We should remember, however, that pay ing the creditor and paying the debt are very different matters. American railroad corpor ations have regularly adopted the practice of paying the creditor, but not of paying the debt. In other words, they do not amortize a debt but refund it.
Since a continuance of the debt seems de sirable from the argument so far, why do so many corporations other than railroads pro vide for amortization by sinking-funds or by serial repayment? Are they mistaken in their policy, or do they consider business reasons beyond those indicated ? We have already twice mentioned one reason, the opportunity amortization gives for readjusting financial arrangements to accord with changed condi tions, whether in the general business situa tion or in the particular enterprise. It may be that in the course of time the corporation can not advantageously use so much capital in the business as at present and will therefore desire to pay off part of the debt. Refunding would meet the contingency of conditions changing for the better, and enable the cor poration to borrow on more favorable terms or in large amounts. The business may have grown so prosperous, its earning power so in creased, or the general business situation may have grown better, so that, whereas at first it may have had to pay, say, 6 per cent for its bor rowed money, it can at the maturity of this issue now borrow at, say, 41 per cent. This is taken up at length in the section on the interest rate. Or the corporation may want to increase its borrowings in order either to trade on a thinner equity or to extend the business. By a refunding operation it can do either of these things advantageously. It can issue the new bonds at the lower rate, or it can put them out in a larger amount than the issue they refund. On the other band, if con ditions make it desirable to retire or reduce the debt, the corporation cannot do either unless it has provided funds.
Then, too, when a specific asset stands back of a specific liability, and that asset by its nature decreases during the lifetime of the debt, conservative corporate management compels an amortization of the debt at least as rapid as the decrease in the value of the asset, or the building-up of a special fund to stand in place of the decreasing value. Equip
ment bonds stand in just this position, and form an exception to the general rule that railroads do not provide means for the retire ment of their debts. The bonds are issued for the purchase of specific cars and locomotives and are secured by title to the equipment bought. A serial maturity retires them faster than the depreciation. Serial repayment is the rule, too, in the case of the Great Lakes steamship bonds issued on the security of single vessels. It is also the rule with bonds issued on the security of natural resources which diminish with use, as bonds on timber lands and coal or other mines.
With the railroad equipment and the steamboat the decrease in the value of the asset is regular, and the debtor corporation must, in prudence, provide with correspond ing regularity for amortization. In the case of bonds issued on natural resources, prudence dictates that amortization need only be pro vided to keep pace proportionately with the quantitative decrease of the asset. Regu larly the amortization agreement provides that a certain amount per thousand feet of timber cut per ton of coal _mined be set aside for the sinking-fund. This sum should be large enough at least to maintain the ratio of assets to liabilities. Further to as sure the bondholders the corporation usually agrees to cut or mine annually an amount sufficient to provide for the retirement of all the bonds by the time of their maturity. It is common, in fact, to have such bonds actually mature in series.
Assets of a timberland, unless conserved by forestation, or of a coal mine, necessarily diminish with use. With the ordinary public service or manufacturing corporation this does not follow. Reasonably careful manage ment requires that the corporation at the very least spend enough in maintenance to keep up the value of its assets. If the corpor ation keeps its assets in the same proportion to its debt it satisfies the demands of pru dence.