The gross revenue received by a railroad is applied first to the payment of operating expenses. As an average for the whole United States this amounts to approximately 65%. From the remainder must be paid the interest on the funded debt and current liabilities, and also the taxes. This will take about 20% more, but it is not even permitted to use all of the remainder for dividends, since a very large fund is needed for permanent improvements and for bolstering up weak branch lines which are not paying their expenses but which are operated because of their indirect or their future value. It will thus be seen that the dividends are only paid out of the last small percentage of the gross earnings. Since there is so much variation in the financial condition of railroads, from one which is unable to pay its operating expenses to another which is declaring dividends on watered stock, we may learn something by studying the statistics of all the railroads of the United States "considered as a system." This last phrase refers to the fact that, since such a considerable proportion of railway stock is held by railway companies in their corporate capacity, there is a very large percentage of payments made to and by railroad companies which are merely intercorporate payments. By deducting those payments, which would appear as receipts in the accounts of one road and as expenses in the accounts of another, we may prepare a statement such as would be made up if all the railroads of the country were actually combined into one system. Another condition which somewhat complicates the situation is due to the fact that railroads are also the owners of property which brings in an income totally independent of their work as common carriers. In 1904 this "clear income from investments" amounted to nearly $50,000,000, although it was only 2«% of the gross earnings, but such income has been ignored in the following statements. The tabular form below gives the gross earnings of the railroads of the country considered as one system for the year ending June 30, 1904 (using even millions throughout).

The actual amount of surplus available for "adjustment and improvements" was nearly $50,000,000 in excess of the $94,000,000 surplus given in the table, on account of the added sources of income not included in " gross earnings from operation." It should be noted that in the above case the dividends were taken from the last 9.3% of the gross earnings.

Earnings from passenger service

.............

$ 444,000,000

" freight " ......

.......................

1,379,000,000

" " other sources..........

...............

152,000,000

Gross earnings from operation ...............

.................

$1,975,000,000

Subtracting operating expenses ........

......................

1,339,000,000

We have as net earnings ........

.................

636,000,000

Out of these earnings were paid,

Taxes ..........

$ 62,000,000

Interest on debt and on current liabilities ........

296,000,000

and then dividends ...........

184,000,000

542,000,000

leaving a surplus of ...................

94,000,000

The dividends actually paid averaged less than 3% on the total capital stock. That which has been called surplus may almost be considered in the light of an expense, since it was not considered wise to increase the dividends beyond the amount actually paid. The average revenue per passenger per mile amounted to 2.006 c. The revenue per ton of freight per mile amounted to .780 c. If the passenger and freight receipts, as well as the rates on mail, express, etc., had been cut down 10% without any increase in business the amount available for dividends would have been entirely wiped out. Even cutting them down 5% under the same conditions would have cut the dividends in two. It may thus be readily seen that there is but a small margin between large dividends and no dividends, which will be produced by comparatively small differences in rates.

Of course the above should not be interpreted as meaning that a difference in the amount of business done will have the same effect on dividends. Although to a very considerable extent it is true that when times are hard and business is slack, so that the amount of traffic is reduced, the gross expenses of the railroads are cut down, they cannot be cut down in strict proportion to the reduction in traffic. It will be shown later on that the cost of running an extra train is by no means equal to the average cost of running all trains. To put it more concretely a railroad which is regularly running 20 trains per day each way can run one additional train per day each way for much less than 1/20 of the average cost. Vice versa, the saving which is made by running one less train, because the traffic has been cut down, is less than 1/20 of the average cost. If, therefore, a road is doing a certain gross amount of business which requires say 20 trains per day, a change of policy which increases or diminishes the amount of business done will increase or diminish the gross receipts in strict proportion to the change in the business, but the change in operating expenses will be far less. If the business is reduced say 10%, the gross receipts are reduced 10%, while the operating expenses are reduced probably not more than 4 or 5%, and the probable result is that all money which otherwise might be devoted to dividends has been entirely wiped out. On the other hand, an increase in business of 10% will not increase the operating expenses more than 4 or 5%, and therefore the amount for dividends may be nearly doubled. This fact may be made still clearer by a concrete example.