If it is impossible to arrive at a fair estimate of true interest, even on a commitment of any particular length, to say nothing of a per petual commitment, what can we do with the much more difficult problem of estimating a fair compensation for assuming the special risk of the business? We cannot arrive at it as insurance risks are determined. We should find it of no use to appoint an actuarial board to make estimates. There are not a sufficient number of enterprises operating under ap proximately the same conditions to work out a law of averages. The only possible estimate of this risk is the appraisal at large. In the particular circumstances, so far as he can as certain them, what does each investor com pute it? These opinions working on each other, and forming a market, establish the common estimate of the risk. Events fre quently prove this conclusion wrong. If any government agency should attempt estimat ing the risk of enterprises, how much more frequently would they be right than the con sensus of opinion expressed in the market ? An estimate by a governmental agency in the case of a projected enterprise could be effective only in one situation. If the govern ment estimate were higher than a market esti mate, it would not affect the market estimate, and the project would go ahead just as if the Government had made no estimate at all. When the government estimate chanced to coincide with that of the market, we should have exactly the same result. If the Gov ernment, however, should estimate the risk lower than the market, and fix the adequate return on capital correspondingly, investors would not put their funds into an enterprise in which they estimated the risk as greater than the possible return would justify, and the project would never get under way. So much for the effect of any attempt by a gov ernment agency to measure the risk of a pro jected enterprise. How about an established business? Should the Government be per mitted to take advantage of "hindsight," and after the event has proved of a business that its promoters were justified in undertak ing it, step in and say that the measure of re turn shall be the measure of risk now appar ent? Or should the Government make what we may call a retroactive estimate of the risk, and, from the standpoint of the present, attempt to measure the risk originally as sumed? Human judgment cannot be counted on to be fair under such circumstances. It is so easy now to look back and feel sure that the telegraph, the telephone, the Union Pa cific Railway, in fact, practically any estab lished business, was bound from the start to be successful in a large way. Yet at the be ginning of all these things there were more thousands who believed that the anticipated profits did not justify the risk to be taken than tens who believed that they did. It is impossible from the standpoint of the present to get the same view backward that the stand point of twenty-five or fifty years ago pre sented forward. It is unfair to get the meas ure of reward for a risk assumed in the past by a present estimate of the risk now existing.
We have then several very distinct dif ficulties in any attempt, assuming that the capitalization is fair, at deciding on what con stitutes an adequate return. We must first determine what the "true interest" should be on a permanent committing of capital. Our judgment of that must necessarily vary from day to day as circumstances shift, and the outlook changes. No statutory fiat could in any fairness determine that true interest should be regarded for a period of years as so and so. Assuming, however, that true in terest could be established, we have seen the difficulties in attempting any estimate of the risk. Fixing the conditions, including the re turn on capital committed, would not, with regard to new enterprises, be unfair to the capitalist contemplating putting his funds into them, because he has the option of com mitting his capital or not. If such conditions
with regard to new enterprises were made so stringent as to prevent the embarking of cap ital in them, they would tend to give too great an advantage to established businesses by relieving them of potential competition. We have pointed out the difficulties of being fair in any attempt to make artificially, as by legislative enactment, the conditions under which an established business shall operate, including the return on capital, different from those under which the capital was committed to the enterprise. It is not easy to see a solu tion of the difficulties, unless, indeed, some thing might be done along the line of the long term franchise, guaranteeing against a change of conditions for a sufficiently long time for the investor, or the enterprise in the invest or's behalf, to set up an insurance fund against the risk of change. Whatever change may be made, it should not throw the entire burden on the people who committed their capital to an enterprise relying on the condi tions as to freedom of action in charging for services permitted at the time the project was taken up. Though it may not be good public policy to permit the enjoyment in perpetuity of conditions that have proved more advan tageous than could have been anticipated, it is likewise not good public policy to make those conditions immediately more onerous than anticipated.
It must be kept in mind,. too, that the con ditions under which one enterprise does busi ness are never just like those under which any other enterprise operates. Therefore, the esti mation of risk, and consequently of an ade quate return, must vary with every property. Obviously' no statutory enactment could cover the situation. Only some agency that could consider the merits of each case could handle the matter. Up to the present, so far as the Government has dealt with the matter, it has done so, for the most part, in just this way through such agencies as the Interstate Commerce Commission and the various state commissions on railroads, and other public service corporations.
To go on with the discussion, let us assume, however, that it is possible in some way to de terminc what is an adequate 'return on cap ital committed to a particular enterprise. That does not get us halfway. We have next to consider what is the fair capitalization on which such an adequate return shall be paid. It may seem, in changing from the word "capital" to "capitalization," that we are shifting our premises. The further discussion, it is believed, will show that we are not in dulging in this logical fallacy. Though it may prove more convenient to speak in terms of capitalization, the actual question is always as to what the capital, the assets value, in the enterprise really is on which a return is to be allowed.
Much confusion has come in at this point over the question of securities sold at a dis count. One set of people contend that every such transaction represents a capitalization watering operation, another that the dis count is a necessary part of the cost of con struction. Neither is right, as a great many people, including both the managers of some corporations, and also some public service commissions, are well aware. The discount has nothing to do with capital cost, but is simply and entirely deferred interest and re presents part of the investor's estimate of the risk involved. The discount has to do entirely with the question of adequate return and not at all with the question of fair capitalization. Though it may conceivably be a matter of public concern as to how far it is desirable to go in deferring interest in this way, such de ferred interest should be confined to its pro per place in a discussion of return on capital ization, and not be allowed to confuse by coming in at the wrong point. It may be re 'marked, however, that the various statutory provisions against selling securities at a dis count have an element of stupidity in them.