[First published in the Edinburgh Review for October 1854.]
Believers in the intrinsic virtues of political forms, might draw an instructive lesson from the politics of our railways. If there needs a conclusive proof that the most carefully-framed constitutions are worthless, unless they be embodiments of the popular character—if there needs a conclusive proof, that governmental arrangements in advance of the time will inevitably lapse into congruity with the time; such proof may be found over and over again repeated in the current history of joint-stock enterprises. As devised by Act of Parliament, the administrations of our public companies are almost purely democratic. The representative system is carried out in them with scarcely a check. Shareholders elect their directors, directors their chairman; there is an annual retirement of a certain proportion of members of the board, giving facilities for superseding them; and, by this means, the whole ruling body may be changed in periods varying from three to five years. Yet, not only are the characteristic vices of our political state reproduced in each of these mercantile corporations—some even in an intenser degree—but the very form of government, while remaining nominally democratic, is substantially so remodelled as to become a miniature of our national constitution. The direction, ceasing to fulfil its theory as a council formed of members who possess equal powers, falls under the control of some one member of superior cunning, will, or wealth, to whom the majority become so subordinate, that the decision on every question depends on the course he takes. Proprietors, instead of constantly exercising their franchise, allow it to become on all ordinary occasions a dead letter. Retiring directors are so habitually re-elected without opposition, and have so great a power of insuring their own election when opposed, that the board becomes practically a close body; and it is only when the misgovernment grows extreme enough to produce a revolutionary agitation among the shareholders, that any change can be effected. Thus, a mixture of the monarchic, the aristocratic, and the democratic elements, is repeated with such modifications only as the circumstances involve. The modes of action, too, are substantially the same; save in this, that the copy outruns the original. Threats of resignation, which ministries hold out in extreme cases, are commonly made by railway-boards to stave off disagreeable inquiries. By no means regarding themselves as servants of the shareholders, directors rebel against dictation from them; and construe any amendment to their proposals into a vote of want of confidence. At half-yearly meetings, disagreeable criticisms and objections are met by the chairman with the remark, that if the shareholders cannot trust his colleagues and himself, they had better choose others. With most, this assumption of offended dignity tells; and, under fear that the company’s interests may suffer from any disturbance, measures quite at variance with the wishes of the proprietary are allowed to be carried. The parallel holds yet further. If it be true of national administrations, that those in power have the support of public employés; it is not less true of incorporated companies, that the directors are aided by the officials in their struggles with shareholders. If, in times past, there have been ministries who spent public money to secure party ends; there are, in times present, railway-boards who use the funds of the shareholders to defeat the shareholders. Nay, even in detail, the similarity is maintained. Like their prototype, joint-stock companies have their expensive election contests, managed by election committees, employing election agents; they have their canvassing with its sundry illegitimate accompaniments; they have their occasional manufacture of fraudulent votes. And, as a general result, that class-legislation, which has been habitually charged against statesmen, is now habitually displayed in the proceedings of these trading associations: constituted though they are on purely representative principles.
These last assertions will surprise not a few. The general public who never see a railway-journal, and who skip the reports of half-yearly meetings which appear in the daily papers, are under the impression that dishonesties like those gigantic ones so notorious during the mania, are no longer committed. They do not forget the doings of stags and stock-jobbers and runaway-directors. They remember how men-of-straw held shares amounting to £100,000, and even £200,000; how numerous directorates were filled by the same persons—one having a seat at twenty-three boards; how subscription-contracts were made up with signatures bought at 10s and even 4s each, and porters and errand-boys made themselves liable for £30,000 and £40,000 a-piece. They can narrate how boards kept their books in cipher, made false registries, and refrained from recording their proceedings in minute-books; how in one company, half-a-million of capital was put down to unreal names; how in another, directors bought for account more shares than they issued, and so forced up the price; and how in many others, they repurchased for the company their own shares, paying themselves with the depositors’ money. But, though more or less aware of the iniquities which have been practised, the generality think of them solely as the accompaniments of bubble schemes. More recent enterprises they know to have been bonâ fide ones, mostly carried out by old-established companies; and knowing this, they do not suspect that in the getting-up of branch lines and extensions, there are chicaneries near akin to those of Capel Court; and quite as disastrous in their ultimate results. Associating the ideas of wealth and respectability, and habitually using respectability as synonymous with morality, it seems to them incredible that many of the large capitalists and men of station who administer railway affairs, should be guilty of indirectly enriching themselves at the expense of their constituents. True, they occasionally meet with a law-report disclosing some enormous fraud; or read a Times leader, characterising directorial acts in terms which are held libellous. But they regard the cases thus brought to light as entirely exceptional; and, under that feeling of loyalty which ever idealises men in authority, they constantly tend towards the conviction, if not that directors can do no wrong, yet that they are very unlikely to do wrong.
A history of railway management and railway intrigue, however, would quickly undeceive them. In such a history, the tricks of projectors and the mysteries of the share-market would occupy less space than the analysis of the multiform dishonesties which have been committed since 1845, and the genesis of that elaborate system of tactics by which companies are betrayed into ruinous undertakings which benefit the few at the cost of the many. Such a history would not only have to detail the doings of the personage famed for “making things pleasant;” nor would it have merely to add the misdeeds of his colleagues; but it would have to describe the kindred corruptness of other railway administrations. From the published report of an investigation-committee, it would be shown how, not many years since, the directors of one of our lines allotted among themselves 15,000 new shares then at a premium in the market; how to pay the deposits on these shares they used the company’s funds; and how one of their number thus accommodated himself in meeting both deposits and calls to the extent of more than £80,000. We should read in it of one railway chairman who, with the secretary’s connivance, retained shares exceeding a quarter of a million in amount, intending to claim them as his allotment if they rose to a premium; and who, as they did not do so, left them as unissued shares on the hands of the proprietors, to their vast loss. We should also read in it of directors who made loans to themselves out of the company’s floating balances at a low rate of interest, when the market rate was high; and who paid themselves larger salaries than those assigned: entering the difference in an obscure corner of the ledger under the head of “petty disbursements.” There would be a description of the manœuvres by which a delinquent board, under impending investigation, gets a favourable committee nominated—“a whitewashing committee.” There would be documents showing that the proxies enabling boards to carry contested measures, have in some cases been obtained by garbled statements; and, again, that proxies given for a specified purpose have been used for other purposes. One of our companies would be proved to have projected a line, serving as a feeder, for which it obtained shareholders by offering a guaranteed dividend, which, though understood by the public to be unconditional, was really contingent upon a condition not likely to be fulfilled. The managers of another company would be convicted of having carried party measures by the aid of preference-shares standing in the names of station-masters; and of being aided by the proxies of the secretary’s children too young to write.
That the corruptions here glanced at are not exceptional evils, but result from some deep-seated vice in our system of railway-government, is sufficiently proved by the fact, that notwithstanding the falling of railway-dividends produced by the extension policy, that policy has been year after year continued. Does any tradesman, who, having enlarged his shop, finds a proportionate diminution in his rate of profits, go on, even under the stimulus of competition, making further enlargements at the risk of further diminutions? Does any merchant, however strong his desire to take away an opponent’s markets, make successive mortgages on his capital, and pay for each sum thus raised a higher interest than he gains by trading with it? Yet this course, so absurd that no one would insult a private individual by asking him to follow it, is the course which railway-boards, at meeting after meeting, persuade their clients to pursue. Since 1845, when the dividends of our leading lines ranged from 8 to 10 per cent., they have, notwithstanding an ever-growing traffic, fallen from 10 per cent. to 5, from 8 to 4, from 9 to 3 1⁄4; and yet the system of extensions, leases, and guarantees, notoriously the cause of this, has been year by year persevered in. Is there not something needing explanation here—something more than the world is allowed to see? If there be any one to whom the broad fact of obstinate persistence in unprofitable expenditure does not alone carry the conviction that sinister influences are at work, let him read the seductive statements by which shareholders are led to authorize new projects, and then compare these with the proved results. Let him look at the estimated cost, anticipated traffic, and calculated dividend on some proposed branch line; let him observe how the proprietary before whom the scheme is laid, are induced to approve it as promising a fair return; and then let him contemplate, in the resulting depreciation of stock, the extent of their loss. Is there any avoiding the inference? Railway-shareholders can never have habitually voted for new undertakings which they knew would be injurious to them. Every one knows, however, that these new undertakings have almost uniformly proved injurious to them. Obviously, therefore, railway-shareholders have been continually deluded by false representations. The only possible escape from this conclusion is in the belief that boards and their officers have been themselves deceived; and were the discrepancies between promises and results occasional only, there would be grounds for this lenient interpretation. But to suppose that a railway-government should repeatedly make such mistakes, and yet gain no wisdom from disastrous experiences—should after a dozen disappointments again mislead half-yearly meetings by bright anticipations into dark realities, and all in good faith—taxes credulity somewhat too far. Even, then, were there no demonstrated iniquities to rouse suspicion, we think that the continuous depreciation in the value of railway-stock, the determined perseverance of boards in the policy which has produced this depreciation, and the proved untruth of the statements by which they have induced shareholders to sanction this policy, would of themselves suffice to show the viciousness of railway-administration.
That the existing evils, and the causes conspiring to produce them, may be better understood, it will be needful to glance at the mode in which the system of extensions grew up. Earliest among the incentives to it was a feeling of rivalry. Even while yet their main lines were unfinished, a contest for supremacy arose between our two greatest companies. This presently generated a confirmed antagonism; and the same impulse which in election contests has sometimes entailed the squandering of a fortune to gain a victory, has largely aided to make each of these great rivals submit to repeated sacrifices rather than be beaten. Feuds of like nature are in other cases perpetually prompting boards to make aggressions on each other’s territories—every attack on the one side leading to a reprisal on the other; and so violent is the hostility occasionally produced, that directors might be pointed out whose votes are wholly determined by the desire to be revenged on their opponents. Among the first methods used by leading companies to strengthen themselves and weaken their competitors, was the leasing or purchase of subordinate neighbouring lines. Of course those to whom overtures were made, obtained bids from both sides; and it naturally resulted that the first sales thus effected, being at prices far above the real values, brought great profits to the sellers. What resulted? A few recurrences of this proceeding, made it clear to quick-witted speculators, that constructing lines so circumstanced as to be bid for by competing companies, would be a lucrative policy. Shareholders who had once pocketed these large and easily-made gains, were eager to repeat the process; and cast about for districts in which it might be done. Even the directors of the companies by whom these high prices were given, were under the temptation to aid in this; for it was manifest to them that by obtaining a larger interest in any such new undertaking than they possessed in the purchasing company, and by using their influence in the purchasing company to obtain a good price or guarantee for the new undertaking, a great advantage would be gained. That this motive has been largely operative, railway history abundantly proves. Once commenced, sundry other influences conspired to stimulate this making of feeders and extensions. The non-closure of capital-accounts rendered possible the “cooking” of dividends, which was at one period carried to a great extent. Expenditure that should have been charged against revenue was charged against capital; works and rolling stock were allowed to go unrepaired, or insufficient additions made to them, by which means the current expenses were rendered delusively small; long-credit agreements with contractors permitted sundry disbursements that had virtually been made, to be kept out of the accounts; and thus the net returns were made to appear greater than they really were. Naturally new undertakings put before the moneyed world by companies whose stock and dividends had been thus artificially raised, were received with proportionate favour. Under the prestige of their parentage their shares came out at high premiums, bringing large profits to the projectors. The hint was soon taken; and it presently became an established policy, under the auspices of a prosperity either real or mock, to get up these subsidiary lines—“calves,” as they were called in the slang of the initiated—and to traffic in the premiums their shares commanded. Meanwhile had been developing, a secondary set of influences which also contributed to foster unwise enterprises; namely, the business interests of the lawyers, engineers, contractors, and others directly or indirectly employed in railway construction. The ways of getting up and carrying new schemes, could not fail, in the course of years, to become familiar to all concerned; and there could not fail to grow up among them a system of concerted tactics for achieving their common end. Thus, partly from the jealousy of rival boards, partly from the greediness of shareholders in purchased lines, partly from the dishonest schemings of directors, partly from the manœuvres of those whose occupation it is to carry out the projects legally authorized, partly, and perhaps mainly, from the delusive appearance of prosperity maintained by many established companies, there came the wild speculations of 1844 and 1845. The consequent disasters, while they pretty well destroyed the last of these incentives, left the rest much as they were. Though the painfully-undeceived public have ceased to aid as they once did, the various private interests that had grown up have since been working together as before—have developed their methods of co-operation into still more complex and subtle forms; and are even now daily thrusting unfortunate shareholders into losing undertakings.
Before proceeding to analyze the existing state of things, however, we would have it clearly understood that we do not suppose those implicated to be on the average morally lower than the community at large. Men taken at random from any class, would, in all probability, behave much in the same way when placed in like positions. There are unquestionably directors grossly dishonest. Unquestionably also there are others whose standard of honour is far higher than that of most persons. And for the remainder, they are, doubtless, as good as the mass. Of the engineers, parliamentary agents, lawyers, contractors, and others concerned, it may be admitted that though custom has induced laxity of principle, yet they would be harshly judged were the transactions which may be recorded against them, used as tests. Those who do not see how in these involved affairs, bad deeds may be wrought out by men not correspondingly bad, will readily do so on considering all the conditions. In the first place, there is the familiar fact that the corporate conscience is inferior to the individual conscience—that a body of men will commit as a joint act, that which each one of them would shrink from, did he feel personally responsible. And it may be remarked that not only is the conduct of a corporate body thus comparatively lax, but also the conduct towards one. There is ever a more or less distinct perception, that a broad-backed company scarcely feels what would be ruinous to a private person; and this perception is in constant operation on all railway-boards and their employés, as well as on all contractors, landowners, and others concerned: leading them to show a want of principle foreign to their general behaviour. Again, the indirectness and remoteness of the evils produced, greatly weaken the restraints on wrongdoing. Men’s actions are proximately caused by mental representations of the results to be anticipated; and the decisions come to, largely depend on the vividness with which these results can be imagined. A consequence, good or bad, that is immediate and clearly apprehended, influences conduct far more potently than a consequence that has to be traced through a long chain of actions or influences, and, as eventually reached, is not a particular and readily conceivable one, but a general and vaguely conceivable one. Hence, in railway affairs, a questionable share-transaction, an exorbitant charge, a proceeding which brings great individual advantage without apparently injuring any one, and which, even if traced to its ultimate results, can but very circuitously affect unknown persons living no one knows where, may be brought home to men who, could the results be embodied before them, would be shocked at the cruel injustices they had committed—men who in their private business, where the results can be thus embodied, are sufficiently equitable. Further, it requires to be noted that most of these great delinquencies are ascribable not to the extreme dishonesty of any one man or group of men, but to the combined self-interest of many men and groups of men, whose minor delinquencies are cumulative. Much as a story which, passing from mouth to mouth, and receiving a slight exaggeration at each repetition, comes round to the original narrator in a form scarcely to be recognised; so, by a little improper influence on the part of landowners, a little favouritism on the part of members of Parliament, a little intriguing of lawyers, a little manœuvring by contractors and engineers, a little self-seeking on the part of directors, a little under-statement of estimates and over-statement of traffic, a little magnifying of the evils to be avoided and the benefits to be gained—it happens that shareholders are betrayed into ruinous undertakings by grossly untrue representations, without any one being guilty of more than a small portion of the fraud. Bearing in mind then, the comparative laxity of the corporate conscience; the diffusion and remoteness of the evils which malpractices produce; and the composite origin of these malpractices; it becomes possible to understand how, in railway affairs, gigantic dishonesties can be perpetrated by men who, on the average, are little if at all below the generality in moral character.
With this preliminary mitigation we proceed to detail the various illegitimate influences by which these seemingly insane extensions and this continual squandering of shareholders’ property are brought about.
Conspicuous among these is the self-interest of landowners. Once the greatest obstacles to railway enterprise, owners of estates have of late years been among its chief promoters. Since the Liverpool and Manchester line was first defeated by landed opposition, and succeeded with its second bill only by keeping out of sight of all mansions, and avoiding game preserves—since the time when the London and Birmingham Company, after seeing their project thrown out by a committee of peers who ignored the evidence, had to “conciliate” opponents by raising the estimate for land from £250,000 to £750,000—since the time when Parliamentary counsel justified resistance by the flimsiest excuses, even to reproaching engineers with having “trodden down the corn of widows” and “destroyed the strawberry-beds of gardeners”—since then, a marked change of policy has taken place. Nor was it in human nature that it should be otherwise. When it became known that railway-companies commonly paid for “land and compensation,” sums varying from £4000 to £8000 per mile; that men were indemnified for supposed injury to their property, by sums so inordinate that the greater part has been known to be returned by the heir as conscience-money; that in one case £120,000 was given for land said to be worth but £5000—when it was noised abroad that large bonuses in the shape of preference shares and the like, were granted to buy off opposition—when it came to be an established fact that estates are greatly enhanced in value by the proximity of railways; it is not surprising that country gentlemen should have become active friends of schemes to which they were once the bitterest enemies. On considering the many temptations, we shall see nothing wonderful in the fact that in 1845 they were zealous provisional committee-men; nor in the fact that their influence as promoters enabled them to get large sums for their own acres. If we are told of squires soliciting interviews with the engineer of a projected railway; prompting him to take their side of the country; promising support if he did, and threatening opposition if he did not; dictating the course to be followed through their domains; and hinting that a good price would be expected; we are simply told of the special modes in which certain private interests show themselves. If we hear of an extensive landowner using his influence as chairman of a board of directors, to project a branch running for many miles through his own estate, and putting his company to the cost of a parliamentary contest to carry this line; we hear only of that which was likely to occur under such circumstances. If we find now before the public, a line proposed by a large capitalist, serving among other ends to effect desirable communications with his property, and the estimates for which line, though considered by the engineering world insufficient, are alleged by him to be ample; we have but a marked case of the distorted representations which under such conditions self-interest is sure to engender. If we discover of this or that scheme, that it was got up by the local nobility and gentry—that they employed to make the survey a third-rate engineer, who was ready in anticipation of future benefit to do this for his bare expenses—that principals and agent wearied the directors of an adjacent trunk-line to take up their project; threatened that if they did not their great rival would; alarmed them into concession; asked for a contribution to their expenses; and would have gained all these points but for shareholders’ resistance—we do but discover the organized tactics which, in course of time, naturally grow up under such stimuli. It is not that these facts are particularly remarkable. From the gross instance of the landowner who asked £8000 for that which he eventually accepted £80 for, down to the every-day instances of influence used to get railway accommodation for the neighbourhood, the acts of the landed class are simply manifestations of the average character acting under special conditions. All that it now behoves us to notice, is, that we have here a large and powerful body whose interests are ever pressing on railway extension, irrespective of its intrinsic propriety.
The great change in the attitude of the Legislature towards railways, from “the extreme of determined rejection or dilatory acquiescence, to the opposite extreme of unlimited concession,” was simultaneous with the change above described. It could not well fail to be so. Supplying, as the landowning community does, so large a portion of both Houses of Parliament, it necessarily follows that the play of private interests seen in the first, repeats itself in the last under modified forms, and complicated by other influences. Remembering the extent to which legislators were themselves implicated in the speculations of the mania, it is unlikely that they should since have been free from personal bias. A return proved, that in 1845 there were 157 members of Parliament whose names were on the registers of new companies for sums varying from £291,000 downwards. The supporters of new projects boasted of the numbers of votes they could command in the House. Members were personally canvassed, and peers were solicited. It was publicly complained in the upper chamber, that “it was nearly impossible to bring together a jury, some members of which were not interested in the railway they were about to assess.” Doubtless this state of things was in a great degree exceptional; and there has since been not only a diminution of the temptations, but a marked increase of equitable feeling. Still, it is not to be expected that private interests should cease to act. It is not to be expected that a landowner who, out of Parliament, exerts himself to get a railway for his district, should, when in Parliament, not employ the power his new position gives him to the same end. It is not to be expected that the accumulation of such individual actions should leave the legislative policy unchanged. Hence the fact, that the influence once used to throw out railway bills is now used to carry them. Hence the fact, that railway committees no longer require a good traffic case to be made out in justification for the powers asked. Hence the fact, that railway directors having seats in the House of Commons, are induced to pledge their companies to carry out extensions. We could name a member of Parliament who, having bought an estate fitly situated, offered to an engineer, also in Parliament, the making of a railway running through it; and having obtained the Act (in doing which the influence of himself and his friend was of course useful), pitted three railway companies against each other for the purchase of it. We could name another member of Parliament who, having projected and obtained powers for an extension through his property, induced the directors of the main line, with whom he had great influence, to subscribe half the capital for his extension, to work it for fifty per cent. of the gross receipts, and to give up all traffic brought by it on to the main line until he received four per cent. on his capital; which was tantamount to a four per cent. guarantee. But it is not only, nor indeed mainly, from directly personal motives that legislators have of late years unduly fostered railway enterprises. Indirectly personal motives of various kinds have been largely operative. The wish to satisfy constituents has been one. Inhabitants of an unaccommodated district, are naturally urgent with their representatives to help them to a line. Not unfrequently such representatives are conscious that their next elections may perhaps turn upon their successful response to this appeal. Even when there is no popular pressure there is the pressure of their leading political supporters—of large landholders whom it will not do to neglect; of local lawyers, important as electioneering friends, to whom a railway always brings business. Thus, without having immediately private ends, members of Parliament are often almost coerced into urging forward schemes which, from a national point of view, or from a shareholder’s point of view, are very unwise ones. Then there come the still less direct stimuli. Where neither personal nor political ends are to be gained, there are still the interests of a relative to be subserved; or, if not those of a relative, still those of a friend. And where there is no decided impulse to the contrary, these motives, of course, have their weight. Moreover, it requires in fairness to be said, that possessed as most members of Parliament are, with the belief that all railway-making is nationally beneficial, there exist in their minds few or no reasons for resisting the influences brought to bear on them. True, shareholders may be injured; but that is their own affair. The public will be better served; constituents will be satisfied; friends will be pleased; perhaps private ends gained: and under some or all of these incentives, affirmative votes are readily given. Thus, from the Legislature also, there has of late years proceeded a factitious stimulus to railway extensions.
From Parliament to Parliamentary agents, and the general body of lawyers concerned in railway enterprise, is a ready transition. With these, the getting up and carrying of new lines and branches is a matter of business. Whoever traces the process of obtaining a railway Act, or considers the number of legal transactions involved in the execution of railway works, or notes the large sums that figure in half-yearly reports under the head of “law charges;” will at once see how strong are the temptations which a new project holds out to solicitors, conveyancers, and counsel. It has been shown that in past years, parliamentary expenses have varied from £650 to £3000 per mile; of which a large proportion has gone into the pockets of the profession. In one contest, £57,000 was spent among six counsel and twenty solicitors. At a late meeting of one of our companies it was pointed out, that the sum expended in legal and parliamentary expenses during nine years, had reached £480,000; or had averaged £53,500 a-year. With these and scores of like facts before them, it would be strange did not so acute a body of men as lawyers use vigorous efforts and sagacious devices to promote fresh enterprises. Indeed, if we look back at the proceedings of 1845, we shall suspect, not only that lawyers are still the active promoters of fresh enterprises, but often the originators of them. Many have heard how in those excited times the projects daily announced were not uncommonly set afloat by local solicitors—how these looked over maps to see where plausible lines could be sketched out—how they canvassed the local gentry to obtain provisional committeemen—how they agreed with engineers to make trial surveys—how, under the wild hopes of the day, they found little difficulty in forming companies—and how most of them managed to get as far as the Committee on Standing Orders, if no farther. Remembering all this, and remembering that those who were successful are not likely to have forgotten their cunning, but rather to have yearly exercised and increased it, we may expect to find railway lawyers among the most influential of the many parties conspiring to urge railway proprietaries into disastrous undertakings; and we shall not be deceived. To a great extent they are in league with engineers. From the proposal to the completion of a new line, the lawyer and the engineer work together; and their interests are throughout identical. While the one makes the survey, the other prepares the book of reference. The parish plans which the one gets ready, the other deposits. The notices to owners and occupiers which the one fills in, the other serves upon those concerned. And there are frequent consultations between them as to the dealing with local opposition and the obtainment of local support. In the getting up of their case for Parliament, they necessarily act in concert. While, before committee, the one gets his ten guineas per day for attending to give evidence, the other makes profits on all the complicated transactions which carrying a bill involves. During the execution of the works they are in constant correspondence; and alike profit by any expansion of the undertaking. Thus there naturally arises in each, the perception that in aiding the other he is aiding himself; and gradually as, in course of years, the proceedings come to be often repeated, and a perfect familiarity with railway politics gained, there grows up a well-organized system of co-operation between them—a system rendered the more efficient by the wealth and influence which each has year by year accumulated.
Among the manœuvres employed by railway solicitors thus established and thus helped, not the least remarkable is that of getting their own nominees elected as directors. It is a fact, which we state on good authority, that there are puppet-directors who vote for this or that at the instigation of the company’s lawyer. The obtainment of such tools is not difficult. Vacancies are about to occur in the directorate. Almost always there are men over whom a solicitor, conducting the extensive law-business of a railway, has considerable power: not only connexions and friends, but persons to whom in his legal capacity he can do great benefit or great injury. He selects the most suitable of these; giving the preference, if other things are equal, to one living in the country near the line. On opening the matter to him, he points out the sundry advantages attendant on a director’s position—the free pass and the many facilities it gives; the annual £100 or so which the office brings; the honour and influence accruing; the opportunities for profitable investment that are likely to occur; and so forth. Should ignorance of railway affairs be raised as an objection, the tempter, in whose eyes this ignorance is a chief recommendation, replies that he shall always be at hand to guide his votes. Should non-possession of a due amount of the company’s stock be pleaded, the tempter meets the difficulty by offering himself to furnish the needful qualification. Thus incited and flattered, and perhaps conscious that it would be dangerous to refuse, the intended puppet allows himself to be put in nomination; and as it is the habit of half-yearly meetings, unless under great indignation, to elect any one proposed to them by those in authority, the nomination is successful. On subsequent occasions this proceeding can, of course, be repeated; and thus the company’s legal agent and those leagued with him, may command sufficient votes to turn the scale in their own favour.
Then, to the personal interest and power of the head solicitor, have to be added those of the local solicitors, with whom he is in daily intercourse. They, too, profit by new undertakings; they, therefore, are urgent in pressing them forwards. Acting in co-operation with their chief, they form a dispersed staff of great influence. They are active canvassers; they stimulate and concentrate the feeling of their districts; they encourage rivalry with other lines; they alarm local shareholders with rumours of threatened competition. When the question of extension or non-extension comes to a division, they collect proxies for the extension party. They bring pressure to bear on their shareholding clients and relatives. Nay, so deep an interest do they feel in the decision, as sometimes to create votes with the view of influencing it. We have before us the case of a local solicitor, who, before the special meeting called to adopt or reject a contemplated branch, transferred portions of his own shares into the names of sundry members of his family, and so multiplied his seventeen votes into forty-one; all of which he recorded in favour of the new scheme.
The morality of railway engineers is not much above that of railway lawyers. The gossip of Great George Street is fertile in discreditable revelations. It tells how So-and-so, like others before him, testified to estimates which he well knew were insufficient. It makes jocose allusion to this man as being employed to do his senior’s “dirty work”—his hard-swearing; and narrates of the other that, when giving evidence before committee, he was told by counsel that he was not to be believed even on his knees. It explains how cheaply the projector of a certain line executed the parliamentary survey, by employing on it part of the staff in the pay of another company to which he was engineer. Now it alludes to the suspicion attaching to a certain member of the fraternity from his having let a permanent-way contract, for a term of years, at an extravagant sum per mile. Again it rumours the great profits which some of the leaders of the profession made in 1845, by charging for the use of their names at so much the prospectus: even up to a thousand guineas. And then, it enlarges on the important advantages possessed by engineers who have seats in the House of Commons.
Thus lax as is the ethical code of engineers, and greatly as they are interested in railway enterprise, it is to be expected that they should be active and not very scrupulous promoters of it. To illustrate the vigour and skill with which they further new undertakings, a few facts may be cited. Not far from London, and lying between two lines of railway, is an estate lately purchased by one of our engineers. He has since obtained Acts for branches to both of the adjacent lines. One of these branches he has leased to the company whose line it joins; and he has tried to do the like with the other, but as yet without success. Even as it is, however, he is considered to have doubled the value of his property. Again, an engineer of celebrity once nearly succeeded in smuggling through Parliament, in the bill for a proposed railway, a clause extending the limits of deviation, to several miles on each side of the line, throughout a certain district—the usual limits being but five chains on each side; and the attempt is accounted for by the fact, that this engineer possessed mines in this district. To press forward extensions by the companies with which they are connected, they occasionally go to great lengths. Not long since, at a half-yearly meeting, certain projects which the proprietary had already once rejected, were again brought forward by two engineers who attended in their capacity of shareholders. Though known to be personally interested, one of them moved and the other seconded, that some new proposals from the promoters of these schemes be considered without delay by the directors. The motion was carried; the directors approved the proposals; and again, the proprietors negatived them. A third time a like effort was made; a third time a conflict arose; and within a few days of the special meeting at which the division was to take place, one of these engineers circulated among the shareholders a pamphlet denying the allegations of the dissentient party and making counter-statements which it was then too late to meet. Nay, he did more: he employed agents to canvass the shareholders for proxies in support of the new undertaking; and was obliged to confess as much when charged with it at the meeting.
Turn we now to contractors. Railway-enterprise has given to this class of men a gigantic development; not only in respect of numbers, but in respect of the vast wealth to which some of them have acquired. Originally, half a dozen miles of earthwork, fencing, and bridges, was as much as any single contractor undertook. Of late years, however it has become common for one man to engage to construct an entire railway; and deliver it to the company in a fit condition for opening. Great capital is required for this. Great profits are made by it. And the fortunes accumulated in course of time have been such, that sundry contractors are named as being each able to make a railway at his own cost. But they are as insatiable as millionaires in general; and so long as they continue in business at all, are, in some sort, forced to provide new undertakings to keep their plant employed. As may be imagined, enormous stocks of working appliances are needed: many hundreds of earth-waggons and of horses; many miles of temporary rails and sleepers; some dozen locomotive engines, and several fixed ones; innumerable tools; besides vast stores of timber, bricks, stone, rails, and other constituents of permanent works, that have been bought on speculation. To keep the capital thus invested, and also a large staff of employés, standing idle, entails loss, partly negative, partly positive. The great contractor, therefore, is both under a strong stimulus to get fresh work, and enabled by his wealth to do this. Hence the not unfrequent inversion of the old arrangement under which companies and engineers employed contractors, into an arrangement under which contractors employ engineers and form companies. Many recent undertakings have been thus set on foot. The most gigantic project which private enterprise has yet dared, originated with a distinguished contracting firm. In some cases this mode of procedure may, perhaps, be advantageous; but in far more numerous cases its results are disastrous. Interested in promoting railway extensions, even in a greater degree than engineers and lawyers, contractors habitually co-operate with these, either as agents or as coadjutors. Lines are fostered into being, which it is known from the beginning, will not pay. Of late, it has become common for landowners, merchants, and others personally interested, who, under the belief that their indirect gains will compensate for their meagre dividends, have themselves raised part of the capital for a local railway, but cannot raise the rest—it has become common for such to make an agreement with a wealthy contractor to construct the line, taking in part payment a portion of the shares, amounting to perhaps a third of the whole, and to charge for his work according to a schedule of prices to be thereafter settled between himself and the engineer. By this last clause the contractor renders himself secure. It would never answer his purpose to take part payment in shares likely to return some £2 per cent., unless he compensated himself by unusually high profits; and this subsequent settlement of prices with one whose interests, like his own, are wrapped up in the prosecution of the undertaking, ensures him high profits. Meanwhile, it is noised abroad that all the capital has been subscribed and the line contracted for; these facts unduly raise the public estimate of the scheme; the shares are quoted at much above their true worth; unwary persons buy; the contractor from time to time parts with his moiety at fair prices; and the new shareholders ultimately find themselves part owners of a railway which, unprofitable as it originally promised to be, had been made yet more unprofitable by expensiveness of construction. Nor are these the only cases in which contractors gain after this fashion. They do the like with lines of their own projecting. To obtain Acts for these, they sign the subscription-contracts for large amounts; knowing that in the way above described, they can always make it answer to do this. So general had the practice latterly become, as to attract the attention of committees. As was remarked by a personage noted for his complicity in these transactions—“Committees are getting too knowing; they won’t stand that dodge now.” Nevertheless, the thing is still done under a disguised form. Though contractors no longer enter their own names on subscription lists for thousands of shares; yet they effect the same end by making nominal holders of their foremen and others: themselves being the real ones.
Of directorial misdoings some samples have already been given; and more might be added. Besides those arising from directly personal aims, there are sundry others. One of these is the increasing community between railway boards and the House of Commons. There are eighty-one directors sitting in Parliament; and though some of these take little part in the affairs of their respective railways, many of them are the most active members of the boards to which they belong. We have but to look back a few years, and mark the unanimity with which companies adopted the policy of getting themselves represented in the Legislature, to see that the furtherance of their respective interests—especially in cases of competition—was the incentive. How well this policy is understood by the initiated, may be judged from the fact, that gentlemen are now in some cases elected on boards, simply because they are members of Parliament. Of course this implies that railway legislation is affected by a complicated play of private influences; and that these influences generally work towards the facilitation of new enterprises, is obvious. It naturally happens that directors having seats in the House of Commons can more or less smooth the way of their annual batch of new bills through committees. It naturally happens that those whose companies are not opposed, exchange good offices. Not only do they aid the passing of schemes in which they are interested, but they are solicited to undertake further schemes by those around them. It is a common-sense conclusion that representatives of small towns and country districts needing railway accommodation, who are daily thrown in contact with the chairman of a company capable of giving this accommodation, do not neglect the opportunity of furthering their ends. It is a common-sense conclusion that by hospitalities, by favours, by flattery, by the many means used to bias men, they seek to obtain his assistance. And it is an equally common-sense conclusion that in many cases they succeed—that by some complication of persuasions and temptations they swerve him from his calmer judgment; and so introduce into the company he represents, influences at variance with its welfare.
Under some motives however—whether those of directself-interest, of private favour, or of antagonistic feeling, matters not here—it is certain that directors are constantly committing their constituents to unwise enterprises; and that they frequently employ unjustifiable means for either eluding or overcoming their opposition. Shareholders occasionally find that their directors have given to Parliament, pledges of extension much exceeding any they were authorised to give; and they are then persuaded that they are bound to endorse the promises made for them by their agents. In some cases, among the misleading statements laid before shareholders to obtain their consent to a new project, will be found an abstract of the earnings of a previously-executed branch to which the proposed one bears some analogy. These earnings are shown (not always without “cooking”) to be tolerably good and improving; and it is argued that the new project, having like prospects, offers a fair investment. Meanwhile, it is not stated that the capital for this previously-executed branch was raised on debentures or by guaranteed shares at a higher rate of interest than the dividend pays; it is not stated that as the capital for this further undertaking will be raised on like terms, the annual interest on debt will swallow up more than the annual revenue; and thus unsuspecting shareholders—some unacquainted with the company’s antecedents, some unable to understand its complicated accounts—give their proxies, or raise their hands, for new works which will tell with disastrous effect on their future dividends. In pursuit of their ends, directors will from time to time go directly in the teeth of established regulations. Where it has been made a rule that proxies shall be issued only by order of a meeting of the proprietors, they will yet issue them without any such order, when by so doing they can steal a march on dissentients. If it suits their purpose, they will occasionally bring forward most important measures without due notice. In stating the amount of the company’s stock which has voted with them on a division, they have been known to include thousands of shares on which a small sum only was paid up, counting them as though fully paid up.
To complete the sketch, something must be said on the management of board meetings and meetings of shareholders. For the first—their decisions are affected by various manœuvres. Of course, on fit occasions, there is a whipping-up of those favourable to any project which it is desired to carry. Were this all, there would be little to complain of; but something more than this is done. There are boards in which it is the practice to defeat opposition by stratagem. The extension party having summoned their forces for the occasion, and having entered on the minutes of business a notice worded with the requisite vagueness, shape their proceedings according to the character of the meeting. Should their antagonists muster more strongly than was expected, this vaguely-worded notice serves simply to introduce some general statement or further information concerning the project named in it; and the matter is passed over as though nothing more had been meant. On the contrary, should the proportion of the two sides be more favourable, the notice becomes the basis of a definite motion committing the board to some important act. If due precautions have been taken, the motion is passed; and once passed, those who, if present, would have resisted it, have no remedy; for in railway government there is no “second reading,” much less a third. So determined and so unscrupulous are the efforts sometimes made by the stronger party to overcome and silence their antagonists, that when a contested measure, carried by them at the board, has to go before a general meeting for confirmation, they have been known to pass a resolution that their dissentient colleagues shall not address the proprietary!
That, at half-yearly and special meetings, shareholders should be so readily misled by boards, even after repeated experience of their untrustworthiness, seems at first sight difficult to understand. The mystery disappears, however, on inquiry. Very frequently, contested measures are carried against the sense of the meetings before which they are laid, by means of the proxies previously collected by the directors. These proxies are obtained from proprietors scattered everywhere throughout the kingdom, who are mostly weak enough to sign the first document sent to them. Then, of those present when the question is brought to an issue, not many dare attempt a speech. Of those who dare, but few are clear-headed enough to see the full bearings of the measure they are about to vote upon; and such as can see them are often prevented by nervousness from doing justice to the views they hold. Moreover, it must be borne in mind that proprietors displaying antagonism to the board are usually regarded by their brother proprietors with more or less reprobation. Unless the misconduct of the governing body has been very glaring and very recent, there ever arises in the mass a prejudice against all playing the part of an opposition. They are condemned as noisy, and factious, and obstructive; and often only by determined courage avoid being put down. Besides these negative reasons for the general inefficiency of shareholders’ resistance, there are sundry positive ones. As writes to us a Member of Parliament who has been an extensive holder of stock in many companies from the first days of railway enterprise:—“My large and long acquaintance with Railway Companies’ affairs, enables me to say, that a large majority of shareholders trust wholly to their directors, having little or no information, nor caring to have any opinion of their own. . . . . Some others, better informed but timid, are afraid, by opposing the directors, of causing a depreciation of the value of their stock in the market, and are more alarmed at the prospect of this temporary depreciation than at the permanent loss entailed on the company by the useless, and therefore unprofitable, outlay of additional capital. . . . . Others again, believing that the impending permanent evil is inevitable, resolve on the spot to sell out immediately, and to keep up the prices of their shares, also give their support to the directors.” Thus, from lack of organization and efficiency among those who express their opposition, and from the timidity and double-facedness of those who do not, it happens that extremely unwise projects are carried by large majorities. Nor is this all. The tactics of the aggressive party are commonly as skilful as those of their antagonists are bungling. The chairman, who is generally the chief promoter of the contested scheme, has it in his power to favour those who take his own side, and to throw difficulties in the way of opponents; and this he not unfrequently does to a great extent—refusing to hear, putting down on some plea of breach of order, browbeating, even using threats. 5 It generally turns out too, that, whether intentionally or not, some of the most important motions are postponed until nearly the close of the meeting, when the greater part of the shareholders are gone. Large money-votes, extensive powers, unlimited permits to directors to take, in certain matters, “such steps as in their judgment they may deem most expedient,”—these, and the like, are hurried over during the last half-hour, when the tired and impatient remnant will no longer listen to objectors; and when those who have personal ends to serve by outstaying the rest, carry everything their own way. Indeed, in some cases, the arrangements are such as almost ensure the meeting becoming a pro-extension one towards the end. This result is brought about thus:—A certain portion of the general body of proprietors are also proprietors of some subordinate work—some branch line, or canal, or steamboats, which the Company has purchased or leased; and as holders of guaranteed stock, ready to take up further such stock if they can get it, these lean towards projects that are to be executed on the preference-share system. They hold their meeting for the declaration of dividend, &c., as soon as the meeting of the Company at large has been dissolved; and in the same room. Hence it happens that being kept together by the prospect of subsequent business, they gradually, towards the close of the general meeting, come to form the majority of those present; and the few ordinary shareholders who have been patient enough to stay, are outvoted by those having interests distinct from their own and quite at variance with the welfare of the Company.
5 We may remark in passing, that the practice of making the chairman of the board also chairman of the half-yearly meetings, is a very injudicious one. The directors are the servants of the proprietary; and meet them from time to time to render an account of their stewardship. That the chief of these servants, whose proceedings are about to be examined, should himself act as chief of the jury is absurd. Obviously, the business of each meeting should be conducted by some one independently chosen for the purpose; as the Speaker is chosen by the House of Commons.
And here this allusion to the preference-share system, introduces us to a fact which may fitly close this detail of private interests and questionable practices—a fact serving at once to illustrate the subtlety and concert of railway officialism, and the power it can exert. That this fact may be fully appreciated, it must be premised, that though preference-shares do not usually carry votes, they are sometimes specially endowed with them; and further, that they occasionally remain unpaid up until the expiration of a time after which no further calls can be legally made. In the case in question, a large number of £50 preference-shares had thus long stood with but £5 paid. Promoters of extensions, &c., had here a fine opportunity of getting great power in the Company at small cost; and, as we shall see, they duly availed themselves of it. Already had their party twice tried to thrust the proprietors into a new undertaking of great magnitude. Twice had they entailed on them an expensive and harassing contest. A third time, notwithstanding a professed relinquishment of it, they brought forward substantially the same scheme, and were defeated only by a small majority. The following extracts from the division lists we take from the statement of one of the scrutineers.
|50l. Preference Shares with 5l. paid up.||Additional Stock or Shares||Recorded Stock at the Poll as held.||Total actual Capital paid up.||Number of Votes scored for the Extension.|
|The Company’s solicitor||500||7,500l. stock, and 100 50l. shares, with 42l. 10s. paid up.||75,650||18,140||188|
|Ditto in joint account with another||778||None.|
|The solicitor’s partner||60||None.||3,000||300||20|
|The Company’s engineer||150||None.||7,500||750||33|
|The engineer’s partner||1,354||4,266l. stock.||71,966||11,036||161|
|One of the Company’s parliamentary counsel||200||1,000l. stock.||11,000||2,000||40|
|Another ditto, ditto||125||200l. stock.||6,450||825||30|
|Local solicitor for the proposed extension||7||None.||350||35||7|
|The Company’s contractor for permanent-way||347||52,833l.||70,183||54,568||158|
|The Company’s conveyancer||1,003||333l. stock.||50,483||5,348||118|
|The Company’s furniture printer||35||10,000l. stock.||11,750||10,175||41|
|The Company’s surveyor||360||1,250l. stock.||19,250||3,050||56|
|The Company’s architect||217||14,916l. stock; 119 50l. shares, with 42l. 10s. paid up; and 13 40l. shares, with 34l. paid up.||32,230||20,416||82|
|One of the Company’s carriers.||17||833l. stock.||1,683||918||14|
|The Company’s bankers:—|
|One Partner||.. ..||.. ..||33,666||32,366||90|
|Another partner||.. ..||.. ..||2,500||2,500||18|
|Ditto in joint account with another||.. ..||.. ..||1,000||850||12|
To this list, some seven or eight of the Company’s tradesmen, similarly armed, might be added; raising the number of the almost factitious shares held by functionaries to about 5200, and increasing the votes commanded by them, from its present total of 1068 to upwards of 1100. If now we separate the £380,000, which these gentlemen bring to bear against their brother shareholders, into real and nominal; we find that while not quite £120,000 of it is bonâ fide property invested, the remaining £260,000 is nine parts shadow and one part substance. And thus it results, that by virtue of certain stock actually representing but £26,000, these lawyers, engineers, counsel, conveyancers, contractors, bankers, and others interested in the promotion of new schemes, outweigh more than a quarter of a million of the real capital held by shareholders whom these schemes will injure!
Need we any longer wonder, then, at the persistence of Railway Companies in seemingly reckless competition and ruinous extensions? Is not this obstinate continuance of a policy that has year after year proved disastrous, sufficiently explicable on contemplating the many illegitimate influences at work? Is it not manifest that the small organized party always out-manœuvres the large unorganized one? Consider their respective characters and circumstances. Here are the shareholders diffused throughout the kingdom, in towns and country houses; knowing nothing of each other, and too remote to co-operate were they acquainted. Very few of them see a railway journal; and scarcely any know much of railway politics. Necessarily a fluctuating body, only a small number are familiar with the Company’s history—its acts, engagements, policy, management. A great proportion are incompetent to judge of the matters that come before them, and lack decision to act out such judgments as they may form—executors who do not like to take steps involving much responsibility; trustees fearful of interfering with the property under their care, lest possible loss should entail a lawsuit; widows who have never in their lives acted for themselves in any affair of moment; maiden ladies, alike nervous and innocent of all business knowledge; clergymen whose daily discipline has been little calculated to make them acute men of the world; retired tradesmen whose retail transactions have given them small ability for grasping large considerations; servants possessed of accumulated savings and cramped notions; with sundry others of like helpless characters—all of them rendered more or less conservative by ignorance or timidity, and proportionately inclined to support those in authority. To these should be added the temporary shareholders, who, having bought stock on speculation, and knowing that a revolution in the Company is likely to depress prices for a time, have an interest in supporting the board irrespective of the goodness of its policy. Turn now to those whose efforts are directed to railway expansion. Consider the constant pressure of local populations—of small towns, of rural districts, of landowners: all of them eager for branch accommodation; all of them with great and definite advantages in view; few of them conscious of the loss those advantages may entail on others. Remember the influence of legislators, prompted, some by their constituents, some by personal aims, and encouraged by the belief that additional railway facilities are in every case nationally beneficial; and then infer the extent to which as stated to Mr. Cardwell’s committee, Parliament has “excited and urged forward” Companies into rivalry. Note the temptations under which lawyers are placed—the vast profits accruing to them from every railway contest, whether ending in success or failure; and then imagine the range and subtlety of their extension manœuvring. Conceive the urgency of engineers; to the richer of whom more railway-making means more wealth; to the mass of whom more railway-making means daily bread. Estimate the capitalist-power of contractors; whose unemployed plant brings heavy loss; whose plant when employed brings great gain. Then recollect that to lawyers, engineers, and contractors the getting up and executing of new undertakings is a business—a business to which every energy is directed; in which many years of practice have given great skill; and to the facilitation of which, all means tolerated by men of the world are thought justifiable. Finally, consider that the classes interested in carrying out new schemes, are in constant communication, and have every facility for combined action. A great part of them live in London, and most of these have offices at Westminster—in Great George Street, in Parliament Street, clustering round the Legislature. Not only are they thus concentrated—not only are they throughout the year in frequent business intercourse; but during the session they are daily together, in Palace-Yard Hotels, in the lobbies, in the committee-rooms, in the House of Commons itself. Is it any wonder then, that the wide-spread, ill-informed unorganized body of shareholders, standing severally alone, and each pre-occupied with his private affairs, should be continually out-generalled by the comparatively small but active, skilful, combined body opposed to them, whose very occupation is at stake in gaining the victory?
“But how about the directors?” it will perhaps be asked. “How can they be parties to these obviously unwise undertakings? They are themselves shareholders; they gain by whatever benefits the proprietary at large; they lose by whatever injures it. And if without their consent, or rather their agency, no new scheme can be adopted by the Company, the classes interested in fostering railway enterprise are powerless to do harm.”
This belief in the identity of directorial and proprietary interests, is the fatal error commonly made by shareholders. It is this which, in spite of bitter experiences, leads them to be so careless and so trustful. “Their profit is our profit; their loss is our loss; they know more than we do; therefore let us leave the matter to them.” Such is the argument which more or less definitely passes through the shareholding mind—an argument of which the premises are delusive, and the inference disastrous. Let us consider it in detail.
Not to dwell on the disclosures that have in years past been made respecting the share-trafficking of directors, and the large profits realized by it—disclosures which alone suffice to disprove the assumed identity between the interests of board and proprietary—and taking for granted that little, if any, of this now takes place; let us go on to notice the still-prevailing influences which render this apparent community of aims illusive. The immediate interests which directors have in the prosperity of the Company, are often much less than is supposed. Occasionally they possess only the bare qualification of £1000 worth of stock. In some instances even this is partly nominal. Admitting, however, as we do frankly, that in the great majority of cases the full qualification, and much more than the qualification, is held; yet it must be borne in mind that the indirect advantages which a wealthy member of a board may gain from the prosecution of a new undertaking, will often far outweigh the direct injury it will inflict on him by lowering the value of his shares. A board usually consists, to a considerable extent, of gentlemen residing at different points throughout the tract of country traversed by the railway they control: some of them landowners; some merchants or manufacturers; some owners of mines or shipping. Almost always some or all of them are advantaged by a new branch or feeder. Those in close proximity to it, gain either by enhanced value of their lands, or by increased facilities of transit for their commodities. Those at more remote parts of the main line, though less directly interested, are still frequently interested in some degree; for every extension opens up new markets either for produce or raw materials; and if it is one effecting a junction with some other system of railways, the greater mercantile conveniences afforded to directors thus circumstanced, become important. Obviously, therefore, the indirect profits accruing to such from one of these extensions, may more than counterbalance the direct loss upon their railway investments; and though there are, doubtless, men too honourable to let such considerations sway them, yet the generality can scarcely fail to be affected by temptations so strong. Then we have to remember the influences brought to bear upon directors having seats in Parliament. Already these have been noticed; and we recur to them only for the purpose of pointing out that the immediate evil of an increased discount on his £1000 worth of stock, may be to a director of much less consequence than the favours, patronage, connexions, which his aid in carrying a new scheme will bring him. So that here too the supposed identity of interests between directors and shareholders does not hold.
Moreover, this disunion of interests is increased by the system of preference-stock. Were there no other cause in action, the raising of capital for supplementary undertakings, by issuing shares bearing a guaranteed interest of 5, 6, and 7 per cent., would destroy that community of motives supposed to exist between a railway proprietary and its executive. Little as the fact is recognized, it is yet readily demonstrable that by raising one of these mortgages, a Company is forthwith divided into two classes; the one consisting of the richer shareholders, inclusive of the directors, and the other of the poorer shareholders; of which classes the richer one can protect itself from the losses which the poorer one has to bear—nay, can even profit by the losses of the poorer one. This assertion, startling as it will be to many, we will proceed to prove.
When the capital required for a branch or extension is raised by means of guaranteed shares, it is the custom to give each proprietor the option of taking up a number of such shares proportionate to the number of his original shares. By availing himself of this offer, he partially protects himself against any loss which the new undertaking may entail. Should this, not fulfilling the promises of its advocates, diminish in some degree the general dividend; yet, a high dividend on the due proportion of preference-stock, may nearly or quite compensate for this. Hence, it becomes the policy of all who can do so, to take up as many guaranteed shares as they can get. But what happens when the circular announcing this apportionment of guaranteed shares is sent round? Those who possess much stock, being generally capitalists, accept as many as are allotted to them. On the other hand, the smaller holders, constituting as they do the bulk of the Company, having no available funds with which to pay the calls on new shares, are obliged to part with their letters of allotment. What results? When this additional line has been opened, and it turns out, as usual, that its revenue is insufficient to meet the guaranteed dividend on its shares—when the general income of the Company is laid under contribution to make up this guaranteed dividend—when as a consequence, the dividend on the original stock is diminished; then the poorer shareholders who possess original stock only, find themselves losers; while the richer ones, possessing guaranteed shares in addition, find that their gain on preference-dividends nearly or quite counterbalances their loss on general dividends. Indeed, as above hinted, the case is even worse. For as the large share-proprietor who has obtained his proportion of guaranteed stock, is not obliged to retain his original stock—as, if he doubts the paying character of the new undertaking, he can always sell such of his shares as will suffer from it; it is obvious that he may, if he pleases, become the possessor of preference-shares only; and may so obtain a handsome return for his money at the expense of the Company at large and the small shareholders in particular. How far this policy is pursued we do not pretend to say; though the table given some pages back suggests extensive pursuit of it. All which it here concerns us to notice, is, that directors, being mostly men of large means, and being therefore able to avail themselves of this guaranteed stock, are liable to be swayed by motives different from those of the general proprietary. And that they often are so swayed there cannot be a doubt. Without assuming that any of them deliberately intend to benefit at the cost of their co-proprietors; and believing, as we do, that few of them duly perceive that the protection they will have, is a protection not available by the shareholders at large; we think it is a rational deduction from common experience, that this prospect of compensation often turns the scale in the minds of those who are hesitating, and diminishes the opposition of those who disapprove.
Thus, the belief which leads most railway shareholders to place implicit faith in their directors, is an erroneous one. It is not true that there is an identity of interest between the proprietary and its executive. It is not true that the board forms an efficient guard against the intrigues of lawyers, engineers, contractors, and others who profit by railway-making. Contrariwise, its members are not only liable to be drawn from their line of duty by various indirect motives, but by the system of guaranteed shares they are placed under a positive temptation to betray their constituents.
And now what is the proximate origin of these corruptions? and what is the remedy for them? What error in railway legislation is it that has made possible such complicated chicaneries? Whence arises this facility with which interested persons thrust companies into unwise enterprises? We believe there is a very simple answer to these questions. It is an answer, however, which will at first sight seem quite irrelevant; and we doubt not that the corollary we propose drawing from it, will be forthwith condemned by so-called practical men. Nevertheless, we are not without hope of showing, both that the evils laboured under would be excluded were this corollary recognized, and that recognition of it is not only feasible, but would even open the way out of sundry perplexities in which railway legislation is at present involved.
We conceive, then, that the fundamental vice of our system, as hitherto carried out, lies in the misinterpretation of the proprietary contract—the contract tacitly entered into between each shareholder and the body of shareholders with whom he unites; and that the remedy for these evils which have now become so great, lies simply in the enforcement of an equitable interpretation of this contract. In reality the contract is a strictly limited one. In practice it is treated as altogether unlimited. And the thing needed is, that it should be clearly defined and abided by.
Our popular form of government has so habituated us to seeing public questions decided by the voice of the majority, and the system is so manifestly equitable in the cases daily before us, that there has been produced in the general mind, an unhesitating belief that the majority’s right is unbounded. Under whatever circumstances men co-operate, it is held that if difference of opinion arises among them, justice requires that the will of the greater number shall be executed rather than that of the smaller number; be the question at issue what it may. So confirmed is this conviction, that to most this mere suggestion of a doubt will cause astonishment. Yet it needs but a brief analysis to show that the conviction is little better than a political superstition. Instances may readily be selected which prove, by reductio ad absurdum, that the right of a majority is a purely conditional right, valid only within specific limits. Let us take a few. Suppose that at the general meeting of some philanthropic association, it was resolved that in addition to relieving distress the association should employ home-missionaries to preach down popery. Might the subscriptions of Catholics, who had joined the body with charitable views, be rightfully used for this end? Suppose that of the members of a book-club, the greater number, thinking that under existing circumstances rifle-practice is more important than reading, should decide to change the purpose of their union, and to apply the funds in hand for the purchase of powder, ball, and targets. Would the rest be bound by this decision? Suppose that under the excitement of news from Australia, the majority of a Freehold Land Society should determine, not simply to start in a body for the gold diggings, but to use their accumulated capital to provide outfits. Would this appropriation of property be just to the minority? and must these join the expedition? Scarcely any one would venture an affirmative answer even to the first of these questions; much less to the others. And why? Because everyone must perceive that by joining with others, no man can equitably be committed to acts utterly foreign to the purpose for which he joined them. Each of these supposed minorities would properly reply to those seeking to coerce them:—“We combined with you for a defined object; we gave money and time for the furtherance of that object; on all questions thence arising, we tacitly agreed to conform to the will of the greater number; but we did not agree to conform on any other questions. If you induce us to join you by professing a certain end, and then undertake some other end of which we were not apprised, you obtain our support under false pretences; you exceed the expressed or understood compact to which we committed ourselves; and we are no longer bound by your decisions.” Clearly this is the only rational interpretation of the matter. The general principle underlying the right government of every incorporated body, is, that its members contract with each other severally to submit to the will of the majority in all matters concerning the fulfilment of the objects for which they are incorporated; but in no others. To this extent only can the contract hold. For as it is implied in the very nature of a contract, that those entering into it must know what they contract to do; and as those who unite with others for a specified object, cannot contemplate all the unspecified objects which it is hypothetically possible for the union to undertake; it follows that the contract entered into cannot extend to such unspecified objects. And if there exists no expressed or understood contract between the union and its members respecting unspecified objects, then for the majority to coerce the minority into undertaking them, is nothing less than gross tyranny.
Now this almost self-evident principle is wholly ignored, alike in our railway legislation and the proceedings of our companies. Definite as is the purpose with which the promoters of a public enterprise combine, many other purposes not dreamed of at the outset are commonly added to it; and this, apparently, without any suspicion that such a course is unwarrantable, unless taken with the unanimous consent of the proprietors. The unsuspecting shareholder who signed the subscription contract for a line from Greatborough to Grandport, did so under the belief that this line would not only be a public benefit but a good investment. He was familiar with the country. He had been at some trouble to estimate the traffic. And, fully believing that he knew what he was embarking in, he put down his name for a large amount. The line has been made; a few years of prosperity have justified his foresight; when, at some fatal special meeting, a project is put before him for a branch from Littlehomestead to Stonyfield. The will of the board and the intrigues of the interested, overbear all opposition; and in spite of the protests of many who like him see its impolicy, he presently finds himself involved in an undertaking which, when he joined the promoters of the original line, he had not the remotest conception would ever be proposed. From year to year this proceeding is repeated. His dividends dwindle and his shares go down; and eventually the congeries of enterprises to which he is committed, grows so vast that the first enterprise of the series becomes but a small fraction of the whole. Yet it is in virtue of his consent to this first of the series, that all the rest are thrust upon him. He feels that there is injustice somewhere; but, believing in the unlimited right of a majority, fails to detect it. He does not see that when the first of these extensions was proposed, he should have denied the power of his brother-shareholders to implicate him in an undertaking not named in their deed of incorporation. He should have told its proposers that they were perfectly free to form a separate Company for the execution of it; but that they could not rightfully compel dissentients to join in a new undertaking, any more than they could rightfully have compelled dissentients to join in the original. Had such a shareholder united with others for the specified purpose of making railways, he would have had no ground for protest. But he united with others for the specified purpose of making a particular railway. Yet such is the confusion of ideas on the subject, that there is absolutely no difference recognized between these cases!
It will doubtless be alleged in defence of all this, that these secondary enterprises are supplementary to the original one—are in part undertaken for the furtherance of it; professedly minister to its prosperity; cannot, therefore, be regarded as altogether separate enterprises. And it is true that they have this for their excuse. But if it is a sufficient excuse for accessories of this kind, it may be made a sufficient excuse for any accessories whatever. Already, Companies have carried the practice beyond the making of branches and extensions. Already, under the plea of bringing traffic to their lines, they have constructed docks; bought lines of steam-packets; built vast hotels; deepened river-channels. Already, they have created small towns for their workmen; erected churches and schools; salaried clergymen and teachers. Are these warranted on the ground of advancing the Companies’ interests? Then thousands of other undertakings are similarly warranted. If a view to the development of traffic, justifies the making of a branch to some neighbouring coal-mines; then, should the coal-mines be inefficiently worked, the same view would justify the purchase of them—would justify the Company in becoming coal-miner and coal-seller. If anticipated increase of goods and passengers is a sufficient reason for carrying a feeder into an agricultural district; then, it is a sufficient reason for organizing a system of coaches and waggons to run in connexion with this feeder; for making the requisite horse-breeding establishments; for hiring the needful farms; for buying estates; for becoming agriculturists. If it be allowable to purchase steamers plying in conjunction with the railway; it must be allowable to purchase merchant vessels to trade in conjunction with it; it must be allowable to set up a yard for building such vessels; it must be allowable to erect depôts at foreign ports for the receipt of goods; it must be allowable to employ commission agents for collecting such goods; it must be allowable to extend a mercantile organization all over the world. From making its own engines and carriages, a Company may readily progress to manufacturing its own iron and growing its own timber. From giving its employés secular and religious instruction, and providing houses for them, it may go on to supply them with food, clothing, medical attendance, and all the needs of life. Beginning simply as a corporation to make and work a railway between A and B; it may become a miner, manufacturer, merchant, shipowner, canal-proprietor, hotel-keeper, landowner, house-builder, farmer, retail-trader, priest, teacher—an organization of indefinite extent and complication. There is no logical alternative between permitting this, and strictly limiting the corporation to the object first agreed upon. A man joining with others for a specific purpose, must be held to commit himself to that purpose only; or else to all purposes whatever which they may choose to undertake.
But proprietors dissenting from one of these supplementary projects are told that they have the option of selling out. So might the dissentients from a new State-enforced creed be told, that if they did not like it they might leave the country. The one reply is little more satisfactory than the other would be. The opposing shareholder sees himself in possession of a good investment—one perhaps which, as an original subscriber, he ran some risk in obtaining. This investment is about to be endangered by an act not named in the deed of incorporation. And his protests are met by saying, that if he fears the danger he may part with his investment. Surely this choice between two evils scarcely meets his claims. Moreover, he has not even this in any fair sense. It is often an unfavourable time to sell. The very rumour of one of these extensions frequently causes a depreciation of stock. And if many of the minority throw their shares on the market, this depreciation is greatly increased; a fact which further hinders them from selling. So that each is in a dilemma: he has to part with a good investment at much less than its value; or to run the risk of having its value greatly diminished.
The injustice thus inflicted on minorities is, indeed, already recognized in a vague way. The recently-established Standing Order of the House of Lords, that before a Company carry out any new undertaking, three-fourths of the votes of the proprietors shall be recorded in its favour, clearly implies a perception that the usual rule of the majority does not apply. And again, in the case of The Great Western Railway Company versus Rushout, the decision that the funds of the Company could not be used for purposes not originally authorized, without a special legislative permit, involves the doctrine that the will of the greater number is not of unlimited validity. In both these cases, however, it is taken for granted that a State-warrant can justify an act which without it would be unjustifiable. We must take leave to question this. If it be held that an Act of Parliament can make murder proper, or can give rectitude to robbery; it may be consistently held that it can sanctify a breach of contract; but not otherwise. We are not about to enter upon the vexed question of the standard of right and wrong; and to inquire whether it is the function of a government to make rules of conduct, or simply to enforce rules deducible from the laws of social life. We are content, for the occasion, to adopt the expediency-hypothesis; and adopting it, must yet contend that, rightly interpreted, it gives no countenance to this supposed power of a Government to alter the limits of an equitable contract against the wishes of some of the contracting parties. For, as understood by its teachers and their chief disciples, the doctrine of expediency is not a doctrine implying that each particular act is to be determined by the particular consequences that may be expected to flow from it; but that the general consequences of entire classes of acts having been ascertained by induction from experience, rules shall be framed for the regulation of such classes of acts, and each rule shall be uniformly applied to every act coming under it. Our whole administration of justice proceeds on this principle of invariably enforcing an ordained course, regardless of special results. Were immediate consequences to be considered, the verdict gained by the rich creditor against the poor debtor would generally be reversed; for the starvation of the last is a much greater evil than the inconvenience of the first. Most thefts arising from distress would go unpunished; a large proportion of men’s wills would be cancelled; many of the wealthy would be dispossessed of their fortunes. But it is clearly seen that were judges thus guided by proximate evils and benefits, the ultimate result would be social confusion; that what was immediately expedient would be ultimately inexpedient; and hence the aim at rigorous uniformity, spite of incidental hardships. Now, the binding nature of agreements is one of the commonest and most important principles of civil law. A large part of the causes daily heard in our courts, involve the question, whether in virtue of some expressed or understood contract, some of those concerned are, or are not, bound to certain acts or certain payments. And when it has been decided what the contract implies, the matter is settled. The contract itself is held sacred. This sacredness of a contract being, according to the expediency-hypothesis, justified by the experience of all nations in all times that it is generally beneficial, it is not competent for a Legislature to declare that contracts are violable. Assuming that the contracts are themselves equitable, there is no rational system of ethics which warrants the alteration or dissolving of them, save by the consent of all concerned. If then it be shown, as we think it has been shown, that the contract tacitly entered into by railway shareholders with each other, has definite limits; it is the function of the Government to enforce, and not to abolish, those limits. It cannot decline to enforce them without running counter, not only to all theories of moral obligation, but to its own judicial system. It cannot abolish them without glaring self-stultification.
Returning, now, to the manifold evils of which the cause was asked; it only remains to point out that, were the just construction of the proprietary contract insisted upon, such evils would, in great part, be excluded. The various illicit influences by which Companies are daily betrayed into disastrous extensions, would necessarily be inoperative when such extensions could not be undertaken by them. When such extensions had to be undertaken by independent bodies of shareholders, with no one to guarantee them good dividends, those who are locally and professionally interested would find it a less easy matter than at present to aggrandize themselves at the expense of others.
And now as to the policy of thus modifying railway legislation—the commercial policy we mean. Leaving out of sight the more general social interests, let us glance at the effects on business interests—the proximate instead of the ultimate effects. The implication contained in the last paragraph, that the making of supplementary lines would no longer be so facile, will be thought to prove the disadvantage of any such limit as the one advocated. Many will argue, that to restrict Companies to their original undertakings would fatally cripple railway enterprise. Many others will remark, that, however detrimental to shareholders this extension system may have been, it has manifestly proved beneficial to the public. Both these positions seem to us more than questionable. We will first look at the last of them.
Even were travelling accommodation the sole thing to be considered, it would not be true that prodigality in new lines has been advantageous. The districts supplied have, in many cases, themselves been injured by it. It is shown by the evidence given before the Select Committee on Railway and Canal Bills, that in Lancashire, the existence of competing lines has, in some cases, both diminished the facilities of communication and increased the cost. It is further shown by this evidence, that a town obtaining branches from two antagonist Companies, by-and-by, in consequence of a working arrangement between these Companies, comes to be worse off than if it had but one branch; and Hastings is quoted as an example. It is again shown that a district may be wholly deprived of railway accommodation by granting a superfluity of lines; as in the case of Wilts and Dorset. In 1844–5, the Great Western and the South Western Companies projected rival systems of lines, supplying these and parts of the adjacent counties. The Board of Trade, “asserting that there was not sufficient traffic to remunerate an outlay for two independent railways,” reported in favour of the Great Western schemes; and bills were granted for them: a certain agreement, suggested by the Board of Trade, being at the same time made with the South Western, which, in return for specified advantages, conceded this district to its rival. Notwithstanding this agreement, the South Western, in 1847, projected an extension calculated to take most of the traffic from the Great Western extensions; and in 1848, Parliament, though it had virtually suggested this agreement, and though the Great Western Company had already spent a million and a half in part execution of the new lines, authorized the South Western project. The result was, that the Great Western Company suspended their works; the South Western Company were unable, from financial difficulties, to proceed with theirs; the district has remained for years unaccommodated; and only since the powers granted to the South Western have expired from delay, has the Great Western recommenced its long-suspended undertakings.
And if this undue multiplication of supplementary lines has often directly decreased the facilities of communication, still more has it done this indirectly, by maintaining the cost of travelling on the main lines. Little as the public are conscious of the fact, it is nevertheless true, that they pay for the accommodation of unremunerative districts, by high fares in remunerative districts. Before this reckless branch-making commenced, 8 and 9 per cent. were the dividends returned by our chief railways; and these dividends were rapidly increasing. The maximum dividend allowed by their Acts is 10 per cent. Had there not been unprofitable extensions, this maximum would have been reached many years since; and in the absence of the power to undertake new works, the fact that it had been reached could not have been hidden. Lower rates for goods and passengers would necessarily have followed. These would have caused much additional traffic; and with the aid of the natural increase otherwise going on, the maximum would shortly again have been reached. There can scarcely be a doubt that repetitions of this process would, before now, have reduced the fares and freights on our main lines by at least one-third. This reduction, be it remembered, would have affected those railways which subserve commercial and social intercourse in the greatest degree—would, therefore, have applied to the most important part of the traffic throughout the kingdom. As it is, however, this greater proportion of the traffic has been heavily taxed for the benefit of the smaller proportion. That the tens who travel on branches might have railway communication, the hundreds who travel along main lines have been charged 30, or 40 per cent. extra. Nay, worse: that these few might be accommodated, the many who would have been brought on to the main lines by lower fares have gone unaccommodated. Is it then so clear that undertakings which have been disastrous to shareholders have yet been beneficial to the public?
But it is not only in greater cost of transit that the evil has been felt; it has been felt also in diminished safety. The multiplication of railway accidents, which has of late years drawn so much attention, has been in no inconsiderable degree caused by the extension policy. The relation is not obvious; and we had ourselves no conception that such a relation existed, until the facts illustrative of it were furnished to us by a director who had witnessed the whole process of causation. When preference-share dividends and guarantees began to make large draughts upon half-yearly returns—when original stock was greatly depreciated, and the dividends upon it fell from 9 and 8 per cent. to 4 1⁄2 and 4 and 3 1⁄2, great dissatisfaction necessarily arose among shareholders. There were stormy meetings, motions of censure, and committees of investigation. Retrenchment was the general cry; and retrenchment was carried to a most imprudent extent. Directors with an indignant proprietary to face, and under the fear that their next dividend would be no greater, perhaps less, than the last, dared not to lay out money for the needful repairs. Permanent way, reported to them as requiring to be replaced, was made to serve awhile longer. Old rolling stock was not superseded by new to the proper extent; nor increased in proportion to the demand. Committees, appointed to examine where the expenditure could be cut down, went round discharging a porter here, dispensing with a clerk there, and diminishing the salaries of the officials in general. To such a length was this policy carried, that in one case, to effect a saving of £1200 per annum, the working staff was so crippled as to cause, in the course of a few years, a loss of probably £100,000: such, at least, is the opinion of the gentleman on whose authority we make this statement, who was himself one of the retrenchment committee. What, now, was the necessary result of all this? With the line out of condition; with engines and carriages neither sufficient in number nor in the best working order; with drivers, guards, porters, clerks, and the rest, decreased to the smallest number with which it was possible to work; with inexperienced managers in place of the experienced ones driven away by reduced salaries; what was likely to occur? Was it not certain that an apparatus of means just competent to deal with the ordinary traffic, would be incompetent to deal with extraordinary traffic? that a decimated body of officials under inferior regulation, would fail in the emergencies sure from time to time to occur? that with way and works and rolling stock all below par, there would occasionally be a concurrence of small defects, permitting something to go wrong? Was not a multiplication of accidents inevitable? No one can doubt it. And if we trace back this result step by step to its original cause—the reckless expenditure on new lines—we shall see further reason to doubt whether such expenditure has been as advantageous to the public as is supposed. We shall hesitate to indorse the opinion of the Select Committee on Railway and Canal Bills, that it is desirable “to increase the facility for obtaining lines of local convenience.”
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 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 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 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 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 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 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 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 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 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, 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 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.