Chapter IV: Front Matter (4)

+──────────────────────────+──────────+──────────────────────+────────+────────+──────────+ │ │ 50_l._ │ │Recorded│ Total │ Number │ │ │Preference│ Additional Stock or │Stock at│ actual │of Votes │ │ │ Shares │ Shares │the Poll│Capital │ scored │ │ │with 5_l._│ │as held.│paid up.│ for the │ │ │ paid up. │ │ │ │Extension.│ +──────────────────────────+──────────+──────────────────────+────────+────────+──────────+ │ │ │ │ £ │ £ │ │ │ │ +──────────────────────+────────+────────+──────────│ │ │ │ 7,500_l._ stock, and │ │ │ │ │The Company’s solicitor │ 500 │ 100 50_l._ shares, │ │ │ │ │ │ │ with 42_l._ 10_s._ │ │ │ │ │ │ │ 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 │ 4,266_l._ stock. │ 71,966 │ 11,036 │ 161 │ │One of the Company’s │ │ │ │ │ │ │ parliamentary counsel │ 200 │ 1,000_l._ stock. │ 11,000 │ 2,000 │ 40 │ │Another ditto, ditto │ 125 │ 200_l._ stock. │ 6,450 │ 825 │ 30 │ │Local solicitor for │ │ │ │ │ │ │ the proposed extension │ 7 │ None. │ 350 │ 35 │ 7 │ │The Company’s contractor │ │ │ │ │ │ │ for permanent-way │ 347 │ 52,833_l._ │ 70,183 │ 54,568 │ 158 │ │The Company’s conveyancer │ 1,003 │ 333_l._ stock. │ 50,483 │ 5,348 │ 118 │ │The Company’s furniture │ │ │ │ │ │ │ printer │ 35 │ 10,000_l._ stock. │ 11,750 │ 10,175 │ 41 │ │The Company’s surveyor │ 360 │ 1,250_l._ stock. │ 19,250 │ 3,050 │ 56 │ │The Company’s architect │ 217 │14,916_l._ stock; 119 │ 32,230 │ 20,416 │ 82 │ │ │ │ 50_l._ shares, with │ │ │ │ │ │ │ 42_l._ 10_s._ paid │ │ │ │ │ │ │ up; and 13 40_l._ │ │ │ │ │ │ │ shares, with 34_l._ │ │ │ │ │ │ │ paid up. │ │ │ │ │One of the Company’s │ │ │ │ │ │ │ carriers. │ 17 │ 833_l._ 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 {82} 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!

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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 {83} 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. {84} 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 {85} 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; {86} 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 {87} 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 {88} 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.

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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 {89} 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 {90} 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, {91} 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 {92} 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 {93} 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 {94} 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 {95} 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 {96} 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.

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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 {97} 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 {98} 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 {99} 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. {100} 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 {101} 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 {102} employed, is the measure. Money which, if used for a certain end, gives a smaller return than it would give if otherwise used, is used disadvantageously, not only to its possessors, but to the community. This is a corollary from the commonest principles of political economy—a corollary so obvious that we can scarcely understand how, after the free-trade controversy, a committee, numbering among its members Mr. Bright and Mr. Cardwell, should have overlooked it. Have we not been long ago taught, that in the mercantile world capital goes where it is most wanted—that the business which is at any time attracting capital by unusually high returns, is a business proved by that very fact to be unusually active—that its unusual activity shows society to be making great demands upon it; giving it high profits; wanting its commodities or services more than other commodities or services? Do not comparisons among our railways demonstrate that those paying large dividends are those subserving the public needs in a greater degree than those paying small dividends? and is it not obvious that the efforts of capitalists to get these large dividends led them to supply the greater needs before the lesser needs? Surely, the same law which holds in ordinary commerce, and also holds between one railway investment and another, holds likewise between railway investments and other investments. If the money spent in making branches and feeders is yielding an average return of from 1 to 2 per cent.; while if employed in land-draining or ship-building, it would return 4 or 5 per cent.; it is a conclusive proof that money is more wanted for land-draining and ship-building than for branch-making. And the general conclusions to be drawn are, that that large proportion of railway capital which does not pay the current rate of interest, is capital ill laid out; that if the returns on such proportion were capitalized at the current rate of interest, the resulting sum would represent its real value; and that {103} the difference between this sum and the amount expended, would indicate the national loss—a loss which, on the lowest estimate, would exceed £100,000,000. And however true it may be that the sum invested in unprofitable lines will go on increasing in productiveness; yet as, if more wisely invested, it would similarly have gone on increasing in productiveness, perhaps even at a greater rate, this vast loss must be regarded as a permanent and not as a temporary one.

Again then, we ask, is it so obvious that undertakings which have been disastrous to shareholders have been advantageous to the public? Is it not obvious, rather, that, in this respect, as in others, the interests of shareholders and the public are in the end identical? And does it not seem that instead of recommending “increased facilities for obtaining lines of local convenience,” the Select Committee might properly have reported that the existing facilities are abnormally great, and should be decreased?

There remains still to be considered the other of the two objections above stated as liable to be raised against the proposed interpretation of the proprietary contract—the objection, namely, that it would be a serious hindrance to railway enterprise. After what has already been said, it is scarcely needful to reply, that the hindrance would be no greater than is natural and healthful—no greater than is requisite to hold in check the private interests at variance with public ones. This notion that railway enterprise will not go on with due activity without artificial incentives—that bills for local extensions “rather need encouragement,” as the Committee say, is nothing but a remnant of protectionism. The motive which has hitherto led to the formation of all independent railway companies—the search of capitalists for good investments—may safely be left to form others as fast as local requirements become great enough to promise fair returns—as fast, that is, as local requirements {104} should be satisfied. This would be manifest enough without illustration; but there are facts proving it.

Already we have incidentally referred to the circumstance, that it has of late become common for landowners, merchants, and others locally interested, to get up railways for their own accommodation, which they do not expect to pay satisfactory dividends; and in which they are yet content to invest considerable sums, under the belief that the indirect profits accruing to them from increased facilities of traffic, will outbalance the direct loss. To so great an extent is this policy being carried that, as stated to the Select Committee, “in Yorkshire and Northumberland, where branch lines are being made through mere agricultural districts, the landowners are _giving their land_ for the purpose, and taking shares.” With such examples before us, it cannot rationally be doubted that there will always be capital forthcoming for making local lines as soon as the sum of the calculated benefits, direct and indirect, justifies its expenditure.

“But,” it will be urged, “a branch that would be unremunerative as an independent property, is often remunerative to the company which has made it, in virtue of the traffic it brings to the trunk line. Though yielding meagre returns on its own capital, yet, by increasing the returns on the capital of the trunk line, it compensates, or more than compensates. Were the existing company, however, forbidden to extend its undertaking, such a branch would not be made; and injury would result.” This is all true, with the exception of the last assertion, that such a branch would not be made. Though in its corporate capacity the company owning the trunk line would be unable to execute a work of this nature, there would be nothing to prevent individual shareholders in the trunk line from uniting to execute it; and were the prospects as favourable as is assumed, this course, being manifestly advantageous to individual shareholders, would be pursued by many of them. If, acting in concert with others similarly {105} circumstanced, the owner of £10,000 worth of stock in the trunk line, could aid the carrying out of a proposed feeder promising to return only 2 per cent. on its cost, by taking shares to the extent of £1000, it would answer his purpose to do this, providing the extra traffic it brought would raise the trunk-line dividend by one-fourth per cent. Thus, under a limited proprietary contract, companies would still, as now, foster extensions where they were wanted: the only difference being that, in the absence of guaranteed dividends, due caution would be shown; and the poorer shareholders would not, as at present, be sacrificed to the richer.

In brief, our position is, that whenever, by the efforts of all parties to be advantaged—local landowners, manufacturers, merchants, trunk-line shareholders, &c., the capital for an extension can be raised—whenever it becomes clear to all such, that their indirect profits plus their direct profits will make the investment a paying one; the fact is proof that the line is wanted. On the contrary, whenever the prospective gains to those interested are insufficient to induce them to undertake it, the fact is proof that the line is not wanted so much as other things are wanted, and therefore _ought not to be made_. Instead, then, of the principle we advocate being objectionable as a check to railway enterprise, one of its merits is, that by destroying the artificial incentives to such enterprise, it would confine it within normal limits.

A perusal of the evidence given before the Select Committee will show that it has sundry other merits, which we have space only to indicate.

It is estimated by Mr. Laing—and Mr. Stephenson, while declining to commit himself to the estimate, “does not believe he has overstated it,”—that out of the £280,000,000 already raised for the construction of our railways, £70,000,000 has been needlessly spent in contests, in duplicate lines, in “the multiplication of an immense number of schemes prosecuted at an almost reckless {106} expense;” and Mr. Stephenson believes that this sum is “a very inadequate representative of the actual loss in point of convenience, economy, and other circumstances connected with traffic, which the public has sustained by reason of parliamentary carelessness in legislating for railways.” Under an equitable interpretation of the proprietary contract, the greater part of this would have been avoided.

The competition between rival companies in extension and branch-making, which has already done vast injury, and the effects of which, if not stopped, will, in the opinion of Mr. Stephenson, be such that “property now paying 5 1/2 per cent. will in ten years be worth only 3 per cent., and that on twenty-one millions of money”—this competition could never have existed in its intense and deleterious form under the limiting principle we advocate.

Prompted by jealousy and antagonism, our companies have obtained powers for 2000 miles of railway which they have never made. The millions thus squandered in surveys and parliamentary contests—“food for lawyers and engineers”—would nearly all have been saved, had each supplementary line been obtainable only by an independent body of proprietors with no one to shield them from the penalties of reckless scheming.

It is admitted that the branches and feeders constructed from competitive motives have not been laid out in the best directions for the public. To defeat, or retaliate upon, opponents, having been one of the ends—often the chief end—in making them, routes have been chosen especially calculated to effect this end; and the local traffic has in consequence been ill provided for. Had these branches and feeders, however, been left to the enterprise of their respective districts, aided by such other enterprise as they could attract, the reverse would have been the fact; seeing that on the average, in these smaller cases as in the greater ones, the routes which most accommodate the public must be the routes most profitable to projectors.