"The earning capacity of the railroad cannot be equitably or logically made the sole criterion of value, because the rates, and hence the earnings, should depend to some extent, at least, upon the amount of capital justly entitled to profit."
It would seem to be self-evident that the earnings alone, either gross or net, are not necessarily an indication of the value of the road. Gross earnings are not, because, if a minimum proportion of them is used for maintenance and betterment, the value of the property will steadily decrease; whereas, if the opposite policy be followed, it will increase. On the same principle, the net earnings offer no criterion as to the manner in which the property has been kept up, and alone are, therefore, no measure of its true value.
As an example of the arguments used by some of the opponents of physical valuation, the following quotations are made from an article by Mr. Henry Fink, Chairman of the Board of the Norfolk and Western Railway.[[21]] Referring to the fluctuation in the costs of construction, he says:
"As the cost of materials and labor fluctuates ... it follows that what may be a fair valuation of a railroad one year may not be so one or two years later. Hence, it would be necessary to make new valuations from time to time."
Further, in the same article, referring to a valuation based on the market value of bonds and stocks, he says:
"Unlike the physical valuation, this method has a rational basis.... It is true that prices of stock fluctuate—at times violently—but this difficulty can be overcome in a measure by using the average prices for long periods."
It is strange that it did not occur to so able a man as Mr. Fink that the value of the physical property might also be based on average prices for long periods; the cost of railroad construction and equipment as a whole does not fluctuate nearly so violently as the stock market.
The report on "The Basis of Unit Prices,"[[22]] by W. D. Pence, M. Am. Soc. C. E., the Engineer of the Wisconsin Railroad Commission, in connection with the Appleton Water-works case, is an excellent example of a fair and impartial study of this phase of the subject, and the conclusion of the Commission in this matter can only be regarded as reasonable by any one who is disposed to be at all fair-minded. It says:
"If the standard by which the reasonableness of charges is to be determined should fluctuate with the market prices of material, labor and land, no schedule of rates could be established for any length of time, for, under the circumstances, a rate that would be reasonable to-day might be very unreasonable to-morrow. The principles of the law applicable to the subject certainly involve no such absurd consequences."
Another instance of an argument based on technicalities is found in the Railway Age Gazette.[[23]] In an editorial on Valuation and Rate Regulation, it is said: