The British State Telegraphs / A Study of the Problem of a Large Body of Civil Servants in a Democracy

by Hugo Richard Meyer

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 to State 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 companies on 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.[31] Mr. 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.”[32] Mr. 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 the Government introduced its Bill, was indicated in the issue of April 11, 1868, of The 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 be adopted 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.”[34] The 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.”