Volume 3 — RAILWAY MORALS AND RAILWAY POLICY. (continued 2)
Reading edition
Still more doubtful becomes the alleged benefit accruing to the public from extensions which cause loss to shareholders, when, from considering the question as one of traffic, we turn to consider it as a general commercial question—a question of political economy. Were there no facts showing that the travelling facilities gained were counterbalanced, if not more than counterbalanced, by the travelling facilities lost; we should still contend that the making of branches which do not return fair dividends, is a national evil, and not a national good. The prevalent error committed in studying matters of this nature, consists in looking at them separately, rather than in connexion with other social wants and social benefits. Not only does one of these undertakings, when executed, affect society in various ways, but the effort put forth in the execution of it affects society in various ways; and to form a true estimate, the two sets of results must be compared. The axiom that “action and re-action are equal, and in opposite directions,” is true, not only in mechanics—it is true everywhere. No power can be put forth by a nation to achieve a given end, without producing, for the time being, a corresponding inability to achieve some other end. No amount of capital can be abstracted for one purpose, without involving an equivalent lack of capital for another purpose. Every advantage wrought out by labour, is purchased by the relinquishment of some alternative advantage which that labour might else have wrought out. In judging, therefore, of the benefits flowing from any public undertaking, it is requisite to consider them not by themselves, but as compared with the benefits which the invested capital would otherwise have secured. But how can these relative benefits be measured? it may be asked. Very simply. The rate of interest which the capital will bring as thus respectively {102} employed, is the measure. Money which, if used for a certain end, gives a smaller return than it would give if otherwise used, is used disadvantageously, not only to its possessors, but to the community. This is a corollary from the commonest principles of political economy—a corollary so obvious that we can scarcely understand how, after the free-trade controversy, a committee, numbering among its members Mr. Bright and Mr. Cardwell, should have overlooked it. Have we not been long ago taught, that in the mercantile world capital goes where it is most wanted—that the business which is at any time attracting capital by unusually high returns, is a business proved by that very fact to be unusually active—that its unusual activity shows society to be making great demands upon it; giving it high profits; wanting its commodities or services more than other commodities or services? Do not comparisons among our railways demonstrate that those paying large dividends are those subserving the public needs in a greater degree than those paying small dividends? and is it not obvious that the efforts of capitalists to get these large dividends led them to supply the greater needs before the lesser needs? Surely, the same law which holds in ordinary commerce, and also holds between one railway investment and another, holds likewise between railway investments and other investments. If the money spent in making branches and feeders is yielding an average return of from 1 to 2 per cent.; while if employed in land-draining or ship-building, it would return 4 or 5 per cent.; it is a conclusive proof that money is more wanted for land-draining and ship-building than for branch-making. And the general conclusions to be drawn are, that that large proportion of railway capital which does not pay the current rate of interest, is capital ill laid out; that if the returns on such proportion were capitalized at the current rate of interest, the resulting sum would represent its real value; and that {103} the difference between this sum and the amount expended, would indicate the national loss—a loss which, on the lowest estimate, would exceed £100,000,000. And however true it may be that the sum invested in unprofitable lines will go on increasing in productiveness; yet as, if more wisely invested, it would similarly have gone on increasing in productiveness, perhaps even at a greater rate, this vast loss must be regarded as a permanent and not as a temporary one.
Again then, we ask, is it so obvious that undertakings which have been disastrous to shareholders have been advantageous to the public? Is it not obvious, rather, that, in this respect, as in others, the interests of shareholders and the public are in the end identical? And does it not seem that instead of recommending “increased facilities for obtaining lines of local convenience,” the Select Committee might properly have reported that the existing facilities are abnormally great, and should be decreased?
There remains still to be considered the other of the two objections above stated as liable to be raised against the proposed interpretation of the proprietary contract—the objection, namely, that it would be a serious hindrance to railway enterprise. After what has already been said, it is scarcely needful to reply, that the hindrance would be no greater than is natural and healthful—no greater than is requisite to hold in check the private interests at variance with public ones. This notion that railway enterprise will not go on with due activity without artificial incentives—that bills for local extensions “rather need encouragement,” as the Committee say, is nothing but a remnant of protectionism. The motive which has hitherto led to the formation of all independent railway companies—the search of capitalists for good investments—may safely be left to form others as fast as local requirements become great enough to promise fair returns—as fast, that is, as local requirements {104} should be satisfied. This would be manifest enough without illustration; but there are facts proving it.
Already we have incidentally referred to the circumstance, that it has of late become common for landowners, merchants, and others locally interested, to get up railways for their own accommodation, which they do not expect to pay satisfactory dividends; and in which they are yet content to invest considerable sums, under the belief that the indirect profits accruing to them from increased facilities of traffic, will outbalance the direct loss. To so great an extent is this policy being carried that, as stated to the Select Committee, “in Yorkshire and Northumberland, where branch lines are being made through mere agricultural districts, the landowners are giving their land for the purpose, and taking shares.” With such examples before us, it cannot rationally be doubted that there will always be capital forthcoming for making local lines as soon as the sum of the calculated benefits, direct and indirect, justifies its expenditure.
“But,” it will be urged, “a branch that would be unremunerative as an independent property, is often remunerative to the company which has made it, in virtue of the traffic it brings to the trunk line. Though yielding meagre returns on its own capital, yet, by increasing the returns on the capital of the trunk line, it compensates, or more than compensates. Were the existing company, however, forbidden to extend its undertaking, such a branch would not be made; and injury would result.” This is all true, with the exception of the last assertion, that such a branch would not be made. Though in its corporate capacity the company owning the trunk line would be unable to execute a work of this nature, there would be nothing to prevent individual shareholders in the trunk line from uniting to execute it; and were the prospects as favourable as is assumed, this course, being manifestly advantageous to individual shareholders, would be pursued by many of them. If, acting in concert with others similarly {105} circumstanced, the owner of £10,000 worth of stock in the trunk line, could aid the carrying out of a proposed feeder promising to return only 2 per cent. on its cost, by taking shares to the extent of £1000, it would answer his purpose to do this, providing the extra traffic it brought would raise the trunk-line dividend by one-fourth per cent. Thus, under a limited proprietary contract, companies would still, as now, foster extensions where they were wanted: the only difference being that, in the absence of guaranteed dividends, due caution would be shown; and the poorer shareholders would not, as at present, be sacrificed to the richer.
In brief, our position is, that whenever, by the efforts of all parties to be advantaged—local landowners, manufacturers, merchants, trunk-line shareholders, &c., the capital for an extension can be raised—whenever it becomes clear to all such, that their indirect profits plus their direct profits will make the investment a paying one; the fact is proof that the line is wanted. On the contrary, whenever the prospective gains to those interested are insufficient to induce them to undertake it, the fact is proof that the line is not wanted so much as other things are wanted, and therefore ought not to be made. Instead, then, of the principle we advocate being objectionable as a check to railway enterprise, one of its merits is, that by destroying the artificial incentives to such enterprise, it would confine it within normal limits.
A perusal of the evidence given before the Select Committee will show that it has sundry other merits, which we have space only to indicate.
It is estimated by Mr. Laing—and Mr. Stephenson, while declining to commit himself to the estimate, “does not believe he has overstated it,”—that out of the £280,000,000 already raised for the construction of our railways, £70,000,000 has been needlessly spent in contests, in duplicate lines, in “the multiplication of an immense number of schemes prosecuted at an almost reckless {106} expense;” and Mr. Stephenson believes that this sum is “a very inadequate representative of the actual loss in point of convenience, economy, and other circumstances connected with traffic, which the public has sustained by reason of parliamentary carelessness in legislating for railways.” Under an equitable interpretation of the proprietary contract, the greater part of this would have been avoided.
The competition between rival companies in extension and branch-making, which has already done vast injury, and the effects of which, if not stopped, will, in the opinion of Mr. Stephenson, be such that “property now paying 5 1⁄2 per cent. will in ten years be worth only 3 per cent., and that on twenty-one millions of money”—this competition could never have existed in its intense and deleterious form under the limiting principle we advocate.
Prompted by jealousy and antagonism, our companies have obtained powers for 2000 miles of railway which they have never made. The millions thus squandered in surveys and parliamentary contests—“food for lawyers and engineers”—would nearly all have been saved, had each supplementary line been obtainable only by an independent body of proprietors with no one to shield them from the penalties of reckless scheming.
It is admitted that the branches and feeders constructed from competitive motives have not been laid out in the best directions for the public. To defeat, or retaliate upon, opponents, having been one of the ends—often the chief end—in making them, routes have been chosen especially calculated to effect this end; and the local traffic has in consequence been ill provided for. Had these branches and feeders, however, been left to the enterprise of their respective districts, aided by such other enterprise as they could attract, the reverse would have been the fact; seeing that on the average, in these smaller cases as in the greater ones, the routes which most accommodate the public must be the routes most profitable to projectors.
Were the illegitimate competition in extension-making {107} done away, there would remain between companies just that normal competition which is advantageous to all. It is not true, as is alleged, that there cannot exist between railways a competition analogous to that which exists between traders. The evidence of Mr. Saunders, the secretary of the Great Western Company, proves the contrary. He shows that where the Great Western and the North Western railways communicate with the same towns, as at Birmingham and Oxford, each has tacitly adopted the fare which the other was charging; and that while there is thus no competition in fares, there is competition in speed and accommodation. The results are, that each takes that portion of the traffic which, in virtue of its position and local circumstances, naturally falls to its share; that each stimulates the other to give the greatest advantages it can afford; and that each keeps the other in order by threatening to take away its natural share of the traffic if, by ill-behaviour or inefficiency, it counterbalances the special advantages it offers. Now, this is just the form which competition eventually assumes between traders. After it has been ascertained by underselling what is the lowest remunerative price at which any commodity can be sold, the general results are, that that becomes the established price; that each trader is content to supply those only who, from proximity or other causes, naturally come to him; and that only when he treats his customers ill, need he fear that they will inconvenience themselves by going elsewhere for their goods.
Is there not, then, pressing need for an amendment of the laws affecting the proprietary contract—an amendment which shall transform it from an unlimited into a limited contract; or rather—not transform it into such, but recognize it as such? If there be truth in our argument, the absence of any limitation has been the chief cause of the manifold evils of our railway administration. The share-trafficking {108} of directors; the complicated intrigues of lawyers, engineers, contractors, and others; the betrayal of proprietaries—all the complicated corruptions which we have detailed, have primarily arisen from it, have been made possible by it. It has rendered travelling more costly and less safe than it would have been; and while apparently facilitating traffic, has indirectly hindered it. By fostering antagonism, it has led to the ill laying-out of supplementary lines; to the wasting of enormous sums in useless parliamentary contests; to the loss of an almost incredible amount of national capital in the making of railways for which there is no due requirement. Regarded in the mass, the investments of shareholders have been reduced by it to less than half the average productiveness which such investments should possess; and, as all authorities admit, railway property is, even now, kept below its real value, by the fear of future depreciations consequent on future extensions. Considering, then, the vastness of the interests at stake—considering that the total capital of our companies will soon reach £300,000,000—considering, on the one hand, the immense number of persons owning this capital (many of them with no incomes but what are derived from it), and, on the other hand, the great extent to which the community is concerned, both directly as to its commercial facilities, and indirectly as to the economy of its resources—considering all this, it becomes extremely important that railway property should be placed on a secure footing, and railway enterprise confined within normal bounds. The change is demanded alike for the welfare of shareholders and the public. No charge of over-legislation can be brought against it. It is simply an extension to joint-stock contracts, of the principle applied to all other contracts; it is merely a fulfilment of the State’s judicial function in cases hitherto neglected; it is nothing but a better administration of justice.
POSTSCRIPT.—That the proprietary contract should be {109} strictly adhered to, and no undertakings beyond those specified in the deed of incorporation entered upon, is a doctrine unpalatable to those in authority. A friend who, as chairman of one of our great railway-companies, has been familiar with railway-politics and parliamentary usages in connexion with them, contends that such a restrictive interpretation would be unworkable; and, further, that the legislature would never allow itself to be shackled in the implied way.
That he is right in the last of these assertions I think highly probable. In face of the currently accepted dogma that an Act of Parliament can do anything, it is foolish to expect that Parliament would, by ethical considerations, be restrained from breaking contracts and authorizing the breaking of contracts. When we see this dogma habitually acted upon to the extent of trampling under foot State-guarantees (as in the case of those who purchased land under the Irish Encumbered Estates Act, or as in the case of agreements originally entered into with companies to confer on them certain powers under certain conditions) it would be absurd to suppose that any tender regard for the claims of dissentient proprietors would deter the ruling body from cancelling the understanding under which shareholders consented to co-operate. Men must be much more conscientious than they are before any such check is likely to be effective.
To the other objection—that such a restriction would entail an unworkable complication—I entirely demur. That its consequences would be awkward under our present form of railway-administration may be true; but it is also true that had such a restriction been insisted on, another and better form of railway-administration would have arisen. This will probably be thought an unwarranted assertion. Nevertheless I make it with some confidence, since the form of administration to which I refer is one which was, in a different guise, contemplated when railways {110} were originally authorized. To those whose only conception of the mode of carrying on railway-traffic is that derived from their daily observations, this will be an incomprehensible statement; but those who remember how railways were originally intended to be used will know what I mean.
Novel schemes are always more or less shaped by old habits. At the time when the first railways were authorized, the experience men had of coach-travelling on high roads, affected in various ways the structures of the new appliances and the natures of the new arrangements. The railway gauge was determined by the width between the wheels of a stage-coach. Early first-class carriages were made to appear like the central parts of three stage-coaches joined together: preserving their convex panels and curved outlines, and frequently having, on the centre one, the words “Tria juncta in uno.” The inside of the first-class carriage was fitted up to resemble the inside of a stage-coach; and the original second-class carriage, having bare wooden seats over which, on vertical iron rods, was supported a roof allowing the wind and rain to blow through from side to side, was so designed as to be scarcely more comfortable than the outside of a coach. For some years the guard had a seat on the outside, at the end of a carriage, as on a coach; and for many years the luggage, covered with tarpaulin, was placed on the roofs of carriages, as on the outsides of coaches. Once more the booking-offices were at first like the booking-offices for stage-coaches—places where passengers entered their names to secure seats. Little as the fact is now recognized, this kinship of ideas extended to the contemplated arrangements for working. Men thought that traffic on railways might be carried on after the same manner as traffic on high roads. It was assumed that on lines of rails, where the passing of vehicles going in the same direction is impracticable, the system pursued might be like that in use on high roads, {111} where vehicles can pass and re-pass in any direction and join or leave the stream at will. Does the reader ask proof of this? The proof lies in the fact, well-known to those who were adult in the early days of railways, that in the office or waiting-room of every railway-station was fixed up a table of tolls, like that which was fixed up at every toll-gate; but in this case specifying the rate chargeable per mile for all things carried—passengers, horses, cattle, goods, &c. This table of tolls implied that it was within the power of others besides the company to run vehicles on the company’s line, and pay them at such and such rates for the privilege of doing so—a privilege which, so far as I know, was never made use of, for the sufficient reason that it would have been impossible to carry on business amid the confusion which would have resulted.
But while this arrangement, in the form implied, would have been impracticable, it foreshadows an arrangement which would have been practicable; and one which would have grown up had each railway company been limited to the undertaking specified in its deed of incorporation. After experience of inefficient co-operation, when so many independent bodies owning branches and extensions had to adjust their train services, &c., there would, in all probability, have been formed what we may call running-companies or traffic-companies, separate from the original railway-companies. Each one of these would have proposed to the companies owning the various main lines, extensions, and branches, within some large district conveniently delimited, to undertake the working of their various lines: either taking them severally on lease, or agreeing to give a specified share of the net returns annually received, or agreeing to pay certain tolls for passengers and goods. Under such an arrangement the original companies, standing in the position of landlords, would have had for their chief business to keep the embankments, cuttings, bridges, permanent way, stations, &c., in working {112} order; while the running-companies, standing in the position of tenants, but owning the rolling-stock, would have had for their business to conduct the passenger and goods traffic throughout the whole area, with power to arrange the workings of the various subdivisions of the system in a harmonious manner. Clearly, if there is an advantage in division of labour in other cases, there would have been an advantage in this case. The fixed works constituting each of these inter-connected railways would have been kept in more perfect repair, had preservation of them been the exclusive business of the companies owning them; while the running-companies, with nothing to attend to beyond the keeping in order of their rolling-stock and the management of train-services &c. would have done this more satisfactorily.
A further reason for believing that better results would have been achieved than are now achieved, is that under such circumstances there would have been no absorption of directors’ time in carrying on railway-wars and getting new acts of parliament—a business which, under the existing system, has chiefly occupied the attention of boards.
The enforcement of equitable arrangements is often fraught with unanticipated benefits; and there seems reason to think that unanticipated benefits would have resulted in this case also.
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