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.

Parliament enacted the Bill of 1868 authorizing the Government to purchase the property of the telegraph companies and the rights of the railways; but it provided that the resulting Act of 1868 should not take effect, unless, in the Session of 1869, Parliament should put at the disposal of the Postmaster General such monies as were required to carry out the provisions of the Act of 1868.

The Government immediately appointed a committee to ascertain the profits earned by the telegraph companies in the year that had ended with June, 1868. The committee, which consisted of the Receiver and Accountant General of the Post Office, and other gentlemen selected from the Post Office for their general ability, but especially for their knowledge of accounts, in June and July, 1869, reported that the aggregate of the sums to be paid to the six telegraph companies was $28,575,235,42 the companies having put in claims aggregating $35,180,185.

While the Bill had been before the Select Committee, the Government had agreed to purchase the properties of Reuters Telegram Company (Norderney Cable), as well as of the Universal Private Company. The price paid for those properties absorbed the margin on which Mr. Scudamore and the Government had counted for the purchase of the reversionary rights of the railways.

In the meantime, the Disraeli Ministry, which had carried the measure of 1868, had been replaced, on December 9, 1868, by the Gladstone Ministry. On July 5, 1869, the Marquis of Hartington, Postmaster General, laid before Parliament a Bill authorizing the Post Office Department to spend $35,000,000 for the purpose of carrying out the act of 1868. The Marquis of Hartington said that $28,575,000 would be required for the purchase of the assets of the telegraph companies; that $3,500,000 would cover the claims of the railways, which had not yet been adjusted; and that $1,500,000 would suffice to rearrange the telegraph lines and to make such extensions as would be required to give Government telegraph offices to 3,776 places, towns, and cities, the present number of places having telegraph offices being 1,882.

The Marquis of Hartington stated that Parliament “was quite competent to repudiate the bargain of 1868, if they thought it a bad one…. Having given the subject his best consideration, he must say, without expressing any opinion as to the terms of the bargain, that if they were to begin afresh, he did not think they could get the property on better terms.” He added that the “Government would take over the telegraphs of the companies on January 1, 1870, on the basis of paying twenty times the profits of the year 1867-68. But that in consequence of the increase of the business since 1867-68, the $28,575,000 which the State would pay the telegraph companies, would represent, not twenty years’ purchase of the profits in 1870, but considerably under seventeen years’ purchase of those profits. The trade of the Electric and International had been found to be growing at the rate of 18 per cent. a year; that of the British and Irish at the rate of 32 per cent.”43

The Chancellor of the Exchequer, Mr. Robert Lowe, was by no means so sanguine. He spoke of the “immense price” which the Government was asked to pay, “a price of which he, at all events, washed his hands altogether. The Right Honorable Gentlemen opposite [Mr. Hunt, Chancellor of the Exchequer in 1868], had accused them of appropriating the honor of this measure. He had not the slightest desire to contest the point with the Right Honorable Gentleman, who was welcome to it all. The matter was found by the present Government in so complicated a state that it was impossible for them to recede; but unless the House was prepared to grant that [i. e. a government monopoly] without which they believed it would be impossible to carry on the business effectively, it would be better that they should reject the Bill altogether.”44

Mr. Torrens moved an amendment adverse to the Bill, but his motion was defeated by a vote of 148 to 23. Before the vote was taken, Mr. W. Fowler, of the firm of Alexander & Company, Lombard Street, speaking of the reversionary rights of the railway companies, had said: “Therefore, for what the House knew, there might be contingent liabilities for hundreds of thousands or millions of pounds sterling more.”45

The measure became a law in August, 1869; and on February 5, 1870, the telegraphs of the United Kingdom were transferred to the Post Office Department. In the course of the year 1870, the Government bought the properties of the Jersey and Guernsey Company and of the Isle of Man Company. Those purchases, together with a large number of minor purchases made in 1869, but not previously mentioned, raised the total sum paid to the telegraph companies to $29,236,735.

Not until 1879 were the last of the claims of the railway companies adjusted. The writer has not succeeded in finding a specific official statement of the aggregate sum paid to the railway companies for their reversionary rights and for the grant to the Post Office of perpetual and exclusive way-leaves over their properties, but he infers that that sum was $10,000,000 or $11,000,000. That inference is based on testimony given in 1888 by Mr. C. H. B. Patey,46 Third Secretary to the Post Office, and on information given by the Postmaster General in 1895.47 It will be recalled, that in 1869, the Marquis of Hartington, Postmaster General, had told the House of Commons that the payments for the rights in question would not exceed $3,500,000. The Postmaster General doubtless spoke on the strength of assurances given by Mr. Scudamore. It will be remembered also that Mr. Leeman, in 1868, had warned the House in strong terms that Mr. Scudamore’s estimates were not to be trusted. Finally, it will be remembered that in 1869, Mr. W. Fowler, a financier of high standing, had warned the House of Commons that “there might be contingent liabilities of thousands or millions of pounds sterling more.”

CHAPTER V
None of Mr. Scudamore’s Financial Forecasts Were Realized

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 $2,500,00050 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.

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.

Mr. Scudamore began by assuming that the Post Office would take charge of the telegraphs on July 1, 1869; and that by that time the telegraph companies would have developed a business of 7,500,000 messages a year. On the basis of the traffic of 1866, and under the companies’ charges, 55 per cent. of the business would consist of messages carried 100 miles or less, which would be charged 24 cents each; 30 per cent. would be messages carried from 100 to 200 miles, being charged 36 cents each; 10 per cent. would be messages carried beyond 200 miles, which would be charged 48 cents; and, finally, 5 per cent. would consist of messages to and from Ireland, which would be charged from 72 cents to 96 cents. The adoption of the uniform rate of 24 cents, irrespective of distance, would reduce by 33 per cent. the charge on the messages sent from 100 to 200 miles, and would increase those messages by 90 per cent.; it would reduce by 50 per cent. the charge on the messages carried more than 200 miles, and would increase those messages by 90 per cent.; and, finally, it would increase by 150 per cent. the number of messages between Great Britain and Ireland. The introduction of the uniform 24 cent rate, therefore, would increase the total number of messages from 7,500,000 to 10,612,500. That last number would be further increased by 10 per cent. in consequence of the general increase of facilities, and a material reduction in the charges made for the delivery of messages to points outside of the free delivery areas. Thus the total number of messages that the Post Office telegraphs would carry in the first year would be 11,673,000, or, say, in round numbers, 11,650,000.

Since the average message would be somewhat over 20 words in length, one might count on average receipts per message of 28 cents; so that the 11,650,000 messages in question would bring the Post Office a gross revenue of $3,400,000.

Mr. Scudamore next proceeded to estimate what it would cost to earn the $3,400,000 just mentioned. He began with the total working expenses, in 1866, of the four leading companies, namely $1,650,000. He stated that the companies had said that if permitted to consolidate, they could reduce expenses by $275,000 a year. But if the Post Office were to take over the telegraphs, it would reduce the expenses by more than the last mentioned sum, for it could use the existing Post Office buildings, the existing staff, and so forth. Deducting numerous other items representing expenses that the companies had incurred on account of the operation of foreign cables and the conduct of other forms of business that the Post Office would discontinue, Mr. Scudamore reached the conclusion that the Post Office, in 1866, could have operated at a total cost of $1,325,000 the plants of the four telegraph companies.

Mr. Scudamore added 10 per cent. to the last mentioned sum, in order to cover the cost of maintaining and operating the extensions that the State proposed to make at a cost of $1,000,000. He took 10 per cent. because $1,000,000 was 1/11 or 1/12 of the capital invested in the plants of the telegraph companies. That raised to $1,457,500 Mr. Scudamore’s estimate of the cost of operating the telegraphs on the supposition of a business of 7,500,000 messages.

Mr. Scudamore then allowed 33 per cent. or $437,250, for the assumed increase in the number of messages from 7,500,000 to 11,650,000. He said the Post Office might safely assume that it could increase its business by 55 per cent. at an increase of 33 per cent. in the operating expenses, since the Electric and International Telegraph Company recently had increased its business by 105 per cent. at an increase of 33 per cent. in the operating expenses. Mr. Scudamore’s conclusion was that the Post Office could carry 11,650,000 messages, yielding an income of $3,400,000, at a cost of $1,895,000, thus obtaining a net revenue of $1,505,000.

To that sum must be added the net revenue to be obtained from the carriage of messages for the newspaper press, $60,000; and $225,000 to be obtained from the rental of the State’s cables to the several foreign cable companies. Thus Mr. Scudamore counted on a maximum net revenue of $1,790,000.

By similar reasoning, under the supposition that the total number of messages should not exceed 7,500,000, Mr. Scudamore arrived at a minimum estimated net revenue of $1,015,000. Taking the average of the two foregoing estimates, he said the Government “might with almost entire certainty rely upon a net revenue within a range of from $1,000,000 to $1,800,000, the mean of which was $1,400,000.” That was for the first year; in the subsequent years the net revenue would increase rapidly. He said: “It is the experience of all people who have worked a large business of this kind that the cost does not by any means increase in proportion to the increase of business; you can always do a greater amount of business at a less proportionate cost than you can do a smaller amount.”

Mr. Goschen repeatedly asked Mr. Scudamore whether he would stand by his estimates, and whether he deemed them moderate, adding that the Select Committee was taking the matter almost exclusively on his [Mr. Scudamore’s] evidence. Mr. Goschen always received the strongest assurances that the Committee might rely on the estimates submitted.58

Mr. Scudamore’s predictions as to the growth of traffic that might be expected from the great increase in the facilities for telegraphing, and from the reduction of the charges by fully one-half, turned out to be brilliant indeed. They were fully realized. The number of messages increased from about 6,500,000 in 1869, to 9,850,000 in 1870-71, to 19,253,000 in 1874-75, and to 26,547,000 in 1879-1880.59

But Mr. Scudamore’s predictions as to the net revenue to be obtained from the State telegraphs turned out to be appalling blunders. In only thirteen out of thirty-six years, from 1870-71 to 1905-06, did the net revenue reach Mr. Scudamore’s minimum estimate; in only two of those thirteen years did it reach the maximum estimate; and in only seven of the thirteen years did it reach the average estimate. In the period 1892-93 to 1905-06, the operating expenses aggregated $231,196,000, while the gross receipts aggregated $229,761,000. In the latter sum are included $8,552,000, the proceeds of the royalties paid the Government by the British National Telephone Company for the privilege of conducting the telephone business in competition with the State telegraphs.60 If that sum be excluded from the postal telegraph gross revenues, as not having been earned by the telegraphs, it will be found that in the period, 1892-93 to 1905-06, the operating expenses exceeded the gross revenue by $9,987,000.

Mr. Scudamore, in 1869, predicted that the operating expenses would be 51 per cent. to 56 per cent. of the gross revenue, in the first year of the working of the telegraphs by the Post Office; and that they would continue to be correspondingly low. In 1875, a Committee appointed by the Treasury reported that in consequence of the great extension of facilities effected since 1870, “it would be difficult for the Government to work the Telegraph Service as cheaply as did the Companies, but a reasonable expectation might be entertained that the expenses might be kept within 70 per cent. or 75 per cent. of the gross revenue. That would leave a margin sufficient to pay the interest on the debt incurred in purchasing the telegraphs.”61 As a matter of fact, the operating expenses only once have come within the limits fixed by the Committee of 1875; and at the close of 1900-01, they had averaged 92.5 per cent.62 Here again, the telephone royalties are included in the gross receipts.

On March 31, 1906, the capital invested in the telegraphs was $84,812,000.63 To raise that capital, the Government had sold $54,300,000 three per cent. bonds at an average price of about 92.3;64 and for the rest, the Government had drawn upon the current revenue raised by taxation.

The net revenue earned by the telegraphs covered the interest on the bonds outstanding, in 1870-71, and in the years 1879-80 to 1883-84. On March 31, 1906, the sums annually paid by the Government by way of interest that had not been earned by the telegraphs, had aggregated $22,530,000, or 26.5 per cent. of the capital invested in the telegraphs.65 Upon the sums invested since 1874, aggregating $34,534,000, the Government has received no interest.

The statement is commonly made, and widely accepted, that the financial failure of the State telegraphs is due to the excessive price paid for the plant. But that statement overlooks two facts: that since 1892-93 the telegraphs have not earned operating expenses; and that in 1880-81 the telegraphs became abundantly able to earn the interest even upon their immoderate capitalization.66 The statement in question also overlooks the fact that the telegraphs easily could have maintained the position reached in 1880-81, had not the House of Commons taken the reins out of the hands of the successive Governments of the day. The House of Commons after 1881 fixed the wages and salaries to be paid the Government telegraph employees in accordance with the political pressure those employees were able to bring, not in accordance with the market value of the services rendered by the employees. The House of Commons also reduced the tariff on telegrams from 24 cents for 20 words, to 12 cents for 12 words. It took that course against the protests of the Government of the day, and cut deep into the margin of profit of the telegraph department.

The fact that the House of Commons after 1880-81 took the reins out of the hands of the successive Governments of the day, in no way diminished Mr. Scudamore’s responsibility for the appalling errors into which he fell when he forecast the financial outcome of the nationalization of the telegraphs. Mr. Leeman, of the Parliamentary Select Committee of 1868, expressly asked Mr. Scudamore: “You do not think there is any fear of the cost being increased by the salaries being much increased under the management of the Post Office?” Mr. Scudamore without hesitation replied in the negative, though he had just stated that in the Post Office and in all Government departments the pay of the lower grades of employees was somewhat higher than it was in commercial and industrial life.67 Moreover, Mr. Scudamore, as one of the two chief executive officers of the Post Office, must have been aware that the Government was neither perfectly free to promote men according to their merit, and irrespective of length of service, nor free to discharge men who were comparatively inefficient and lax in the discharge of their duties. He must have known that those disabilities made it impossible for the Post Office to work as cheaply as private enterprise worked.

As for the House of Commons forcing on the Government the 12 cent rate for messages of 12 words, that action was due largely to the expectations raised by Mr. Scudamore himself in 1868 and 1869, that the nationalization of the telegraphs would soon give the public a twelve cent rate.

Mr. W. Stanley Jevons, the eminent statistician and economist, who, in 1866 to 1869, had warmly supported the proposal to nationalize the telegraphs, in 1875 pointed out that while the postal telegraph traffic had increased 81 per cent. in the period 1870 to 1874, the operating expenses had increased 110 per cent. He said: “The case is all the more hopeless, since the introduction of the wonderful invention of duplex telegraphy has doubled at a stroke, and with very little cost, the carrying power of many of the wires.”68

In 1870 each wire afforded one channel for communication; in 1895 it afforded two channels under the Duplex system, four channels under the Quadruplex system, and six channels under the Multiplex system. In 1870 the maximum speed per minute was 60 to 80 words. In 1895 the fixed standard of speed for certain circuits was 400 words, while a speed of 600 words was possible of attainment. The “repeaters” used for strengthening the current on long circuits also were greatly improved after 1870.69

CHAPTER VI
The Party Leaders Ignore Their Fear of an Organized Civil Service