ized by increasing or decreasing costs. The same will be true if there takes place any change in the prices of materials and supplies, or in the wages of labor. Moreover, business runs in cycles of good years and bad years, and thus there are pronounced changes in industrial conditions from time to time. To meet this situation with even a modicum of success it would be necessary for the government to keep in close touch at all times with the costs of producing the articles under its control; it would not suffice for it to make spasmodic investigations, since by the time it had completed its investigations the costs may have changed once more, and meanwhile grave injustice would have been done. Is it to be anticipated that the actions of a governmental investigating body, animated by a desire to establish a fair price, would be characterized by that promptness demanded in the situation? Were the government to fix the price of everything these objections based on changing conditions would largely disappear. But industry would then be stereotyped as well as stabilized; and the remedy would prove worse than the disease.

A vital question is whether the decision of the price-fixing body as to costs, and as to prices based on these costs, would be final or would be reviewed by the courts. If the former, producers would be denied the privilege enjoyed by public service corporations of having a judicial determination of the question whether the establishment of a price (or rate) amounts to a confiscation of their property. As matters now stand, a producer who can not dispose of his product at a profit because the price is below his cost has no legal case; but what would be his situation if his inability to earn a fair return were due to an order or decision of the price-fixing agency? If, however, there was to be a judicial review of the price-making orders of the government, as almost certainly there would be, the inevitable outcome would be delay, and conceivably such a consideration for property interests as would prevent the consumers from realizing any notable gain through governmental price-fixing. The fixing of the price of news print paper is a case in point.1 As a

1 See Haney, American Economic Review, 9, pp. 47-56; and Merchant, Quarterly Journal of Economics, 34, pp. 313-328.

result of an agreement between certain news print paper manufacturers and the Attorney General of the United States, the Federal Trade Commission, not possessing any war powers in the matter, undertook to establish the maximum price to be charged for news print paper. The Commission after an investigation extending over half a year fixed the maximum price at $3.10 per 100 pounds f. o. b. mill in carload lots. Three months later a United States Circuit Court on appeal fixed the price at $3.50 per 100 pounds, or 13 per cent higher. It would thus appear that either the Commission was unfair to the manufacturers or the courts inconsiderate of the public interests. Of course both the Commission and the courts fixed what they regarded as a fair price, yet if they can not come any nearer to an agreement than this, it must be that the problem of establishing a fair price is a highly perplexing one.

The cost of production having been ascertained as accurately as may be, the next problem would be to determine the "fair" rate of profit, which in conjunction with the amount of the investment would fix the total of the profits to be allowed. Undoubtedly, if experience with other industries subject to price and rate regulation is any guide, the fair rate of profit and the investment would in the last analysis be matters for judicial determination. Yet after grappling with this subject for a generation what have the courts to offer on this point? We do not know as yet what the Supreme Court considers a fair return on property employed in the railroad business, a business of much greater stability than manufacturing, and one much less subject to the menace of new competition. The railroad industry is recognized to be a natural monopoly, and the federal government, as well as a number of states, do not permit new lines to be constructed without the consent of the appropriate authorities. How much more difficult then it would be to determine the fair rate of profit for diverse manufacturing industries enjoying no statutory immunity from outside competition. It would be necessary to make allowance in each case for the danger of obsolescence, the hazard of the business, the stability of the industry,

the exhaustion of the capital (as in a mining enterprise), the attractiveness to investors, and the like.

Even more shrouded in doubt is the manner in which the investment, or the "fair value of the property," is to be arrived at. The Supreme Court in Smyth v. Ames, decided in 1898, said: "We hold, however, that the basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must be the fair value of the property being used by it for the convenience of the public. And in order to ascertain that value, the original cost of construction, the amount expended in permanent improvements, the amount and market value of its bonds and stock, the present as compared with the original cost of construction, the probable earning capacity of the property under particular rates prescribed by statute, and the sum required to meet operating expenses, are all matters for consideration, and are to be given such weight as may be just and right in each case." As if this were not enough, it went on to say that there might be still other matters to be regarded in estimating the value of the property. Accordingly when Congress provided in 1913 for a valuation of the railroads in order to ascertain their fair value, it required the Interstate Commerce Commission to determine the value in a variety of ways. Upon this task the Commission has been engaged for eight years, and the task is not yet completed. Its completion, moreover, will be the signal for a prolonged controversy over methods and results. And if the ascertainment of the fair value of railroad property is beset with so many difficulties, would not the same prove true of the determination of the investment for a considerable variety of industries. The task may not be so imposing perhaps in the case of industrial enterprises as in the case of railroads, but its satisfactory completion would require considerable time; and meanwhile the trusts would continue to enjoy monopoly gains.

If it be said that during the war the various price-fixing agencies determined the fair profit with promptitude, it may be pointed out that the pressing necessity of stimulating production

1169 U. S. 546-547.

insured the producers a liberal profit with which they could not well be dissatisfied, and that the inexpediency of criticising governmental agencies during war times restrained public protest at the liberal rate of profit. In those cases in which the rate of profit obtained by the producers was actually meager the same considerations prevented their objections from being as vociferous as they would be under conditions of peace. In fact, however, the investment in the property was not determined with exactitude-there was not time during the war for exactness and the allowance for profit was thus commonly made upon a rough and ready basis that offered no guarantee of justice as between the producers and the consumers, and that would hardly be tolerated as a permanent condition.

At this point we may digress to consider the proposal that we regulate the profits of trusts, and not the prices of their products. In view of the manifest difficulty in controlling trust prices, can not the tendency of the trust to charge excessive prices be prevented from operating to the public injury by governmental limitation of or taxation of its profits?

At first glance it might appear as if the regulation of profits would be comparatively simple,-much more so than the determination of a reasonable price. The capitalization of a company being known, its profits can be limited to such a return on that capital as will suffice in that industry to attract the requisite supply of new funds. Yet there are three serious defects in this scheme. First, the capitalization of any particular company bears no necessary relation to the sum on which the concern is entitled to a fair return. Some companies, both industrial and public service, have an excessive capitalization, whether on the basis of original investment, cost of reproduction, or earning capacity; and for them to be allowed a fair return on their excessive capitalization would be unjust to the public, and to the other companies in this industry that had not overcapitalized their business. The only equitable arrangement, therefore, would be to permit a fair rate of profit on the value of (or investment in) the property devoted to the public use. However, if to secure justice it be necessary to determine the value

of (or the investment in) the property, the simplicity of the plan largely disappears. Second, the limitation of profits may possibly be evaded in part through the payment of excessive salaries and bonuses, or through the diversion of the profits to other companies, not subject to regulation, which the directors or stockholders of the regulated concern control or at least have an interest in. Third, and more fundamental, the limitation of profits, when not evaded, removes the incentive to efficient and progressive management. Why should a concern be alert to adopt the most economical and up-to-date devices when the benefits thereof are to accrue to the state in the form of taxes or to the consumers in the form of reduced charges? The outcome, therefore, of profit limitation is likely to be the penalizing of the producer without any particular benefit to the public. And even if the state through taxation does secure a slice of the profits, the objection may be raised that the consumers of monopolized articles have been mulcted in the interests of the taxpayers.

The regulation of profits, instead of being employed as an alternative to price regulation, may be used as a supplement thereto. If the governmentally established prices, believed to be "fair," permit the earning of usually large returns, provision may be made for the appropriation by the government of all or a part of the profits over a specified rate. Such action would be analogous to that taken with regard to railroads in the EschCummins Act, passed in February, 1920. On the outcome of such measures, whether applied to railways or to manufacturing industries, it is not possible to speak with assurance, yet there is grave danger lest a restriction of profits may result in lessened efficiency. Should this prove to be the case the producers would lose and the consumers would realize no gain.

Certain possible consequences of a policy of price-fixing, giving rise to complex and far-reaching problems, should not be overlooked.

(1) The regulation of the prices of trust controlled products may require the regulation of the prices of the raw materials and supplies that enter into the finished product; may require,