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] for the 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 he spoke 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,[38] he 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]
Railway Companies’ Reversionary Rights
For the better understanding of this question of reversions, it must be stated that the telegraph companies, for the most part, had erected their poles and wires on the permanent way of the railway companies, under leases of way-leaves, which, in 1868, still had 23.7 years to run, on the average.[40] As the leases should expire, the railway companies would have an opportunity to try to obtain better terms, or to order the companies to remove their plant, and then to erect their own plant, and themselves engage in the telegraph business. But the railway companies were handicapped by the fact that the leases did not expire together, and that it would be difficult to build up a new telegraph system piecemeal out of the parts of line that would become free in the next three years to twenty-nine years. There was, therefore, much room for difference of opinion on the question how far the railway companies would be able “to put the screw” on the telegraph companies upon the successive expirations of leases. The Stock Exchange doubtless took the contingency into consideration, that being one reason why the Electric and International shares did not rise above fourteen years’ purchase of the annual dividends. Mr. Scudamore, before the Select Committee, expressed the opinion that the railway companies could force the telegraph companies “to give them somewhat better terms; that would be the extreme result of any negotiations between the telegraph companies and the railway companies.” To Mr. Foster, principal officer of the Finance Division of the Treasury, whom the Government called to support Mr. Scudamore’s evidence, Mr. Leeman put the question: “Looking at it as a financial question, do you suppose all the railways in the country, having power to work their telegraphs at the end of ten years, but for this Bill, will not put in a claim for a very large sum in respect of that reversion?” The witness replied: “I do not think it would be of very great value in the first place, and in the next place it would be a value deferred for ten years, which would very much diminish it.” To the further query: “You do not take the view that we shall have to pay the railway companies and also the telegraph companies for the same thing,” he replied in the negative.[41]
Shortly after the Government’s Bill had been referred to the Select Committee, the Government made the railway companies this proposition, which was accepted. The Government was to acquire perpetual and exclusive way-leaves for telegraph lines over the railways, and the price to be paid therefor was to be left to arbitration. The railway companies were to have the choice of presenting their claims either under the head of payment for the cession of perpetual and exclusive way-leaves to the Government; or, under the head of compensation for the loss of right to grant way-leaves to any one other than the Government, as well as for the loss of right themselves to transmit messages, except on their own railway business. The Government was of the opinion that the sums to be paid to the railways under this agreement would not be large enough to raise above $30,000,000, the total sum to be paid to the telegraph companies and the railways.