III. THE POSTMASTER-GENERAL'S ERRONEOUS ASSERTION THAT THE RAILWAYS WERE OVERPAID "ABOUT USD9,000,000.00" IN THE YEAR 1909, RESTS PRIMARILY UPON HIS ADOPTING AN UNPRECEDENTED THEORY WHICH ALLOWS NOTHING FOR A RETURN UPON THE CAPITAL INVESTED IN RAILWAY PROPERTY.

The Postmaster-General assumed that the railways would be properly compensated if they received a sum equal to the operating expenses and taxes attributable to the carriage of the mails plus six per cent. of the sum of those expenses and taxes. The calculation by which he obtained the sum which he assumed would have been proper compensation for the single month covered by his investigation was as follows:

The railways having been paid, for the month selected, $770,679.16 in excess of the sum resulting from the above calculation, the Postmaster-General assumed that this excess over expenses and taxes plus six per cent. constituted excessive profit for that month. He multiplied this assumed excess by twelve to get his estimate of annual excess and stated the result, in round figures, as "about $9,000,000."

The mere statement of this method discloses the fact that it makes no allowance for any return upon the fair value of the railway property employed in the service of the public. This omission is, of itself, sufficient wholly to destroy the Postmaster-General's conclusion. Everyone recognizes that a railway is entitled to at least a reasonable return upon the value of its property devoted to the public service. The Postmaster-General ignored this universally accepted principle and adopted a theory which, if applied to the general business of the companies, would render substantially every mile of railway in the United States immediately and hopelessly bankrupt. The recently published report of the Interstate Commerce Commission on the railway statistics of the year that ended with June 30, 1910, contains data by which this statement is easily demonstrated, as follows:

But if this plan had been in force, the railways would have had, for interest on mortgage bonds, a reasonable surplus as a margin of safety, dividends on stocks, unprofitable but necessary permanent improvements,[A] rents of leased properties, etc., etc., only the six per cent. or $115,585,568. This figure may be compared with the following, among others:

Plainly, the Postmaster-General's proposal is equivalent to an assertion that the railways would make a fair profit if they were enabled to collect the sum of $115,585,568 in addition to their operating expenses and taxes, but the figures given by the Interstate Commerce Commission show that this would be less than one-third of the sum necessary to meet interest charges which must be paid in order to prevent foreclosures of mortgages and, if bond interest could be ignored, is much less than the rentals that must be paid if the existing systems are not to be broken up. And, of course, it would allow nothing whatever for legitimate demands upon income for dividends, permanent improvements or surplus.

It is unnecessary to dwell upon the consequences of such a theory of "compensation" to railroad credit and to the public interest in efficient transportation service, to say nothing of the consequences to owners of railroad stock and bonds. Such a theory is not a theory of compensation—it is a theory of oppression and of destruction.

The fact that the Postmaster-General has found it necessary to justify his attack upon the present basis of railway mail pay by a theory so unprecedented and so unwarranted in principle and in law, raises a strong presumption against all his opinions and conclusions upon this subject.

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