intangible items as "franchises" a high value which has no substantive basis.

The accountant looks closely to the depreciation charge. As a recent writer on accountancy has well said, "All machinery is on an irresistible march to the junk-heap." Provision must be made out of current income, not only for necessary current replacements, but to provide against the day when a large part of the plant will have to be renewed. All this information is of the greatest interest and value to the banker. He wishes to present to his clients such a statement as the following, and to know that it is accurate.

EARNINGS

(Certified by Messrs. Price, Waterhouse & Company, Chartered Accountants; and Allen Knight, Esq., C. P. A.)

NET EARNINGS... $ 5,959,712 $6,123,255 $ 6,531,305 Bond interest paid...

Balance......

3,278,177

$ 3,253,128

Gross earnings during the past five years have shown a steady increase, as follows:

1907.

1908.

1909.

1910.

1911.

$11,342,140 $12,657,305 $13,491,288 $14,044,596 $14,682,669

When the banker can submit information of this character, his argument is convincing.

The banker insists upon a large residual value in the property over the amount of the bond-issue. He does not propose to furnish the money to construct his security. The larger this margin of value is, the safer are the bonds. One measure of equity is the market value of stocks, based on dividends paid. The banker is careful, however, to determine whether these dividends have been fully earned; whether the market value upon which he, as the investor's representative, is asked to rely, represents the judgment of the investor or the hopes of the speculator.

A far better guide to the value of the property is the cost of reproduction. That a public-service property has cost $5,000,000 is not conclusive evidence that it can earn interest on this sum. A large part of the money may have been wasted by careless, incompetent engineers, or the plant may be too large for the business to be obtained. As a rule, however, the standard of original cost, or cost of replacement, whichever is the lower, furnishes a safe guide to the "equity" or margin in the property, for the protection of the bonds. With this margin as a starting point, and with the

assurance of good management, efficient operation, and the opportunity for the development of a large business, the banker has only one remaining consideration to examine the franchise.

In a preceding chapter I have shown that publicservice companies operating in large cities were so-called natural monopolies, supplying necessities of life to increasing populations at diminishing costs of production and distribution, at prices restricted only by considerations of its own interest. These opportunities for large profit must, however, be enjoyed under the supervision of the State. Unreasonable rates will not be permitted. The evidence of unreasonable rates is found in an unusually high percentage of earnings. If the corporation has an express franchise contract with the city, permitting it to charge a certain price or fare, it cannot be disturbed, no matter how great may be its profits. In the absence of such a stipulation, the company's earnings may at any time be reduced to what the courts consider a reasonable return, by a change in rates, fares, or prices.

The banker must look closely into the franchise question. He must consider first the term. If the franchise is for 25 years, then the bonds which

he buys should mature within 25 years. The banker next considers the burdens imposed by the franchise upon the company, what payments-car licenses, street repairs, lighting, direct contribution to the public treasury-does it impose, and finally, what are the provisions for extension at the expiration of the franchise? These questions are the most important asked by the banker concerning the terms on which the company, the purchase of whose bonds he is considering, will be allowed to do business during the life of the bonds.

In recent years a solution of the franchise question has been attempted by the development of various plans of city partnership in public-service undertakings. The experiments of Chicago, Philadelphia and New York in this direction we have now to consider.

XIV

THE PUBLIC-SERVICE CORPORATION AND THE CITY

THE last chapter outlined the examination which is made by the investment-banker when he is asked to purchase the securities of a public-service corporation. The conclusion was reached that the most important part of this examination concerns the franchise, the right of the company to do business.

The foundation of investment is legal security. A corporation is created by the State, and is protected by the power which creates it. It is given great privileges: the right to do business as a private individual or a partnership; the right to take private property at a fair valuation even against the will of its owners; the right to occupy the public streets with tracks, pipes, and wires; and the right to a fair return on the money which its owners have contributed, or which it may have borrowed from creditors.

Along with these rights, however, go certain obligations, often not clearly defined in charters