and miscellaneous indebtedness, leaving the stock and the certificates of indebtedness to be reimbursed, if at all, out of the franchise rights, which are far from being ample security in case the franchises should be terminated by the action of the courts, the city council or the legislature.

Chicago Union Traction Co.

Since the date at which Mr. Bard's investigation ends, December 31, 1897, there have been several operations of considerable importance. Another company has been formed and new leases made between it and the North Chicago Street Railroad Co., and the West Chicago Street Railroad Co., thus bringing under one management all the important lines upon the North and West sides of the city. It also controls, through an operating agreement, the Chicago Consolidated Traction Co., which has a large number of suburban lines.

This company was the Chicago Union Traction Co., organized May 24, 1899, and composed of New York, Philadelphia and Chicago capitalists. Its first act was to purchase Mr. Yerkes' holdings in the two companies, amounting to 32,000 shares of stock of the West Chicago Street Railroad Co. out of a total of 131,890, and 20,000 shares of the North Chicago Street Railroad Co. of a total of 79,200 outstanding. It also leased, June 1, 1899, from these two companies all their property and franchises, including the stocks in other companies which they had acquired in 1886, 1887, 1888 and subsequent years. Thus the new company controls the North Chicago City Railway Co., the Chicago Passenger Railway Co. and the Chicago West Division Railway Co., as it owns a majority of the stock, although it does not own a major portion of the stock of the North Chicago Street Railroad Co. and the West Chicago Street Railroad Co.

In return the Chicago Union Traction Co. agreed to assume all the obligations of the lessor companies, to guarantee their bonds, to pay all sums called for by the preceding agreements between the companies, to pay the North Chicago Street Railroad Co. $237,600 each quarter-equivalent to a 12 per cent. annual dividend upon the capital stock of the company-and to pay the West Chicago Street Railroad Co. $197,835 per quarter-equivalent to 6 per cent. a year upon the capital stock-these being the rates of dividends

which the companies were paying at that time. To secure the lessor companies, $10,000,000 in cash or securities were to be deposited with the Illinois Trust and Savings Bank as trustee, and $3,200,000 in stock of the West Chicago Street Railroad Co. and $2,000,000 in stock of the North Chicago Street Railroad Co. have been deposited. The market value of these securities was about $7,200,000 upon July 1, 1901.

The operating agreement with the Chicago Consolidated Traction Co. concerns us little, as the lines operated by this company have not been examined.

The outstanding capital stock of the company is $12,000,000 preferred, 5 per cent. cumulative, and $20,000,000 common. It has issued no bonds, but under the agreement guarantees the bonds of the lessor companies amounting to $25,770,000 for the North Side and West Side companies and $6,750,000 for the Chicago Consolidated Traction Co., total $32,527,000.

The original cost value of the assets July 1, 1900, were:1

There was in 1900, therefore, a deficit of $32,020,033. That is, by the formation of the new company, $32,000,000 have been added to the capitalization of the street railroad companies above

'The last report of the company does not contain a statement of assets and liabilities, so it has been necessary to adopt the statement given in the Investors' Manual, which is the company's report for year ending June 30, 1900.

any increase in the physical property. It is true, the company owned stocks in various companies amounting to a par value of $6,805,200, or a market value of $13,493,750. But as these companies do not have assets (exclusive of the franchises) of sufficient value to meet their outstanding obligations, it is quite correct to exclude them from the assets and to say there is a deficit of $32,000,000. In other words, the assets equal the liabilities, excluding the capital stock, leaving as security for the stockholders only the franchises which the company has leased from the other companies. And yet the company paid the lessor companies, as per agreement, and made a profit for its own stockholders of 3 3-4 per cent. during 1899-1900. But after July, 1900, no dividends were paid until July 1, 1901, which seems to indicate that the franchises have been overcapitalized, and that the limit had been reached in the attempt to so water the capital stock and bonds as to bring the rate of profit down to the market rate-5 or 6 per cent. However, the increasing value of the franchises caused by increasing population will doubtless enable the company soon to pay a fair dividend. The overcapitalization of the franchise is only temporary.

Coming now to the question as to what the companies could do if the water were squeezed out of their capitalization and the liabilities were equal to the market value of their properties, we find that the Chicago Union Traction Co. made net earnings during 1900-1901 of $3,031,073, not including dividends on stocks owned or leased, interests on deposits and premiums. Upon a capitalization of $14,800,000-the estimated present market value of the operating plant and equipment-this would yield a dividend of over 20 per cent. annually. The company could pay the city over 25 per cent. of the gross earnings and still declare 8 per cent. dividends annually. Or, it could pay the city over 21 per cent. of gross earnings, lay aside a depreciation fund of 4 per cent. annually and pay 6 per cent. dividends. Or, it could reduce fares to 4 cents, upon the basis of present traffic, lay aside a sinking fund of 4 per cent. annually, and divide profits amounting to 6 per cent. Or, it could sell seven tickets for 25 cents and pay 8 per cent. dividends. In each case the increase in traffic resulting from a lowering of fares would make still further reductions possible.

Conclusion.

Although the financial operations of these seven companies have been outlined but briefly, their results are quite evident.

The franchises given away by State Legislature and City Council were at first only fairly remunerative, but with the growth of the city, the rapidly increasing density of population, they became more and more valuable. The temptation to capitalize them was too strong, and when conversion to cable and electric traction became necessary the opportunity was found by which to accomplish this end. It did not originate then, for by failing to write off capitalization as the plant depreciated, the same result was being attained before. But this method did not water the stock and bonds fast enough. In the eighties and nineties new hands took hold and by shrewd manipulations soon capitalized the franchises for all they were worth. But by 1899 the franchises had again outstripped depreciation, and recourse was had to new leases and a new com

pany.

The final result is that of the present outstanding liabilities, amounting nearly to $118,000,000, at least $72,000,000 is "water," and if one were to wipe out the assets which produce practically no income and are of little value, this amount would approach $90,000,000. Of the total liabilities, $74,200,000 represents capital stock and $43,800,000 bonds and miscellaneous obligations. Thus all of the stock and part of the bonds are "water."

The franchise values for which the companies pay the city nothing amount nearly to $75,000,000-a sum almost equal to the watered capital-which shows how closely the companies have estimated the capital to be issued upon the franchises.

It is not surprising, therefore, to learn that the companies have been paying large dividends, even upon watered capital. For example, the Chicago City Railway Co. has paid upon an average over 42 per cent. annual dividends for the last nineteen years. The North Chicago City Railway Co. has paid 30 per cent. since 1886; the North Chicago Street Railroad Co. nearly 15 per cent. for fourteen years.

Some claim might in justice be made for large dividends in recent years, or an excuse offered for an excess of liabilities over assets, if the roads had been constructed before traffic was sufficient

to pay fair dividends, or if they had met with heavy losses due to no fault of their own. But such has not been the case. The roads have almost always paid fair and recently enormous dividends. One line did lose its property in the fire of 1871, but that was over a generation ago and the profits were so large both before and after the fire that there has been ample opportunity to recoup all losses.

The large profits which the companies are paying show that they can afford to pay the city a generous compensation either in the form of cash payments or lower fares. Further, the fact that the companies are using franchises worth millions and are paying nothing for $75,000,000 in franchises, leads to the conclusion that the companies ought to pay considerable. If the "water" were squeezed out they could pay 20 per cent. of gross income to the city and still declare 6 per cent. dividends, while accumulating a depreciation fund of 4 per cent. annually. Or, fares could be lowered to 4 cents, and 6 per cent. dividends and 4 per cent. depreciation set aside. Such a policy would enable fares to be still further lowered, as the traffic will increase and a depreciation fund of 4 per cent. will keep down fixed charges or increase capital value without increasing outstanding liabilities. Whatever course may be adopted, it is certain that the time has passed when private corporations can expect to use the city's property without paying for it. And property worth $75,000,000 is no longer to be had for the asking. The problem is: What return is fair to the city and to the companies? Neither can afford to be too grasping. The welfare of each depends upon an equitable solution.