In Michigan and Wisconsin the railroads of the State have all been valued by a corps of engineers, appointed by the State, who adopted a systematized method of making an actual valuation of the property as it exists. Of course the method was largely an estimate of the cost of reproduction, allowance being made, however, in those elements such as rails, etc., which are subject to wear and depreciation, for the "present value." The various elements of cost of a road were classified, and those elements which were subject to depreciation were examined particularly, while making the appraisal, to determine their present value. For the railroads of Michigan, the total cost of reproduction of construction and equipment was given as $202,716,262, while the present value was given as only $166,398,156, or 81.4% of the value when new. Switch-ties and cross-ties were allowed a present value of only 53.9% of the cost of reproduction. Telegraphs and telephones were allowed only 52%, while, on the other hand, right-of-way, real estate, and grading were allowed their full value, 100%. Although this work was undertaken by the State with the idea of furnishing a basis for a more uniform system of taxation, "it very soon became necessary to publish an order excluding all thought of taxation in connection with the results to be obtained." "The commissioners required of us only the cost of reproduction and the present value of this road, reserving to themselves any adjustments of these values that might be thought necessary to secure uniformity of taxation".

There was added to the "present value" of these properties the sum of $35,814,043 as the value of the "non-physical" properties. The non-physical property is supposed to include among other things the following:

"It includes the franchise

"(a) To be a corporation.

"(6) To use public property and employ public authority for corporate ends.

"2. It includes the possession of traffic not exposed to competition, as, for example, local traffic.

"3. It includes the possession of traffic held by established connections, although exposed to competition, as, for example, through-traffic that is secured because the line in question is a link in a through-route.

"4. It includes the benefit of economies made possible by increased density of traffic.

"5. It includes a value on account of the organization and vitality of the industries served by the corporation, as well as the organization and vitality of the industry which renders the service; this value consequently is, in part, of the nature of an unearned increment to the corporation." (From report of Professor Henry C. Adams).

The value of the non-physical properties was obtained by deducting from the gross earnings from operation the operating expenses, exclusive of taxes, which gives the net income from operation. Adding to this the net income from corporate investments would give the total available corporate income. From this is deducted an annuity, based at 4% of the mean value of the physical elements, which then gives the remainder available for other purposes. From this was deducted further the taxes on the physical elements at 1% of their mean value, also the rentals on property not covered by the appraisal, also the interest on current liabilities, and also the cost of permanent improvements which were charged to income.

Subtracting these deductions from the remainder obtained above, we have a surplus (or deficit) which is capitalized at 7%. This gives such a value of the non-physical elements that it yields a net income of 6% after the payment of taxes of 1%. It is a very curious coincidence that when the value of the non-physical properties of the railroads of Michigan, as it was actually computed according to the above method, was added to the "present value," the sum total agreed with the cost of reproduction to within' a quarter of 1%. It is probable, however, that this should be considered as a coincidence rather than as an illustration of a general law.

25. Stock-Market Valuation

A far more accurate method of valuation is to determine the average market value of the stocks and bonds of the road for a period of time which is long enough to cover the speculative fluctuations of the stock-market. There is one very strong reason for considering this as a true valuation. The market price for railroad securities is determined as a compromise between two opposing classes of financiers, one of which is interested in raising the price as high as possible, the other in making it as low as possible. Such men are experts in valuation. They make it their life-long business. The comproipise value which is offered and accepted between these two classes of experts may therefore be considered as the true valuation of the property, provided we can succeed in eliminating from the price the effect of fluctuations due to speculative excitement. The combined value of these securities (stocks and bonds) represents the value placed upon the earning capacity of the railroad.