THE FISCAL SITUATION

Developments in public finance during the month of December have given a new turn to the problems already recognized at the time of the conclusion of the armistice with Germany. An announcement made by the Secretary of the Treasury on December 14 had already limited the fiscal requirements for the current year to $18,000,000,000 and had rendered possible a modification of the war revenue bill to correspond thereto. Accordingly on December 6 the war revenue bill was reported by the Senate Finance Committee in a form which supposedly provides for an income of $6,000,000,000 instead of the $8,000,000,000 or $9,000,000,000 originally intended. This is substantially a cut in the proportion originally planned by the Secretary of the Treasury when he formulated the program of $2.00 in loans for every $1.00 raised in taxation. The proposal at the opening of the year having been $24,000,000,000, of which $8,000,000,000 were to come from taxation, a reduction to $18,000,000,000 would mean a reduction of $2,000,000,000 in taxation.

This reduction, however, has been effected in such a way as to be comparatively obscure to the average man. The income tax remains practically as formulated by the House of Representatives with a normal rate of 12 per cent, reduced on incomes below $4,000 to 6 per cent and with supertaxes running from 1 per cent up to 65 per cent. The excessprofits tax is now modified and simplified but may conceivably go to 80 per cent in the case of certain classes of concerns. There is therefore no perceptible lightening in either income or excess-profits taxes. The excise or consumption taxes have, however, been materially reduced in number and to some extent in severity, while it is recognized that, due to the prohibitions upon the manufacture of spirits and beer, the income derived from these sources will decline from now on.

Practically simultaneously with the reporting of the war revenue bill the Secretary of the Treasury has called upon Congress, in a letter bearing the date of December 11, to extend the power of making loans and advances to allied countries, in order that this policy may be continued in time of peace on the same basis as in time of war. Almost at the same time, too, it has been made known that the next or fifth liberty loan will be offered in the early spring of 1919 and will consist of shortterm obligations, probably bearing a higher rate of interest than those of the fourth liberty loan. What this rate will be is not stated, but the unofficial intimations place it at 4 to 5 per cent, probably without exemption from taxation, that figure being thought necessary to make

the loan acceptable to investors. It is believed that the amount of the loan will be in the neighborhood of $6,000,000,000, and this in itself implies the necessary continuance of war financing for a good many months to come, pending not only the placing of the bonds of the fifth liberty loan but their eventual absorption by the investors of the country.

In the meantime the question whether new and heavier demands would be brought to bear upon the banks as the result of the so-called reconstruction process, and whether the banks in attempting to meet them may not be driven to the adoption of measures which would practically result in further inflation, is probably the most pressing question of a banking kind that is now open. This makes acute the problem of financing the next loan by a process of saving rather than by a process of expansion of bank credit. The choice between the two methods will evidently depend in considerable degree upon the rates of interest and discount that may be established during the next few months.

FINANCE REPORT FOR 1918

The publication of the report of the Secretary of the Treasury for the past year (Finance Report, 1918) presents the history of a financial period possessed of remarkable interest and embodying the results of probably the largest fiscal and banking operations in history. This report covers the period of the third and fourth liberty loans and covers the great growth in Federal Reserve operations contemporaneous or coincident with them. The document also covers very extensive reorganizations and enlargements in the various financial services which have grown out of the war, such as the Bureau of War Risk Insurance, as well as a variety of others.

It is, of course, not possible at this time to forecast the financial requirements for the coming year even with the degree of accuracy which has sometimes been attained, so that the report is necessarily more truly a historical document than it is a forecast of policy or a discussion of methods to be pursued. Some of the financial expedients of the past year to which reference is particularly made, such as the gold embargo, the control of foreign exchange, and others, are of large interest, and the results tentatively set forth throw light upon the plans and purposes which gave rise to the various measures adopted. The review of experience with the Federal Reserve System and the War Finance Corporation is perhaps less adequate and satisfactory than other portions

of the discussion, due to the fact that the Treasury Department was able to commit the management of these branches of government administration to others, thereby relieving itself of the responsibility but being also correspondingly limited in its information and insight into the situation relating to these branches of finance. The Finance Report for 1918 will nevertheless doubtless stand permanently as a document of first-class importance in American fiscal history.

THE RAILROAD PROBLEM

Further progress in the development of the railroad policy of the nation has been brought about during the past month as a result of three important events: (1) the announcement of the policy of President Wilson in his message to Congress of December 2; (2) the appointment of a representative committee of railway executives at a meeting held in New York on November 4, for the purpose of considering railroad relationships to the government; and (3) the announcement by the Secretary of the Treasury, in a letter to the Chairman of the House Interstate Commerce Committee, bearing date of December 11, to the effect that a further five-year period of control by the government would be necessary in order to bring about a satisfactory settlement of the essentials of the situation.

President Wilson in his message to Congress on December 2 expressly stated that he had no definite plans in the matter, saying: "I have no confident judgment of my own. I do not see how any thoughtful man can have who knows anything of the complexity of the problem..... The only thing that is perfectly clear to me is that it is not fair either to the public or to the owners of the railroads to leave the question unanswered [what should be done with the roads in the interest of the public and in fairness to their owners], and that it will presently become my duty to relinquish the control of the roads even before the expiration of the statutory period unless there should appear some clear prospect in the meantime of a legislative solution." The Secretary of the Treasury in his letter of December 11, on the other hand, stated plainly that only three courses with reference to the railroads are now open:

1. Government operation of the railroads for one year and nine months following a proclamation of peace. . . . .

2. The prompt return of the railroads to private control; or

3. Extension of the period of federal control to five years.

Mr. McAdoo further stated that in his opinion the third alternative was the only one that was now at all workable, and that unless it were

resorted to an early return of the roads to their owners would be unavoidable. The attitude of the railroad executives at the meeting already referred to and in other expressions has been to the effect that they did not want the lines returned to their unrestricted control until such time as legislation had been obtained for the definite settlement and adjustment of problems whose existence, in their opinion, would render private control and management of the carriers entirely unsuccessful were they to be returned to their former statys.

Specifically, the difficulties in the present railroad problem are reducible to the fact that whereas under government control wages have been immensely raised, freights and fares have been raised in a much smaller degree, so that continued profitable operation of the roads under existing conditions is practically out of the question if they are to be properly carried on. Railroad men, moreover, are extremely reluctant to subject themselves again to the difficulties which they had to contend with during the two years prior to the date when the government assumed control. It was then impossible to obtain new capital, owing to the fact that the public at large was not willing to trust them with their funds, due to the evident intention of the Interstate Commerce Commission not to permit any advances in rates. The rate legislation of the past few years, as applied by the Commission, had in fact become so rigid and burdensome as to be for several of the lines almost impossible of application consistently with prosperity.

BOOK REVIEWS AND NOTICES

Valuation and Rate-Making. By ROBERT L. HALE, PH.D. (No. 185, Vol. LXXX, Columbia University Studies in History, Economics, and Public Law.) New York: Columbia University Press, 1918. Pp. 156.

Three important distinctions play a central part in this study of valuation. One is the distinction between valuation as a record of fact and valuation as an attempt to solve the question of policy or of fairness and decide what value should reasonably be allowed to the owners of public-service properties. A second is the distinction between fair policy with reference to the past, in the light of past uncertainties in court decisions and the absence of an announced program on the part of government, and policy for the future in case some definite theory can be adopted and a program announced. Paralleling this runs the distinction between the incentive theory of control, which might justly be adopted for the future, and the theory of equality of treatment between regulated and unregulated businesses, which plays a large part in considering the question of fairness to the present owners of property invested in the past.

The author finds the rationale underlying many cases of the cost-ofreproduction type of valuation in the attempt to record a fact, namely, the exchange value of the physical property" as distinct from the property as a whole. The value of the property as a whole, being based on earnings, cannot be used as a standard on which to determine what fair earnings are. The market value of the physical property, on the other hand, is taken to be what the company possessing the rights to operate would pay to an owner not in possession of those rights. This could not be more than the total earnings-value of the property as a going concern, nor more than what it would cost to produce a substitute plant "which, from the point of view of revenue production, would be equally efficient." Not all cases under the cost-of-reproduction theory could be squared with this principle. Indeed the idea of cost of reproduction under original conditions, the author holds, does not belong in spirit with the cost-of-reproduction theory at all, but is rather a method of getting at the original cost of the existing property, as far as that was reasonably and properly incurred.