with precision, the record is, like many records, only an approximation to the truth. And Professor Young seems to me to argue beside the point when he endeavors to show "the fallacy in the view that the 'reserve for accrued depreciation' is a necessary record of fact," by pointing out that replacement requirements do not necessitate an advance accumulation of a "fund" that will amount to much more than the annual cost of such replacements (pp. 650-651). As I pointed out in my criticism, the keeping of such a reserve does not hold in the business assets which might otherwise be distributed to stockholders, tho by preventing liquidated capital from masquerading as profits it may restrict ordinary dividends. The reserve is typically and properly reduced when property is retired (by the accrued depreciation on the item retired), the reduction going to offset the writing down of the plant account by the cost of the property retired. Far from releasing assets for distribution to stockholders, the making of replacements involves locking up, in more or less fixed capital, liquid assets already in the business or brought into the business for the purpose. The ability to make replacements depends on the amount of such liquid assets available or obtainable; it is less in times of financial depression than in other times, it is greater for companies which make a policy of keeping against such contingencies an amount of liquid assets largely in excess of ordinary needs. The proper keeping of this reserve account does indeed eliminate from the profit and loss account all variations due to the circumstance that replacements are not even normally made with entire regularity. But I see no reason to modify my conclusion that the ability to make replacements or renewals is not affected by the keeping of this account. Granted that the reserve for accrued depreciation will never be " used up as replacements are made, what of it?

This matter is, I believe, intimately related to the question of impairment of investment and the reality of stated profits. If a large and varied physical plant, like each of its several elements, actually depreciates and the reserve for accrued depreciation represents no real assets, figures showing the total outlays for the present plant cannot correctly represent the present amount of the investment in it; and, if a reserve for accrued depreciation is lacking or inadequate, any surplus shown is in part spurious corresponded to by no real assets in the business - while if no surplus is shown, something in addition to genuine profits has been distributed to stockholders, or else losses have directly impaired the investment. I had understood from his original article that Professor Young would deny the depreciation and maintain that, provided repairs and replacements were made as needed to keep the plant in good working order, the investment "in every real sense " remained intact (p. 651). He now admits, however, comparing an old plant with a new one of similar make-up, (1) that the older embodies a smaller store of productive power,1 (2) that outlays for needed repairs and replacements will be larger for the old than for the new (till the new one has reached the stage of normal average depreciation), (3) that accordingly, in an important sense, if not in the sense he prefers, the productive efficiency of the new one is greater,2 and (4) that whether sold at forced sale or changing hands as a going concern in good condition selling prices would be different. Perhaps I am safe in assuming, therefore, that we agree that, from most standpoints, the present

1 At two points in his reply (p. 382), Professor Young imputes to me the use of "productive efficiency" where my term was actually " productive power."

Cf. also the statement in his original article (p. 652): "In the absence of such a reserve net profits for the time being would of course have been higher than if a reserve had been accumulated."

amount of the investment is not indicated by the undepreciated cost. I had further understood him to say that since," in the case of a permanent industrial investment for profit," there is no clear line between profits and repayment of principal, we must rely upon "the expectations, plans, and estimates of the proprietors in order to estimate what may properly be called net income" (p. 652). For my part I cannot see that the question of fact, what were profits and what were not ? — is affected at all by what the proprietors may have thought. Calling a sum "profits" does not make it so, whether the "caller " be promoter, honest investor, or accountant. A line exists in fact between profits and liquidated capital, altho there is no automatic earmarking of the elements of gross income; and a major function of the accountant, with all his "arbitrary categories," is to make the line displayed on financial statements reflect as accurately as possible the invisible line which exists in fact. But if Professor Young sees these facts as I do, much of my criticism was beside the point, except for readers who, like myself, misunderstood his language.

Suppose, then, that he is to be interpreted throughout as implying the phrase "for purposes of rate regulation," and, conducting his argument for this purpose alone, he would argue merely that depreciation should be disregarded if proprietors have not set up a reserve for it, calculated profits should be treated as true profits, stated surplus as true surplus, and the investment should be rated at cost, not at cost-less-depreciation. This would be to separate sharply the question of justice from the question of economic fact,- questions which I have thought Professor Young tended to confuse.

Neglecting for the moment the considerations of justice, the expediency of such action is gravely to be

questioned. So far at least as concerns the depreciable physical plant (and this element alone is under discussion), there would seem to be distinct disadvantages in arriving at four different figures for its value in a going concern, according to whether the valuation has reference to transfer between private parties, purchase by government, regulation of security issues, or regulation of rates. The "fair value " of the plant of a going concern should mean in each case, I believe, the nearest possible approximation, fixed by honest, intelligent, careful appraisal, to what its rating would be in a voluntary, unforced sale of the entire concern in a period of normal business. Any other policy certainly makes against consistent action, and in the long run, I believe, for injustice. If justice requires, it is not difficult to make due allowance in other ways for losses, abnormally low real profits, or what not.3

I am

The problem of justice is an intricate one. ready to admit that cases may be found where, tho the plant investment is actually less than its net book value, well-managed companies have secured no more than a normal return because of reliance upon an assumption which, however erroneous, was fostered by court decisions and prevailing business standards; and that real injustice may be done by disregarding these facts entirely when rates are regulated. Yet I cannot think it safe now to presume that uncontrolled public service

1 The "break-up value or value with "reference to a possible insolvency "would of course be different; but when we are dealing with a going concern such a value is potential, hypothetical, not actual, present, and need not be considered.

? Here is implied, obviously, a criticism of certain court and commission decisions. Since, however, cost-of-reproduction-less-depreciation is a not unusual "basis" for valuing a physical plant, and since this would at least approximate the "fair value as I regard it, my view is by no means revolutionary.

For example, the amount of the loss for which justice is held to require reimbursement may be made a deferred charge to profit and loss, and for the time being rates may be fixed which yield beyond the normal return on the present investment enough gradually to reduce this debit. Less satisfactorily, the sum may be made an independent item in the total valuation.

companies have treated the public better than if a requirement to keep depreciation accounts had been in force. If business men would recognize that the "sale value" of an old plant is less than for a new one similarly constituted, is it certain that they would think that the two represent the same amount of investment ? Or that they would not calculate upon large returns in early years which could be used in part for extensions without increasing the capital stock? Or that they would expect a normal rate of profit measured on the gross outlay for plant? One has been accustomed to believe, moreover, that before public regulation came into vogue the principle of monopoly value held large sway in public utility properties; and if monopolistic proprietors really fixed lower rates because they had not learned to allow for depreciation, their action is not in accord with what the usual expositions of economic theory lead us to expect. Certainly common report of stockwatering episodes and of fortunes made in this field does not predispose one to look upon the investors as having been but barely remunerated for their investment.

On the other hand, it is equally difficult to argue convincingly that the lack of the depreciation requirement has made no difference to investors. Abstract reasoning, it seems to me, cannot establish either this presumption or the other. The facts are not clear. Evidence should be presented to show that, in the main, properly managed public service companies have secured (but not necessarily divided) less than a normal rate of profit on their investment, properly valued. Professor Young offers only one bit of evidence. And I think he adopts too hastily the interpretation placed by the editor (the late Carroll D. Wright?) upon the data published in the report of the Commissioner of Labor