The completion of the telegraph system cost $8,500,000; Mr. Scudamore’s successive estimates had been respectively $1,000,000 and $1,500,000. Mr. Scudamore’s brilliant forecast of the increase of traffic under public ownership. Mr. Scudamore’s appalling blunder in predicting that the State telegraphs would be self-supporting. Operating expenses on the average exceed 92.5% of the gross earnings, in contrast to Mr. Scudamore’s estimate of 51% to 56%. The annual telegraph deficits aggregate 26.5% of the capital invested in the plant. The financial failure of the State telegraphs is not due to the large price paid to the telegraph companies and railway companies. The disillusionment of an eminent advocate of nationalization, Mr. W. Stanley Jevons.
Estimated Expenditure versus Actual Expenditure
As soon as the telegraphs had been transferred to the Government, the Post Office Department set to work to rearrange the wires wherever competition had caused duplication or triplication; to extend the wires into the centre of each town or place “imperfectly” served; to build lines to all places with money order issuing Post Offices that had no telegraphic service; to enlarge the local telegraph system of Metropolitan London from 95 telegraph offices in 1869, to 334 offices at the close of 1870; to give cities like Birmingham, Leeds, Edinburgh, Glasgow and Manchester, from 14 to 32 telegraph offices each;[48] to provide additional wires to meet the anticipated growth of traffic; and to release some 5,000 or 6,000 miles of wire for the exclusive use of the railway companies in the conduct of transportation. For these several purposes the Post Office Department, in the course of the three years ending with September, 1873, erected 8,000 miles of posts, and 46,000 miles of wire; strengthened 8,500 miles of line; laid 192 miles of underground pipes and 23 miles of pneumatic pipes; and laid 248 miles of submarine cable. By September, 1873, the Post Office Department had spent upon the rearrangement and extension of the telegraphs, the sum of $11,041,000.[49] Something over $2,500,000[50] of that sum represented the cost of repairing the depreciation suffered by the plant in the years 1868 and 1869, a depreciation for which full allowance had been made in fixing the purchase price. The balance, $8,500,000, represented new capital outlay.
In 1868 Mr. Scudamore had stated before the Select Committee of the House of Commons that it would cost $1,000,000 to rearrange the telegraphs and give perfect telegraphic service to 2,950 places.[51] In 1869, the Postmaster General, the Marquis of Hartington, had told the House of Commons that $1,500,000 would cover the cost of rearranging the telegraphs and giving perfect accommodation to 3,776 places.[52] In April, 1867, on the other hand, Mr. W. Stanley Jevons, an eminent economist, had estimated at $12,500,000 the cost of “the improvement of the present telegraphs, and their extension to many villages which do not at present possess a telegraph station.”[53]
Mr. Scudamore’s estimate of the cost of extending the telegraphs to 841 places that had no telegraphic accommodation, was based on the assumption that each such extension would require, on the average, the erection of three-quarters of a mile of telegraph line. But when the Post Office Department came to build to “new” places, it found that “the opening of upward of 1,000 additional telegraph offices necessitated the erection of not less than 3,000 miles of telegraph line.”[54]
The results have shown that Mr. Scudamore’s other estimates of the cost of rearranging and extending the telegraphs, presented by himself in 1868, and by the Postmaster General, the Marquis of Hartington, in 1869, were equally wide of the mark. Numerous Committees on the Public Accounts sitting in the years 1871 to 1876, together with the Committee on Post Office Telegraph Department, 1876, attempted to inquire into the enormous discrepancy between the estimated cost and the actual cost of rearranging and extending the telegraphs. But none of those attempts were rewarded with any success whatever.[55] The representatives of the Post Office and of the Treasury always attributed the discrepancy “to the purchase of undertakings which were not contemplated at the time when the original measures were submitted to the House, and to unforeseen expenses for extensions.” But the State, as a matter of fact, made no purchases beyond those contemplated in 1869—excepting the purchase of the Jersey and Guernsey cable for $286,750, and the purchase of the Isle of Man cable for $80,680. As for unforeseen extensions, in 1869, the Marquis of Hartington had counted on carrying the telegraphs to 3,776 places, and in 1878 there were but 3,761 postal telegraph offices, counting the 300 offices in London, and the numerous offices in the several large principal cities.[56]
Mr. Scudamore, aided by the state of public opinion created by the agitation of the British Chambers of Commerce under the leadership of the Chamber of Commerce of Edinburgh, carried away the Disraeli Ministry and the Gladstone Ministry. Even more powerful than Mr. Scudamore’s argument from the extensive use made of the telegraphs on the Continent of Europe, was Mr. Scudamore’s promise that the State telegraphs should begin by paying a profit sufficient to cover the interest on $30,000,000 at the lowest estimate, and $50,000,000 at the highest estimate; and that the profit should increase with the advancing years.
Penny Postage Precedent
Before examining the evidence upon which Mr. Scudamore predicted such large profits, it will be well to consider briefly the nature of the evidence afforded to Mr. Scudamore by Sir Rowland Hill’s epoch-making “invention of penny postage.” This is the more necessary, since Mr. Scudamore himself cited the success of penny postage in support of his proposal for a uniform rate of 24 cents for telegraph messages. Upon the introduction of the penny postage, the letters carried by the Post Office of the United Kingdom jumped from 76,000,000 in 1839 to 169,000,000 in 1840, and to 271,000,000 in 1845. But the net revenue obtained by the Post Office Department from the carriage of letters fell from $8,170,000 in 1839 to $2,505,000 in 1840. Though the net revenue increased each year beginning with 1841, not until 1863 did it again reach the point at which it had been in 1839. In 1863, the number of letters carried was 642,000,000—almost four times the number carried in 1840, and eight times the number carried in 1839.[57] In short, the evidence from the penny postage was, that care must be used in arguing from an increase of business to an increase of net revenue; and that the prospect of a great increase in business did not necessarily justify the incurrence of indefinitely large charges on account of interest on capital invested.