In times of business depression employ ment is less assured; if the situation is pro longed, wages may decline. As a result peo ple economize. They do not curtail in the daily expenditure of nickels and dimes. Such outlay has become a habit. They cut ex penses in the irregular, unfrequent payments of larger amount. Clothing comes under this head. People make the old things "do." That fact accounts in part for the compara tively wide fluctuation in gross earnings of corporations like the American Woolen Com pany. Moreover, in times of depression the competition for business becomes keener, the industrial corporation in order to keep its share cuts prices, and the lower prices cause a further decline in gross income.
The lessening volume of business done by the industrial corporations directly affects the earnings of the railroads. A considerable part of the transportation business comes from industrial products. Much of the other business does not, however, fall off in the same proportion. A depression that results from "over-extension" does not cause poor crops. Railroads may have as large a ton nage of agricultural products as ever. So we should expect to find some fluctuation in the gross earnings of a railroad, but not as great as in those of an industrial corporation.
When we come to public service corpora tions, such as street railway companies and electric lighting companies, we should not ex pect earnings to decline as much as in the case of the classes of corporations already discussed. Such part of the expenditure of nickels in street-car rides as is not a necessity is a habit, and, moreover, a growing habit. The street railway continues to charge a nickel — just as before. It does not, like an industrial corporation, have further to reduce profits, already reduced because of a smaller output, by cutting prices. It is a matter of fact, too, that people do not lessen their con sumption of such things as electric lighting. The price for this service, also, is not cut during times of depression. Earnings of pub lic service corporations, therefore, do not de cline; they rather advance. Though at some future time the rate of advance may show a greater check than now during a trade dull ness, earnings from these businesses probably never will show marked declines in times of depression. All this means that in arranging to finance a corporation, the promoters or managers must consider the nature and prob able fluctuations of gross earnings in the business it engages in.
We have had to go into this discussion of variations of gross earnings first in order pro perly to develop the general subject. It is the fluctuations in net earnings, however, that fully represent the business risk, and net re sults from the relation of gross earnings and operating expenses. If operating expenses consume a large proportion of gross earnings, the fluctuation in gross constitutes a greater business risk than in the case of a corporation in which the proportion of operating expense is smaller. This increase in the business risk results from the fact that a corporation can not cut operating to keep the proportion of operating the same in the face of a declin ing gross.' It has built up an organization to conduct the business on the larger scale. It cannot reduce this organization as rapidly as the business falls off. Having once built up the larger plant, the corporation can never contract the organization temporarily to the scale of the diminished business. The very magnitude of the plant requires a larger force in proportion to the output. Moreover, wages do not fall as rapidly as prices. Let us compare the percentage of operating expenses with the fluctuations of gross earnings.
Even these figures showing a rising percent age of gross used in operating as the amount of gross declines do not tell the full truth. In the endeavor to keep down expenses during a period of falling gross income, corporations commonly do not keep their maintenance up to a proper and usual standard. If mainten ance were kept up, the percentage of operat ing during a period of depression would be much higher than it is.
The increase in the operating ratio from 64 to 69 when gross earnings, so far from showing a decrease, show rather an increase of 4 per cent, seems to be an instance against the general principle that the operating ratio increases as the gross declines, and should therefore decrease as the gross tends to re sume its former amount. Really it illustrates the fact that a corporation is likely to cut maintenance unduly during a period of de pression and throw the burden of making up the maintenance on periods of activity. In the case of the Denver & Rio Grande figures, maintenance is responsible for a great deal more than its natural share of the increase in 1909. Maintenance was 16 per cent greater than for the preceding year against an increase of 9 per cent for all other operating charges.