CHAPTER VII

THE HOUSE OF COMMONS IS RESPONSIBLE FOR THE FINANCIAL FAILURE OF THE STATE TELEGRAPHS

Sir S. Northcote, Chancellor of the Exchequer in Mr. Disraeli's Ministry of 1874 to 1880, is disillusioned. The State telegraphs become self-supporting in 1879-80. The House of Commons, under the leadership of Dr. Cameron, M. P. for Glasgow, overrides the Ministry and cuts the tariff almost in two. In 1890-91 the State telegraphs would again have become self-supporting, had not the House of Commons, under pressure from the civil service unions, increased wages and salaries. The necessity of making money is the only effective incentive to sound management.

The consideration of the reasons for the financial failure of the State telegraphs may begin with the discussion of the effect of the building of unremunerative extensions. In 1873 the Treasury Department forced the Post Office Department to abandon the doctrine that every place with a money order issuing post office was of right entitled to a telegraph office. The treasury in that year adopted the policy of demanding a guarantee from private individuals whenever it did not care to assume the risk of a telegraph office failing to be self-supporting.[73] The new policy, of course, applied only to places not yet provided with telegraphic service, for the withdrawal of an established service would have led "to an immense amount of public inconvenience and agitation that the Government would have been unable to resist."[74]

[Sidenote: _Sir S. Northcote's Disillusionment_]

In speaking of the policy of requiring guarantees in order to check the pressure brought by the House of Commons for additional telegraphic services, the Chancellor of the Exchequer, Sir Stafford Northcote, in 1875, said: "The Government cannot give the answer that private companies could, and I am sure did, give. This is a point worthy of consideration, not so much in regard to the telegraph service itself, in which we are now fairly embarked, and of which we must make the best we can, as in reference to suggestions of acquisitions of other forms of property, and the conduct of other kinds of business, in which I hope the House will never be led to embark without very carefully weighing the results of this remarkable experiment."[75]

The guarantee in question, which had to be given by private individuals, covered: the annual working expenses; interest on the capital investment; sinking fund payments which should repay in seven years the capital invested; and a margin for certain contingencies.[76] In August, 1891, was abolished the provision requiring a guarantee of the repayment of the capital in seven years.[77] At the same time, the local governments were authorized to give the guarantee that continued to be required.[78] In 1897, upon the occasion of Her late Majesty's Diamond Jubilee, the Treasury authorized the Post Office to assume one-half of the burden of non-paying telegraphic services; and since May 1, 1906, the Post Office assumes two-thirds of that burden.[79]

The guarantees demanded after 1873 proved an effective check upon log-rolling. For example, in 1876, Catrine, in Ayrshire, with a population of 2,000, still was without telegraph service, while Tarbolton, in Ayrshire, population 500, had acquired such service previous to 1873.[80] In the period from 1874 to 1878 the number of postal telegraph offices increased only from 3,756 to 3,761.

Before leaving this subject, it is necessary to warn the reader against misleading tables published in several official documents, and purporting to show that non-paying offices rapidly became self-supporting.[81]

Those tables are constructed on the basis of including in the cost of telegraph offices only the allowance to the local postmaster for telegraph work, and the cost of maintaining the instruments in the office, and of excluding the cost of maintaining the wire, the cost of additional force required at the central station in London and at the district centres because of the large number of outlying branches, as well as the interest on the capital invested. Those omissions led the Treasury Committee of 1875 to say: "We fear the full cost of working these numerous and unremunerative offices is not realized [appreciated]." In 1888, Mr. C. H. B. Patey, Third Secretary to the Post Office, was asked by a Select Committee of Parliament: "Where you have established telegraph offices at money order offices under guarantee from individuals interested, do you find that eventually these offices pay?" He replied: "No; in exceedingly few instances do they pay. The guarantee has continued, and after seven years we have got a fresh guarantee in order to continue the office."[82] Mr. Patey's testimony is corroborated by the continued, and successful, agitation of the House of Commons for the reduction of the guarantee demanded by the Treasury.

The second reason for the financial failure of the State telegraphs is, that while the precipitate reductions made in the rates charged to the public led to a great increase in the number of messages transmitted, that very increase of business was accompanied by such augmented operating expenses, that some years elapsed before the reduced average margin of profit per message carried sufficed to pay the interest on the immoderate capitalization of the State telegraphs. The increase in the operating expenses was in part inevitable; in part it was due to the waste inherent in all business operations conducted by executive officers who hold office, either at the pleasure of legislative bodies elected by manhood suffrage, or at the pleasure of large bodies of voters.

In 1876, Mr. C. H. B. Patey, Principal Clerk in the Post Office Department, stated that the average of the operating expenses per telegraphic message transmitted was 16 cents to 18 cents.[83] At that time, with a traffic of 21,000,000 messages a year, and average receipts per message of 28 cents, the net revenue of the telegraphs was $1,060,000, while the interest on the bonds outstanding was $1,475,000. In 1879-80, with a traffic of 24,500,000 messages, average receipts per message of 26 cents, the telegraphs yielded a net revenue of $1,667,000, while the interest on the bonds outstanding was $1,632,000. And in 1880-81, with a traffic of 27,300,000 messages, the net revenue rose to $2,257,000, while the interest on the bonds outstanding remained at $1,632,000. A large part of that improvement was due to a diminution in the waste with which the telegraphs had been conducted in 1874 to 1878. The nature and the extent of that waste are indicated in the fact that the number of clerks, telegraphists, and subordinate engineers was reduced from 6,783 in 1876, to 6,220 in 1880,[84] at the same time that the number of telegraph offices was increased from 3,741 to 3,929, and the number of messages was increased from 21,000,000 to 24,500,000.

[Sidenote: _The Telegraphs become self-supporting_]

In 1880-81, the telegraphs earned 3.25 per cent. on $69,455,000,[85] which was $16,180,000 in excess of the total capital invested in them. Under conditions which shall be described on a subsequent page, the Government, "very much at the instance of the House of Commons,"[86] raised wages and salaries, so that, in the period from 1880-81 to 1884-85, the expenses on account of salaries and wages increased $1,100,325, while the gross receipts increased only $752,635. In 1884-85, the net revenue sufficed to pay the interest at 3.25 per cent. on $45,710,000 only.

In the meantime, on March 29, 1883, the House of Commons had carried against the Government of the day, the resolution of Dr. Cameron, Member of Parliament from Glasgow: "That the time has arrived when the minimum charge for Inland Postal Telegrams should be reduced to 12 cents."[87] Dr. Cameron said: "He brought forward the motion--and he did so last year[88]--because he was absolutely opposed to the taxation of telegrams [_i. e._, to raising more revenue from the telegraphs than was requisite to paying the interest on the bonds outstanding]; and he believed that taxation could be levied in no other manner that would be so prejudicial to the commerce, intercourse, and convenience of the country. At the present moment there was practically no taxation of telegrams, or, at all events, the principle of the taxation of telegrams had not been affirmed. The surplus revenue [above the interest on the debt outstanding] earned up to the present time had been so small that it was impossible by sacrificing it to confer any substantial advantage upon the public. But the telegraph revenue was increasing; and it appeared to him that they had now arrived at a point where a remission of taxation must be made in the shape of extra facilities [_i. e._, reduced charges] for the public, or the vicious principle of the taxation of telegrams for the purpose of revenue must be affirmed. They had, it might be contended, not yet exactly arrived at that point, but they were remarkably near it; and his object in bringing forward the motion from year to year had been to afford the Government no excuse for allowing the point to be passed, but to bring up the subject every year; and the moment it was admitted that a change could be made without loss to the taxpayers he should ask the House to indicate its opinions that the change might be made.... He maintained that the principle of taxing telegrams was most erroneous. It was one of the worst taxes on knowledge[89]--a tax on economy, on time, and on the production of wealth. Instead of maintaining a price which was prohibitory not only to the working classes but also to the middle classes, they ought to take every means to encourage telegraphy. They ought to educate the rising generation to it; and he would suggest to the Government that the composing of telegrams would form a useful part of the education in our board schools."

The Chancellor of the Exchequer, Mr. Childers, "hoped the House would not agree to the motion" even if it were ready to accept Dr. Cameron's estimate that the immediate reduction in the net revenue would not exceed $850,000. "He had heard with surprise in the course of the debate some of the statements which had been made in regard to the unimportance of large items of expenditure [and of revenue]; and he was all the more surprised when he remembered the great anxiety which had been expressed during the present session in regard to the Public Expenditure, and the care which ought to be taken over it."[90]

Dr. Cameron, in the course of his speech in 1882, quoted a statement recently made by Mr. Fawcett, Postmaster General, to the effect that there was an average of 80,000 telegrams a day for 5,600 offices, or 14 telegrams per office. The representative from Glasgow added: "The state of things which they now had, therefore amounted to this--that from each telegraph office was sent a number of messages which afforded a little over half an hour's work per day for the operator. It would, therefore, at once be seen that there was ample room for increased business, without any increase of expenditure."[91] The foregoing argument overlooked the fact that the wires between the large cities were being worked to something like their full capacity; and that the low average of 14 messages per office was due solely to the existence of hundreds of offices in small places that had very little traffic. And shortly after the House of Commons had passed Dr. Cameron's resolution, in 1883, against the protest of the Government, the Treasury authorized the Post Office to spend $2,500,000 in putting up 15,000 miles of additional wires, and in otherwise preparing for the great increase in business that would arise between the larger towns in consequence of the reduction of the tariff.[92] And by July 5, 1885, three months before the date set for putting into force the reduced rate, the Post Office had engaged 1,202 additional telegraphists and learners,[93] to assist in doing the business which Dr. Cameron in 1882, had said could be done "without any great increase of expenditure."

[Sidenote: _Tariff is cut almost in two_]

On March 30, 1885, Mr. Shaw-Lefevre, Postmaster General, brought in a bill to give effect to Dr. Cameron's resolution of March 29, 1883.[94] The measure provided for a rate of 12 cents for not exceeding 12 words, address to be counted, and one cent for each additional word. The Postmaster General began by reminding the House of Commons that Dr. Cameron's resolution had been carried against the Government, and by a considerable majority. That the Post Office has spent $2,500,000 in preparing for the increase of business anticipated from the 12 cent tariff. That the loss of net revenue was estimated at $900,000 for the first year; and that it would take four years to recover that loss. That since Dr. Cameron's resolution had been passed, the financial position of the telegraph department had grown "decidedly worse," the net revenue having fallen from $2,200,000 to $1,275,000, the latter sum yielding barely 2.5 per cent. on the capital invested in the telegraphs, $55,000,000. Mr. Shaw-Lefevre said the decrease in the net revenue had been due "to the very considerable additions to the salaries of the telegraphists and other officers made two or three years ago very much at the instance of honorable Members of the House, and which Mr. Fawcett [the then Postmaster General] considered to be absolutely necessary," and also to increased cost of maintenance[95] arising from the necessity of replacing worn-out plant. The Postmaster General also drew attention to the fact that a new and dangerous factor had appeared: the competition of the telephone.[96]

The Bill became law; and the 12 cent tariff went into effect on October 1, 1885, the close of the first half of the fiscal year 1885-86. The number of messages jumped from 33,000,000 to 50,000,000, while the net revenue dropped from $1,370,000 to $440,000. In the next three years, 1887-88 to 1889-90, the number of messages increased to 62,400,000, and the net revenue rose to $1,451,000, or within $431,000 of the interest on the capital invested, $62,748,000. In the following year, 1890-91, the messages continued to increase at the rate at which they had increased in the three preceding years, and the net revenue would once more have sufficed to pay the interest on the capital invested, had the operating expenses not been swollen by increases in wages and salaries granted under pressure brought by the telegraph employees upon the House of Commons. The raising of salaries and wages continued through the subsequent years; and in the thirteen years 1893-94 to 1905-06, the State telegraphs have earned the operating expenses in five years only.[97]

In 1888, the _Select Committee on Revenue Departments Estimates_ reported as follows: "Your Committee are of the opinion that the reasons urged against treating the Post Office as a commercial business are not applicable in anything like the same degree to the Telegraph Department; and that the increasing annual deficit in the accounts of the latter cannot be viewed otherwise than with grave concern. Looking to the increasing costliness of the service as a whole, and to the constant pressure upon it of demands for increased and unprofitable expenditure, your committee deem it their duty to call attention to the fact that the Department of the Postmaster General, in all its branches, is a vast Government business, which is most likely to continue to be conducted satisfactorily, if it should also continue to be conducted with a view to profit [beyond the payment of interest on the debt outstanding], as one of the revenue yielding departments of the State. Excessive expenditure appears to your committee to be sooner or later inevitable in a great Government business which is not administered with a view to an ultimate profit to the State."

=========+============+============++=========+============+=========== Year | Number of |Net Revenue,|| Year | Number of |Net Revenue | Messages | $ || | Messages | $ ---------+------------+------------++---------+------------+----------- 1884-85 | 33,278,000 | 1,371,000 || 1894-95 | 71,589,000 | -50,000 1885-86 | 39,146,000 | 839,000 || 1895-96 | 78,840,000 | 646,000 1886-87 | 50,244,000 | 442,000 || 1896-97 | 79,423,000 | 678,000 1887-88 | 53,403,000 | 614,000 || 1899-00 | 90,415,000 | 326,000 1888-89 | 57,765,000 | 1,061,000 || 1901-02 | 90,432,000 | -848,000 1889-90 | 62,403,000 | 1,451,000 || 1902-03 | 92,471,000 | -548,000 1890-91 | 66,409,000 | 1,259,000 || 1903-04 | 89,997,000 | -1,530,000 1891-92 | 69,685,000 | 922,000 || 1904-05 | 88,969,000 | -917,000 1892-93 | 69,908,000 | 94,000 || 1905-06 | 89,478,000 | -63,500 =========+============+============++=========+============+===========

The minus sign denotes an excess of operating expenses over receipts.

Had the House of Commons permitted the successive Governments of the day to act upon the doctrine contained in the foregoing quotation, the State telegraphs would have been self-supporting ever since the year 1880-81. They would have paid the full interest upon the whole capital invested in them; in spite of the high prices paid to the telegraph companies and the railway companies for the sale of those companies' plants and rights.

FOOTNOTES:

[73] _Report from the Select Committee on Revenue Estimates_, 1888; q. 2,396, Mr. C. H. B. Patey, Third Secretary to the Post Office.

[74] _Report from the Select Committee on Revenue Estimates_, 1888; q. 950, Sir S. A. Blackwood, Secretary to the Post Office.

[75] _Hansard's Parliamentary Debates_, April 15, 1875, p. 1,025.

[76] _Hansard's Parliamentary Debates_, August 4, 1887, p. 1,126, the Marquis of Salisbury, Prime Minister.

[77] _Hansard's Parliamentary Debates_, August 31, 1893, p. 1,580, Mr. A. Morley, Postmaster General.

[78] _Hansard's Parliamentary Debates_, May 27, 1892, p. 134, Sir James Fergusson, Postmaster General.

[79] _Hansard's Parliamentary Debates_, August 9, 1901, p. 289, Mr. Austen Chamberlain, Postmaster General; and May 9, 1906, p. 1,294, Mr. Sydney Buxton, Postmaster General.

[80] _Report from the Select Committee on Post Office_ (_Telegraph Department_), 1876, Mr. C. H. B. Patey, Principal Clerk in the Post Office; q. 3,705 and following, and 2,021.

[81] _Report of a Committee appointed by the Treasury to investigate the Causes of the Increased Cost of the Telegraph Service since the Acquisition of the Telegraphs by the State_, 1875, p. 8; and _Parliamentary Paper_, No. 34, Session of 1876, p. 6.

NON-PAYING TELEGRAPH OFFICES ========+========+===========+========+=======+======= | |The rest of| | | | London | England |Scotland|Ireland| Total | | and Wales | | | --------+--------+-----------+--------+-------+------- 1872 | 10 | 417 | 40 | 261 | 728 1874 | 7 | 303 | 28 | 111 | 440 1875 | 0 | 150 | 6 | 72 | 228 ========+========+===========+========+=======+=======

[82] _Report from the Select Committee on Revenue Departments Estimates_, 1888; q. 2,621.

[83] _Report from the Select Committee on Post Office_ (_Telegraph Department_), 1876; q. 2,712, 2,713 and 3,734.

Average operating expenses per telegram: Cents

At office where handed in 2 For receipt at transmitting office 3 For forwarding from transmitting office 3 For receipt at delivery office 3 For delivery to addressee 2 Stationery forms used 1 Rent of offices, way-leaves, and maintenance of wires and instruments 2 to 4 -------- 16 to 18

[84] _Miscellaneous Statistics of the United Kingdom_, current issues.

[85] The net revenue Messages paid 3.25 per cent. interest on: $ 1875-76 20,974,000 32,600,000 1877-78 22,172,000 30,165,000 1878-79 22,490,000 41,190,000 1879-80 24,500,000 51,310,000 1880-81 27,300,000 69,455,000 1884-85 33,300,000 45,710,000

[86] _Hansard's Parliamentary Debates_, March 30, 1885, p. 1,072 and following, Mr. Shaw-Lefevre, Postmaster General, 1883-84.

[87] _Hansard's Parliamentary Debates_, March 29, 1883, p. 995 and following.

[88] _Hansard's Parliamentary Debates_, June 26, 1882, p. 422, Dr. Cameron moves the resolution: "That the working of the Postal Telegraph Service, with a view to the realization of profit, involves a Tax upon the use of Telegrams; that any such Tax is inexpedient, and that the profits derived from the service is now such that the charges for Inland Telegrams should be reduced."

[89] Ever since the nationalization of the telegraphs the newspaper press messages had been carried at special rates which did not cover operating expenses.

[90] _Hansard's Parliamentary Debates_, March 29, 1883, p. 1,018 and following.

[91] _Hansard's Parliamentary Debates_, June 26, 1882, p. 427.

[92] _Treasury Minute_, June 14, 1883, _with Regard to Reduction of the Minimum charge for Post Office Telegrams_; and _Hansard's Parliamentary Debates_, April 24, 1884, p. 499, the Chancellor of the Exchequer; and April 24, p. 569, and August 7, p. 138, Mr. Fawcett, Postmaster General.

[93] _Hansard's Parliamentary Debates_, July 5, 1885, p. 1,825, Lord John Manners, Postmaster General.

[94] _Hansard's Parliamentary Debates_, March 30, 1885, p. 1,072 and following.

[95] The increase in salaries and wages in 1880-81 to 1884-85 was $1,100,000, and the increase in the cost of maintenance was $538,000.

[96] Compare also _Hansard's Parliamentary Debates_, June 6, 1887, p. 1,180, Mr. Shaw-Lefevre.

[97] See table on page 111.