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liiifoad Coiiioiission Law of tlie State of Geoep
A LETTER
ADDRESSED BY
Campbell Wallace,
Of the Railroad Commission,
To Hon. F. H. COLLEY, Chaimian Senate Goinniittee on Railroails,
IN REPLY TO LETTER OF
G
Tí 1)
^ 1 IVVJlllVllt VV. II I i 11 1 H llil II U lAill UllU JIlUllllll^
u 1 iTMUüiii nílllrOílu ílllü Mm\
TO THE SAME COMMITTEE.
AT LA IM TA, OA., JUNE 15tL, 188Ô.
ATLANTA, GA.
CONSTITUTION PUBLISHING COMPANY,
1885.
Effect of the Operation
OF THE
Railroad ConnnissioQ Law of tlie State of Georgia.
A LKTTKR
ADDRESSED BY
Campbell Wallace,
Of the Railroad Commission,
To Hon. F. H. COLLEY, Chairman Senate Committee on Railroads,
IN REPLY TO LETTER OF
W. G. RAOUL, President Central Railroad and Ranking Company,
TO THE SAME COMMITTEE.
ATLANTA, OA., JUNE^ 1885.
ATLANTA, OA.
CONSTITUTION PUBLISHING COMPANY,
1885.
Hon. F. H. Colley, Chairman of the Senate Committee on Railroads :
Dear Sir:—Mr. Kaoul having made reply to my former statement to your Hon¬
orable Committee, pending the last session of the General Assembly, I beg to impose
upon your kind indulgence while I take into consideration certain statements and
figures contained in his letter.
I am glad to learn from Mr. Eaoul that he was not correctly reported as to what
he said to. your Honorable Committee with regard to the threatened bankruptcy of
the roads within the State of Georgia. The corrected form of his statement, as
made by himself, however, does not alter the appropriateness of the statement which
I had the honor to present to you, although there is a vast difference between the
import of what was understood to have been said by him, and what, he says, was
really stated.
What he claims to have said, and as repeated by him in his reply to my state¬
ment, contains two separate propositions, as follows :
1. If the same per centage of depreciation in rates continues for the next five
years as has obtained for the past five years, there will not be a solvent railroad
company in Georgia."
2. " With a continuance of the rates now in effect, if the roads are called upon
to face, for three years, a depression in trade and business equal in severity to the
commercial and financial stagnation of the several years succeeding the financial
crisis of 1873, it is a matter of grave doubt if any of the roads in the State can earn
the interest on their fixed charges."
I shall first attempt to show the erroneousness of these propositions, and then
take the liberty of considering other portions of Mr. Kaoul's letter to your Honora¬
ble Committee.
I understand Mr. Eaoul to mean by the first proposition quoted above, that if
the Conimissioners were to take the present rates allowed the various railroad com¬
panies doing business within the State, and make the same proportionate reduction
thereon that was made upon the rates of effect at the time the Commissioners' rates
went into operation, and then reduce the same from time to time during the next
five years, in the same proportion that they have during the five years just passed,
" there would not be a solvent railroad company in Georgia."
So far as his own lines are concerned, this proposition of Mr. Eaoul might
probably be partially correct.
The rates which were of force upon the lines owned and operated by the Central
Eailroad Company were considered so extravagantly high and irregular, that an
Immediate and,efiective reduction was found necessary at the very commencement
of the active operation of the Commission. There are, however, roads within the
State of Georgia that could stand the same proportionate reduction for the next five
years that has obtained upon them for the past five years, and yet be solvent. I
think that the following table of rates showing those of force upon several roads of
the State at the time of the establishment of the Commission, together with the rates
which were adopted by the Commission and which went into effect May 1st, 1880,
will sufficiently substantiate what I have stated upon this point:
4
TABLES,
Giving rates of Freight on principal articles of production and consumption, charged
according to published tariffs, by railroads in Georgia [over 75 miles in length)
prior to the issuance of Commissioners' " standard Tariff" for 10 miles, 50 miles,
140 miles, 200 miles, and 250 miles, and Standard Tariff" rates on same articles
and for same distance.
<o
O)
á
0
<o
oä
M
1
-Flour, etc.
-Grain.
fl
O'
m
u
Q>
NJ
•rH
♦rH
RATES FOR 10 MILES.
1st
4th
5th
6th
pi
ft
O
Q
O
Central Kailroad, Sav. Div . . .
65
25
22
20
20
20
15
25
08
Central Railroad, Atlanta Div .
30
18
15
13
13
13
10
10
North-Eastern Railroad . . . .
18
12
10
08
10
08
08
07
05
Atlanta & Charlotte Air-Line .
23
15
12
10
12
10
10
10
Georgia Railroad & Banking Co
. 07
07
06
05
07
05
05
07
Sav., Ela. & Western Railroad .
35
20
18
15
15
15
10
30
10
"Western & Atlantic
18
10
09
08
08
06
05
10
04
Atlanta & West Point Railroad 30
20
18
16
12
12
08
15
06
Macon & Brunswick Railroad .
45
20
15
12
12
12
12
12
08
Brunswick & Albany Railroad .
45
20
18
15
15
15
15
45
Oomm'rs Standard Tariff. .
16
10
09
08
08
06
05
12
05
RATES FOR 50 MILES.
Central Railroad^ Sav. Div. . .
70
30'
25
22
22
22
18
30
08
Central Railroad, Atlanta Div, .
60
30
25
20
20
20
15
30
Atlanta & Charlotte Air-Line .
40
24
20
17
20
17
17
21
15
Georgia Railroad & Banking Co,
. 27
21
19
16
21
16
12
27
06
Sav., Fla. & Western Railroad .
65
55
45
35
30
35
20
75
15
Western & Atlantic
32
24
20
14
12
10
09
20
6f
Atlanta & West Point Railroad 40
32
28
23
21
24
14
25
09
Macon & Brunswick Railroad .
68
35
30
25
23
24
25
30
08
Brunswick & Albany Railroad .
60
30
25
20
20
20
20
45
Comm'rs Standard Tariff . .
30
22
18
13
13
10
09
20
08
RATES FOR 100 MILES.
Central Railroad, Sav. Div. . .
80
35
30
25
25
25
22
40
12
Central Railroad, Atlanta Div. .
70
45
30
25
25
25
22
30
Atlanta & Charlotte Air-Line .
58
33
29
24
29
24
24
26
15
Georgia Railroad & Banking Co
. 48
32
25
20
32
20
15
38
Sav., Fla. & Western Railroad ,
90
65
55
45
35
42
23
25
15
Western & Atlantic
45
35
30
24
20
15
15
25
09
Macon & Brunswick Railroad .
75
40
35
29
25
25
29
40
10
Brunswick & Albany Railroad .
70
45
35
30
25
25
20
45
Comm'rs Standard Tariff . .
45
30
23
18
18
15
14
30
10
RATES FOR 140 MILES.
Central Railroad, Sav. Div. . .
85
38
33
28
28
28
23
40
12
Atlanta & Charlotte Air-Line .
67
40
32
28
32
28
28
26
15
Georgia Railroad & Banking Co
. 62
36
27
22
36
22
17
42
Sav., Fla. & Western Railroad .
90
65
55
45
35
42
28
75
15
Western & Atlantic
50
40
35
25
25
20
19
25
10
Macon & Brunswick
85
40
35
30
30
29
30
40
12
Brunswick & Albany Railroad .
85
50
45
35
30
30
25
45
Comm'rs Standard Tariff . .
67
34
27
22
22
19
18
34
11
RATES FOR 200 MILES.
Central Railroad
120
65
55
40
40
40
35
55
20
Atlanta & Charlotte Air-Line .
82
52
42
33
42
33
33
42
15
Georgia Railroad
65
40
30
25
40
25
20
45
Sav., Fla. & Western Railroad .
100
70
60
50
40
45
30
75
15
Comm'rs Standard Tariff . .
70
40
32
27
27
23
20
37
13
RATES FOR 250 MILES.
Central Railroad .......
130
70
60
45
45
45
40
65
20
Atlanta & Charlotte Air-Line .
93
61
48
38
48
38
38
42
15
Sav., Fla. & Western Railroad .
110
65
65
55
45
47
30
75
15
Comm'rs Standard Tariff . .
75
45
35
30
30
25
22
40
15
5
Prom the above table it will be seen that the Commissioners advanced the
rates of force upon the Georgia Eailroad in some instances, and also upon the Wes¬
tern and Atlantic, while the rates of force upon the Savannah Division of the Cen¬
tral Eailroad Company were reduced in some instances as much as about three-fourths
of the aggregate. Afterwards the Commissioners advanced the rates allowed the
Central Eailroad Company as well as some other roads.
The statement which I formerly made to your Honorable Committee, and the
facts which I shall present herein, show that the Central Eailroad Company have
not only survived the reductions made by the Commission, but have actually made
money sufficiently to pay handsome dividends and to aid in making purchases of ad¬
ditional railroads, steamships, etc.
The Commissioners felt that the rates of effect by the Central Eailroad Company at the
time of the establishment of the Commission were not " reasonable and just," and
hence lowered them to what they considered just and proper. Slight modifications
have been made from time to time. But as no intelligent Commissioner would en¬
tertain, for a moment, such a proposition as presented by Mr. Eaoul in the first part
of his statement already quoted, its absurdity is too manifest to need further comment.
One other remark in connection with this table. It has been argued by railroad
experts, that the law should allow them to make their own rates, as they are better
capable of doing so than any disinterested set of men, unacquainted with the wants
and necessities of the companies, can be. I desire to compare some of the rates
made by these experts, as presented in the above table, with the rates made by the
Commission. I take the rates charged on first class articles and on fiour, as follows :
FOR DISTANCE OF 10 MILES.
PER CAR LOAD OF 20,000 LBS.
FIRST CLASS.
FLOUR IN
SACKS.
Savannah Division of Central Railroad
$130
00
m
00
Atlanta Division of Central Railroad
60
00
26
00
Savannah, Florida and Western Railroad
70
00
80
00
Macon and Brunswick Railroad
90
00
80
00
Atlanta and Charlotte Air Line Railroad
46
00
20
00
Western and Atlantic Railroad
86
00
12
00
Georgia Railroad
14
00
10
00
Commissioners' Standard Tariff
82
00
12
00
It will be observed from the latter table : That these railroad experts
made rates which would, on a car load of 20,000 lbs. of first class goods, for a distance
of ten (10) miles, amount to figures ranging from $14.00 to $130.00 for the same ser¬
vice; and on a car load of fiour of 20,000 lbs. for the same distance, figures ranging
from $10.00 to $40.00 for the same service.
A similar irregularity might be observed for any other distance, and on other
classes of freights, showing even that in some instances half as much was charged
for the distance of ten miles as was charged for two hundred and fifty miles.
If there existed such irregularity (and enormity in some instances) in rates, and
these experts failed to agree, even approximately, among themselves, then surely it
clearly proved that there was need of the enactment of some law which would har¬
monize these confiicting interests. If the present Commissionion has, in any man¬
ner, succeeded in this difficult task, it shows that disinterested men can have some
idea as to the making of just and reasonable rates.
The Company whose rates were most irregular is the one that has made the great¬
est and most continued cry against the injustice of the law establishing the Eailroad
Commission.
6
The correctness of Mr. Raoul's second proposition depends entirely upon what
legitimately constitutes " fixed charges," and what is embraced in " operating ex¬
penses."
Mr. Kaoul presents to you the following table of earnings, expenses and train
mileage in support of his position.
1880.
Earnings over operating expenses $1,508,652 79
Eixed charges 707,399 00
ISTet for owners $ 801,258 79
which equals about lOf per cent, upon the capital stock.
Train mileage, 2,028,400 miles.
1881.
Earnings over operating expenses $1,867,029 28
Eixed charges 715,865 50
Net for owners $ 651,168 78
which equals about 8f per cent, upon the capital stock.
Train mileage, 2,417,700 miles.
1882.
Earnings over operating expenses $1,021,289 65
Fixed charges 1,010,926 50
Net for owners $ 10,818 15
which equals 14-100 of one per cent, upon the capital stock.
Train mileage, 2,525,789 miles.
1883.
Earnings over operating expenses $1,268,126 82
Fixed charges 1,059,527 50
Net for owners $ 208,599 82
which equals about 2| per cent, upon the capital stock.
Train mileage, 2,708,018 miles.
1884.
Earnings over operating expenses $1,007,472 39
Fixed charges 1,070,451 00
Net deficit for owners .......".$ 62,978 61
Train mileage, 2,895,742 miles.
A thorough analysis of the above table is necessary to a full understanding of
its bearing upon the question. If the figures, as presented by Mr. Raoul therein, are
correctly arranged, then his Company is in an exceedingly bad condition. But we
assert that this table does not correctly represent the financial condition of his
Company.
I shall hope to be able to show you—
1st. That in the term " operating expenses," Mr. Raoul has included all the
money expended for new steel rails, new cars, new engines, new depots, new side
tracks, new buildings, etc.
2d. That he has borrowed more than four millions of dollars, for which he has
mortgaged the road within the State of Georgia, for the purpose of purchasing a
7
steamship line and interests in railroads in other States, and has charged the interest
on this borrowed money to the roads within the State. In other words, he has taxed
the roads in Georgia to pay the-interest on the money borrowed to make investments
outside of the State.
3. That the Central Eailroad Company is not only required to pay an exceedingly
-exorbitant rental for certain roads within tjbe State, hut have actually contracted to
both pay the bonded indebtedness of one of these leased lines, and to issue them
-certificates of indebtedness (or watered stock) to the amount of $1,600,000, interest
on which has to be paid by the stock-holders of the Central Eailroad Company be¬
fore they can receive one cent in dividends themselves.
"OPERATING EXPENSES."
Mr. Eaoul's table first shows the net earnings over operating expenses." To
the casual observer, it would appear that this latter term embraced merely the ex¬
penses incidental to the running of trains. That it includes the items which I have
:already cited, I quote from the annual report of the Central Eailroad Company of
1882. Mr. Alexander, the President, says :
It should be borne in mind, in the examination of these tables, that no Con¬
struction accounts are kept open upon any of the roads named ; but the whole cost
•of the yearly improvements in their condition and out-fit by the substitution of steel
for iron rails, and additions to motive power, rolling stock, and depot and terminal
facilities, as well as all taxes, are included in operating expenses, so that what is re¬
ported as net is really net, and subject only to interest and rentals^ or what are gen-
-erally called fixed charges.''
Again Mr. Alexander says :
"As already explained, no construction accounts are kept open in our system,
:and the gradual remodeling of all our roads and rolling stock in accordance with
modern demands is done as part of the necessary expenses of operation, as well as
the providing of all increased facilities,'''' These quotations are so explicit that further
<îomment upon this point is unnecessary.
"FIXED CHARGES."
Mr. Eaoul, in his table already referred to, next deducts the "fixed charges,"
and immediately following the table, explains what is embraced in this term. He
says :
" In fixed charges are included interest on bonds and rentals."
Again, he says :
" The fixed charges increased for 1882, on account of the issue of certificates of
indebtedness."
"Fixed charges," therefore, include three items: interest on bonds, interest on
<3ertificates of indebtedness, and rentals of roads.
We shall consider each of these items to see to what extent they are to be
-charged to the roads within the State of Georgia which are owned or operated by
fhe Central Eailroad and Banking Company.
INTEREST ON BONDS.
Upon this point I wish to lay down one or two propositions. 1st—A road may
properly issue a reasonable amount of bonds, if absolutely necessary. 2d—The roads
8
or other interests for whose benefit the amounts on such bonds have been realized,
should he made to pay the interest on said bonds.
If the Central Eailroad Company have issued a reasonable amount of bonds for
the purpose of investing the amounts realized thereon upon roads within the State
of Georgia, then, upon the principle just enunciated, the roads within Georgia
should he tàxed to pay the interest upon said bonds. But if the Central Eailroad
Company have issued bonds and invested the amount realized thereon upon foreign
investments, then these foreign interests should be made to pay the interest upon
said bonds.
From the reports of the Central Eailroad Company, we learn that that Company
have issued five millions of bonds, bearing seven (7) per cent interest. To trace the
disposition of the amounts realized upon these bonds, it will be necessary to enter
somewhat into the history of the Central Eailroad Company.
The war left the roads of the Central Eailroad Company, as it did those of nearly
every other railroad in the South, in a most dilapidated condition ; its tracks torn
up, its bridges, depots, etc., destroyed or injured, and its property otherwise seriously
damaged. In order to replace the road in good condition and to purchase necessary
equipment, the said Company issued, in 1865, one million of bonds. The country
developed rapidly, and consolidation became the order of the day. Previous to 1872*
the Central Eailroad Company formed a lease contract with the South Western and
the Macon and Western Eailroad Companies, and the three companies became, thereby,
virtually one company.
In 1872 the Legislature of Georgia authorized this joint company to issue what
are known as tri-partite bonds to the amount of five millions jof dollars, which were
gradually negotiated until the whole amount was taken up. The first million of
these bonds were negotiated for the purpose of taking up the one million of bonds
upon which money had already been realized.
Unfortunately, the annual reports of the President and Directors, to the-
stockholders, do not give explicit information upon every transaction of the
Company. Yery often amounts of stocks and bonds appear as assets in one-
report, and disappear in the next without any explanation, while they reap¬
pear, perhaps, in the next report in a modified form. Enough light is given,
however, to trace with sufiicient clearness the most important enterprises into which
the Central Eailroad Company have embarked, as the following facts will demon¬
strate :
INVESTMENTS OF THE CENTEAL EAILEOAD COMPANY.
In 1872 the Central Eailroad Company owned as assets the following stocks and
bonds of other companies without the State of Georgia, and interests other than rail¬
roads :
outside of georgia.
Stocks.—Western of Ala. . .
Savannah & Memphis
Mont. & West Point
Mobile & Girard . . ,
Bait. & Sav. S. Ship •
Bokds.— Mont. & West Point
Mobile and Girard .
$
37,500
33,300
12,660
3,500
2.000
7,000
10,000
within georgia.
Stocks.—South Western . .
Eatonton Branch .
Bonds. —Muscogee Eailroad
Columbus City . .
City of Macon . .
$423,400'
24,100
21,500
8,000
2,000
Total ....... $479,000
Total
$105,960
9
In 1884, the Central Railroad Company owned as follows:
outside of georgia.
Stocks.—Ocean S. S. Co. . . . $1,995,000
Western R. R. of Ala. 900,000
Mont, and Eufaula . 610,000
Columbus & Western 300,000
Eufaula & Clayton . 100,000
Mobile & Girard . . 4,711
Port Royal & Augusta 500
Bonds.—Port Royal & Augusta 900,000
Columbus & Western 8,000
Total $4,818,211
Total, 1872 $584,960
within georgia.
Stocks.—So. Western R. R. . . $ 10,500
Sav. Grif. & N. Ala. . 6,011
Upson County .... 1,497
Atlanta & West Point 185,400
Columbus & Rome . . 5,000
Rome Railroad . . . 8,000
Bonds. —Sav. Grif. & N. Ala. . 265,100
Cert, of Ind. C. R. R... 168,600
Cert.of Ind.At.& W.P 167,800
Macon Street R. R. Co. 2,666
Mecb. &Ag. Ass. of Ga 500
Savannah Cotton Ex. . 200
Kimball House ... 1,500
$ 772,774
Total, 1884 $5,590,985
Total
RECAPITULATION.
Excess 1884 over 1872 .... $5,006,025
This is as it appears from the statements of assets in the annual reports of the
Central Railroad Company.
But from statements made by the Presidents of this company
in some of their anriual reports, I am of the opinion that this does not rep¬
resent all that has been invested in these respective interests. For instance, the above
table shows that the Central Railroad Company have in the Western Railroad of
Alabama, $900,000. Referring to this road, Mr. Wadley, in bis report in 1875, after
informing bis stockholders of the joint purchase of the Western Railroad oí Alabama,
by the Central Railroad and the Georgia Railroad Companies, for the sum of $3,-
286,257.02," says :
"This, divided equally between the two purchasing companies, gives to eaeb
$1,642,128A1. While the above is the sum paid, or to he paid, by the two companies,
the bonded debt of the Western Railroad Company stands now at $2,553,000, on
which interest has to be paid at the rate of 8 per cent, per annum. Therefore, if the
road earns annually the sum of $204,240 net, it will not be a tax upon the companies
owning it. On the other band, should it fall short oí this amount in its net earnings,
the deficit must he provided hy the purchasing companies.''^
Mr. Raoul, in bis report in 1883, says :
"As stated in the last report of this Company, steps were being taken to organ¬
ize the (purchasers of the Western Railroad of Alabama into a corporate company.
This was consummated in March last and the company incorporated in accordance
with The laws of Alabama, under the corporate name of the 'Western Railroad of
Alabama.' The capital stock has been fixed at $8,000,000, which, when interest a.nd
all other expenses are included no more than represents the cost of the property to the
purchasers''' ,
Thus, from Mr. Raoul's. statement above quoted, it would appear that bis com¬
pany, being half owner, has invested in the Western Railroad of Alabama $1,500,000,
or $600,000, more than is represented in the table of assets above quoted. Other in¬
stances might be given.
10
In addition to this, it appears from the reports of this company that other in¬
vestments have been cancelled by them as being worthless or greatly reduced in
valuation.
It appears also from these reports that large amounts of bonds of the Southwest¬
ern Railroad Company;, the Muscogee and the Mobile and Girard Railroad Compa¬
nies, were paid by the Central Railroad Company.
But granting that the table of assets already given is correct, we have five mil¬
lions of dollars invested in other interests, most of which are without the State, or
one million of dollars more than the remaining four millions of bonds which were
issued in 1872,
It also appears that dividends withheld from the stock-holders were used for the
purpose of aiding in the purchase of foreign investments, and in the payment of the
debts of tiie South "Western Railroad Company. Mr. Wadley, in his report for 1876,
after referring to payment of certain indebtedness of the Company by the issuance
of tri-partite bonds, says :
" The indebtedness of the Company beyond this, it is expected, will be paid from
the earnings of the road."
Mr. Alexander, in his report for 1882, says:
" The earnings and investments accumulated by the Company during
these eight years, enabled the Board in 1881 to refund the stockholders in part for
their suspended dividends."
Mr. Raoul, in his report for 1883, says :
" By reference to the statements above given, it will be seen that the money used
for paying dividends upon your Georgia roads has been chiefly derived from the
profits on property operated outside of the State of Georgia, rohich has been produced
by the foresight and sagacity of a former rnanagement, in part by the application
or the earnings of the road during past years, to its purchase, and in part
by the productiveness of the purchased property."
RENTALS.
The Central Railroad Company rents, or has leased, the following roads within
the State of Georgia, at the prices indicated :
1—The Southwestern Railroad, for the sum of about $350,000 per annum, which
is 7 p^^ cent, upon a capital stock of $5,000,000.
2—The Augusta and Savannah, at $73,000 per annum, or 7 per cent upon its
capital stock.
3—The Milledgeville and Eatonton Branch, at $14,000 per annum, which is 7
per cent upon its capital stock.
It matters not what may be the earnings of these respective roads, or of the
entire system of the Central Railroad Company, these rentals must be paid before
the stock-holders of the Central Railroad Company can receive one dollar in divi¬
dends. This is evinced by the fact that during the great financial depression from
1873 to '77, the stock-holders of the Central Railroad Company paid the above rentals
while they themselves were denied any dividends.
In addition to the rental paid the South Western Railroad Company as above
indicated, the Central Railroad Company obligated itself to pay also the bonded
11
indebtedness of that Company, as will be seen from the following quotation from Mr.
Wadley's report of 1872: " This Company (the Central Eailroad Company') has also
paid matured bonds of the South Western Railroad Company (which by the terms
of the lease ofthat road were to be paid by this Company). This last amount it is
proposed to refund hy the sale of our joint hondsT The amount of bonds thus assum¬
ed to be paid amounted to about $471,500 between 1876 and 1882. As this indebted¬
ness was liquidated by the sale of tri-partite bonds, we observe that the stock-holders
of the Central Railroad Company are further taxed to pay the interest on money
Tealized to pay the indebtedness of another corporation.
The Central Railroad Company, in 1881, issued certificates of indebtedness to
the extent of $4,600,000, bearing 6 per cent interest per annum, as follows :
'The interest upon which takes precedence of the payment of legitimate dividends
to the stock-holders of the Central Railroad Company.
The reasons given for the issuance of these certificates are set forth as follows,
Mr. Wadley, in his annual report for 1881, says: In view of the fact that divi¬
dends have been withheld from the stock-holders and the money expended in con¬
structing and improving the property of the Company, the Board of Directors during
the past year, concluded that it would be but just to make a distribution of deben¬
tures, or certificates of indebtednoss, among the stock-holders, to compensate some¬
what for the interest which they were fairly entitled to upon the original investment."
The reasons implied or expressed in the above quotation, are :
1. That money invested in the stock of a railroad company is entitled to a fair
interest whether earned or not. This is not correct in principle. It is true concerning
the bonds of a company, but not concerning the stock of a company. A party who in¬
vests money in the stock of a railroad company must necessarily run the risk of re¬
ceiving interest thereon as do parties who invest in other business enterprises. The
Directors of a company are neither legally nor morally bound to pay dividends which
have not been fairly earned.
2. Because the Central Railroad Company withheld the dividends due the
stockholders and invested the same in improving the property of the company.
Neither is this a valid reason for the issuance of certificates of indebtedness. If the Di¬
rectors of a company earn dividends and invest them in other enterprises in stead of pay¬
ing them to the stockholders, the stockholders are repaid in the enhanced value of their
property, and, consequently, in the enhanced value of their stock. This view is, I
think, full}^ sustained by Mr. Wadley, who says in his report for 1873 :
"Frcm the foiegoing statement of earnings and expenses, it will readily be seen
that the declaration of a dividend is wholly inconsistent with a prudent manage¬
ment of your financial affairs^ This the Board regrets exceedingly, but it is beyond
their power to change, and it is believed to be sound policy to place your financial
condition beyond doubt rather than yield to the temptation of distributing money
which has not been fairly earned.''^
CERTIFICATES OF INDEBTEDNESS.
To the stock-holders of the Central Railroad Company
To the stock-holders of the South Western Company .
$3,000,000
1,600,000
Total
$4,600,000
12
Again in his report for 1875. referring to the maturity of a large amount of bonds
to be paid on account of the Southwestern, Muscogee and Mobile and Girard Kail-
road Companies, which would have to he met by the Central Railroad Company. He
says :
"If some of this large sum could he paid from the net earnings of the company,
instead of paying a dividend^ it would certainly enhance the intrinsic value of the stocky
and in that way benefit the stockholders more than they would be by the declaration of a
dividend^ involving, as it would, the sale of bonds at a discount, and thereby increas¬
ing instead of diminishing the indebtedness of the company."
The issuance of certificates of indebtedness not being considered just and neces¬
sary, they are, in my opinion, simply what is termed "watered stock," and of the
most obnoxious character, from the fact that the interest on them takes precedence
of the payment of legitimate dividends upon the original stock. The interest on
them, therefore, is improperly computed, as an item of "fixed charges." It is an item
of net earnings, and should be so considered. The placing of it otherwise does not
affect the correctness of this proposition.
The issuance of certificates of indebtedness is also an act of injustice to the stock¬
holders who sold their stock at a depreciated value during the period that dividends
were withheld. If they had had the guarantee that they would be reimbursed in the
future by their issuance, they would not have parted with their stock at a sacrafice.
If the directors of a corporation are anxious that the stockholders should not lose
anything from dividends withheld, the proper manner of reimbursement is through
the payment of extra dividends when earned, not through the issuance of their notes,
thereby further involving the Company in indebtedness.
If it is legitimate to issue certificates of indebtedness once, it would be legitimate
• s ^ *
to issue thernvB second time, and a third time, and on, indefinitely. Where then is
the guarantee of protection to the stockholder ?
Some states, realizing the importance of this matter, have very wisely passed
laws forbidding their issuance. If it were not for the certificates of indebtedness
issued by the Central Railroad Company, her stock would, in my opinion, command
$130.00 per share to-day.
One reason given by the Board of Directors of the Central Railroad Company
for the issuance of these certificates of indebtedness is, that dividends were withheld
for a certain period. By reference to the former part of this division of my state¬
ment, you will note that not only were three million dollars of certificates issued to
the stockholders of the Central Railroad Company, but that one million, six hundred
thousand dollars of certificates were issued by the Directors of the Central Railroad
Company to the stockholders of the South Western Railroad Company, interest upon
which, at six per cent, per annum, amounts to $96,000.00. As dividends have never
been withheld from this latter Company, the same reason for their issuance to this
Company cannot be given as was presented in justification of their issuance to the
stockholders of the Central Railroad Company proper.
Therefore, the Directors of the Central Railroad Company have made a bonus to
the stockholders of the South Western Railroad Company, not only of the annual
interest upon $1,600,000.00, but have obligated themselves to pay the principal. This*
they claim, is in accordance with the terms of their lease contract. We sincerely
doubt the wisdom and propriety of such a contract.
13
RECAPITULATION.
1 think that I have established, from the foregoing, the following facts :
1. That the money realized upon at least four millions of the five millions of
bonds which have been issued by the Central Eailroad Company has been expended
for property outside of the State of Georgia.
2. That the sum of $276,000, which is the annual interest paid upon the certifi¬
cates of indebtedness by the stock-holders of the Central Eailroad Company is not
an item of "fixed charges," hut, in fact, belongs to net earnings, and should he so
computed.
3. That of this sum of $276,000, $96,000 of it is paid annually to the stock-hold¬
ers of the South Western Eailroad Company, in addition to their handsome rentah
by the stock-holders of the Central Eailroad Company.
4. That, granting that this sum of $276,000 is legitimately an item of fixed
charges, it should he charged to the property outside of the State of Georgia, as the
withheld dividends were expended upon these foreign investments.
5. While, in the estimates following, I shall not interfere with the item of
"rentals," still, it is conclusively shown that the Directors of the Central Eailroad
Company pay an exceedingly liberal rental for their leased lines in Georgia.
According to these facts, I shall now attempt to analyze the tables of " earnings
and expenses " presented by Mr. Eaoul.
As the annual report for 1884 is the most recent, and as Mr. Eaoul has attempted
to show therein that his Company has earned only 1 18-100 per cent upon its capital
sto, k, I shall take the table presented in tha(, and analyze it. The year 1884 is the
most unfavorable which the Central Eailroad Company has had under the operations
of the Commission.
The following is the table from Mr. Eaoul's report for 1884:
Savannah Division,
Atlanta Division,
and South Western
Railroad, in clu ding
Bank and Invest¬
ments.
i
Columbus & Western
Railway.
Montgomery & Eu-
faula Railway.
Eufaula & Clayton
Railroad.
Ocean Steamsqip
Company.
Total.
Net income overoperat'g expenses
Interest on bonds
»1,159,06186
350,000 00
444,451 00
276,000 00
$ 62,076 84
68,820 00
»90,768 14
90,000 00
8.736 45
»486,989 21
59,220 00
»1,807,627 50
568,040 00
444,451 00
276,000 00
115,000 00
Rentals
Interest on certificates of Indebt- '
'
eaness
SinlfinEr funds.
15,000 00
100,000 00
Total fixed eharsres
»1,070,45100
88,610 86
» 68,820 00
-1,74816
»105,00000
'14,286 86
»159,220 00
827,76921
$1,898,491 00
409,186 50
Net income over fixed charges, ^
including sinking funds J
8,786 46
14
From the above table it will be seen :
1. That the entire interest on the five million bonds is charged to the roads in
Georgia.
2. That the rentals of the roads are also so charged.
3. That the entire interest on the certificates of indebtedness is charged like¬
wise to the roads in Georgia.
4. That all of the outside investments are thoroughly liberated from any taxa¬
tion whatever, on account of these items of expenses. In other words, the whole bur¬
den of the outside investments are thrown upon the roads within the State of Georgia.
The following arrangement of the items of earnings and expenses, based upon
the facts which I think I have proven to be correct, will throw another and the cor¬
rect phase upon the whole matter :
EAENINGS AND EXPENSES OF THE KOADS WITHIN GEOEGIA.
Net Earnings Savannah Division I After deducting $881,965, amount expended for
" " Atlanta " y new rails, new engines, etc.
" " Southwestern E. E. J $ 1,007,472
Expenses.—Eental of Southwestern Eailroad $ 857,451
Eental of Augusta & Savannah Eailroad .... 78,000
Eental of Eatonton Branch Eailroad 14,000
Total rentals paid $ 444,451
Interest on one million bonds 70,000 514,451
Leaving balance net profit of over 6 per cent, upon the capital stock. ... $ 498,021
Estimating the net earning from all sources, both within and without the State»
and Dot including the amount expended in permanent improvements, the
per centage of net earnings upon the capital stock of $7,500,000 would be more
than ten and a half per cent.
This being the case, what object can the President of a railroad com¬
pany have in stating that his company has earned only 1.18 per cent, upon its capital
stock? There can be but one object, in my opinion, and that is to prejudice, not
the stockholders only, but you and the general public against the Eailroad Com¬
mission law of Georgia. I ask your careful consideration of this important matter,
to see if I am not correct.
Mr. Eaoul very ingeniously says (annual report 1884, page 8,) when stating
that his company had earned only 1.18 per cent, that it was "after paying
rentals and other fixed charges."
He does not tell you that he first paid 7 per cent, on $5,000,000 to the Soutliwes¬
tern Eailroad Company, 7 per cent, to the stockholders of the Augusta & Savannah
E. E. Company, 7 per cent, to the stockholders of the Eatonton Branch ; he does not tell
you that he has paid a dividend of over 3 J per cent on the capital stock of his company
of $7,500,000, in the form of interest on certificates of indebtedness, a part of which
goes as a bonus to the stockholders of the Southwestern Eailroad; he does not tell
you that he has paid $280,000, equal to another dividend of over 3J per cent, upon
the capital stock of $7,500,000, as interest upon four millions of dollars borrowed to
buy a steamship line, and to make other outside investments. Neither does he
tell you that he has invested about $381,965 in new rails, new engines, etc., for the
year 1884, equal to another dividend of over 5 per cent, upon the capital stock, but
merely says that "aeter paying rentals and other fixed charges," his company
15
has been able to earn only 1.18 per cent, upon its capital stock. "What are we to
think of such a statement ? The fallacy is too palpable to any intelligent mind.
TRAIN MILEAGE STATEMENT.
Having considered that part of Mr. Raoul's statement which bears upon the
question of net earnings over "operating expenses" and "fixed charges," I shall now
refer to the train mileage statement of Mr. Raoul. The following is the table which
he presents :
Train mileage in 1880
Train mileage in 1881
Train mileage in 1882
Train mileage in 1883
Train mileage in 1884
Showing that the train mileage of 1884 exceeded that of 1880 by 867,842 miles, and
that of 1888 by 115,724 miles.
Referring to this table, Mr. Raoul says :
(1.) "He (I) does not tell you that the train mileage of a road is a measurably
correct indication of its volume of business."
Again Mr. Raoul says :
(2.) " The train mileage has steadily increased during all this time (from 1880
to 1884), indicating that the volume of business has increased or the character of the
trafiâc has changed so as to involve a heavier expense in conducting it."
(8.) Again referring to the increase in train mileage, he says : "Indicating an
increase of tonnage out of all proportion to the increase of revenue."
Again Mr. Raoul says :
(4.) " I do not claim that all this falling otf in revenue as compared with the
previous year, is due to reductions in the Commissioners' rates of this year over the
Commissioners' rates of last year. Yery much of it is, yet some is due to a lessening
in the volume of business passing over the road."
Again Mr. Raoul says :
(5.) "The small earnings of 1884 were due in part to small crops."
Again Mr. Raoul says in his report for 1884:
(6.) "The chief cause of this (falling off in revenue) is the short yield of cotton
in the sections tributary to your roads, and to some extent to increased competition"
By reference to the above quotations it will be noted that Mr. Raoul, in the sec¬
ond and third extracts, asserts that the "volume of business" has increased^ as shown by
the train mileage, while he admits in the fourth extract that the "volume of business"
passing over the road has lessened" or decreased, and attempts to show in the remain¬
ing extracts the causes for this decrease, which he attributes mostly to crops and
^''increased competition."
There is evidently an unintentional incongruity in the statements made by Mr.
Raoul.
If, therefore, the train mileage, which Mr. Raoul says is a " measurably
correct indication of the volume of business" passing over a road, has gotten him
into "some confusion," it will not be thought strange, that I have not told you
that the "train mileage" of a road is the basis upon which to ascertain the volume of
business passing over it.
2,028,400 miles.
2,417,700 miles^
2,525,789 miles.
2,780,018 miles.
2,895,742 miles.
16
The TONNAGE of a road is, I dare say, conceded by all railroad experts to be the
"measurably correct," in fact, the absolutely correct indication of the volume of busi¬
ness passing over a road.
Measured from this standpoint, and judging from such date as I have,
the tonnage of the Central Kailroad and Banking Company, decreased in 1884
from that of 1883 between fifty and sixty millions of pounds. Yet the train
mileage of 1884 exceeded that of 1883 by 115,724 miles. The actual tonnage, there¬
fore, does not bear out the assertion made by Mr. Eaoul that the train mileage is a
"measurably correct indication of the volume of business passing over a road."
It will be also noted that the gross revenue has decreased in about the same pro¬
portion as the tonnage has decreased.
Another notable feature connected with the train mileage table presented by
Mr. Eaoul is, that in 1881. when the tonnage of the Central Eailroad Company was
greater than that of 1884 by about eighteen millions of pounds, and while the carry¬
ing capacity of cars has almost doubled within the last few years, (the capacity now
being from thirty to forty thousand pounds per car against twenty to twenty-five thou¬
sand pounds formerly,) the train mileage of 1881 was 448,042 miles less than that of
. 1884, There may be just cause for this extraordinary increase in train mileage
while the tonnage has àeereased and capacity of cars increased, but the fact only
shows that, the "train mileage" is not a "measurably correct indication of the volume
of business passing over a road."
GROSS REVENUE.
In my former communication to your honorable Committee, I stated that the
gross revenue from the through business of the Central Eailroad Company had de¬
creased in 1884 from that of 1883 by about $400,000, while the gross revenue from
local business had increased about $30,000 in 1884 over that of 1883.
Mr. Eaoul, in taking issue with me upon this point, says : " I do not know from
what reports Major Wallace has drawn these conclusions, or, how he has analyzed
them, but it is evident that what he terms "through freight" is that business which
comes from or goes beyond the State line, and over which the Commissioners have no
control; and that he terms "local," that business within the State and over which the
Commissioners' rates do control, and that he has fallen into some confusion in sepa¬
rating these distinctive classes of traffic." Mr. Eaoul then quotes from figures in his
last annual report to show that the decrease has been from local business and not from
through business.
Each railroad company doing business within the State of Georgia is furnished
with a blank form, made in accordance with Section V of the law defining local and
through freights, of which the following is a copy, which they are required to for¬
ward to the office of the Commission monthly, filled up in proper order :
17
FOEM 22.
RepQTi of the Eai^nings arid Expenses of the Railroad, for the
month of ... , 188 . and 188 . .
earnings.
••'Through Freight.
Local Freight.
-Coming from or
going beyond Ga.
UP-1881
DOWN-188
TOTAL-188
UP-188
DOWN-188
TOTALr-188
Total...
Through Passenger
Local Passenger
1
Total
Express...
Mail
Miscellaneous. , ,,
¡
Total Earnings.
Increase.
Decrease
expenses.
188 .
188 .
'-Total Current Expenses ...,
t Total Extraordinarv Expenses
Total of all Expenses
Net Earnings over Current Expenses
Net Earnings over all Expenses
■^current expenses—itemized.
Salaries of General Officers
Salaries of Division Superintendents, Civil Engineers, Road Master
and Master Mechanics
Salaries of salaried Attorneys
Legal Expenses
Taxes
Loss and Damage to Persons
Loss and Damage to Stock
Loss and Damage to Freight
Ordinary repairs—Roadway and Bridges
Ordinary repairs—Equipment
- — — — i.
Other actual operating expenses and repairs
t extraordinary expenses—itílmized.
New rail and fastenings (character.
New bridges (charac;ter
New superstructure (character
New buildings (character
New equipment (character
Rebiiiiding equipment
New track—No. miles and feet
All other extraordinary expenses ...
A. C. Briscoe '.—Secretary Railroad Commission, Atlanta, Georgia :
Above please find correct statement from books of
of Earnings and Expensés for month of . , 188 . .
Eespectfully,
To be forwarded to Atlanta by the 20th of each month.
Eailroad,
18
It was from these reports, signed by the General Superintendent of the Central
Kailroad & Banking Company, that I derived the data upon which I made the asser¬
tion concerning the gross revenue of the Central Eailroad Company. From them we
can ascertain how much revenue is from "through" business, (that is business coming
from or going beyond the limits of the State,) and how much is from "local" business.
Without these monthly reports the Commission would not know the exact con¬
dition of the various railroads of the State, and with them, they can always keep
themselves informed as to the earnings and expenses of each railroad company, doing
business within the State of Georgia. They have always been presumed to he cor¬
rect. Either they are correct or the figures presented in the annual report from
which Mr. Kaoul quotes, are correct. If the latter be true, then incorrect reports
have been furnished the Commission since its establishment. In either event, if
there has been "some confusion," it is not attributable to myself, hut due to the va¬
rious reports furnished by the Central Eailroad Company. Of course, I do not inti¬
mate that there has been any error in these reports, or if so that the error has been
intentional. But in the absence of any of&cial correction, the certified reports fur¬
nished the Commission in these monthly forms, must stand as true, and I have, there¬
fore, only to reiterate what I said in my former communication with regard to the
gross receipts from "through" and "local" business.
I did not at that time take the liberty to allude to the causes which, in my
opinion, led to this reduction in the gross revenue from through business, but I now
deem it proper that I should give my views upon the subject. The causes are:
1. Shortness of Crops.—If the freights are not produced and oifered for ship¬
ment, they cannot he transported.
2. Depression in Trade.—This always follows short yield of crops. The
boom to which Mr. Eaoul alludes as having had its climax in 1880, subsided in 1882,
and the last few years have been trying ones in business and manufacturing enter¬
prises, as well as in railroading.
3. Competition.—Thë establishment of competing lines has had more, per¬
haps, to do with the loss of both the business and revenue of the Central Eailroad
Company than any thing else. Since 1880 there have been, I may say, three strong
competitive lines established, which have shared the business of which the Central
«Í. . .
Eailroad Company had previously almost absolute control.
The first of these is a line toward New Orleans, which has taken a good deal
of business to that point from Southwest Georgia. - ■
The second is the completion of a line from Montgomery to Florida by way of
Pensacola, over which a great deal of business now goes which formerly went over
the Central Eailroad lines either via Montgomery or Atlanta, from the West and
Northwest. :
The third and most important is the East Tennessee, Virginia and Georgia line.
With what dread Mr. Wadley, that wise, honest and far-seeing man, looked
upon these proposed lines of competition is seen from the following quotation from
the annual report of 1881 : "To what extent this (the E. T., Ya. & Ga.) will damage
your property, it is now difficult to determine, but it is evident that thé earnings on
that part of our road (the Atlanta division) will suffer some reduction, as we are
now abundantly able to do all the business that offers which must then be partly
divided between the two lines. It is difficult to understand either the motive that
piompted the action of the Legislature or those who have undertaken to build the
road. Looking at the matter from a business stand-point, it can hardly be expected
that they will for many years to come receive a fair return for their investment,
19
especially upon stock and indebtedness amounting to over $70,000 a mile. If a
return is expected upon such an investment, the patrons of the road must he heavily
taxed, and in that case we shall not he seriously aíFected. The only other motive is
supposed to he speculation, and if that succeeds it can only he in consequence of the
great credulity of capitalists unacquainted with the necessity for the road that is to
he hqilt."
Under all the circumstances, I think that the Central Railroad Company has
made a remarkably fine showing. And, as the country develops, by judicious and
wise management, there is no reason why the Central Railroad and her great com¬
petitor, the East Tennessee, Virginia and Georgia, may not both do a still more
handsome business, and pay still larger dividends on their intrinsic value.
THE MAKING OF " JUST AND REASONABLE"
RATES.
Mr. Raoul, in alluding to this question, says :
I assume that the intention of the law was to permit them (the railroads) to
make fair interest upon the capital expended upon them without considering the
amount of property the Company owned outside of the State. It is not a question
of the wealth of the corporation or of the outside resources of the stock-holders, hut
the question is, what is a just and reasonable rate lor the users of railroads to pay,
and what is a reasonable return upon capital invested in a specific property, and
how to adjust and harmonize these two necessarily conflicting interests, and to do
justice to both ? "
Again, Mr. Raoul says : His (my) figures and arguments, however, go to dem¬
onstrate that he (I) as a Commissioner to execute the law of the State, which com¬
mand just and reasonable rates to he made, is taking into consideration as an element
in fixing these just and reasonable rates, the property owned and operated by the
company outside the State of Georgia, and that he feels justified in depressing rates
on a railroad in Georgia to a point that makes it impossible for it to earn anything
for its stockholders because that company owns property outside of the State, the
profits upon which will enable it to assure its solvency. One of these properties, the
Ocean Steamship Company, has proved to be of incalculable service in advancing the
commercial interests of the State. Should not the energy, the enterprise and contri¬
butions of its projectors also reap some of its benefits?"
Before further considering the question of what are just and reasonable rates, I
desire to state that Mr Raoul's assertion that I, as a commissioner, have taken into
consideration, as an element in the making of just and reasonable rates, properties
owned by the Central Railroad Company, outside of the State of Georgia, is entirely
erroneous, and cannot be substantiated. "What I did state and what I now reaffirm
is, that Mr. Raoul, in his reports and his letter to your Honorable Committee, has
charged to the roads in Georgia, as an item of expense, interest upon a large amount
of money which was borrowed to pay for investments without the State of Georgia*
In other words, the roads within Georgia have been taxed to pay for all of the ex¬
penses connected with these outside investments. I have already shown you the
fallacy of this position, and would ask your careful consideration of this matter.
Mr. Raoul's charge that I, as a commissioner, am depressing rates upon roads
in Georgia to a point where they are not remunerative, cannot be established. Thç
question naturally arises, what is the net income of a road ?
20
The Supreme Court of the United States has unanimously decided this question
in the case of the Union Pacific Railroad Company vs. United States (99 U. S. Rep.;
Otto V. 9 402.) That Court has declared that "as a general proposition, net earn¬
ings are the excess of the gross earnings over the expenditures defrayed in producing
them, aside from and exclusive of the expenditure of capital laid out in constructing
and equipping the works themselves." "All payments of interest on the bonded in¬
debtedness of the company should be charged to capital interest account and not to
current expenditures. Though payable out of earnings before any dividends can be
made to stockholders, they cannot be deducted for the purpose of ascertaining the
net earnings of the road." "The bonded indebtedness incurred for the purposes of
construction and equipment, is but another form of capital and analogous to preferred
stock, and the interest a'^cruing thereon is in the nature of a dividend on such capi¬
tal. It has nothing to do ^ith and cannot aiifeet the amount of the net earnings of
the road."
According to this very decisive and clear construction of the matter by the high¬
est tribunal in the land, the following table will give the true "net earnings" of the
Central Railroad & Banking Company of its roads within the State of Geingia, and
exclusive of all outside investments ;
Gross Earnings, 1880 f 3,144,103
Operating Expenses 1,635,450
Net Earnings $ 1,508,653
Gross Earnings, 1881 $ 3,651,888
Operating Expenses 1,732,776
"Net Earnings" $ 1,919,112
Gross Earnings, 1882 f 3,412,642
Operating Expenses 1,878,289
"Net Earnings" f 1,539,353
Gross Earnings, 1883 f 3,589,639
Operating Expenses 1,855,756
"Net Earnings" f 1,733,883
Gross Earnings, 1884 $ 3,213,775
Operating Expenses 1,824,338
"Net Earnings" $ 1,389,437
This surely does not look as if I, as a commissioner, were oppressing the Central
Railroad & Banking Company very greatly. I have already shown how these "net
earnings" are distributed with the exception of the amount invested in permanent
improvements. This, the following table will indicate :
Excess of earnings over operating expenses, 1880 $ 1,508,653
Excess of earnings over all expenses, 1880 1,007,472
Amount expended in permanent improvements, equipments, etc . . 501,181
Excess of earnings over operating expenses, 1881 ^1,919,112
Excess of earnings over all expenses 1,367,029
Amount expended in permanent improvements, equipnients, etc., 1881 552,083
21
Excess of earnings over Operating expenses, 1882 . .$ 1,539,353
Excess of earnings over all expenses . 1,021,239
Amount expended in permanent improvements, equipments, etc., 1882 518,114
Excess of earnings over operating expenses, 1883 $ 1,733,883
Excess of earnings over all expenses 1,268,126
Amount expended in permanent improvements, equipments, etc., 1883 465,757
Excess of earnings over operating expenses, 1884 . $ 1,389,437
Excess of earnings over all expenses 1,007,472
Amount expended in permanent improvements, equipments, etc., 1884 381,965
Aggregating in the five ¿ears to ... $ 2,419,100
In other words, the Central Kailroad and Banking Company have, in the five
years mentioned, in addition to paying dividends, interest on bonds and interest on
certificates of indebtedness, as already indicated, invested nearly two and
one-half millions of dollars in new steel rails, new depots, new cars, new engines, etc.
I would not have you understand that, because I have presented the two pre¬
ceding tables, I do not recognize the necessity and importance of a railroad company
paying its legitimate interest, but have given them to show you what have been the
real net earnings of the Central Kailroad & Banking Company.
I believe that, where possible, a railroad company should be allowed to charge
such rates as will enable it to earn a sufi&cient amount to pay a handsome
dividend upon the intrinsic value of its property, in addition to keep¬
ing its road and equipments in firöt class condition, and reserving a
reasonable amount to meet all contingencies. There are, however, conditions under
which a railroad company cannot, even with the utmost allowance of rates, do this.
The building of a railroad is a business enterprise which should be closely inquired
into before being projected. Competition, sparcity of settlement, want of business, ex¬
treme cost of building and operating greatly affect the interests of a railroad com¬
pany. This is quite evident to any business man. The allowance of an extremely
liberal tariíF can not, and will not, make the business. Pressed too far, tariffs become
prohibitory. The happy medium must be sought.
But the position assumed by some railroad officials that the local rates shall be
made sufficiently high to pay for all expenses connected with the operation of a
railroad, while traffic, known as through business, shall be relieved from such burden,
is not, in my opinion, just and proper. Such a position means unjust discrimination
against the local shipper, and the fostering of industries outside of the limits of the
State. One of the principal objects of the Kailroad Commission law of this State is.
to prevent unjust discrimination, and to give protection to shippers to and from local
stations, that is, points without competition. Kailroad companies cannot reduce the
rates on their through traffic to a point below the cost of transportation and carry on
destructive wars with each other, and then expect to be allowed to tax its local
patrons to make up the loss sustained by such action. Both branches of traffic should
be made to bear the proportionate expenses incidental to the transportation of freight
and passengers. This principle I have sought to recognize in the discharge of
my duties as a Commissioner.
Mr. Albert Fink, General Commissioner of the Eastern and Western Kailroad
lines, whose power to make and change rates is far in excess of that con¬
ferred upon the Kailroad Commission of Georgia, and even more arbitrary, presents
22
S'orne very sound views upon this subject, going even farther than I have ever gone.
I take the liberty of quoting from his testimony delivered before the United
States Senate Committee on Labor and Education, September 17, 1883, as follows :
1. "The principle that railroad charges should be based on the value of services
rendered^ rather than on the cost, is, I think, the correct one."
2. "You have always to go back to the foundation, and that is: 'What are the
charges? Are they reasonable in themselves?' The amount of dividend 'paid does
not enter into the question at ail."
3. "I do not think the people have anything to do with how you got the rail¬
road, and what you paid for it. The only question is, whether you make reasonable
charges."
4. "It does not make the least difference what the indebtedness of a railroad
company is in arranging tariffs. ^ ^ They are commercial conditions en¬
tirely independent of the stock liability of railroads. I have shown that the tariffs
are'not based on the cost of the service or on the indebtedness of the company. If
the rule was established that the cost of-the service should be the basis of all tariffs,
then the watering of stock, increasing the capital of a company ficticiously, and en¬
deavoring to pay interest on that increased capital, would, of course, increase the
transportation charges, and the complaint would be a just one. As it is, the water¬
ing of stock may be done with a view to stock speculation, and may affect the inter¬
est of investors and speculators, but it does not affect the interests of the patrons of
the road."
These extracts are from the testimony of the leading railroad official of the Uni¬
ted States, and present very forcibly and clearly his views as to the principles which
should govern in the making of just and reasonable rates.
THE EARNINGS OF THE GEORGIA R. R. CO.
My allusion to the earnings of the Georgia Kailroad Company heretofore, vrere
purely incidental. It was not necessary to refer particularly to that corporation, be¬
cause its tariff had not been affected as much as those of some other roads.
I simply asserted that the net earnings of the Georgia Railroad during the year
just then passed, were reported at ^593,000, an amount equal to about 14 per cent,
upon the capital stock of $4,200,000. This assertion was made upon facts derived
from Mr. Raoul's own published report, which was the only source of information I
then had. I had no sinister motive, as has been accused, in making the statement.
It is my desire to be always perfectly fair and candid in what I may say. I learn
from a further investigation of the matter that out of the net earnings, the annual
interest on the bonded indebtedness of the company had to be deducted. This being
done, the net income, instead of being a fraction over 14 per cent, is a fraction over
12 per cent.
This correction I cheerfully make, but I do not admit the correctness of Mr.
Raoul's statement, namely ; that the Georgia Railroad Company earned only about 6
per cent.
In order to arrive at this conclusion he has had to estimate the bonded indebted¬
ness in addition to the capital stock. I am not aware that the capital stock of the
Georgia Railroad Company has been increased. It is true that the said company
hgs other assets, but it is also true that they have other liabilities which about offset
each other, as will be seen from the statement made below :
The capital stock of the Georgia Railroad is . . . . , . . . . .... . $ 4,200,000
23
The interest of the Georgia Kailroad in other investments:
Stock of Atlanta and West Point Kailroad ^ 440,000
Certificates of indebtedness West Point Kailroad ^ ......... . 440,000
Stock of Rome Railroad . . . . ". . . . . . . 150,000
Stock of Port Royal and Augusta . . ... . . . . . 200,000
Stock of Western Railway of Alabama . 900,000
Stock of Walton Railroad . , . .' 31,000
Banking capital 500,000
Total .1 2,661,000
Liabilities of the Georgia Railroad Company :
7 per cent, bonds $ 185,000
6 per cent, bonds 2,496,000-^2,681,000
Net income from allsources over operating exp. year ending Mar. 31,1884, $ 674,190.98
Interest on f185,000 7 per cent, bonds $ 12,950.00
Interest on $2,496,000 6 per cent, bonds . 149,760.00 162,7]Q.OO
Net earnings over operating ex. and interest as above . . . .... . $511,480.98
or a fraction over 12 per cent, on the capital stock of $4,200,000.
In the $674,190.98, above given, are $81,964.28, which were properly invested in
new steel rails, engines, cars, etc., instead of being paid to the stockholders. If this
item he ded,ucted it will be found that the Georgia Railroad Company still earned on
its capital stock of $4,200,000, for the year under discussion, a fraction over ten (10)
per cent. Hbw many business enterprises in thé country can make as fine a showing
as this company has made ?
As further explanatory, I give below a table showing the profits of the Georgia
Railroad proper and its outside interests :
Georgia Railroad proper—earned fraction over . . . . . . . . . . . . 13 per cent.
Or '• " " —deducting 81,964.28, amount invested in per- .
manent improvements—earned fraction over . 11 per cent.
Atlanta & West Point stock earned 6 per cent, or 12 per cent, on
Atlanta & West Point certificates earned 6 per cent. / . original stock.
Rome Railroad stock earned, fraction over . . . 6 per cent.
Western Railroad of Alabama, earned fraction over . . . 3 per cent.
Walton Railroad, earned . . . . ... . . . . . . . 6 per cent.
Port Royal & Augusta earned fraction over . . . . . 2 per cent.
Banking capital fraction over 8 per cent.
From which it will be observed that every interest within the State of Georgia
including Atlanta & West Point certificates equal in amount to its capital, earned
6 per cent, and over with our tariffs, while the Georgia Railroad Company's interests
in railroads in other States earned in one case 2 per cent, only, and in another 3 per
cent. only.
This I consider a fair and legitimate analysis of the earnings and expenses of
the Georgia Railroad Company.
It cannot be expected that revenue should be taken from the Geor¬
gia Road proper to bring up the average of its outside investments to a
24
point of 6 per cent, or 7 per cent. Each interest has to stand on its- own merits.
The President of the Central Railroad and Banking Company having questioned
the correctnesl" of my former itatement, I have been forced to enter into the forego¬
ing analysis of the management of the property confided to his care, which I think
will, upon a careful examination, demonstrate the entire correctness of the state¬
ment which I had the honor to place before you in a previous communication, the
substance of which is as foliows:
1. It is true that the stoôk-holders of the Central Railroad and Banking
Company have paid themselves dividends in cash during the five years existence of
the Commission on their capital stock of $7,500,000, and on the certificates of in-
dehtednes of $4,600,000, the sum of $3,452,630.50—a sum equal to nearly one-half
of their capital stock.
2. It is true that the said Company, during the same period, has paid their full
indebtedness for rentals of other roads, $2,200,257, and also the entire interest on
their bonds amounting to the sum of $2,501,058.44.
3. It is true that the said Company has paid during the same period the sum of
$6,503,009, the amount incurred in operating the road, and has invested in perma¬
nent improvements, such as new rails, new cars, etc., the additional sum of $2,419,100.
4. It is true that in 1879 they reported their assets for that year as being worth
or costing $3,571,896.27, and that in 1884, as per their report, their assets were worth
$5,590,985.66, being a gain during that time of $2,019,089.39.
These wonderful amounts of money have been paid to the said Company by its
patrons during the existence of the R. R. Commission law; and yet it is asserted that the
Company is in danger of bankruptcy. If such marvelous results have been accom¬
plished during the active operation of the R. R. Commission law, and during a period too,
a part of which has been noted for its stringency in möney matters and depression
in business, I claim that, though I have been accused of incapacity on account of
advanced age and the want of experience in modern railroading, still I am not too
dull of comprehension to perceive very clearly that there is error in judgment some¬
where in the estimation of the true value and money earning power of this strong-
armed corporation, and that that error is very clearly shown not to lie at my door.
In conclusion, Mr. Chairman, permit me to state that I have not ventured to
burden you with statistics of other companies doing business within this State, for
the reason that they have not made similar assertions to that made by the President
of the Central Railroad & Banking Company.
It is my belief that all the railroad companies of the State are doing as well as
could possibly be expected during the present depressed financial condition of the
country. I am confident that the majority of them are faring equally as well as the
agricultural and other business enterprises, and perhaps better. They are certainly
doing better than the majority of railroad companies in other States.
It is neither the desire nor the intention of the Commission to oppress the rail¬
road companies of the State. There are conditions and facts governing the making
of local rates with which all are not conversant. The Commissioners weigh very
carefully all of these points and always endeaver to act in accordance with their best
judgment based upon a knowledge of these facts, regardless of the clamor of interest¬
ed parties.
I thank you for the privilege which has been granted me to lay these facts
before you. Respectfully,
CAMPBELL WALUCE.
Atlanta, Ga., June 15th, 1885.
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