If the cost of falling short of full operation is constantly and clearly stated, the units of idle capacity being identified and the causes traceable, there is created entirely new likelihood that effective remedies will be applied.

It is the distinguishing mark of a true method that it does not merely accomplish an immediate desired end, but that all its remoter operation is beneficial, in ways foreseen and in ways unforeseen. The abandonment of percentages making a simply inaccurate distribution of certain expenses, and the substitution of the individual machine charge, lead to the exact statement of capacity unused, and this sets at work influences tending to bring that unused capacity into operation. This it does first by relieving cost prices of a burden that does not belong to them, thereby creating immediately a better condition commercially, and next by bringing into plain view the cost of idle factory capacity, and making it possible to trace its causes and to fix responsibility for it and to secure earnest and well-directed efforts to remedy it. It will be seen when the possibilities of the organization of other departments are considered that the mere fact of there being a record of idle machines will tend to bring them into use by securing a more even distribution of work throughout shops and throughout a period of time. And finally there will be noted the effect of it all upon the steady employment of labor, in simple illustration of the principle, which we shall later on see operating in equally certain but less obvious ways, that the interests of the employer and the employed are not antagonistic, but are one.

In the succeeding articles it is proposed to deal in detail with the organization of the shop accounts and records, and with their

uses.

JOHN WHITMORE.

New York.

The Proper Distribution of Interest on Bonds Between Life Tenants and Remaindermen.

A recent paper on "The Proper Treatment of Discounts and Premiums on Bonds" has suggested an examination of the law upon that phase of the subject relating to the distribution between life tenants and remaindermen of the interest on bonds bought at a premium and redeemable at par or at a fixed premium. A concrete case which fairly presents the question may be thus stated: A testator directs that $100,000 be held by a trustee to pay the income therefrom to A for life and upon A's death to pay the principal to B. The trustee invests the fund in, say, St. Paul and Northern Pacific 6% bonds at the market price of 125, redeemable at par at the end of 17 years, and yielding, therefore, according to bond tables, almost exactly 4%. The trust fund will consist of $80,000 face value of bonds, bringing a yearly return of $4,800.

The question that confronts the trustee is whether he should pay A yearly the amount of interest coupons received, $4,800, and permit the principal to be lessened from year to year, until finally, when the bonds are redeemed, only $80,000 remains, or whether he should retain a sufficient sum to make good the $20,000 paid as premium, so that when the bonds are redeemed at the end of 17 years the principal of $100,000 will remain intact. The usual method of accomplishing this latter result is to pay to the life tenant only the amount of the true yield on the original investment, in this case $4,000 per year, and to set aside the balance, $800, annually as a sinking fund, investing these sinking fund installments and adding the interest on the investments to the fund. It should be noted that a similar result may be obtained in other and perhaps more correct ways, but the sinking fund method is the one that has been favored by the courts and will be dealt with in this paper, though presumably any other financially sound method would be equally satisfactory where a sinking fund is held to be necessary.

It has been shown in the paper mentioned, that sound rules

of accounting require the establishment of a sinking fund in cases such as the one suggested. The application of established legal principles would seem to lead to the same conclusion. Running through the entire law that regulates the rights and obligations of life tenants and remaindermen is the rule that the estate must be so dealt with that, while the whole income therefrom shall go to the life tenant, the principal shall be passed to the remainderman free from impairment. Now, if in the case of bonds bought at a premium the whole amount of income were paid to the life tenant he would, in fact, be receiving not only the interest on the investment but part of the capital of the trust fund itself, and if the process were kept up long enough almost the entire estate might be paid to the life tenant and the estate exhausted.

In the illustration used it is readily seen that the sum of $4,800, which is the amount of the yearly interest coupons, does not represent interests on the investment alone, but that $800 thereof is in effect a return of principal, and if the former amount is distributed generally the estate will be depreciated from year to year until at the time of redemption of the bonds but $80,000 of it will remain. This, briefly, is the reason for the claim of the remainderman that the life tenant should receive the net interest yield on the bonds and no more.

In a number of cases it has been argued that this contention should not be allowed, the arguments being usually based on either:

An implied intention of the testator against its application or difficulty, amounting to practical impossibility in applying the rule, though in a few cases they are directed against the soundness of the contention or its application to this particular class of cases.

It is believed, however, that these arguments are inadequate, and that the rule is supported by the weight of authority where bonds are bought by trustees after the death of the testator; though the decisions seem to be against the application of the rule in the case of bonds left by the testator. The various arguments will, however, be considered in more detail as the cases are examined.

The question seems to have been presented to the courts of New York for decision more frequently than elsewhere. In the

lower New York courts there are a number of cases reaching opposite conclusions, some decisions favoring the life tenant,1 others the remaindermen,2 but since the court of appeals has passed upon the matter these are of little value except as cumulative authorities. The earliest decision by the court of appeals is McLouth vs. Hunt, 154 N. Y. 179, decided in 1897. In that case, the testatrix devised certain property to trustees to pay to her three grandchildren during their minority such part of the income as the trustees saw fit and to pay them the "full income" after they became of age. Each of the grandchildren was to receive one-third of the principal and accumulations on reaching the age of 35 years. In the event of the death of any of the grandchildren before reaching the age of 35 years his share was to be paid to his descendants, if any. Four years before the youngest grandchild would have become 35 years of age the two trustees differed as to whether a sinking fund should be created to provide for shrinkage in the value of bonds then carried by them at a premium, and an amicable proceeding was instituted for a construction of the will and for directions upon the disputed question. There were included in the trust estate two classes of United States bonds, and all of the bonds, except a part so small that the court considered it immaterial, were a part of the estate left by the testator. The court properly treated the case as if the contest was between a life tenant and a remainderman, since if the youngest child died before reaching the age of 35 years there would be a remainderman who was not one of the life tenants and whose interest must be protected. The court decided that the decrease in the value of the bonds owing to the wearing away of the premiums must be borne by the principal of the estate, and that no deduction should be made on that account from the income paid over to the life tenant. The decision was placed on the ground that the intention of the testatrix as shown by the will should prevail, and that in directing that the grandchildren should receive the "full income" she expressed her desire that the entire interest, without deduction, should be paid to

'In matter of Johnson, 57 App. Div. 494. Burgess vs. Valentine, 63 How Pr. 221. Whittemore vs. Beckman, 2 Demarest, 275.

2 Farewell v. Tweddel, 10 Abb. N. C. 94. N. Y. Life Ins. & Trust Co. v. Kane, 57 App. Div. 542. Regnard v. Thebald, 3 Misc. Rep. 187.

the grandchildren. The basis of the decision is contained in the following extract from the opinion:—

We think that when the testatrix directed that her grandchildren should receive the whole income of these securities she must have intended the full interest payable thereon without discrimination by reserving a considerable portion of it for the purpose of meeting any depreciation in the market value of the bonds due to the fact that they were approaching maturity. Whatever meaning the words "full income " in the will may convey to the mind of a trained expert in finance, it cannot, we think, be doubted that the common mind must always understand such a direction in a will as meaning the annual interest upon securities.

While the court rested its decision upon the intention of the testatrix, the opinion went further than was necessary to a decision of the case and expressed approval of the doctrine that, independent of any intention of the testator, the remainderman must bear the loss. The following extract presents the argument of the court:

But quite apart from these considerations it is said that upon principle and the great weight of authority the decision of the learned referee was right. The absolute security of Government bonds both to the life tenant and remainderman must always be kept in view. They may be purchased at a premium and sold at a still higher one, in which case, if there is a deduction made from the interest and added to the principal to balance the premium the remainderman would be doubly benefited. Some investments will increase, while others will diminish in value. When all things are considered, the better rule, it is urged, is to allow these matters to balance themselves, as on the whole they are quite likely to in the end.

The above argument, which is the line of reasoning commonly adopted by those courts that have decided against the sinking fund doctrine, has been conclusively shown to be unsound in the paper heretofore mentioned.

Although the tenor of the opinion leads to the conclusion that the court would in any case presented dispose of the claim of the remainderman in the same way, the decision cannot be regarded as an authority of so wide an application, as it is rested upon the intention expressed by the testatrix, and what is said in addition thereto is merely dicta with little or no value as precedent. Moreover, the bonds in question were part of the estate left by the testator, and the court recognized that there was a difference between such a case and one where the bonds were purchased by