1 Probably the best indication of existing business conditions is the railroad earnings; they reflect good and bad periods with wonderful precision. They are transporters, not producers of wealth. The prices of railroad stocks and bonds follow very closely, in the long run, the course of their earnings.

Without railways, the wheels of progress in this country would come almost to a standstill. There is hardly any industry, outside of agriculture, which means so much to the country as the great distributing arteries, the railways. The conservative savings bank laws relating to investments in the various States are being constantly amended to permit of the purchase of additional railway issues, recognizing the soundness of this class of securities. As soon as an issue becomes known as a legal investment for savings banks, say, in New York, Connecticut, or Massachusetts, such an issue advances in price, making the net return to the investor much less than previously. There are many high grade railway issues, now not accepted under the law by the savings banks of the large Eastern States, which, perforce, must become so in the not very distant future, and a careful selection of such issues to-day may offer a reasonable chance for an enhancement in the value of the principal, in the case of a long-time bond.

1 If one is to become a considerable investor or dealer in railroad securities, an enormous amount of information is necessary, which can but be hinted at here. There are many books which bear upon the subject, such as, "The Anatomy of a Railroad Report " by Woodlock, " British Railway Finance," by Wall, " American Railway Transportation," by Johnson, "Poor's Manual of Railroads," "The Manual of Statistics Stock Exchange Hand-book," "Moody's Manual of Railroads and Corporation Securities," and " White & Kemble's Atlas and Digest of Railroad Mortgages." For weekly or daily publications, the Commercial and Financial Chronicle and the Wall Street Journal will prove of great assistance.

The thought of any serious competition to the large trunk lines, on account of the building of new through routes, may practically be eliminated. The cost, in the present rapidly increasing density of population, of obtaining right of way for the construction of any through line and for the obtaining of suitable terminals (In this connection read footnote to "Terminal Company Bonds.") in the large cities would absolutely prohibit the completion of such a route. It would be unable to return sufficient interest upon the investment, owing to its extraordinary cost, to make it attractive. Therefore, the railroad building of the country, from now on, must be very largely limited to the building in the more sparsely settled sections and to branch lines, or feeders, to the large roads already in existence.

In a word, the best rate of interest return, safety considered, probably obtainable, to-day, in practically almost unlimited amounts, must be in the better grade railroad bonds, and, unless these roads be in the future selfishly managed or overburdened with indebtedness from poor financing, there seems no reasonable doubt as to the permanent solvency of the large majority of such corporations. The investor, however, must be brought face to face with the intricate problem of the proper selection of a railroad bond, and, to that end, must not be misled by a title which a railroad issue may bear, leading one to think that it occupies a position, as regards claim upon the assets of the property, closer than is absolutely the fact. Study carefully each bond issue; find out just how it is secured; consider the earning ability and physical condition of the road and confine yourself as nearly as possible to the issues which are not preceded by earlier mortgages; otherwise, be sure that there is an ample margin of security and earning capacity over the above such earlier mortgages to protect the later one issued and under consideration. Such bond issues as prior liens, first consolidated, general mortgage, consolidated mortgage, etc., may all be misleading, and the real status of such a mortgage should be clearly understood before purchase is made.

The tremendous expenditure by the American railroads of to-day for improvements is necessitating an abnormal increase in the capital account, i. e. new securities. The question may well be asked if the net earnings will permanently increase in proportion to the increased capitalization. Such has not been the case in Great Britain, and many wise financiers, as well as practical railroad men, believe that we have reached our limit in the increase of per cent, of net earnings to capitalization in this country. This argues for the conservative investor to select those securities which have the earliest claims upon assets and earnings, i. e. " first mortgage bonds," to illustrate, " preferred " rather than " common " stocks, etc.

In selecting a railroad bond, first or junior issue, the selling price of the stock is a good guide. If it is, and has been for some years, quoted at a good premium, and can show a good record for dividends paid, it argues for safety in the bonded capitalization.

One very important fact to ascertain in the investigating of any railroad company, is whether or no it is keeping up its physical condition and making proper expenditures for the same directly from earnings. The tendency of recent years is to run much heavier rolling stock and larger train loads, calling for heavier rails, more substantial bridges, and a reduction of sharp grades and curves, all of which many of our better roads have accomplished. The statement has been made that a road which has not spent at least $10,000 per mile for such purpose within the past ten years is behind the times. Roads which have been able to accomplish this without increasing their indebtedness on account thereof should be considered, everything else being equal, sound financially.

Compare cost of operating any road under consideration with that of other companies similarly located, and form, thereby, an opinion as to whether or not the particular road is being economically managed.

The management of a railroad property, its control, class of business tributary to it, its competition, or the likelihood of competition, the importance of its terminals, must all be carefully investigated. The large agricultural business* tributary to the Union Pacific system, or the numerous coal fields which pay tribute to the coal-carrying roads, are factors of undeniable strength. Some short railroad which may in itself originate a vast freight tonnage, like one occupying a strategic position in a mining district of practically a permanent character, may be a very sound proposition, although but a small one.

Ascertain if the freight rates, expecially if it is a railroad not doing an interstate business, and so not amenable to the railway rate law, are excessive. A road may have such a monopoly that it may be charging exorbitant rates and tempt competition. For a permanent, prosperous condition of any railroad so situated, fair passenger and freight rates are essential.

Some roads may be so clearly dependent upon agricultural products that a crop failure would be disastrous. A road to be a one-crop or a one-industry road must be based on the traffic of an industry of a fairly permanent character.

The earnings of a railroad under construction are worthy of careful study. For the purpose of illustration, here is a railroad half built; it is operating, but at the same time the remaining half is under construction. By force of circumstances most of the material used for this purpose is hauled over that part of the line in operation. The transportation of this is not in any sense a proper earning for the road, although many roads take credit for such a haul. There is no objection to having the figures show; that is, the actual cost of hauling such freight, and the earnings from so doing, and possibly it may be legitimate to charge against the construction of the new part of the road the cost of this haul, but it is decidedly improper to allow any earnings upon this haul to be used as an argument for the sale of the bonds by the swelling of the gross and net income of the property, as the transportation of this freight cannot be a permanent factor. This illegitimate and improper method of bookkeeping has been adopted at times in the past, and has been unfair to the investor.

Railroad managers have of late given much attention to the investment basis of their companies. It is becoming more'the custom not to pay, or increase, dividends, until the permanency of the rate is reasonably assured. The paying for improvements out of earnings is a very good feature, and is so universal that it is estimated that our whole railroad mileage earns double what it distributes in the way of dividends.

We differ somewhat from the English in our way of estimating the intrinsic value of a railroad issue, and this is partly due to their custom of placing irredeemable debentures, while we put out bonds with a definite date of maturity. Even, although in practice our debt is not extinguished when due, but refunded, we, nevertheless, consider what the value of the property will be at the loan's maturity. In England, the irredeemable feature eliminates that factor and results in a careful analysis of the road's earning power, so that the interest rate may be permanent, as in the case of a stock. And, perhaps, they are following the truer course, for the value of a railroad if it cannot earn its charges under good management and normal conditions, is doubtful - leaving out of consideration the possibility that some other company may buy it. It is said that about 93% of the railroad capitalization is invested in immovable property.

It is becoming the generally accepted opinion among financiers that the value of a railroad should be determined by its present and future net income.