tem." Belgium and Prussia have made state management all but universal; Italy has practically given it up.
Of much more importance in the United States has been the effort to regulate charges by legislation, without touching the question of ownership. There was no lack of authority for so doing. Common carriers had been made the subject of special regulation from time immemorial, and it was a well-accepted principle that their charges must be reasonable.
But what constitutes a reasonable charge? On what basis are we to compute it?
It is by no means a sufficient answer to say that rates should be based upon cost of service. What items of cost shall we include? Shall we count the fixed charges, or simply consider operating expenses? In the earliest legislation the former course was adopted. The English tolls and maxima were calculated upon this basis. But they were soon found to be so high as to be almost inoperative. At any rate, they did not prevent discrimination. They allowed the railroad to earn its fixed charges where it chose, and to lower rates elsewhere. A prescribed rate of this kind is too high to be of any use.
On the other hand, to prescribe a rate which does not provide for fixed charges is even worse. This was tried in the Mississippi Valley in the Granger movement. It was argued by the farmers that, if the railroads could afford to carry their competitive traffic at very low rates, they could afford to do the same for the local traffic. All rates were therefore reduced by law to the basis of the competitive ones. What was the result? In Wisconsin, where the system was carried out most completely, a law of this kind was in operation for two years. At the end of that time, not a single railroad was paying dividends; only four were paying interest on their bonds. Railroad construction was at a stand-still. The existing roads could not afford to extend their facilities for traffic. The development of the State was checked—checked so abruptly that the very men who were most clamorous for the railroad law in 1874 were most clamorous for its repeal in 1876. In their anxiety to secure low rates, they had overlooked the necessity for railroad development. This oversight reacted forcibly against them; and the same reaction is likely to be felt wherever reckless railroad legislation is attempted. Our railroad profits are not so high as is often supposed. They are less than four per cent on the nominal capital; and, making all due allowance for water, probably less than six per cent on the actual investment. Admit, if you please, that the corruption of inside rings absorbs an additional amount which ought to go to the investor; this does not affect the fact that, if your legislation prevents the investor from receiving his dividends, he will not invest his capital in your State. It is not now a question of ethics as to what you or he ought to do; it is a matter of fact, proved by actual experience as to what he will do.