in which it could be secured.
If a proper provision for depreciation had always been
set aside every year to be drawn upon by the director
of public works, whenever funds were needed for re¬
pairs, betterments and minor constructions,; the Phila¬
delphia gasworks would still be operated by the public
agent. These works were lost to municipal ownership
through the failure to properly insure the investment
against impairment and the enforcement of proper
civil service regulations. .\o errors are so fatal as
those made by the self-deceived.
SHORT-TERM ERAXCHISES.
Another source of unfair comparisons is found in
comparing results shown by public plants operating
under perpetual, exclusive and untaxed franchises,
^'4
SHORT-TERM FRANCHISES.
with private plants operating under short-term, com¬
petitive and taxed franchises. If a franchise is to ex¬
pire at a fixed date, correct financiering requires an
annual provision to he charged in the current expenses
of each year of the life of the franchise as an insurance
against a loss that may result from its expiration. If a
franchise gives no protection against competitive raid¬
ing by other corporations, or by the public, a provision
as an insurance against loss from this cost must be
made. Whether these conditions are recognized or
not in the accounts of a corporation, their influence is
seen in the character of construction, the extensions
and betterments made during the last few years of the
franchise, rates of interest on borrowed capital, and
the rates of profits necessary to induce capital to invest
in these industries. These conditions are well illus¬
trated by the provisions in the Berlin contract reported
by Professor Remis, on pages 563, 564 and 565 of his
book—"Municipal Monopolies."
The unwisdom of short-term franchises is found not
only in the handicap placed upon those operating un¬
der them as shown, but also in the disadvantage it
places a municipality under whenever it may wish to
change its policy from private to municipal ownership.
A franchise that is perpeptual and exclusive "does not
shut out the right of eminent domain." (See pages
441, 442, 453.) When an industry operating under a
SHORT-TERM FRANCHISES.
65
perpetual franchise is taken for pulilic use, "the meas¬
ure of damages is the fair market value of the prop¬
erty." (See pages 454, 455.) But when the industry
is operating under a short-term franchise, the measure
of damages is the value of the property plus the earn¬
ing power of the industry for the unexpired term of
the franchise. I pointed this fact out to Professor
Eemis'some years ago and told him he was working
in the interest of corporations instead of the people by
demanding short-term franchises. He has recently
proven this to be a fact by acting as actuary for the
Detroit Street Railway Commission and reporting the
"present worth of franchise earnings and of conserva¬
tive prospects of growth" of the street railway systems
of Detroit as being "$8,478,563.86" and the "value
of physical plant $8,000,000." (See report of Commis¬
sion, page 31.) Eight million dollars is the high price
this teacher asks the citizens of Detroit to pay for his
miseducation. Although the proof of the fallacy of
his position is contained in his own book (see pages
441, 442, 453, 454, 455), he still fails to recognize and
acknowledge it. Is this another case of voluntary
error ?
An equally glaring failure to recognize the true in¬
terests of the people was reported by the New York
Rapid Transit Commission when it refused to approve
a demand for a perpetual franchise contained in an of-
5
66
PRICK TO L'SERS
fer by the Metropolitan Traction Compan\ to con¬
struct and operate a rapid transit system in that city.
Surely a correct test for intelligence is the knowl¬
edge it has of its limitations, and the judgment with
which it accepts or rejects the guidance of others.
FI.V.\L ELEMENTS OF PRICE TO USERS.
Having stated in brief the requirements of a-correct
system of public regulation, and referred to the unre¬
liability of the representations and judgment of those
who advocate the advantages of public ownership, the
final elements of price to users will now be stated.
PRICE TO USERS PUBLIC PLANTS.
Cost, determined as shown, plus provision for sub¬
stituting capital taken from taxpayers or invested by
bondholders. It will at once be seen that the longer
the period of time over which this refunding of capital
is distributed the smaller will be the annual provision
for this purpose, and as a result the lower will be the
price to users.
PRICE TO USERS PRIVATE PLANTS.
Cost, determined as shown, plus legal profit. This
provision makes necessary an explanation of the na¬
ture of profit, and the fixing of a standard by which a
legal profit can be invariably determined under varying
conditions and at different periods.
XATURE OF PROFIT.
67
THE N'.VrURE OF PROFIT.
Profit is a creation. It is not an exaction nor a tax.
It is a product of favoring conditions, and of energy,
skill, care, economy, executive ability and inventive
genius applied to the methods and requirements of vo¬
cations undertaken for gain. It is an individual saving
obtained from the results of individual labor sus¬
tained by individual capital. The ownership and oper¬
ation of an industry is the result of the joint labor
and capital employed by it. The profit obtained is the
result of a joint saving effected by the united effort to
increase income and decrease costs. To justify a ven¬
ture the margin of possible profit must be determined
by the pressure and force of uncertainties that may de¬
feat the purpose of making a profit and cause the ef¬
fort to result in a loss. Success is dependent upon cor¬
rect judgment in efforts to secure income, in directing
the energy of the labor employed, in the purchase and
use of materials used, and upon the direct personal
interest of every human factor loyally working to se¬
cure for itself its individual share of the profit created
by its individual labor.
Profit as an economic factor is entirely dissimilar to
the factor of interest and must always be separated
from it if a correct solution of industrial problems is to
be made. Profit is a product of successful effort and
saving. It is a creation of new capital. Interest is a
68
NATURE OK PROFIT.
payment for the use of capital, under conditions of
security more or less perfect, for the regular payment
of the interest and the refunding of the principal. The
element of risk is not entirely eliminated from the con¬
ditions under which capital is leased by an owner to
a user, for the sole consideration of an interest pay¬
ment, the owner having no voice in its actual employ¬
ment, or in the results of its use. But the estimated
force of the risk is a potent factor in determining the
interest rate. The demand for capital and the factor
of ri>k involved in its emplo\ ment determine the rate
of interest, exactly as these two factors determine the
rale of wages for labor. All elements that combine in
the determination of rates of interest and of wages are
identical. This is necessarily so, because in economic
equations capital and labor are two names for the same
element. They are one. Capital is crystallized labor.
Labor is physical capital.
When a person employs his capital for the purpose
of making a profit, he must charge the same rate of in¬
terest for its use as he could obtain by leasing it and
taking security for the payment of the interest and
the refunding of the capital. He should make no
distinction in this respect between paying for the use
of the capital he borrows from himself and the use of
the capital he may borrow from others. If he fails to
do this he will be self-deceived by the results of his ven-
NATURE OF PROFIT.
69
ture. His expenses will be understated by the amount
of the interest he neglects to charge. His apparent
profit will be overstated by the same amount. If un¬
der these conditions he shows a net margin of 8 per
cent, when he could have obtained 4 per cent, for the
use of his capital, instead of having made 8 per cent,
profit, as he will fondly believe, he will be able only to
pay the wages due capital, 4 per cent., and a 4 per cent,
dividend. If he has been as inaccurate in charging to
his expenses a necessary provision for insurance
against loss by accident ; a provision for taxes to be
paid if not paid ; and a provision for insuring his capi¬
ta! against impairment, as he has been in failing to
charge the wages of capital, the probabilities are that,
instead of having made any profit whatever, he has
made none. He may not even have saved the inter¬
est on his capital.
Self-deception of this kind is responsible for more
failures than any other cause. .V high rate of appar¬
ent but not actual profit misleads judgment in busi¬
ness management. It tends to induce an unwarranted
extension of the means of production or distribution.
It tends to weaken resistance in preventing increases
of expenses and of economic efficiency and saving care
in directing the energy employed and the use of ma-
X
terials. It tends to weaken resistance for pressure in
reductions in prices and to mislead in the determination
70
NATURE OF PROFIT
of a price that will cover all costs plus the expected
profit.
Prices made by managers who do not know how to
calculate costs tend to be too low, because a low price
is the easiest way of attracting business, and the be¬
lief that the price named will yield a profit induces its
adoption. The public has no interest in the fact that
the price may not yield a profit, that in fact it may be
less than actual cost. It buys where it can buy the
cheapest and asks no questions about costs. This com¬
pels the educated manager to meet the price made by
the self-deceived manager. The result is an era of
capital exhaustion, during which those with smallest
means and least economic efficiency are sowing the
seeds of their own destruction by vainly endeavoring
to meet prices which may yield a profit to others, but
not to them. They do not discover their errors, be¬
cause they are not sufficiently intelligent to correctly
understand the problem. In due time they reach an
era of failure and panic. The disasters are charged to
every conceivable cause except the true cause, and
thus self-deceived, these practical business men, as they
so love to esteem themselves, continue to spurn the
teachings of theorists, and to repeat their errors.
Ir. the management of public service industries the
underestimating of costs as a first effect has led to the
payment of unearned dividends. This cause is respon-
NATURE OF PROFIT. /t
sible for the popular impression that the people have
heen rohhed. The second effect has heen a demand
for reductions in price, for the org-anization of com¬
peting companies, and for public ownership. In the
absence of a uniform and correct system for calculat¬
ing costs, legally established, audited and certified, mu¬
nicipal councils and weak managers have vied with
each other in their efforts to fix reasonable prices.
Self-deceived as to true costs, without any desire to be
unjust, they have fixed unreasonable prices, which
have yielded no true profit ; in many cases have not
paid for the use of capital : and in some cases have not
even protected investments from, impairment. .An
unreasonable low price voluntarily or compulsorily
established in one place has invariably been used as
a club to knock down the price in other places, and
without valuing and making due allowance for dif¬
ferences in local economic conditions. This explains
the universal feeling of antagonism between the peo¬
ple and corporations that is so acute throughout the
country, and unerringly points to the remedy. There
must be a legal recognition of the nature of and a
measure for profit, and a declaration of the elements of
cost that shall be fully and truly included in all state¬
ments of costs used as a basis of determining price.
72 STANDARD FOR DETERMINING PROFIT.
STAXD.VRD FOR DETERMINING REASONABLE PROFIT.
A correct knowledge of the nature of profit is neces¬
sary to the determination of a reasonable profit. The
adoption of a standard for determining a reasonable
profit will be greatly helped hy the recognition of the
fact that profit is in itself not what one takes from an¬
other to his disadvantage, but that it is a margin of
gain made by one in rendering a service to another at
a price that gives the buyer an advantage of equal
value or a greater value than the gain secured by the
other. The gain of a user of a street car ride, esti¬
mated by any just valuation, is enormously greater
than the fraction of a cent that may represent the en¬
tire gain of the corporation rendering the service. A
user is not required by the laws of justice to pay for a
monopoly service on the basis of what it is worth to
him, but to pay for it on the basis of its cost plus a
reasonable profit. The intelligent application of this
rule will cause every gain in economic production and
distribution, and in the subdivision of costs between an
increasing number of users, to go directly to the user,
unimpaired. Assuming agreement on the elements
and methods of calculating costs, the only remaining
problem is how to determine a reasonable profit.
There is no clearly defined rule for determining a
reasonable profit in the minds of those who sincerely
agree that labor and capital employed in an industry
STANDARD FOR DETERMINING PROFIT. 73
are justly entitled to the profit they create. This profit
is the margin of différence between cost and price. It
is as natural for corporations to want this margin as
great as possible as it is for users to want it as small
as possible. The most effective way to cut down this
margin is to make public service industries legal
monopolies. By doing this, by giving the protection
and eliminating the legislative risks involved, users
will reduce costs to the lowest possible point, and will
acquire the right to limit profit, and thus to fix a rea¬
sonable price.
The problem is one of determining a reasonable
profit under conditions involving a minimum risk.
Profit under such conditions is almost entirely the
creation of those employed by the industry. In the
absence of any standard for placing a reasonable limit
on a monopoly profit, it is frequently said that it should
not exceed the average profit realized in competitive
business. This conclusion is undoubtedly partly due
to the popular belief that free competition is the most
potent operative force in keeping down prices, and
therefore in minimizing profits. It may also be partly
due to the fact that capital will not be voluntarily in¬
vested in an industry unless it has a fighting chance to
earn a profit that will be equivalent to the profit it
might earn if otherwise employed.
It is difficult to ascertain the average profit realized
74 STANDARD FOR DETERMINIXG PROFIT.
iti competitive business. As a standard for determin¬
ing a reasonable profit, while it may be theoretically
just, it is practically impossible, on account of its in¬
tangible nature. .\ more concrete standard must be
found. For this I have sought most diligently. As a
result I have reached the conclusion that the rate of
profit should sustain the same relation to the rate of
wages, in a public service monopoly, as it does in a
competitive business. In most states the laws fix the
legal interest payment for the use of capital at 6 per
cent. The relation of competitive profit to legal inter¬
est is as 2 to I. The total margin over costs less inter¬
est is apportioned between the difïerent factors as
follows :
Interest 6 per cent.
Estimate for risks 6 per cent.
Estimate for economic profit 6 per cent.
Excluding risk, the margin is reduced to I2 per
cent., which, after the payment of interest, leaves 6
per cent, as the earning power of the energy and
economic saving-employed.
Twelve per cent, is the divisible income allowed a
street railroad corporation in the Berlin (Germany)
contract, which Prof. Bemis declares is "the best that
the continent of Europe can teach" and is "worthy of
all praise." (See pages 562, 563, 564, 565.) .\n error
STANDARD FOR DETERMINING PROFIT. 75
will be made, however, if this competitive standard is
accepted.
The legal rate of interest is more than the market
rate for investments that are practically free of risk.
The credit of a municipality should be, and is claimed
by every public ownership advocate to be, betten than
the credit of any individual or corporation. munici¬
pal government is a political monoply, endowed with
the power of eminent domain. When it employs capi¬
tal it pledges as security a first mortgage on all taxable
property within the cit\ limits. This fixes the rate of
interest under monopolistic conditions. In cities of the
first class this rate is 3 per cent. The relation of profit
to interest being 2 to i, monopoly profit in these cities,
including risk and earning power, should be 6 per
cent. This is the same as the rate for earning power,
exclusive of risk, in competitive business. Taking in¬
terest and profit into account, the total margin over
costs, less interest, is 9 per cent. This is j per cent,
less than the Berlin rate so Avarraly. commended by
Prof. Bemis. It is a rate that cannot be rejected as
unreasonable b\ any fair and intelligent mind.
Under the regulation proposed the standard for in¬
terest is the rate paid by the municipality on its bonded
debt. The standard for determining a reasonable
profit is tzvicc the rate of interest paid on its bonded
debt by the municipality in which the industry is lo-
76 STANDARD FOR DETERMINING PROFIT
cated. This is a monopoly standard established by
competition in fixing the rate of interest a municipality
pays on its bonded debt. It cannot be changed by
legal enactments. It is known to all men. It will
change only as general economic conditions change,
which will aflfect the value of money and the margin
of possible profit in every business. It reduces the
margin for profit so low that the closest care, diligence
and economy on the part of every person employed
must be actively exercised to prevent a possible profit
from being turned into a positive loss.
A legal profit, determined by this standard, added
to cost, determined as shown, will make a theoretical
margin of difïerence between public and private price
to users of the amount of this profit. If, however, the
theory is correct that profit is a creation, not an ex¬
action nor a tax, private cost will bo less than public
cost by the full amount of the legal profit, therefore
public and private price to users will be equal after
excluding from the public price the provision required
for refunding the capital employed. To such a price
there can be no just objection. It must be accepted
as the ideal reasonable price, which all public owner¬
ship advocates agree should be paid to private cor¬
porations, which all honest users are perfectly willing
to pay, and all honest investors are willing to accept.
INVESTMENT.
77
INITIAL INVESTMENT.
The fact has not escaped attention that this system
of regulation is based upon investment. The follow¬
ing items of expense are all calculated on the total of
investment account;
Interest.
Insurance against accidents.
Insurance against the impairment of investment.
Legal profit.
The importance of limiting investment is clearly
apparent. Everything that can be done to minimize
the investment should be done, and will contribute
directly to lowering the price to users. When a pri¬
vate monopoly is correctly regulated the people may
find a way of recovering some portion of the unearned
increment of value accruing to abutting property own¬
ers on streets improved by a public service, instead of
undertaking to accomplish the impossible in attempts
to gain advantages through increasing the capitaliza¬
tion of corporations by requiring payments for fran¬
chises, street paving, free services, etc. I made this
suggestion in a paper submitted to the "Educational
Alliance of New York City," February i6, 1898. Prof.
Bemis has now conceived the idea and brings it forth
as a newy found advantage for municipal ownership.
(See page 665.)
7«
INVESTMENT.
1 am not unmindful of the state of public opinion
created by known and suspected overcapitalization,
and of the deep-seated feeling of resentment against
being required to pay interest and dividends upon
watered bonds and stocks. I solved this tangled prob¬
lem by simply ignoring all issues of bonds and stocks,
and taking the position that the people are interested
only in the amount of the investment used as a basis
for calculating the various items of costs and profit.
They are not interested in the way this amount may
be subdivided between bondholders and shareholders,
since the manner of its division cannot make one cent
difference in calculations based on the total amount.
That the value of an investment, independent of bond
and stock issues, can be easily ascertained to the satis¬
faction of municipal ownership advocates and cor¬
poration managers has been recently demonstrated by
the proceedings of the Detroit Street Railway Com¬
mission. The initial investment having been agreed
upon for the adoption of this system of regulation, the
requirements of the proposed uniform system of ac¬
counting and auditing, aided by the definite use_of an
investment insurance fund, should always keep the in¬
vestment account at par with or below the cost of
duplication at any given time. This is the initial and
the final condition to be considered.
PEOPLE NOT ROBBED.
79
THE PEOPLE HAVE NOT BEEN ROBBED.
In considering- this jubject no statement is com¬
plete that omits reference to the benefits, public and
private, that have been conferred on all of the people
by the genius, enterprise and skill of those who have
been grouped together by the cohesive force of self
interest for the purpose of exploiting public service in¬
dustries. They have' made possible a degree of com¬
fort, facilities for giving employment, advantages for
manufacturing, and for exchanging the products of
fields, mines and workshops, opportunities and means
for social enjoyment, recreation and pleasure unknown
to any former age or civilization. However much
individuals may have gained, though their wealth be
colossal, their gain is but a very small per cent of the
total value that has been created by the use of their
genius, skill, enterprise and capital. While it may be
entirely true that users have paid far more for services
under the conditions on which they have been supplied
by unregulated corporations than they will pay in the
future under the system of public regulation now pro¬
posed, it is not true that they have paid more than the
service was worth to them. \o law has compelled
them to make the payments they have made, except the
law of their own self-interest. No corporation has
ever had the power to take from a community all of
the value created by the improvements it has made.
8o
PEOPLE NOT ROBBED.
Turn back but fifty years in the history of American
development and measure against the increase of gen¬
eral wealth all of the stocks and bonds of public serv¬
ice corporations, and all of the individually owned
wealth of every person holding a share of their stock
or one of their bonds, and you will learn that the re¬
lative holdings on the part of the people, as against
the holdings of public service corporations and their
owmers, is as 65 to i. Is this doubted? Take any city
of 50,000 inhabitants or over, make a statement of the
capitalization of all the public service corporations
in the city—their entire stock and bond issues outstand¬
ing—and compare the amount with the increased valu¬
ation of the real estate that has been realized since the
plants owned and operated by these corporations were
installed, and tell me of how much value the owners
of the city have been robbed ? Or, imagine that these
plants were taken out of existence, who would lose
most, the owners of the plants losing their entire prop¬
erty, or the owners of the city who would lose only
the values these improvements sustain? Although
every charge of watered stocks and bonds, every
charge of extortion ever made against public service
corporations, should be proven strictly true, it cannot
be shown that the people, all of the people, have not
been far greater gainers than they by reason of their
speculative ventures.
PEOPLE NOT ROBBED.
8i
"Governments, whether national or local, cannot
safely undertake experiments on a large scale. The
assumption of a well-established industry may itself be
called an experiment. The introduction of new modes
of manufacture or service, and the creation of ne\y
wants among the people, are matters invglving risks of
an incalculable and speculative kind. This is not
safely the business of government. Private parties
should be encouraged to push forward in all .untried
fields. If their ventures are unsuccessful, if they are
ahead of their times, failure and bankruptcy will affect
only them and their immediate dependents. Succes¬
sors will come in ; and if the service in question meets
i
a truly growing need of the people, success and for¬
tune will follow. But if government ventures upon
the sea of uncertainty, bankruptcy means the begin¬
ning of anarchy." (See pages 55 and 56.)
In referring to the telephone business the statement
is made :
"It is right that any invention should yield a profit,
but $21,000,000 in six years seems pretty high. It
would have been well for the nation to have bought
the patent for $100,000 (as it could have done in the
early eighties), and thrown it open to public use by
establishing postal trunk lines, and leasing franchises
to municipalities, or to private persons under proper
guarantees as to charges, services, etc., when the
6
82
PEOPLE NOT ROBBED.
municipal authorities refuse to undertake the work."
(See pages 340, 342, 343.)
Here are two views, both from able advocates of
municipal ownership. The first was written by Prof.
John R. Commons, the second by Prof. Frank Parsons.
What kind of a telephone service would we now have
if the government had bought the patents in the
eighties and followed the advice now given in the light
of all private enterprise has since accomplished in this
field ? The government can better afford to pay to-day
the full market value of all telephone securities out¬
standing and take over the business as it now exists,
than it could Jiave afforded to pay $100,000 for the
patents in the early eighties. Government made its
record in exploiting patents of this kind in its nego¬
tiations with Morse in the early days of telegraph in¬
dustry.
Governments cannot safely take risks in exploiting
the ideas of inventors. When the incentive of self-
interest is taken from an industry it is paralyzed. Not
one of the inventions that have made the splendid in¬
dustrial successes of the nineteenth century possible
were initiated and perfected in works owned and oper¬
ated by the public. In refutation of this statement, one
ray of comfort has been found by municipal ownership
advocates in the fact that "The Brighton (England)
system of charging (for electrical services), by which
PEOPLE NOT ROBBED.
83
the advantages of both contract rates and meter rates
are combined, was invented by the city electrician. He
invented the system and the meter employed, which
has been copied by many private companies. This is
given as an interesting refutation of the plea that
municipal enterprise is not progressive and inventive.
(See page 87.) When the numberless inventions and
improvements that have been made, in the electrical
industries during the last ten years are considered this
reference proves the relative progressiveness and in¬
ventiveness of public and private enterprise to be as
I to 10,000.
These observations have been made simply to show,
if all students of these subjects were as eager to give
credit as they are to find fault they would say that the
people have been gainers, although corporations have
made much, and that their demand for a change in
policy is based upon the fact that a monopoly charge
should not be based on "what the traffic will bear," but
upon the cost plus a reasonable profit for rendering the
service. The people do not want to pay what the
service is worth to them, but only what the corpora¬
tions can afford to take for it. This is the true con¬
tention that demands settlement. It can be settled
much easier and far more satisfactorily if both parties
will discuss it in a spirit of complete fairness than it
can if they address one another as "robbers" or "an¬
archists."
84
PEOPLE NOT ROBBED.
This attitude has long since been taken by some of
the ablest advocates of public ownership. Prof. Rich¬
ard T. Ely said, in the North American Review for
March, 1894:
"The mode of accomplishment (in changing from
private to municipal ownership) of course, requires
careful consideration, but only a few suggestions can be
thrown out at present. One of the most important is
that a fair, but never an excessive, value should be
paid for the property acquired, and a fair value does
not mean simply the cost of duplication of a plant.
The policy which has been pursued has been favored
by the nation as a whole ; and the nation as a whole, and
not simply a fractional part of it, should bear the loss.
It is largely competition which has led to such enor¬
mous expenditures in this non-competitive field, and
for this attempted competition the public at large is
responsible. If it is insisted that a property should be
purchased at the cost of duplication, it makes one part
of the community bear the loss due to a false social
policy ; and, moreover, to urge a hard policy with re¬
spect to purchase does more than anything can to de¬
feat the reform."
All praise is due to Professor Ely for the clear and
sound manner in which he states the right of private
owners to compensation for their investments when¬
ever the public shall deem it good policy to assume
WHO CAUSED EXISTING EVILS? 85
the ownership and management of the business they
have been engaged in. Upon the basis he lays down
all honest-minded persons can agree. Others have no
right to be considered.
WHO CAUSED EXISTING EVILS?
"''The application to other public utilities of the
principles of public ownership and operation that
have proved successful with our waterworks may
seem'to some minds socialism, but it is evidently not a
crime that will alarm most people. If such an out¬
come does appear, the monopolist "who has resisted or
weakened national public regulation will have only him¬
self to thank for the result." (See page 656.)
"Our rich and influential citizens, whose financial
interests, as investors in franchises, now prompt them
to desire weak or corrupt government, Would, under
public operation, have no financial interests at stake,
except as taxpayers, and in that capacity would desire
efficient administration." (See page 661.)
"No one agent is doing so much to hasten the move¬
ment (for public ownership) as the grasping private
owners of many of these monopolies, who are riding
rough-shod over the rights of the people, and convinc¬
ing all that the corrupting power of corporate influence
over legislation is growing, both on Beacon Hill, in
sight of Faneuil Hall, and near the grave of Lincoln
in the capital of Illinois." (See pages 679 and 680.)
86 WHO CAUSED EXISTING EVILS?
"Unless we greatly misread the temper of the
American people, they will not wait in patience at the
feet of the monopolist, nor will they offer him still
larger profits than he now gets, in return for the in¬
formation that he might thus give, under a tacit pledge
of secrecy, to some state official or even in return for
the concession to the public of the right to restrict
stock-watering." (See pages 655 and 656.)
These quotations show that the opinions of the writer
have been formed, not without bias, but without ballast.
Had he turned back to page 47 in his own book, he
might have read Mr. Baker's statement that; "The
city official who will enrich himself at public expense
through contracts for building or maintaining a munic¬
ipal water, lighting or street railway plant, will not be
slow to betray his trust to a private company perform¬
ing the same' service, either through the passing of
too liberal franchises, or the failure to enforce those
which properly protect the interests of the city."
Enough has been said to show that evils exist and
that they have been caused by failure to honestly and
intelligently serve the general welfare by those who
have sought and those who have granted public serv¬
ice francises.
BAD ADVICE.
"In case a municipality is burdened with a franchise
of long duration, and desires to purchase the same with
BAD ADVICE.
87
the view to direct operation or a new lease for a short
period, it would be wiser to begin by forcing such a re¬
duction of charges as the courts will permit. This is
entirely legitimate, and will reduce the market value
of the stock more nearly to the structural value of the
plant than it would otherwise be. City ownership
would not then involve so large a purchase of water
as if it were not preceded by regulation of rates."
(See page 645.)
"When a community is found resting content with
enormous monopoly profits and high charges in its
city monopolies, it deserves the rebuke recently ad¬
ministered by Governor Pingree to the Michigan Board
of Railway Commissioners. The,y had congratulated
themselves and the public on the friendly relations
existing between them and the corporations they were
supposed to regulate and supervise. 'You have no
business to have the relations so friendly,' remarked the
Mayor of Detroit." (See pages 646 and 647.)
What a remarkable exhibition of consistency this
writer makes of himself, and of Mr. Pingree, who, it
will be observed, according to the text, is Governor in
one sentence and Mayor of Detroit in the other. This
was probably written when he was trying to hold both
offices. See them here, the uncompromising enemies
of corporations, who could not tolerate even pleasant
words when no wrong-doing was found to^ complain
88
BAD ADVICE.
about. See them only a few months later fighting with
all their might to give their corporation friends the
largest guaranteed profit ever proposed in an American
franchise sale, and fighting with all the art and energy
at their command the proposal insisted upon hy Mayor
Mayhury that it was "wiser to begin hy forcing such
a reduction of charges as the courts will permit
* * * so that city ownership would not then
involve so large a purchase of water."
After this exhibition of lack of principle or staying
power, no surprise need he felt at the advice to make
war on corporations to reduce the market value of their
stock, in order to buy them out cheap. A person
guilty of this advice should never speak another word
about the methods of wreckers of property for specu¬
lative purposes, the "strikes" of hoodling aldermen, or
the demands of highwaymen. It is a deliberate asser¬
tion of the right to use the power of office to despoil
the corporations whose only sin has been to accept a
long-term franchise, which the people were glad to
give to get the benefits of the improvements they
have made. It will be a sad day for those who desire
to feel respect for government, and those administer¬
ing its affairs, when they are forced to believe that their
representatives are willing to follow such advice as
this. It is not only bad ; it is vicious. This self-expo¬
sure should destroy all right of leadership for this
writer until he repents and does work of penance.
PUBLIC REGULATION.
89
WHO OPPOSES PUBLIC REGULATION?
"To attempt reform to-day in public regulation of
private ownership is to endanger one's position as edi¬
tor, professor, preacher, attorney, or man of affairs,
since the men who gain by existing corruption and
degradation of government are the leading supporters
of our churches, our colleges, and our business.
Against such people reform has hard sledding," (See
page 661.)
While I do not question the truthfulness of this
statement, I can see in it no reason why anyone should
not advocate what he believes to be right and just.
"One can now admit a belief in ownership by the
people of monopolies which concern the people of
town or city, without losing the respect of either our
wealthy or professional classes." (See page 679.)
This reason may be satisfactory to Prof. Bemis for
advocating municipal ownership, but it has no influ¬
ence with me.
I advocate public regulation, I oppose public own¬
ership for the sole and only reasons that I have given
ii: all of my writings on this subject. I have secured
the approval of my own judgment for what I have
said. Having that, I am glad to have as much ap¬
proval from others as I can secure, and I am ready to
change my position on any proposition I have ad¬
vanced whenever anyone will furnish me with a sound
economic reason for doing so, but on no other terms.
90 IMPORTANCE OF CORRECT REGULATION.
THE VITAL I.MPORTANCE OF CORRECT PUBLIC REGULA¬
TION.
Public regulation of municipal public service indus¬
tries is the foundation on which the industrial develop¬
ment of our American republic must rest if we are to
enjoy the advantages of being masters of the trade of
the world. In 1892 I wrote the following statement:
"No general question of governmental policy occu¬
pies at this time so prominent a place in the thoughts
of the people as that of properly controlling without
unnecessarily checking the growth of corporate power.
As urban citizens are closely in touch with corpora¬
tions operating under municipal franchises, and as the
legislation of municipal councils and state legislatures
readily respond to clearly defined demands, such cor¬
porations naturally receive a large share of considera¬
tion in this connection. For this reason, the generally
accepted policy of municipalities and states for regu¬
lating and controlling municipal franchise corporations
will become the sure foundation of a national policy
for the regulation and control of interstate and na¬
tional undertakings." (i)
"The settlement of the questions discussed as here¬
in recommended will establish an economic policy
that will secure the best public services at the lowest
' See preface pages iii and iv, ' ' The Law of Incorporated
Companies." The Robert Clarke Co., Cincinnati, Ohio,
IMPORTANCE OF CORRECT REGULATION. 91
obtainable cost for all users, and at the same time
will give a stable and permanent value to all invest¬
ments in public industrial corporations. Upon this
foundation other work will rest, which will reach into
larger spheres of action and involve greater interests.
It will lead from the remodeling of public municipal in¬
dustries to the remodeling of the public industries of
the state and of the nation." (2)
If there is a demand for the best municipal public
services at the lowest prices that will sustain the in¬
dustries, the demand for similar conditions increases
in intensity as people affected by an industry increase
in number and its scope broadens, covering states and
the nation, and affecting the commerce and parrying
trade of the world.
Local governments and local interests are the pri¬
mary schools of the people. They must learn to skill¬
fully handle the business that is their own and nearest
to them as a preparation for wisely administering the
greater interests of larger groups. Those who desire
a correct public regulation of the great transportation
interests of the country must lay the foundation for
such regulation in a correct system of public regula¬
tion of municipal waterworks under public and private
ownership. These works are the first line of defense.
^ See page 3, " The Law of Incorporated Companies," Robert
Clarke Co., Cincinnati, Ohio.
92 IMPORTANCE OF CORRECT REGULATION.
They are the simplest and least complicated form of a
public service industry. The number owned and
operated as public and as private works are about
equal. Let them be placed under a system of regula¬
tion identical for each, and then let the records of ex¬
perience show the advantages and disadvantages of
■the employment of a public or private agent. Back of
these works, in successive order, are gasworks, electric
lighting works, street railroads, telephone and tele¬
graph systems, and the great steam railroads and trans¬
portation lines. The principles of correct regulation
for all of these industries are the same in every case.
All the people require is to understand them and to
learn the art of applying them and out of the existing
chaos a symmetrical and perfect system of public
regulation will appear rooted in the public services of
every municipality, and branching out through every
state and national industry, making possible social and
industrial conditions that will cause the producing and
distributing business of this country to command a
majority of the international trade of the world.
MUNICIPAL, STATE AND NATIONAL REGULATION.
If the principal of self-government is correct, indi¬
viduals must govern individual interests ; municipal
governments must govern municipal interests ; states
must govern state interests, and the Congress must
IMPORTANCE OF.CORRECT LEGISLATION. 93
¿;uvern national interests. Each group should be free
to govern its own affairs without interference, except
so far as the government of large interests by large
groups necessarily interferes with the government of
small interests in the included groups. (See page 434.)
"The first lesson to be learned is that justice is es¬
tablished, not by demanding, but by doing justice.
Just individual conduct is the only immovable founda¬
tion for the justice of the state. The fundamental un¬
derlying principles that must be applied in all moral
and economic legislation and administration, whether
it be a municipality, a state, or a nation, if it is to be
just, do not differ in any way from the moral and
economic principles that must govern individual con¬
duct if individual action is to be just. They are the
principles of universal natural laws, applicable through¬
out the entire sphere of human activity and overrule
every legislative and administrative act, from lowest to
highest." (i)
The stern lesson of submission and service must be
learned before we can enter into knowledge and free¬
dom.
ALL ECONOMIC BENEFITS SECURED FOR THE PEOPLE.
Under the system of public control herein proposed
every reason urged against trust and combinations in
' '■ Municipal Public Service Industries," page 91, The Other
Side Publishing Company, Chicago.
94 THE PEOPLE'S OPPORTUNITY.
competitive business will be urged in favor of con¬
solidations of public service industries, because, price
being based on cost, every condition that contributes
to reduce cost will contribute to a reduction of price in
exactly the same ratio. Every extension that develops
a service beyond municipal limits, taking it out of
municipal, and placing it under state regulation, will
tend to increase the efficiency of the regulation and to
reducé prices through increasing the number of users
between whom total cost may be divided. With in¬
creasing force, the pressure of these economic condi¬
tions will apply to a national service. Under these
conditions the best that human knowledge, genius and
enterprise can devise will be placed at the service of
the people at a cost and price that will have no paral¬
lel in any other country. To this consummation all
legislation affecting public service industries should
tend.
the people's opportunity has come.
Discussion should terminate in action. The ques¬
tions under consideration are not new. They have
been discussed and experimented with until it is now
almost impossible to bring to view a new thought
about them. The advocates of public and private
ownership have committed the error of seeking confir¬
mation for their views, instead of trying to, find a way
THE PEOPLE'S OPPORtUNITY. 95
of bringing opponents into agreement by adopting
such modifications as will tend to eliminate the evils
complained of on both sides, and to preserve the full
meaning and stimulate to most vigorous action every
sound economic principle essential to safeguard and
serve the general welfare. It is the part of wisdom to
now take account of the situation and find all points of
agreement with the view of eliminating them from
future discussions. By doing this we may at least re¬
port progress and form new lines for future work,
based on the gains made by the work already done.
Taking all statements on both sides into account,
the truth and the romance of each, by crediting as much
honesty to one side as to the other, you will find all
parties in agreement on one proposition : A correct
system of public regulation is as necessary to safeguard
the interests of users and taxpayers under public as under
private ownership and operation.
Such a system will be permanently satisfactory if it
is just. If it is just there is no reason why it should not
be applied in identical terms to public and private own¬
ership and operation. If it is just it will hold all ad¬
vantages in even balance between each interest in¬
volved, giving to each its.equitable share and no more.
This, every user, taxpayer, employe, and investor has
an undeniable right to demand. More than this, no
user, taxpayer, employe or investor has any moral, nor
should he have any legal, right to enjoy or possess.
96 THE PEOPLE'S OPPORTUNITY.
The issue is now clearly stated, let the people act.
Shall unregulated public or private ownership and opera¬
tion of public service industries be permitted to continue,
breeding all the evils portrayed by both sides, or shall a
correct system of public regulation be adopted, identical in
all of its requirements for both agents, one of which the
people must e7nploy to secure the services they need to the
best advantage and at the lowest price.
The people have the intelligence to settle this ques¬
tion right, and now. You, their representatives, can
do it.
Turn to the history of the eruption in Chicago last
winter over a simple question of street railroad fran¬
chises and you will find volumes of denunciation, but
not one statement to show what those who posed as
the friends of the people believed to be the require¬
ments of a settlement that would be just and right. It
was a campaign of destruction without a single con¬
structive proposal. That is anarchy.
Do you wish this experience repeated in the cities you
represent? If not, give voice to the thought you know
is in the hearts of the people and fiirnish a solution to
public service problems by saying to existing cor¬
porations, we will create a correct system of public reg¬
ulation under which you may continue to own and op¬
erate with the distinct understanding that—"'this is our
business. For its purposes we will employ your cap-
WHAT CITY WILL LEAD?
97
¡tal urtdér your own management. We will in.suré
yóur investment against impairment ; we will pay you
a reasonable profit for its use while it is so employed,
and when we are done with it we will hand it back to
you, dollar for dollar. All advantages that can be sé-
cured from the business beyond the fulfillment of our
agreements with you shall be ours." (i)
WHAT CITY WILL GRASP THE HONOR OF LEADING THE
WORK OF ESTABLISHING A CORRECT SYSTEM
OF PUBLIC REGULATIONS.
You, to whom I now speak, know more accurately
than others can the full sweep of the advantages of
the system of public regulation which I have submitted
for your criticism and approval. I have given to you
as fully as circumstances will permit my reasons for
recommending the proposals I advocate. Every rea¬
son is based on a true ethical and economical principle,
if my knowledge and judgment have not deceived me.
Please let it be distinctly understood that I have no
other reasons for these measures. If anyone will give
me a valid economic reason for modifying or changing
my position I will do so at once and thank him for his
assistance. I seek only the truth and its correct ap¬
plication to the solution of the problems under discus¬
sion. If I am wrong, show me my errors. If you can-
^ "Municipal Public Service Industries," page 84, The Other
Side Publishing Company, Chicago,
7
98 WHAT CITY WILL LEAD?
not do that, then, by the logic of our relations to each
other, I have the right to expect you to agree with me
and lend a hand in putting this system into immediate
operation. In many cities and states the franchise
question is an issue demanding an early settlement.
Which of all these cities and states will be the first to
lead the work in the adoption of a correct system of
public regulations, to be applied in identical terms to
public and private ownership and operation? I care
not where this system finds its first practical application.
Vitalized as it is with the native power of truth, from
whatever city and state it makes a start it will work
its way through all cities and states. All it requires, all
I ask for it, is an honest and intelligent application.
What mayor or councilman here present, or to whom
this greeting may come, will permit me to join him in
the effort to secure its approval and adoption by the
people of the city he represents?
RÉSUME.
I submit to you and ask your definite opinion on
the following proposals pertaining to the ownership
and operation of all public service industries :
1. Practical civil service regulations, strictly and
continuously enforced, are necessary to efficient pub¬
lic management; and a just system of profit-sharing
with employes is necessary to efficient private manage¬
ment.
2. A uniform system of accounting, prescribed and
audited by the state, designed to show the true and
entire cost of every public service industry, identical in
every particular for public and private ownership and
operation, is an indispensable condition of intelligent
and just regulation.
3. All true statements of costs must include interest
on the investment at the rate paid on its bonded debt
by the municipality in which the industry is located ;
a sufficient provision for insurance against loss by acci¬
dents of any kind ; the amount of taxes relinquished if
a publicly owned industry, and paid if a privately
owned industry ; an ample provision for insurance
99
lOO
RÉSUMÉ.
against the impairment of investment; the true and
entire costs of all materials used and salaries and
Avages paid, and an accurate statement of all miscel¬
laneous expenses.
4. Prices to users should be based on cost, plus a
provision for the refunding of all capital secured by
taxation or the sale of bonds in case of all publicly
owned, and cost plus a legally limited profit in case of
all privately owned industries.
5. Prices should be determined for periods of five
years.
6. There should be no free service. All service, pub¬
lic and private, should be valued and paid for at prices
determined as specified in proposition number 4.
7. No service should be sold at less than cost.
8. The profits of private corporations should be de¬
termined and limited by twice the rate of interest paid
on its bonded debt by the municipality in which the
industry is located, in all cases where costs are calcu¬
lated and allowed, as specified in proposition num¬
ber 3.
9. All profits in excess of the legal profit specified
in number 8 should be divided equally between the
municipality and the corporation.
10. The initial investment to be used as a basis for
these regulations should be determined by process un¬
der the law of eminent domain, or by arbitration, as
RÉSUMÉ.
lOI
may be mutually agreed upon between the municipal¬
ity and the corporation.
II. At the expiration of every period of five years
the municipality should have the option of paying to
the corporation the full amount of its investment and
taking possession of the property, and thereafter oper¬
ating it as a municipal plant, or of determining prices
for another period of five years and continuing its con¬
tract with the owning and operating corporation.
*4'» ^
4^
THE OTHER SIDE
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«1» PAMPHLETS AND BOOHS PUBLISHED FOR AUTHORS. «|»
4» «i»
4» PROGRAM FOR DISCUSSION. 4*
«fe Practical civil service regulations for all public employment.
S A uniform system of accounting for all sub-state govern-
^ ments.tobeprescrlbedandaudltedbytheState.devlsedtoshoW'
the true and entire cost of all public services and Industries.
For the protection of taxpayers, a law prohibiting munici- t
«fe pallties owning and operating an industry from selling service ít®»
, for less than cost.
For the protection of users and Investors, a law requiring
,»1» the fixing of charges on the basis of cost plus a reasonable
; profit when public service industries are owned and operated ^
«fe by private corporations. ■
f Competition In the sphere of a natural monopoly is as great
an evil as a monopoly Is In the natural sphere of competition. *1^
Just Taxation, state and local.
^ If you see anything In "Thb Other Side" you want people
«fe to know, ask the publishers of the pa,pers they read to copy lt. líf»
THE BLAKELY PRINTING CO.. CHICAGO*
THE LAW t)F INCORPORATED COM¬
PANIES OPERATING UNDER
MUNICIPAL FRANCHISES.
BY FOOTE & EVERETT.
A REFERENCE BOOK OF GREAT VALUE FOR
1. Officers of City Governments and Members of Municipal
' Councils.
2. Officers of State Governments and Members of State Legis¬
latures.
3. Attorneys and Jurists.
4. Officers and Stockholders of Public Service Corporations.
5. Bankers and Brokers.
6. Managers of Water, Gas, Electric Light, Electric PowerJ
Telephone or Street Railway Companies.
THE OFFICIAL LIBRARY OF EVERY MAYOR AND
PUBLIC SERVICE CORPORATION MANAGER
SHOULD CONTAIN THIS BOOK.
Three Octavo Volumes of over 3,000 pages. Bound in
Law Sheep. Price, $10.00 Net. Sent
Prepaid on Receipt of Price.
The Robert Clarke Company, Publishers,
31«39 E. Fourth St., CINCINNATI, OHIO.
338.8
F68