There are several objects for which a valuation is placed on railway property. The method of making the valuation as well as the value arrived at is apt to depend very largely on the purpose for which it is made. An estimate may be made for the purpose of taxation. Another and very different estimate may be made by the agents of individuals or a corporation who are contemplating buying the property. Legislatures may wish to obtain a valuation which may be used as a basis for some form of railroad legislation. The fact that some railroad properties have become very valuable and have returned very large profits to their promoters has caused a general belief throughout the country that railroad earnings are far higher than a fair return on their valuation will justify. This has resulted in the demand that railway rates should be reduced so that the net earnings will be more nearly in proportion to the true valuation of the road. Some of the methods of appraising railroad property will be here discussed.

22. Nominal Valuation

The nominal valuation of a railroad property is the sum of the par values of its stocks and bonds. On the basis that a bond is a mere evidence of indebtedness and that it represents money which has been used to create the property, the bondholder may be considered as one of the owners of the road and that his rights and control of the property are merely somewhat different from those of a stockholder. If the capital stock is not fully paid, then of course the true valuation must be considered as the sum of the paid-in capital together with the bonds and other liabilities. Of course such figures are very approximate and are discussed chiefly on account of their simplicity. When the road is first constructed, such figures ought to be a fair representation of the value of the physical property, provided expenditures have been cautiously and efficiently made. Such a valuation does not assign any value to the franchise or the charter of the road. A railroad property is very different from any other form of landed property. A tract of land, averaging about four rods in width and an indefinite number of miles in length, is diverted from its original use as farmland or other purposes and devoted to a particular use. A very large amount of money is spent in grading, in the construction of tunnels and the building of bridges, and the construction of the road-bed and track. Except for the comparatively insignificant value of the rails, which may be torn up and sold as second-hand rails, or the value of steel bridges, which may be removed and erected elsewhere or sold for scrap, all the money which is spent for the construction of the road is absolutely sunk beyond hope of reclamation. It can only be used for one purpose, and the value of the property as an investment is represented by its earning capacity when used for its one sole purpose of being a common carrier. Thereafter its value is really represented, not by the amount of money which has been sunk in the enterprise, but by the capitalized value of the road as an organization for earning money in one particular way - that of a "common carrier." If the road is well located for obtaining business, which is virtually the same as saying that it has a valuable franchise, then it will probably earn dividends on a comparatively small expenditure of capital. On the other hand, if there is but little business to be done, its earnings will be small, no matter how much the road may have cost. We may thus see that the amount which has been spent on the construction of the road does not necessarily bear any relation to the real value of the railroad property. Practically the two values will ordinarily approach equality. If the amount of money which has been spent is far higher than is justified by its earning capacity, it simply indicates that the expenditure has been foolishly made. If, on the other hand, it is far less, then it means that the promoters have seized an unusual golden opportunity. It would seem unnecessary to point out any further fallacies in the method of valuation from the amount of money spent in construction, if it were not for the fact that so many people still cling to some such method. Such a method sometimes gives values which are far too great, while in other cases they are far too small. To quote from one writer on the subject: "The commercial value has nothing to do with its cost. If John Smith buys a hotel for $1,000,000 and, although a good hotel man, cannot make more than $50,000 a year out of it, and wants to sell, the commercial value is probably not over $500,000." A hotel man might go into a wilderness, select a site for a hotel on land which costs him practically nothing, build a summer resort at a comparatively small expenditure, and in a few years create a custom and give his hotel a name and reputation which would make his hotel property exceedingly valuable and worth many times its original cost. Under such conditions, the market value of that hotel would have little or no relation to its actual cost.