CHAPTER V

NONE OF MR. SCUDAMORE'S FINANCIAL FORECASTS WERE REALIZED

The completion of the telegraph system cost $8,500,000; Mr. Scudamore's successive estimates had been respectively $1,000,000 and $1,500,000. Mr. Scudamore's brilliant forecast of the increase of traffic under public ownership. Mr. Scudamore's appalling blunder in predicting that the State telegraphs would be self-supporting. Operating expenses on the average exceed 92.5% of the gross earnings, in contrast to Mr. Scudamore's estimate of 51% to 56%. The annual telegraph deficits aggregate 26.5% of the capital invested in the plant. The financial failure of the State telegraphs is not due to the large price paid to the telegraph companies and railway companies. The disillusionment of an eminent advocate of nationalization, Mr. W. Stanley Jevons.

[Sidenote: _Estimated Expenditure_ versus _Actual Expenditure_]

As soon as the telegraphs had been transferred to the Government, the Post Office Department set to work to rearrange the wires wherever competition had caused duplication or triplication; to extend the wires into the centre of each town or place "imperfectly" served; to build lines to all places with money order issuing Post Offices that had no telegraphic service; to enlarge the local telegraph system of Metropolitan London from 95 telegraph offices in 1869, to 334 offices at the close of 1870; to give cities like Birmingham, Leeds, Edinburgh, Glasgow and Manchester, from 14 to 32 telegraph offices each;[48] to provide additional wires to meet the anticipated growth of traffic; and to release some 5,000 or 6,000 miles of wire for the exclusive use of the railway companies in the conduct of transportation. For these several purposes the Post Office Department, in the course of the three years ending with September, 1873, erected 8,000 miles of posts, and 46,000 miles of wire; strengthened 8,500 miles of line; laid 192 miles of underground pipes and 23 miles of pneumatic pipes; and laid 248 miles of submarine cable. By September, 1873, the Post Office Department had spent upon the rearrangement and extension of the telegraphs, the sum of $11,041,000.[49]

Something over $2,500,000[50] of that sum represented the cost of repairing the depreciation suffered by the plant in the years 1868 and 1869, a depreciation for which full allowance had been made in fixing the purchase price. The balance, $8,500,000, represented new capital outlay.

In 1868 Mr. Scudamore had stated before the Select Committee of the House of Commons that it would cost $1,000,000 to rearrange the telegraphs and give perfect telegraphic service to 2,950 places.[51] In 1869, the Postmaster General, the Marquis of Hartington, had told the House of Commons that $1,500,000 would cover the cost of rearranging the telegraphs and giving perfect accommodation to 3,776 places.[52] In April, 1867, on the other hand, Mr. W. Stanley Jevons, an eminent economist, had estimated at $12,500,000 the cost of "the improvement of the present telegraphs, and their extension to many villages which do not at present possess a telegraph station."[53]

Mr. Scudamore's estimate of the cost of extending the telegraphs to 841 places that had no telegraphic accommodation, was based on the assumption that each such extension would require, on the average, the erection of three-quarters of a mile of telegraph line. But when the Post Office Department came to build to "new" places, it found that "the opening of upward of 1,000 additional telegraph offices necessitated the erection of not less than 3,000 miles of telegraph line."[54]

The results have shown that Mr. Scudamore's other estimates of the cost of rearranging and extending the telegraphs, presented by himself in 1868, and by the Postmaster General, the Marquis of Hartington, in 1869, were equally wide of the mark. Numerous _Committees on the Public Accounts_ sitting in the years 1871 to 1876, together with the _Committee on Post Office Telegraph Department_, 1876, attempted to inquire into the enormous discrepancy between the estimated cost and the actual cost of rearranging and extending the telegraphs. But none of those attempts were rewarded with any success whatever.[55] The representatives of the Post Office and of the Treasury always attributed the discrepancy "to the purchase of undertakings which were not contemplated at the time when the original measures were submitted to the House, and to unforeseen expenses for extensions." But the State, as a matter of fact, made no purchases beyond those contemplated in 1869--excepting the purchase of the Jersey and Guernsey cable for $286,750, and the purchase of the Isle of Man cable for $80,680. As for unforeseen extensions, in 1869, the Marquis of Hartington had counted on carrying the telegraphs to 3,776 places, and in 1878 there were but 3,761 postal telegraph offices, counting the 300 offices in London, and the numerous offices in the several large principal cities.[56]

* * * * *

Mr. Scudamore, aided by the state of public opinion created by the agitation of the British Chambers of Commerce under the leadership of the Chamber of Commerce of Edinburgh, carried away the Disraeli Ministry and the Gladstone Ministry. Even more powerful than Mr. Scudamore's argument from the extensive use made of the telegraphs on the Continent of Europe, was Mr. Scudamore's promise that the State telegraphs should begin by paying a profit sufficient to cover the interest on $30,000,000 at the lowest estimate, and $50,000,000 at the highest estimate; and that the profit should increase with the advancing years.

[Sidenote: _Penny Postage Precedent_]

Before examining the evidence upon which Mr. Scudamore predicted such large profits, it will be well to consider briefly the nature of the evidence afforded to Mr. Scudamore by Sir Rowland Hill's epoch-making "invention of penny postage." This is the more necessary, since Mr. Scudamore himself cited the success of penny postage in support of his proposal for a uniform rate of 24 cents for telegraph messages. Upon the introduction of the penny postage, the letters carried by the Post Office of the United Kingdom jumped from 76,000,000 in 1839 to 169,000,000 in 1840, and to 271,000,000 in 1845. But the net revenue obtained by the Post Office Department from the carriage of letters fell from $8,170,000 in 1839 to $2,505,000 in 1840. Though the net revenue increased each year beginning with 1841, not until 1863 did it again reach the point at which it had been in 1839. In 1863, the number of letters carried was 642,000,000--almost four times the number carried in 1840, and eight times the number carried in 1839.[57] In short, the evidence from the penny postage was, that care must be used in arguing from an increase of business to an increase of net revenue; and that the prospect of a great increase in business did not necessarily justify the incurrence of indefinitely large charges on account of interest on capital invested.

[Sidenote: _Mr. Scudamore's Revenue Forecasts_]

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

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

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

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

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

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

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

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

Mr. Scudamore's predictions as to the growth of traffic that might be expected from the great increase in the facilities for telegraphing, and from the reduction of the charges by fully one-half, turned out to be brilliant indeed. They were fully realized. The number of messages increased from about 6,500,000 in 1869, to 9,850,000 in 1870-71, to 19,253,000 in 1874-75, and to 26,547,000 in 1879-1880.[59]

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

[Sidenote: _Operating Expenses under-estimated by one-half_]

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

On March 31, 1906, the capital invested in the telegraphs was $84,812,000.[63] To raise that capital, the Government had sold $54,300,000 three per cent. bonds at an average price of about 92.3;[64] and for the rest, the Government had drawn upon the current revenue raised by taxation.

[Sidenote: _Aggregate Telegraph Deficit_]

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

[Sidenote: _Parliament Responsible for Deficits_]

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

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

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

* * * * *

[Sidenote: _Mr. W. S. Jevons' Disillusionment_]

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

In 1870 each wire afforded one channel for communication; in 1895 it afforded two channels under the Duplex system, four channels under the Quadruplex system, and six channels under the Multiplex system. In 1870 the maximum speed per minute was 60 to 80 words. In 1895 the fixed standard of speed for certain circuits was 400 words, while a speed of 600 words was possible of attainment. The "repeaters" used for strengthening the current on long circuits also were greatly improved after 1870.[69]

FOOTNOTES:

[48] _Report by Mr. Scudamore on the Reorganization of the Telegraph System of the United Kingdom_, January, 1871.

Number of telegraph offices before and after the transfer of the telegraphs to the State:

+================+========+========+ | | 1869 | 1870 | +----------------+--------+--------+ |London | 95 | 334 | +----------------+--------+--------+ |Birmingham | 10 | 14 | +----------------+--------+--------+ |Edinburgh | 9 | 15 | +----------------+--------+--------+ |Leeds | 10 | 18 | +----------------+--------+--------+ |Glasgow | 13 | 19 | +----------------+--------+--------+ |Manchester | 21 | 32 | +================+========+========+

This table does not indicate fully the expense incurred by the State in providing local telegraph systems. Under the companies the offices were all concentrated in the heart of the city; under the Post Office administration the offices were spread throughout the city and suburbs.

[49] _First Report from the Committee on Public Accounts_, 1873; Appendix, p. 118; and _Report from the Committee on Public Accounts_, 1874; Appendix, p. 159 and following.

[50] _Report by Mr. Scudamore on the Reorganization of the Telegraph System of the United Kingdom_, January, 1871, p. 43.

[51] _Special Report from the Select Committee on the Electric Telegraphs Bill_, 1868; q. 1,864 and 1,922.

[52] _Hansard's Parliamentary Debates_, July 5, 1869, p. 1,217.

[53] _Transactions of the Manchester Statistical Society_, Session 1866-67.

[54] _Special Report from the Select Committee on the Electric Telegraphs Bill_, 1868; q. 1,922 and 94; and _First Report from the Committee on Public Accounts_, 1873; Appendix, p. 96.

[55] _Report from the Select Committee on Post Office (Telegraph Department)_, 1876, p. xi. "The Committee have not received any full and satisfactory explanation of these great differences between the estimated expenditure of 1869 and the actual expenditure incurred up to 1876."

[56] _Miscellaneous Statistics of the United Kingdom_, current issues from 1872 to 1882.

Telegraph Stations open to the public:

===================+======+======+======+=======+=======+=======+======= | 1869 | 1871 | 1872 | 1873 | 1874 | 1878 | 1880 -------------------+------+------+------+-------+-------+-------+------- Telegraph Companies| 2,155[A] 0| 0| 0| 0| 0| 0 Post Office | | | | | | | Telegraphs | 0| 2,441| 3,369| 3,659| 3,756| 3,761| 3,929 Railway Stations[B]| 1,226| 1,833| 1,804| 1,815| 1,816| 1,555| 1,407 |------+------+------+-------+-------+-------+------- | 3,381| 4,274| 5,173| 5,474| 5,572| 5,316| 5,336 | | | | | | | Miles of Line |21,751| ? |22,000[C] ? | 24,000[D] ? [E]23,156 Miles of Wire |90,668|68,998|91,093|104,292|106,730|114,902|114,242 ===================+======+======+======+=======+=======+=======+======= [A] In 1,882 places.

[B] For the benefit of the traveling public, and of persons residing in the immediate vicinity of railway stations, the Post Office made arrangements whereby the railway companies received messages from the public for transmission to the postal telegraphs, and received messages from the postal telegraphs for delivery to the public.

[C] _Report of the Postmaster General_, 1895, p. 36.

[D] _The Fortnightly Review_, December, 1875, W. S. Jevons.

[E] _Report of the Postmaster General_, 1880, p. 16.

[57] The penny postage was introduced on December 5, 1839.

==========+===============+==============+=========== |Letters Carried| Gross Revenue|Net Revenue[A] | | $ | $ ----------+---------------+--------------+----------- 1839 | 76,000,000 | 11,955,000 | 8,170,000 1840 | 169,000,000 | 6,795,000 | 2,505,000 1845 | 271,000,000 | 9,440,000 | 3,810,000 1850 | 347,000,000 | 11,325,000 | 4,020,000 1859 | 545,000,000 | 16,150,000 | 7,230,000 1863 | 642,000,000 | 19,350,000 | 8,950,000 ==========+===============+==============+=========== [A] The British Post Office does not charge itself with interest upon the capital invested in the postal business; it charges itself only with interest upon the capital borrowed on account of the telegraphic business.

[58] _Special Report from the Select Committee on the Electric Telegraphs Bill_, 1868; Appendix, pp. 27 and 28; and q. 1,813 and following, and 2,439 and following. Compare: _Hansard's Parliamentary Debates_, July 5, 1869, p. 1,219 and following, the Marquis of Hartington, Postmaster General.

[59] Number of messages.

1869 6,500,000 (estimated) 1870-71 9,850,000 1871-72 12,474,000 1874-75 19,253,000 1879-80 26,547,000 1884-85 33,278,000 1889-90 62,403,000 1894-95 71,589,000 1899-1900 90,415,000 1905-1906 89,478,000

In 1869 Mr. Scudamore revised his estimate of the number of messages in 1870-71, reducing it to 8,815,400. _Hansard's Parliamentary Debates_, July 5, 1869, p. 1,219, the Marquis of Hartington, Postmaster General.

[60] Garcke: _Manual of Electrical Undertakings_. The current issues report the amount of these royalties. _The Report of the Postmaster General_, 1885, p. 9, and _Parliamentary Paper_, No. 34, Session of 1901, state that these royalties are included in the gross revenue of the telegraphs.

[61] _Report of a Committee appointed by the Treasury to investigate the causes of the increased Cost of the Telegraphic Service since the Acquisition of the Telegraphs by the State_, 1875, p. 6.

[62] _Parliamentary Paper_, No. 295, Session of 1902.

Proportion borne by operating expenses to gross revenue, after excluding from operating expenses all expenses properly chargeable to capital account. The capital account of the telegraphs having been closed in September, 1873, the Post Office, since that date, has charged to operating expenses all expenditures on account of extensions, the purchase of sites, and the erection of buildings.

Average percentage of operating expenses Range

1870-71 57.24 1871-72 78.94 1872-73 to 1874-75 88.77 85.13 to 92.40 1875-76 to 1884-85 79.34 72.27 to 85.50 1885-86 to 1891-92 91.31 87.72 to 95.30 1892-93 to 1900-01 98.30 95.43 to 101.07 1901-02 to 1905-06 100.38 99.69 to 108.06

_Parliamentary Paper_, No. 34, Session of 1876. Lord John Manners, Postmaster General: "In the first two years after the transfer the expenditure was kept down, because no charge was raised for maintenance, as it took the form of renewal of the plant of the late companies, which, between 1868 and 1870, had, in some instances, been allowed to fall into decay, and was therefore considered properly chargeable against capital."

[63] That sum was made up as follows:

Telegraph companies $29,237,000 Railway companies 10,000,000 Extensions: 1870 to 1873 11,041,000 Extensions: 1874 to 1906 34,534,000 ----------- $84,812,000

[64] _Parliamentary Paper_, No. 267, Session of 1870.

[65] The subjoined table gives, for successive periods, the average capital sums upon which the net revenue earned by the telegraphs would have paid the interest; and also the average sums actually invested in the telegraphs in those periods. The first column of the table is constructed on the assumption that the interest paid by the State for borrowed money was 3.25 per cent. from 1870-71 to 1883-84; 3 per cent. from 1884-85 to 1888-89; and 2.75 per cent. from 1889-90 to 1900-01.

The ten million dollars paid to the railway companies some time between 1873 and 1879 are not included in the sum put down for the average capital investment in 1875-76 to 1877-78, since it has been impossible to assign that payment to specific years.

The results of the year 1870-71 should be ignored, since the cost of the maintenance of the telegraphs was charged to capital account in the year in question.

The net revenue The average sufficed to pay capital actually interest on: invested was: $ $ 1870-71 52,710,500 33,790,000 1871-72 to 1874-75 20,090,000 40,045,000 1875-76 to 1877-78 31,305,000 41,715,000 1878-79 to 1884-85 52,785,000 54,510,000 1885-86 to 1888-89 24,646,000 60,545,000 1889-90 to 1891-92 44,033,000 63,446,000 1892-93 to 1905-06 Nil 74,243,000

[66] The net revenue sufficed to pay the interest on:

$ 1877-78 30,165,000 1878-79 41,190,000 1879-80 51,310,000 1880-81 69,455,000 1881-82 55,055,000 1886-87 14,745,000

[67] _Special Report from the Select Committee on the Electric Telegraphs Bill_, 1868; q. 3,296 to 3,302.

[68] _The Fortnightly Review_, December, 1875.

[69] _Report of the Postmaster General_ for 1895; Historical Outline of the Telegraph Service since 1870.