"... the true method of valuing a corporate property is first to determine the cost of reproduction of the property and its depreciation, and modify this figure by any applicable positive or negative non-physical elements of value."
It is submitted that the clear meaning of the foregoing is that both replacement cost and real value as derived from use must be separately and independently ascertained, and that, these aggregates having been compared, the former is to be corrected by whatever allowance for non-physical value may be required to make it agree precisely with the latter. The obvious suggestion flowing from this discovery of his theory is that only value in use is wanted, as that is the only real value, and as it must be separately ascertained in any event, no other and pseudo value need be taken. The essential character of the method is as described, even when it is applied through determination of the annual value of the use and the assignment of one portion of such annual value to return on the capital value of the physical property and another portion to return on the capital value of non-physical property. The real nature of the method is not even effectually concealed by the capitalization of the income assigned to physical property at one rate and the income assigned to non-physical property at a different and higher rate. In fact, if it is necessary to conclude that a portion of the net annual income of railway property is normally paid to, or in respect of, a portion of capital entitled to a lower rate of return, and the remainder to or in respect of a remainder of capital entitled to a higher rate, the appraisal of the physical property is an excessively costly, cumbersome, and inaccurate expedient for determining the amount or value of either portion of the capital. Yet that is exactly what was done in Michigan by Professor Adams, the "valuation" he then made being completed before he altered his view by deciding that the non-physical elements of value are entitled to no consideration whatever, and that only cost of replacement is worthy of inclusion in an official "valuation."
But is there any real distinction between the "physical properties" and the "immaterial elements," such as the foregoing extract seems to assume? Is not the superficial appearance of such a distinction plausible but deceptive? A locomotive is an entity; so is a railway. The separate parts of a locomotive are most of them independently valuable; so are the separate parts of a railway; but a large share of the value of the locomotive is the result of the nice adjustment of these separate parts to each other and to the work to be done.
Take a hundred different-sized locomotives, each adapted to different work under different conditions, and separate each piece of metal; it would be possible to value all these parts, but the aggregate would be far less than the value of the locomotives from which they were taken. Again, it would be possible to construct from these parts a hundred locomotives of such poor design, their respective parts so out of adjustment and balance, that they would be worth even less than the parts out of which they were assembled. The highest paid intelligence has not yet contrived the perfectly balanced locomotive, but a large part of the so-called "physical value" of every locomotive represents this sort of highly paid intelligence put forth at every stage from the opening of the mine where the ore was obtained to the delivery of the completed locomotive. Take ten railways of a thousand miles each, every one of them efficiently constructed, and equipped with proper terminals, stations, signals, rolling stock, and trained employees, and each properly adapted to the requirements of its territory and traffic; separate them into piles of ties and rails, groups of locomotives and cars, acres of land, unorganized bodies of men of varied capacity and training; what sort of intelligence will it require to build up out of these masses ten railways as efficient and useful as those that originally existed? Why, then, should the "physical value" of the locomotive include the assembling of its parts in proper balance and the "physical value" of the railway exclude the cost of the much more complicated adjustment of its elements of machinery and labor and location to each other?
At an early point in his discussion, Mr. Riggs makes an announcement, highly becoming on the part of one who proposes to deal with the problem solely from the point of view of a civil engineer, that he does not intend to argue the public utility of any sort of valuation, but only the method by which it may best be made, should one be determined upon. He says:
"This paper is confined to a discussion of the methods which should be used in arriving at a correct figure of cost of reproduction and depreciation—it does not take up questions involving the propriety of those figures when reached. The propriety or legality of using such figures as a basis for an assessed valuation, as a basis for rate-making (rate-making being an art in itself involving complications as great as those encountered in valuation), or any arguments as to the justice or injustice of legislation restricting issues of stocks or bonds, will be conceded no place in this paper. It is assumed that all these questions would have been taken up and a satisfactory answer reached before a valuation could have been ordered."
Two pages after the foregoing paragraph, under the sub-heading "The Relation of Public Service, or Quasi-Public Corporations, to the People," Mr. Riggs proceeds to violate the wise, though self-imposed restriction, and devotes no less than eleven pages to a defense of the project on grounds of alleged public policy. In these pages he concludes that such a valuation as he proposes—not a mere determination of replacement costs, but a real valuation, with proper allowance for all elements of value in use—would be of service in connection with (a) taxation, (b) public control of rates, and (c) public control of issues of capital securities.
In supporting valuation as an expedient in taxation of railway property, Mr. Riggs seems to rely on a table made up from Professor Adams' Bulletin No. 21, as expert employed by the Federal Bureau of the Census, which table shows that the assessment of the railways of Wyoming for taxation purposes in 1904 was but 7.5% of their commercial valuation, as estimated by Professor Adams, and that this ratio varied greatly throughout the different States, running as high as 114.4 in Connecticut. Of course, nearly every one knows, even if Mr. Riggs does not, that the relation between the real value and the assessed value of all other kinds of property varies greatly from State to State, and even in different portions of the same State. On account of this variation, no table such as that offered by Mr. Riggs in support of his argument can have any value unless supplemented and explained by data covering the assessment of other kinds of property. It is worth noting, en passant, that the so-called "Commercial Valuation," on which Mr. Riggs rests this part of his argument, assigns a value equivalent to $32,054 per mile to the railways of Michigan and one of $45,211 per mile to the railways of the prairie State of Nebraska. Possibly this variation in the estimate of value is partly expressed in the conclusion that Michigan railways are assessed at 70.9% of their value and Nebraska railways at but 18.5 per cent. Obviously, there is no more need of uniformity among the States in the taxation of railway property than in their methods of deriving revenue from other kinds of property.
Also, Mr. Riggs admits that, when the Michigan valuation for taxation was made, it was not diminished, as it should have been, by the use of negative, non-physical value. This is fully equivalent to an admission that the method was unjust to every railway not capable of earning the full return on its replacement cost. He says:
"The use of a negative or subtractive non-physical value was considered, and advised by Professor Adams....