guard these investments. It has been found necessary from time to time to amend these laws to fit the changing conditions, admitting new types of bonds. The West has never been a large buyer of railroad bonds, although beginning about 1900 this type of bond began to attain some degree of popularity. High-grade listed bonds were bought by wealthy individuals and estates, and also, on account of their ready convertibility, by a good many banks, for what they termed a "secondary reserve," but the experience of 1907 proved that long-time railroad bonds were anything but desirable as a bank reserve, and few are carried at this time. Since the advent of the income tax, the holdings of individual owners have been exchanged for tax-exempt securities. Thus railroad bonds today comprise a comparatively small portion of total bond sales. COURSE OF BOND PRICES It is interesting to review the course of bond prices for the last 25 years. As stated before, money was extremely easy in 1899-1900, and the best railroad bonds sold down very close to a 3% basis on the theory that this rate would prevail for some time to come. Further, it was pointed out that most of these bonds were extremely long-time. The course of investment money, however, has run contrary to the prevailing view, and, with a few breaks, rates mounted steadily until 1921. Examples of the effect of the change in money rates since 1900 are shown in the following table: These figures show very graphically the effect of a change in the investment rate on long-time bonds. A comparison of the number of times interest is earned on the funded debt of the various railroads is interesting and has a direct bearing on the security. TABLE 18 NUMBER OF TIMES INTEREST WAS EARNED ON FUNDED DEBT OF 20 RAILROADS IN 1922* As stated before, the tendency of the railroads has been to issue very long-time securities, a condition which is wrong in principle. The buyer of a bond buys it subject to all the changes that may occur during its life, and none can look a hundred years ahead. Writers on financial subjects are too prone to discuss the difference between long- and short-time bonds as merely one of price, without taking into consideration that time is one of the essential factors of safety. While it is impossible accurately to predict the future for even a short time, it is obviously easier to anticipate conditions for five years than for fifty. An analysis of railroad bonds would be incomplete without taking into consideration some of the factors in the railroad situation as it exists today, and, unfortunately, most of these appear to be unfavorable. In the last four years 98.25% of railroad capital has been furnished by bond issues and only 1.75% by the issue of stock, resulting in a constantly diminishing equity behind the funded debt. Both railroad rates and wages are controlled by commissions which too often are prone to listen to public sentiment; taxes have doubled and now exceed dividends, and motor transportation, traveling on roads which railroads are taxed to build, is a formidable competitor. In an article in the Railway Age of February 23, 1924, James C. Davis, Director-General of Railroads, makes the following state ment: I believe that today and now the railroads of the United States are facing the most crucial situation since the government assumed the right and authority of control. They are at the parting of the ways. One road, the straight and narrow path, by strengthening and supporting private ownership, leads to a privately owned and operated system of transportation, which, if given reasonably remunerative rates, will furnish to the people of this country what they need and are entitled to, the cheapest and most effective transportation in the world. The other, the broad road, leads perhaps to destruction, or at least to government ownership, which, I believe, would be not only the greatest mistake in judgment, but the most expensive experiment ever undertaken by this government, and eventually would result in an inefficient and unsatisfactory service, at a greatly increased cost. There are, however, a few bright spots, the inauguration of dividends by the Southern Railway after 30 years, being one of them. On the whole, 1923 showed an improvement in railroad earnings. Let us hope that the policy of regula tion is not carried to the point of destruction and that there will be a return to saner thought on the part of the people, particularly the representatives of those sections of the country which have most to gain from good service. SELF-TEST QUESTIONS 1. Why do the states not issue bonds at present to aid the railroads? Why have land grants to railroads by the states and the National Government ceased? 2. Classify railroad bonds according to security, and define each kind and class. 3. Why do investors dislike second and third mortgage bonds? What has been done in naming bonds to overcome this antagonism? Is such antagonism always reasonable? 4. Why did railroads issue general mortgage bonds in such large quantities during the period 1895-1900? 5. What weaknesses are typical of the general mortgage bond issues of the period 1895-1900? Are they weaknesses from an investment view-point? 6. How have the weaknesses discussed in connection with Question 5 been remedied in later general mortgage issues? 7. Why have railroads ceased to incorporate sinking-fund provisions in trust deeds under general mortgage bond issues? Why are equipment trust bonds always retired in series by sinking fund? 8. Why are equipment trust issues such sound investments? 9. Suggest texts to use in analyzing a railroad bond for investment purposes. 10. How do the rights of railroad bondholders differ from those of real estate bondholders in case of default? Explain your answer. II. What are the main purposes of railroad reorganization, and how does their accomplishment affect the various classes of railroad security owners? 12. Study the reorganization plan of the Chicago and Eastern Illinois road. Try to account for the treatment given the various classes of security holders. 13. Is the market for railroad bonds increasing or decreasing? 14. Discuss the present railroad situation with respect to its effects on rail securities as investments. XII PUBLIC UTILITY BONDS By WILLIAM J. WARDALL Western Manager, Bonbright & Company, Inc. Definition of a public utility. History of public utility industry. Public utilities and industrials compared. Capital turnover. Work of public utility commissions. Constructive regulation. Public utility holding company. Customer ownership. Municipal ownership. Private ownership. Classification of various types of public utility bonds. Cooperative achievements in electrical industry. A PUBLIC utility has been defined as a business affected with a public interest. This definition requires a certain amount of explanation. The very words "public utility" imply community usefulness, but it is readily seen that many institutions might come under this definition which could not properly be termed public utilities. If the only qualification necessary to inclusion in the group were a readiness to perform a necessary service to the public, it would be rather difficult to explain why a hospital, a drygoods store, a physician, and a flour manufacturer are not public utilities. There are, however, certain conditions that affect the definition and limit the public utility field to a few recognized forms of business. The distinction between a man selling flour and a man selling water, and between a company selling rides on a roller-coaster and a company selling rides on a street-car, roughly may be said to be that one operates subject to competition and the other does not. Many years ago in a legal sense the term "public utility" included surgeons, blacksmiths, innkeepers, ferrymen, victuallers, and many others who were responsible to their public legally and morally to provide their best service at a fair price because of the fact that in their community they |