CHAPTER IVThe Purchase of the Telegraphs

Adequate Results of Private Enterprise

The foregoing facts show that private enterprise was ready throughout the period beginning with 1838 to incur considerable risks in establishing the new industry of telegraphy, and in giving to the public facilities for the use of that industry. Private enterprise did not at any time adopt the policy of exploiting the public by confining itself to operations involving little or no risk, while paying well. It is true that once a company had reached the position of paying 5, 6, 7, 8, or more, per cent., it tried to maintain that position, and refrained from making extensions at such a rate as to cause a decrease in the dividend. But that fact does not warrant the charge that the companies neglected their duty to the public. Until the threat of purchase by the State arrested extensions, and the dividends rose unusually rapidly, the earnings of the companies were moderate; and finally, though the companies tried to maintain whatever rate of dividend had once been attained, the investing public never believed that even the Electric and International would maintain indefinitely the 10 per cent. rate. That is shown by the fact that until the public began to speculate on the strength of the prospect of the State paying a big price for the property of the Electric and International, the stock of that company never sold for more than 14years’ purchase.21Had the public believed that the 10 per cent. dividend would be maintained indefinitely, the stock would have risen to 25 years’ purchase, the price of the best railway shares.

Mr. Scudamore’s Statistics

In order to show that the people of the United Kingdom suffered from a lack of telegraphic facilities, when compared with the people of Belgium and Switzerland, Mr. Scudamore stated in his reports of 1865 and 1866, that there were: in Belgium, 17.75 miles of telegraph line to every 100 square miles; in Switzerland, 13.7; and in the United Kingdom, 11.3. He stated, also, that there were in Belgium 6.33 telegraph offices to every 100,000 people; in Switzerland, 9.9; and in the United Kingdom, 5.6.

Mr. Scudamore obtained the figures with regard to the United Kingdom from the Board of Trade returns.22For 1865 to 1867, those returns were very incomplete; but in 1868 they became very full. Mr. Scudamore’s reports of 1865 and 1868 were not ordered, by the House of Commons, to be printed, until April, 1868, when the completed Board of Trade returns were available. But neither in the reports as laid before Parliament, nor in the testimony given before the Select Committee of Parliament in 1868, didMr. Scudamore draw attention to the fact that the statement that the United Kingdom had only 11.3 miles of telegraph line to every 100 square miles of area, and 5.6 telegraph offices to every 100,000 people, was based on incomplete returns.

The Board of Trade return for 1868 stated that the Lancashire and Yorkshire Railway Company had 432 miles of telegraph lines and that various other companies not enumerated in 1865, had, in 1868, 3,665 miles of line. If it be assumed that in the period from 1865 to 1868 the Lancashire and the other railway companies not enumerated in 1865, increased their net at the same rate as did the three railway companies that were enumerated in 1865, namely, 11 per cent.,there must have been, in 1865, not less than 3,825 miles of telegraph line of which Mr. Scudamore took no account in fixing the total mileage at 16,066 miles. If it be further assumed that one-third of the 3,825 miles in question paralleled telegraph lines of the telegraph companies, there were left out of account in 1865 by Mr. Scudamore 2,550 miles of telegraph line, the equivalent of 2.1 miles per 100 square miles of area. On the foregoing assumptions the mileage that should have been assigned to the United Kingdom in 1865 was not 11.3, but 13.4.

Considerations similar to the foregoing ones, when applied to Mr. Scudamore’s statement that there were, in 1865, 2,040 telegraph stations, show that there probably were 2,680 telegraph stations in 1865, a full allowance being made for duplication. The last named figure would have been equivalent to 8.9 telegraph offices for every 100,000 people as against 5.6 reported by Mr. Scudamore.

The foregoing corrections probably err in the direction of understating the telegraph facilities existent in the United Kingdom in 1865. These corrected results show that in the matter of telegraph line per 100 square miles of area, the United Kingdom was abreast of Switzerland in 1865, though considerably behind Belgium; and that, in the matter of telegraph offices per 100,000 people, it was almost abreast of Switzerland, and considerably in advance of Belgium.

In this connection it is helpful to note that in 1875,after the British Government had spent about $12,500,000 in rearranging and extending the telegraph lines, as against Mr. Scudamore’s estimate of 1868 that $1,500,000 would suffice for all rearrangements and extensions, the number of miles of telegraph line per 100 square miles of area was, 20 in the United Kingdom, and 27.4 in Belgium.23

Mr. Scudamore’s Standards of Service

Mr. Scudamore submitted several other arguments in support of the statement that private enterprise had failed to provide the public with sufficient telegraphic facilities. He submitted a list of 486 English and Welsh towns, ranging in population from 2,000 to 200,000, and stated in each case whether or not the town was a telegraph station; and if it was one, whether the telegraph office was, or was not, within the town limits. Mr. Scudamore summarized the facts elucidated, with the statement that 30 per cent. of the 486 towns were well served; that 40 per cent. were indifferently served; that 12 per cent. were badly served; that 18 per cent. were not served at all; and that the towns not served at all had an aggregate population of more than 500,000.24

Mr. Scudamore did not define his standards of good service, indifferent service, bad service, and absence of service; but examination of his data shows that his standards were so rigorous that the state of affairs revealed in his summary was by no means so bad as might appear at first sight. Mr. Scudamore took as the standard of good service, the presence of a telegraph office within the town limits. He characterized as indifferent the service of 98 towns in which the telegraph office was within one-quarter of a mile of the Post Office, though outside of the town limits; as well as the service of 88 towns in which the telegraph office was within one-half a mile of the Post Office, though outside of the town limits. He called the service bad in the case of 38 towns in which the telegraph office was within three-quarters of a mile of the Post Office; as well as in the case of 22 towns in which the telegraph office was one mile from the Post Office. He said there was no service whenever the distance of the telegraph office from the Post Office exceeded one mile. In this connection it should be added that the telegraph lines followed the railway; and that in consequence of the prejudice against railway companies in the early days, very many cities and towns refused to allow the railway to enter the city or town limits.

Mr. Scudamore’s data showed that there had been in 1865 not less than 96 towns in which the distance between the Post Office and the nearest telegraph office exceeded one mile. In a foot-note, in the appendix,Mr. Scudamore stated that in 1868, not less than 25 of the 96 towns had been given a railway telegraph office; but no mention of that fact did he make in the main body of the report, the only part of the document likely to be read even by the comparatively small number of the Members of Parliament who took the trouble to read the document at all. As for the writers of the newspaper press, and the general public, they accepted without exception the statement that in 1868 not less than 18 per cent. of the towns in question, with anaggregate population of over 500,000, had no telegraphic service. As a matter of fact the statement applied only to 14.6 per cent. of the towns, with an aggregate population of 388,000;25and many of the towns that still were without service in 1868 would not have been in that condition, had not the agitation for the nationalization of the telegraphs arrested the investment of capital in telegraphs in the years 1865 to 1868.

Mr. Scudamore also submitted a table giving the total number of places with money order issuing Post Offices in England and Wales, Scotland and Ireland; and stated what number of those places had respectively perfect telegraph accommodation, imperfect telegraphic accommodation, and no telegraphic accommodation.26Mr. Scudamore contended that the public interest demanded that each one of those places should have at least one telegraph office, that office to be located as near the centre of population as was the Post Office. He submitted no argument in supportof that proposition. But Parliament and the public accepted the proposition with avidity, since Mr. Scudamore promised that the extension required to give such a service would not cost more than $1,000,000, about 1/11 or 1/12 of the total sum invested by the several telegraph companies. Mr. Scudamore also promised that, after the service had been thus extended, the total operating expenses of the State telegraphs would be less than 45 per cent. of the gross receipts; that the State telegraphs would at least pay their way, and that they probably would yield a handsome profit. But when Mr. Scudamore came to extend the State telegraphs, he spent upon extensions, not $1,000,000, but about $8,500,000, and when the State came to operate the telegraphs, the operating expenses quickly ran up to 87 per cent. of the gross receipts in three years, 1874 to 1876. These errors of Mr. Scudamore justify the statement that he made no case whatever against the system oflaissez-faire, or private ownership, on the ground of the extent of the facilities offered to the public, under the system of private ownership. For obviously it was one thing to condemn the telegraph companies for not building certain extensions, those extensions being estimated to cost only $1,000,000, and a different thing altogether to condemn the telegraph companies for refusing to build out of hand extensions that would cost $8,500,000 and would be relatively unremunerative, if not absolutely unprofitable.

Tariffs and Growth of Traffic

It remains to consider whether the facts as to thecharges made by the telegraph companies for the transmission of messages, and the facts as to the rate of increase in the number of messages transmitted, supported Mr. Scudamore’s contention that the system of private ownership of the telegraphs had failed to conserve and promote the public interest.

In 1851, the Electric and International Telegraph Company carried 99,216 messages, receiving on an average $2.41 per message. In 1856, the year in which the Scotch Chambers of Commerce began the agitation for nationalization, the company carried 812,323 messages, receiving on an average $0.99 per message. In 1865, the year in which the telegraph companies abolished the rate of 24 cents, irrespective of distance, that had been in force between the leading cities, and the Chambers of Commerce increased the agitation for purchase by the State, the Electric and International carried 2,971,084 messages, receiving on an average $0.49 a message. In the period from 1851 to 1867, the messages carried by the company increased on an average by 28.76 per cent. a year; the average receipts per message decreased on an average by 7.58 per cent. a year; and the gross receipts of the company increased on an average by 13.61 per cent. a year.

In the period 1855 to 1866, the messages carried annually by the British and Irish Magnetic Company grew from 264,727 to 1,520,640, an average annualgrowth of 17.58 per cent. At the same time the average receipts per message fell from $0.96 in 1855, to $0.48 in 1866.

In the period from 1855 to 1866, the number of messages carried annually by all of the telegraph companies of the United Kingdom increased from 1,017,529, to 5,781,989, an average annual increase of 16.36 per cent.

In the same period, from 1855 to 1866, the telegrams sent in Switzerland increased on an average by 13.14 per cent. each year; those sent in Belgium increased on an average by 31.45 per cent.; and those sent in France increased on an average by 25.40 per cent. When one takes into consideration that in Belgium, in 1867, only 38 per cent. of the messages transmitted related to stock exchange and commercial business, and that in France in the same year only 48 per cent. of the messages sent related to industrial, commercial, and stock exchange transactions, there is nothing in the comparison between the rate of growth in the United Kingdom on the one hand, and in the countries of Continental Europe on the other hand, to indicate that the use of the telegraphs for the purposes of trade and industry was held back in the United Kingdom by excessive charges or by lack of telegraphic facilities. So far as the United Kingdom lagged behind, it did so because the public had not learned to use the telegraphs freely for the transmission of personal and family news. And when, in 1875, underState owned telegraphs, the public of the United Kingdom had learned to use the telegraphs as freely as the public of Continental Europe used them, Mr. W. Stanley Jevons, the eminent British political economist, in the course of a review of the price paid for this free use of the telegraphs, said: “A large part of the increased traffic on the Government wires consists of complimentary messages, or other trifling matters, which we can have no sufficient motive for promoting. Men have been known to telegraph for a clean pocket handkerchief”—Mr. Jevons, in 1866 to 1869, had been an ardent advocate of nationalizing the telegraphs.27

Mr. Scudamore in 1866 to 1869 caused many people to believe that the United Kingdom was woefully behind the continental countries in the use of the telegraphs. He did so by publishing a table which showed that in 1866 there had been sent: in Belgium, 1 telegram to every 37 letters carried by the Post Office; in Switzerland, 1 telegram to every 69 letters; and in the United Kingdom, 1 telegram to every 121 letters. That table, however, really proved nothing; for in 1866, there were carried: in Belgium, 5 letters for every inhabitant; in Switzerland, 10 letters; and in the United Kingdom, 25 letters. Had the people of Belgium and Switzerland written as many letters proportionately as the people of the United Kingdom, thetable prepared by Mr. Scudamore would have read: Belgium, 1 telegram for every 185 letters; Switzerland, 1 telegram for every 172 letters; and the United Kingdom, 1 telegram for every 121 letters.

Mr. Scudamore could, however, have prepared a table showing that the people of Switzerland and Belgium used the telegraph more freely than did the people of the United Kingdom, but not so much more freely as to call for so drastic a remedy in the United Kingdom as the nationalization of the telegraphs. The table in question would have shown that in 1866, there was transmitted: in Switzerland, 1 telegram to every 3.75 inhabitants; in Belgium, 1 telegram to every 4.25 inhabitants; and in the United Kingdom, 1 telegram to every 5.3 inhabitants. The table in question would also have indicated the necessity of care in the use of the several kinds of statistics just put before the reader. The table placed Switzerland in advance of Belgium, while the other sets of statistics had placed Belgium in advance of Switzerland.

Alleged Wastefulness of Competition

Mr. Scudamore’s concluding argument was that little or no relief from the evils from which the public was suffering could be expected “so long as the working of the telegraphs was conducted by commercial companies striving chiefly to earn a dividend, and engaged in wasteful competition.” In support of the charge of wasteful competition he stated “that many large districts are provided with duplicate and triplicate lines,worked by different companies, but taking much the same course and serving precisely the same places; and that these duplicate or triplicate lines and duplicate or triplicate offices only divide the business without materially increasing the accommodation of the districts or towns which they serve.” But when Mr. Scudamore sought to substantiate this charge of waste arising out of competition, he could do no more than state that not less than 2,000 miles of line in a total of 16,066 miles were redundant, and that perhaps 300 to 350 offices in a total of 2,040 offices were redundant.

The evidence presented by Mr. Scudamore failed to reveal a situation that called for so drastic a remedy as the nationalization of the telegraphs. It revealed no evils or shortcomings that it was unreasonable to expect would be sufficiently mitigated, if not entirely removed, by the measures proposed by the telegraph companies.

Mr. Robert Grimston, Chairman of the Electric and International Telegraph Company, stated that the telegraph companies long since would have asked Parliament to permit them to consolidate, had there been the least likelihood of Parliament granting the request. Consolidation would have made the resulting amalgamated company so strong that the company would have been justified in adopting a bolder policy in the matterof extending the telegraph lines to places remote from the railways. No single company could afford to assume too large a burden of lines that would begin as “suckers” rather than “feeders.” A company with a large burden of that kind would be in a precarious position, because any of the other existing companies, or some new company, might take advantage of the situation and cut heavily into that part of the company’s business that was carried on between the large cities and was bearing the burden of the non-paying extensions. But if the existing companies were to consolidate, the resulting company would become so strong that it need not fear such competition from any company newly to be organized. That there was much strength in that argument appears from the fact that, in 1869, Mr. Scudamore as well as the Government adopted it in support of the request that the State be given the monopoly of the business of transmitting messages by electricity. Mr. Scudamore argued that since the State was going to assume the burden of building and operating a large number of unprofitable, or relatively unprofitable, extensions, it should not be exposed to the possibility of competition from companies organized for the purpose of tapping the profitable traffic between the large cities, “the very cream of the business.” Mr. Scudamore added that he had been told that a company was on the verge of being organized for the purpose of competing for the business between the large towns as soon as the properties of theexisting companies should have been transferred to the State.28

The Companies’ Proposal

The telegraph companies proposed to give the public substantial safeguards against the possibility of being exploited by the proposed amalgamated company. They proposed that Parliament should fix maximum charges for the transmission of messages, in conjunction with a limit on dividends that might be exceeded only on condition that the existing charges on messages be reduced by a stated amount every time that the dividend be raised a stated amount beyond the limit fixed. The companies proposed also that shares to be issued in the future should be sold at public auction, and that any premiums realized from such sales should be invested in the plant with the condition that they should not be entitled to any dividend. Provisions such as these, at the time, were in force in the case of certain gas companies and water companies. They have for years past been incorporated in all gas company charters; and they have worked well. There was no reason, in 1866 to 1869, why the proposals of the telegraph companies should not be accepted; that is, no reason from the view-point of the man who hesitated to exchange the evils and shortcomings incident to private ownership for the evils and shortcomings incident to public ownership.

FOOTNOTES:17The Edinburgh Review, July, 1870.18Annales télégraphiques, 1860, p. 547.The company obtained a concession covering the whole of Belgium. In September, 1846, it opened a line between Brussels and Antwerpen. The tariff charged was low, but the line was so unprofitable that, in 1847, the company declined to build from Brussels to Quiévrain, where connection was to be made with a proposed French telegraph line.19Journal of Statistical Society, March, 1881.20Statistical Journal, September, 1876, and current issues ofThe Economist(London).21Journal of the Statistical Society, September, 1872.22Miscellaneous Statistics for the United Kingdom, 1868-9, andParliamentary Paper, No. 416, Session 1867-68.Length of electric telegraphs belonging to railway companies and telegraph companies respectively.In placing the total mileage of telegraph line at 16,066, in 1865, Mr. Scudamore excluded the mileage of the London, Chatham, and Dover Railway Company.Railway Companies:1865186618671868Lancashire & YorkshireNotstated430432London, Brighton & South Coast241266284284London, Chatham & Dover134134134140South Eastern Railway324333351351Other Railway CompaniesNotstated…3,665Total returned6997331,1994,872Electric Telegraph Companies:Electric & International9,3069,74010,00710,007British & Irish Magnetic4,4014,4644,6964,696The United Kingdom1,6721,6761,6921,692The London District123150150163So. Western of IrelandNotstated…85Total of Companies15,50216,03016,54516,643Grand Total returned16,20116,76317,74421,51523In theFortnightly Review, December, 1875, Mr. W. S. Jevons, the eminent British statistician and economist, stated that the telegraph mileage was 24,000 miles. This statement is accepted in the absence of any official information. From 1870 to 1895 neither theReports of the Postmaster General, nor theStatistical Abstracts, nor theBoard of Trade Returnsstated the mileage of telegraph lines; only the total mileage of telegraph wires was published.24Mr. Scudamore’s percentage figures, in some instances, were only roughly correct.25Distance of the Telegraph Station from the Post Office, milesNumber of TownsRange of PopulationAggregate Population1.2572,000 to 16,00043,0001.5072,000 to 65,00084,0001.7522,000 to 4,0006,0002.0062,000 to 15,00023,0002.5033,000 to 5,00011,0003.0062,000 to 8,00023,0003.2514,0004,0003.5042,000 to 4,00011,0003.7513,0003,0004.0034,00012,0004.5023,0006,0004.7523,000 to 5,0008,0005.0072,000 to 37,00062,0005.5015,0005,0006.0042,000 to 4,00012,0006.7514,0004,0007.0054,000 to 7,00027,0009.0023,000 to 6,0009,0009.2513,0003,00010.0023,000 to 6,0009,00012.50114,00014,00014.0014,0004,00017.7513,0003,000?12,0002,00071388,00026England and WalesScotlandIrelandNumber of places having Post Offices that issued money orders2,056385509Number of such places having: Perfect telegraph accommodation64891109Imperfect accommodation5679233No accommodation85019636727The Fortnightly Review, December, 1875; andTransactions of the Manchester Statistical Society, 1866-67.28Report from the Select Committee on the Telegraphic Bill, 1869: q. 321 to 329. In 1868, Mr. Scudamore and the Government had said that the State ought not to be given the monopoly of the telegraph business.Special Report from the Select Committee on the Telegraphs Bill, 1868; q. 124 and following, 319 and 320, and 2,464 and following.

17The Edinburgh Review, July, 1870.

18Annales télégraphiques, 1860, p. 547.The company obtained a concession covering the whole of Belgium. In September, 1846, it opened a line between Brussels and Antwerpen. The tariff charged was low, but the line was so unprofitable that, in 1847, the company declined to build from Brussels to Quiévrain, where connection was to be made with a proposed French telegraph line.

18Annales télégraphiques, 1860, p. 547.

The company obtained a concession covering the whole of Belgium. In September, 1846, it opened a line between Brussels and Antwerpen. The tariff charged was low, but the line was so unprofitable that, in 1847, the company declined to build from Brussels to Quiévrain, where connection was to be made with a proposed French telegraph line.

19Journal of Statistical Society, March, 1881.

20Statistical Journal, September, 1876, and current issues ofThe Economist(London).

21Journal of the Statistical Society, September, 1872.

22Miscellaneous Statistics for the United Kingdom, 1868-9, andParliamentary Paper, No. 416, Session 1867-68.Length of electric telegraphs belonging to railway companies and telegraph companies respectively.In placing the total mileage of telegraph line at 16,066, in 1865, Mr. Scudamore excluded the mileage of the London, Chatham, and Dover Railway Company.Railway Companies:1865186618671868Lancashire & YorkshireNotstated430432London, Brighton & South Coast241266284284London, Chatham & Dover134134134140South Eastern Railway324333351351Other Railway CompaniesNotstated…3,665Total returned6997331,1994,872Electric Telegraph Companies:Electric & International9,3069,74010,00710,007British & Irish Magnetic4,4014,4644,6964,696The United Kingdom1,6721,6761,6921,692The London District123150150163So. Western of IrelandNotstated…85Total of Companies15,50216,03016,54516,643Grand Total returned16,20116,76317,74421,515

22Miscellaneous Statistics for the United Kingdom, 1868-9, andParliamentary Paper, No. 416, Session 1867-68.

Length of electric telegraphs belonging to railway companies and telegraph companies respectively.

In placing the total mileage of telegraph line at 16,066, in 1865, Mr. Scudamore excluded the mileage of the London, Chatham, and Dover Railway Company.

23In theFortnightly Review, December, 1875, Mr. W. S. Jevons, the eminent British statistician and economist, stated that the telegraph mileage was 24,000 miles. This statement is accepted in the absence of any official information. From 1870 to 1895 neither theReports of the Postmaster General, nor theStatistical Abstracts, nor theBoard of Trade Returnsstated the mileage of telegraph lines; only the total mileage of telegraph wires was published.

24Mr. Scudamore’s percentage figures, in some instances, were only roughly correct.

25Distance of the Telegraph Station from the Post Office, milesNumber of TownsRange of PopulationAggregate Population1.2572,000 to 16,00043,0001.5072,000 to 65,00084,0001.7522,000 to 4,0006,0002.0062,000 to 15,00023,0002.5033,000 to 5,00011,0003.0062,000 to 8,00023,0003.2514,0004,0003.5042,000 to 4,00011,0003.7513,0003,0004.0034,00012,0004.5023,0006,0004.7523,000 to 5,0008,0005.0072,000 to 37,00062,0005.5015,0005,0006.0042,000 to 4,00012,0006.7514,0004,0007.0054,000 to 7,00027,0009.0023,000 to 6,0009,0009.2513,0003,00010.0023,000 to 6,0009,00012.50114,00014,00014.0014,0004,00017.7513,0003,000?12,0002,00071388,000

26England and WalesScotlandIrelandNumber of places having Post Offices that issued money orders2,056385509Number of such places having: Perfect telegraph accommodation64891109Imperfect accommodation5679233No accommodation850196367

27The Fortnightly Review, December, 1875; andTransactions of the Manchester Statistical Society, 1866-67.

28Report from the Select Committee on the Telegraphic Bill, 1869: q. 321 to 329. In 1868, Mr. Scudamore and the Government had said that the State ought not to be given the monopoly of the telegraph business.Special Report from the Select Committee on the Telegraphs Bill, 1868; q. 124 and following, 319 and 320, and 2,464 and following.

Upon inadequate consideration the Disraeli Ministry estimated at $15,000,000 to $20,000,000 the cost of nationalization. Political expediency responsible for Government’s inadequate investigation. The Government raises its estimate to $30,000,000; adding that it could afford to pay $40,000,000 to $50,000,000. Mr. Goschen, M. P., and Mr. Leeman, M. P., warn the House of Commons against the Government’s estimates, which had been prepared by Mr. Scudamore. The Gladstone Ministry, relying on Mr. Scudamore, estimates at $3,500,000 the “reversionary rights” of the railway companies, for which rights the State ultimately paid $10,000,000 to $11,000,000.

On April 1, 1868, the Disraeli Government brought into Parliament a “Bill to enable the Postmaster General to acquire, work, and maintain Electric Telegraphs in the United Kingdom.”29At this time the Government still was ignorant of the precise relations existing between the telegraph companies and the railways; and it did not foresee that the purchase of the assets of the telegraph companies would lead to the purchase of the reversionary rights of the railways in the telegraphs, the telegraphs having been, for the most part, erected on the lands of the railways, underleases of way-leaves that still had to run, on an average, 23.7 years. At this time, therefore, the Government contemplated only the purchase of the Electric and International Company, the British and Irish Company, the United Kingdom Company, and the London and Provincial, the successor of the London District Telegraph Company.

Purchase Price estimated at $15,000,000 to $20,000,000

In the course of the debate upon the order for the Second Reading of the Bill, the Chancellor of the Exchequer, Mr. G. W. Hunt, said that “if the House would excuse him, he would rather not enter fully into details with respect to the purchase at present. But he would say that, speaking roughly, it would take something near $20,000,000, or, at all events, between $15,000,000 and $20,000,000 for the purchase and the necessary extensions of the lines.” He added that if the purchase should be made, the telegraphs would yield a net revenue of $1,050,000 a year; and that sum would suffice to pay the interest on the debt to be contracted, and to clear off that debt in twenty-nine years.30

Parliament was to be prorogued in August; and a General Election was to follow prorogation. The Government naturally was anxious to avoid having to go into the General Election without having achieved the nationalization of the telegraphs; particularly, since the opposition party also had committed itself toState purchase. Then again, the Government believed that the value of the telegraphs was increasing so rapidly that the State would lose money by any postponement of the act of purchase. For these reasons the Government entered into negotiations with the various interests that evinced a disposition to oppose in Parliament the Government’s Bill, until finally all opposition was removed.

Politics forces Government’s Hand

The Bill, as introduced, proposed that the State pay the four telegraph companies enumerated, the money actually invested by them—about $11,500,000—together with an allowance for the prospective increase of the earnings of the companies, and an additional allowance for compulsory sale. The last two items were to be fixed by an arbitrator who was to be appointed by the Board of Trade. The companies flatly rejected this offer, pointing, by way of precedent, to the Act of 1844, which fixed the terms to be given to the railways, should the State at any time resolve upon the compulsory purchase of the railways. The Act in question prescribed: “twenty-five years’ purchase of the average annual divisible profits for three years before such purchase, provided these profits shall equal or exceed 10 per cent. on the capital; and, if not, the railway company shall be at liberty to claim any further sum for anticipated profits, to be fixed by arbitration.”

The Government next offered the companies the highest market price reached by the stock of the companieson the London Stock Exchange up to May 28, 1868, plus an allowance for prospective profits, to be fixed by arbitration. The companies rejected that offer, but accepted the next one, namely, twenty years’ purchase of the profits of the year that was to end with June 30, 1868.31Mr. W. H. Smith, one of the most highly esteemed Members of the House of Commons, who was himself a director in the Electric and International, subsequently spoke as follows of these negotiations: “In 1868 the telegraph companies were by no means desirous to part with their property, but the question whether the Government should be in possession of the telegraphs having been forced on their consideration, the three principal companies very reluctantly came to an arrangement with the Government of the day. He did not wish to express any opinion on the bargain which had been made, and would only say for himself and those with whom he was associated, that they very deeply regretted to be obliged to part with property which had been profitable, and which they had great pleasure in managing.”32Mr. Smith added that the net earnings of the Electric and International had increased from $336,815 in 1862, to $859,215 in 1868; and that the average annual increase per cent. had been 17.2 per cent.

The state of the public mind at the time when theGovernment introduced its Bill, was indicated in the issue of April 11, 1868, ofThe Economist, the leading financial newspaper of Great Britain. Said the journal in question: “Even if the companies resist, they will not be very powerful opponents—firstly, because the leaders of both parties have already sanctioned the scheme; and, secondly, because the companies are exceptionally unpopular. There is, probably, no interest in the Kingdom which is so cordially disliked by the press, which, when united, is stronger than any interest, and which has suffered for years under the shortcomings of the private companies. The real discussion in Parliament, should there be any, will turn upon a very different point, and it will be not a little interesting to observe how far the current of opinion on the subject of State interference with private enterprise, has really ebbed within the last few years. Twelve or fourteen years ago it would have been useless for any Chancellor of the Exchequer to propose such an operation…. It was [at that time] believed on all sides that State interference was wrong, because it shut out the private speculators from the natural reward of their energy and labor.”

Before the Select Committee of the House of Commons to which was referred the Government’s Bill, Mr. Scudamore argued that if Parliament could not make a reasonable bargain with the telegraph companies, it could authorize the Post Office to build a system of telegraphs. But that measure ought to beadopted only as a last resource. It was of paramount importance to avoid shaking the confidence of the investors that private enterprise would be allowed to reap the full benefits of its enterprise, and that it would be exposed to nothing more than the ordinary vicissitudes of trade. That the possibility of competition by the State, by means of money taken from the people by taxation, never had been included within the ordinary vicissitudes of trade. Coming to the question of paying twenty years’ purchase of the profits of the year 1867-1868, Mr. Scudamore said: “The telegraphs are so much more valuable a property than we originally believed, that if you do not buy them this year, you unquestionably will have to pay $2,500,000 more for them next year…. Their [average] annual growth of profit is certainly not less than ten per cent. at present. If you wait till next year and only give them nineteen years’ purchase, you will give them more than you will now give. If you wait two years, and give them eighteen years’ purchase, you will still give them more than you will now give, assuming the annual growth of profit to be the same. If you wait four years, and give them sixteen years’ purchase, you will again give them more, and in addition you will have lost the benefit accruing in the four years, which would have gone into their pockets instead of coming into the pockets of the nation.”33

Purchase price estimated at $30,000,000

In the House of Commons, the Chancellor of the Exchequer, Mr. G. W. Hunt, said: “The terms agreed upon, although very liberal, were not more liberal than they should be under the circumstances, and did not offer more than an arbitrator would have given. The companies had agreed to sell at twenty years’ purchase of present net profits, although those profits were increasing at the rate of 10 per cent. a year. He was satisfied the more the House looked into the matter, the more they would be satisfied with the bargain made.”34The Chancellor of the Exchequer continued with the statement that Mr. Scudamore estimated that the Postmaster General would obtain from the telegraphs a net revenue of $1,015,000 at the minimum, and $1,790,000 at the maximum. The mean of those estimates was $1,402,500, which sum would pay the interest and sinking fund payments—3.5 per cent. in all—on $40,000,000. The Government, therefore, could afford to pay $40,000,000 for the telegraphs. Indeed, on the basis of the maximum estimate of net revenue, it could pay $50,000,000. But Mr. Scudamore confidently fixed at $30,000,000 at the maximum, the price that the Government would have to pay. Mr. Scudamore’s estimates of net revenue “would stand any amount of examination by the House, as they had stood very careful scrutiny by the Select Committee,and for the Government to carry out the scheme would not only prove safe but profitable.”

By this time the Government had learned that it would be necessary to purchase the reversionary rights of the railway companies in the business of the telegraph companies. The Government had agreed with the railway companies upon the terms under which it was to be left to arbitration how much should be paid for those reversionary rights. The Chancellor of the Exchequer stated that he was unwilling to divulge the Government’s estimates of what sums would be awarded under the arbitration; for, if he did divulge them, they might be used against the Government before the arbitrators. “But Mr. Scudamore, whose ability with regard not only to this matter, but also to other matters, had been of great service to the Government, had given considerable attention to the matter, and Mr. Scudamore believed that $30,000,000 would be the outside figure” to be paid to the telegraph companies and the railway companies. The Chancellor of the Exchequer added that Mr. Scudamore’s “calculations had been submitted to and approved by Mr. Foster, the principal finance officer of the Treasury.”

In passing, it may be stated that Mr. Foster had stated before the Select Committee of the House of Commons that he had given only “two or three days” to the consideration of the extremely difficult question of the value that the arbitrators would be likely to put upon the railway companies’ reversionary rights.35

Parliament warned against Government’s Estimates

Mr. Goschen, of the banking firm of Frühling and Goschen, who had been a member of the Select Committee, and had taken an active part in its proceedings, replied that “the inquiry [by the committee] had been carried on under great disadvantages. An opposition, organized by private interests [the telegraph companies and the railway companies], had been changed into an organization of warm supporters of the Bill pending the inquiry. Before the Committee there appeared Counsel representing the promoters [i. e., the Government], and, at first, counsel representing the original opposition to the Bill [i. e.the telegraph and railway companies]; but in consequence of the change in the views of the opposition, who during the proceedings became friendly to the Bill, there was no counsel present to cross-examine the witnesses. Consequently, in the interests of the public, and in order that all the facts might be brought to light, members of the committee [chiefly Mr. Goschen and Mr. Leeman] had to discharge the duty of cross-examining the witnesses. The same causes led to the result that the witnesses produced were all on one side….”36

Mr. Goschen emphasized the fact that upon the expiring of the telegraph companies’ leases of rights of way over the railways, the reversionary rights of the railways would come into play, and that the Government, after having paid twenty years’ purchase to the telegraph companies, “would probably have to pay half as much again to the railways.” “The railways had felt the strength of their position so much, that they had pointed out to the committee that they would not only be entitled to an increase in the rate which they now received [as rent from the telegraph companies] as soon as the leases expired, but they would also be entitled to an indemnification [from the State] forthe loss they would sustain in not being allowed [in consequence of the nationalization of the telegraphs] to put the screw on the telegraph companies.” Mr. Goschen said “he felt very strongly on this point because he was convinced that it was impossible to find an instance of any private enterprise which, while it returned a profit of 15 per cent. to its shareholders, enjoyed a monopoly for any great length of time.” If the Government purchased the assets of the telegraph companies, the railway companies would succeed in compelling the State to share with them the great profits to be obtained from the business of telegraphy. They would do so by compelling the Government to pay a big sum for their reversionary rights in the telegraph companies, as the price for abstaining from building up a telegraph business of their own, upon the expiry of the telegraph companies’ leases. No business that yielded a return of 15 per cent. could be worth twenty years’ purchase, for such returns were very insecure, because of the certainty that competition would arise from persons who would be content with ten per cent., or less.37

Mr. Leeman, who had sat on the Select Committee, and had, with Mr. Goschen, done all of the cross-examining directed to bring out the points that told against the Government’s proposal, followed Mr. Goschen in the debate. He began by stating that hespoke with “twenty years’ experience as a railway man;” and he directed his argument especially against the terms of the agreements made by the Government to purchase the reversionary rights of the railways in the telegraph companies’ businesses. “Mr. Scudamore, who was what he had already been described to be—a most able man—had not known, up to the time of the second reading of the Bill [June 8, 1868], what were the existing arrangements between the telegraph companies and the railway companies; and, subsequently, while still without the requisite knowledge on that point,38he went and agreed on the part of the Government to buy the interest of the telegraph companies at 20 years’ purchase of their profits. In addition it was to be remembered that the railway companies had reversionary interests which would come into operation after comparatively short time for which their arrangements with the telegraph companies were to continue. In July, 1866, Mr. Scudamore estimated the necessary outlay on the part of the Government at $12,000,000. In February, 1868, another officer of the Government raised the estimate to $15,000,000; but it was not until the Bill came before the committee[July, 1868], that Mr. Scudamore said that $30,000,000 would be required…. He [Mr. Leeman] undertook to say that Mr. Scudamore was as wide of the mark in his estimate of $30,000,000, as he had been in his estimate of $12,000,000. At the expiration of their agreements with the telegraph companies, several [all] of the railway companies would have it in their power to compete with the Post Office in the transmission of telegraphic messages. No doubt this fact would be brought under the notice of the arbitrators when the value of their reversion was being considered, and at what price would the arbitrators value this reversionary power of competition? Had Mr. Scudamore made any estimate on the subject? Owing to the position in which Mr. Scudamore had placed the Government, the railway companies had demanded and had been promised terms in respect of their reversions, which he, as a railway man, now said it was the duty of any Government to have resisted….”39

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