On April 1, 1868, the Disraeli Government brought into Parliament a “Bill to enable the Postmaster General to acquire, work, and maintain Electric Telegraphs in the United Kingdom.”29 At this time the Government still was ignorant of the precise relations existing between the telegraph companies and the railways; and it did not foresee that the purchase of the assets of the telegraph companies would lead to the purchase of the reversionary rights of the railways in the telegraphs, the telegraphs having been, for the most part, erected on the lands of the railways, under leases of way-leaves that still had to run, on an average, 23.7 years. At this time, therefore, the Government contemplated only the purchase of the Electric and International Company, the British and Irish Company, the United Kingdom Company, and the London and Provincial, the successor of the London District Telegraph Company.

In the course of the debate upon the order for the Second Reading of the Bill, the Chancellor of the Exchequer, Mr. G. W. Hunt, said that “if the House would excuse him, he would rather not enter fully into details with respect to the purchase at present. But he would say that, speaking roughly, it would take something near $20,000,000, or, at all events, between $15,000,000 and $20,000,000 for the purchase and the necessary extensions of the lines.” He added that if the purchase should be made, the telegraphs would yield a net revenue of $1,050,000 a year; and that sum would suffice to pay the interest on the debt to be contracted, and to clear off that debt in twenty-nine years.30

Parliament was to be prorogued in August; and a General Election was to follow prorogation. The Government naturally was anxious to avoid having to go into the General Election without having achieved the nationalization of the telegraphs; particularly, since the opposition party also had committed itself to State purchase. Then again, the Government believed that the value of the telegraphs was increasing so rapidly that the State would lose money by any postponement of the act of purchase. For these reasons the Government entered into negotiations with the various interests that evinced a disposition to oppose in Parliament the Government’s Bill, until finally all opposition was removed.

The Bill, as introduced, proposed that the State pay the four telegraph companies enumerated, the money actually invested by them—about $11,500,000—together with an allowance for the prospective increase of the earnings of the companies, and an additional allowance for compulsory sale. The last two items were to be fixed by an arbitrator who was to be appointed by the Board of Trade. The companies flatly rejected this offer, pointing, by way of precedent, to the Act of 1844, which fixed the terms to be given to the railways, should the State at any time resolve upon the compulsory purchase of the railways. The Act in question prescribed: “twenty-five years’ purchase of the average annual divisible profits for three years before such purchase, provided these profits shall equal or exceed 10 per cent. on the capital; and, if not, the railway company shall be at liberty to claim any further sum for anticipated profits, to be fixed by arbitration.”

The Government next offered the companies the highest market price reached by the stock of the companies on the London Stock Exchange up to May 28, 1868, plus an allowance for prospective profits, to be fixed by arbitration. The companies rejected that offer, but accepted the next one, namely, twenty years’ purchase of the profits of the year that was to end with June 30, 1868.31 Mr. W. H. Smith, one of the most highly esteemed Members of the House of Commons, who was himself a director in the Electric and International, subsequently spoke as follows of these negotiations: “In 1868 the telegraph companies were by no means desirous to part with their property, but the question whether the Government should be in possession of the telegraphs having been forced on their consideration, the three principal companies very reluctantly came to an arrangement with the Government of the day. He did not wish to express any opinion on the bargain which had been made, and would only say for himself and those with whom he was associated, that they very deeply regretted to be obliged to part with property which had been profitable, and which they had great pleasure in managing.”32 Mr. Smith added that the net earnings of the Electric and International had increased from $336,815 in 1862, to $859,215 in 1868; and that the average annual increase per cent. had been 17.2 per cent.

The state of the public mind at the time when the Government introduced its Bill, was indicated in the issue of April 11, 1868, of The Economist, the leading financial newspaper of Great Britain. Said the journal in question: “Even if the companies resist, they will not be very powerful opponents—firstly, because the leaders of both parties have already sanctioned the scheme; and, secondly, because the companies are exceptionally unpopular. There is, probably, no interest in the Kingdom which is so cordially disliked by the press, which, when united, is stronger than any interest, and which has suffered for years under the shortcomings of the private companies. The real discussion in Parliament, should there be any, will turn upon a very different point, and it will be not a little interesting to observe how far the current of opinion on the subject of State interference with private enterprise, has really ebbed within the last few years. Twelve or fourteen years ago it would have been useless for any Chancellor of the Exchequer to propose such an operation…. It was [at that time] believed on all sides that State interference was wrong, because it shut out the private speculators from the natural reward of their energy and labor.”

Before the Select Committee of the House of Commons to which was referred the Government’s Bill, Mr. Scudamore argued that if Parliament could not make a reasonable bargain with the telegraph companies, it could authorize the Post Office to build a system of telegraphs. But that measure ought to be adopted only as a last resource. It was of paramount importance to avoid shaking the confidence of the investors that private enterprise would be allowed to reap the full benefits of its enterprise, and that it would be exposed to nothing more than the ordinary vicissitudes of trade. That the possibility of competition by the State, by means of money taken from the people by taxation, never had been included within the ordinary vicissitudes of trade. Coming to the question of paying twenty years’ purchase of the profits of the year 1867-1868, Mr. Scudamore said: “The telegraphs are so much more valuable a property than we originally believed, that if you do not buy them this year, you unquestionably will have to pay $2,500,000 more for them next year…. Their [average] annual growth of profit is certainly not less than ten per cent. at present. If you wait till next year and only give them nineteen years’ purchase, you will give them more than you will now give. If you wait two years, and give them eighteen years’ purchase, you will still give them more than you will now give, assuming the annual growth of profit to be the same. If you wait four years, and give them sixteen years’ purchase, you will again give them more, and in addition you will have lost the benefit accruing in the four years, which would have gone into their pockets instead of coming into the pockets of the nation.”33

In the House of Commons, the Chancellor of the Exchequer, Mr. G. W. Hunt, said: “The terms agreed upon, although very liberal, were not more liberal than they should be under the circumstances, and did not offer more than an arbitrator would have given. The companies had agreed to sell at twenty years’ purchase of present net profits, although those profits were increasing at the rate of 10 per cent. a year. He was satisfied the more the House looked into the matter, the more they would be satisfied with the bargain made.”34 The Chancellor of the Exchequer continued with the statement that Mr. Scudamore estimated that the Postmaster General would obtain from the telegraphs a net revenue of $1,015,000 at the minimum, and $1,790,000 at the maximum. The mean of those estimates was $1,402,500, which sum would pay the interest and sinking fund payments—3.5 per cent. in all—on $40,000,000. The Government, therefore, could afford to pay $40,000,000 for the telegraphs. Indeed, on the basis of the maximum estimate of net revenue, it could pay $50,000,000. But Mr. Scudamore confidently fixed at $30,000,000 at the maximum, the price that the Government would have to pay. Mr. Scudamore’s estimates of net revenue “would stand any amount of examination by the House, as they had stood very careful scrutiny by the Select Committee, and for the Government to carry out the scheme would not only prove safe but profitable.”

By this time the Government had learned that it would be necessary to purchase the reversionary rights of the railway companies in the business of the telegraph companies. The Government had agreed with the railway companies upon the terms under which it was to be left to arbitration how much should be paid for those reversionary rights. The Chancellor of the Exchequer stated that he was unwilling to divulge the Government’s estimates of what sums would be awarded under the arbitration; for, if he did divulge them, they might be used against the Government before the arbitrators. “But Mr. Scudamore, whose ability with regard not only to this matter, but also to other matters, had been of great service to the Government, had given considerable attention to the matter, and Mr. Scudamore believed that $30,000,000 would be the outside figure” to be paid to the telegraph companies and the railway companies. The Chancellor of the Exchequer added that Mr. Scudamore’s “calculations had been submitted to and approved by Mr. Foster, the principal finance officer of the Treasury.”

In passing, it may be stated that Mr. Foster had stated before the Select Committee of the House of Commons that he had given only “two or three days” to the consideration of the extremely difficult question of the value that the arbitrators would be likely to put upon the railway companies’ reversionary rights.35

Mr. Goschen, of the banking firm of FrÜhling and Goschen, who had been a member of the Select Committee, and had taken an active part in its proceedings, replied that “the inquiry [by the committee] had been carried on under great disadvantages. An opposition, organized by private interests [the telegraph companies and the railway companies], had been changed into an organization of warm supporters of the Bill pending the inquiry. Before the Committee there appeared Counsel representing the promoters [i. e., the Government], and, at first, counsel representing the original opposition to the Bill [i. e. the telegraph and railway companies]; but in consequence of the change in the views of the opposition, who during the proceedings became friendly to the Bill, there was no counsel present to cross-examine the witnesses. Consequently, in the interests of the public, and in order that all the facts might be brought to light, members of the committee [chiefly Mr. Goschen and Mr. Leeman] had to discharge the duty of cross-examining the witnesses. The same causes led to the result that the witnesses produced were all on one side….”36

Mr. Goschen emphasized the fact that upon the expiring of the telegraph companies’ leases of rights of way over the railways, the reversionary rights of the railways would come into play, and that the Government, after having paid twenty years’ purchase to the telegraph companies, “would probably have to pay half as much again to the railways.” “The railways had felt the strength of their position so much, that they had pointed out to the committee that they would not only be entitled to an increase in the rate which they now received [as rent from the telegraph companies] as soon as the leases expired, but they would also be entitled to an indemnification [from the State] for the loss they would sustain in not being allowed [in consequence of the nationalization of the telegraphs] to put the screw on the telegraph companies.” Mr. Goschen said “he felt very strongly on this point because he was convinced that it was impossible to find an instance of any private enterprise which, while it returned a profit of 15 per cent. to its shareholders, enjoyed a monopoly for any great length of time.” If the Government purchased the assets of the telegraph companies, the railway companies would succeed in compelling the State to share with them the great profits to be obtained from the business of telegraphy. They would do so by compelling the Government to pay a big sum for their reversionary rights in the telegraph companies, as the price for abstaining from building up a telegraph business of their own, upon the expiry of the telegraph companies’ leases. No business that yielded a return of 15 per cent. could be worth twenty years’ purchase, for such returns were very insecure, because of the certainty that competition would arise from persons who would be content with ten per cent., or less.37

Mr. Leeman, who had sat on the Select Committee, and had, with Mr. Goschen, done all of the cross-examining directed to bring out the points that told against the Government’s proposal, followed Mr. Goschen in the debate. He began by stating that he spoke with “twenty years’ experience as a railway man;” and he directed his argument especially against the terms of the agreements made by the Government to purchase the reversionary rights of the railways in the telegraph companies’ businesses. “Mr. Scudamore, who was what he had already been described to be—a most able man—had not known, up to the time of the second reading of the Bill [June 8, 1868], what were the existing arrangements between the telegraph companies and the railway companies; and, subsequently, while still without the requisite knowledge on that point,38 he went and agreed on the part of the Government to buy the interest of the telegraph companies at 20 years’ purchase of their profits. In addition it was to be remembered that the railway companies had reversionary interests which would come into operation after comparatively short time for which their arrangements with the telegraph companies were to continue. In July, 1866, Mr. Scudamore estimated the necessary outlay on the part of the Government at $12,000,000. In February, 1868, another officer of the Government raised the estimate to $15,000,000; but it was not until the Bill came before the committee [July, 1868], that Mr. Scudamore said that $30,000,000 would be required…. He [Mr. Leeman] undertook to say that Mr. Scudamore was as wide of the mark in his estimate of $30,000,000, as he had been in his estimate of $12,000,000. At the expiration of their agreements with the telegraph companies, several [all] of the railway companies would have it in their power to compete with the Post Office in the transmission of telegraphic messages. No doubt this fact would be brought under the notice of the arbitrators when the value of their reversion was being considered, and at what price would the arbitrators value this reversionary power of competition? Had Mr. Scudamore made any estimate on the subject? Owing to the position in which Mr. Scudamore had placed the Government, the railway companies had demanded and had been promised terms in respect of their reversions, which he, as a railway man, now said it was the duty of any Government to have resisted….”39

For the better understanding of this question of reversions, it must be stated that the telegraph companies, for the most part, had erected their poles and wires on the permanent way of the railway companies, under leases of way-leaves, which, in 1868, still had 23.7 years to run, on the average.40 As the leases should expire, the railway companies would have an opportunity to try to obtain better terms, or to order the companies to remove their plant, and then to erect their own plant, and themselves engage in the telegraph business. But the railway companies were handicapped by the fact that the leases did not expire together, and that it would be difficult to build up a new telegraph system piecemeal out of the parts of line that would become free in the next three years to twenty-nine years. There was, therefore, much room for difference of opinion on the question how far the railway companies would be able “to put the screw” on the telegraph companies upon the successive expirations of leases. The Stock Exchange doubtless took the contingency into consideration, that being one reason why the Electric and International shares did not rise above fourteen years’ purchase of the annual dividends. Mr. Scudamore, before the Select Committee, expressed the opinion that the railway companies could force the telegraph companies “to give them somewhat better terms; that would be the extreme result of any negotiations between the telegraph companies and the railway companies.” To Mr. Foster, principal officer of the Finance Division of the Treasury, whom the Government called to support Mr. Scudamore’s evidence, Mr. Leeman put the question: “Looking at it as a financial question, do you suppose all the railways in the country, having power to work their telegraphs at the end of ten years, but for this Bill, will not put in a claim for a very large sum in respect of that reversion?” The witness replied: “I do not think it would be of very great value in the first place, and in the next place it would be a value deferred for ten years, which would very much diminish it.” To the further query: “You do not take the view that we shall have to pay the railway companies and also the telegraph companies for the same thing,” he replied in the negative.41

Shortly after the Government’s Bill had been referred to the Select Committee, the Government made the railway companies this proposition, which was accepted. The Government was to acquire perpetual and exclusive way-leaves for telegraph lines over the railways, and the price to be paid therefor was to be left to arbitration. The railway companies were to have the choice of presenting their claims either under the head of payment for the cession of perpetual and exclusive way-leaves to the Government; or, under the head of compensation for the loss of right to grant way-leaves to any one other than the Government, as well as for the loss of right themselves to transmit messages, except on their own railway business. The Government was of the opinion that the sums to be paid to the railways under this agreement would not be large enough to raise above $30,000,000, the total sum to be paid to the telegraph companies and the railways.

Parliament enacted the Bill of 1868 authorizing the Government to purchase the property of the telegraph companies and the rights of the railways; but it provided that the resulting Act of 1868 should not take effect, unless, in the Session of 1869, Parliament should put at the disposal of the Postmaster General such monies as were required to carry out the provisions of the Act of 1868.

The Government immediately appointed a committee to ascertain the profits earned by the telegraph companies in the year that had ended with June, 1868. The committee, which consisted of the Receiver and Accountant General of the Post Office, and other gentlemen selected from the Post Office for their general ability, but especially for their knowledge of accounts, in June and July, 1869, reported that the aggregate of the sums to be paid to the six telegraph companies was $28,575,235,42 the companies having put in claims aggregating $35,180,185.

While the Bill had been before the Select Committee, the Government had agreed to purchase the properties of Reuters Telegram Company (Norderney Cable), as well as of the Universal Private Company. The price paid for those properties absorbed the margin on which Mr. Scudamore and the Government had counted for the purchase of the reversionary rights of the railways.

In the meantime, the Disraeli Ministry, which had carried the measure of 1868, had been replaced, on December 9, 1868, by the Gladstone Ministry. On July 5, 1869, the Marquis of Hartington, Postmaster General, laid before Parliament a Bill authorizing the Post Office Department to spend $35,000,000 for the purpose of carrying out the act of 1868. The Marquis of Hartington said that $28,575,000 would be required for the purchase of the assets of the telegraph companies; that $3,500,000 would cover the claims of the railways, which had not yet been adjusted; and that $1,500,000 would suffice to rearrange the telegraph lines and to make such extensions as would be required to give Government telegraph offices to 3,776 places, towns, and cities, the present number of places having telegraph offices being 1,882.

The Marquis of Hartington stated that Parliament “was quite competent to repudiate the bargain of 1868, if they thought it a bad one…. Having given the subject his best consideration, he must say, without expressing any opinion as to the terms of the bargain, that if they were to begin afresh, he did not think they could get the property on better terms.” He added that the “Government would take over the telegraphs of the companies on January 1, 1870, on the basis of paying twenty times the profits of the year 1867-68. But that in consequence of the increase of the business since 1867-68, the $28,575,000 which the State would pay the telegraph companies, would represent, not twenty years’ purchase of the profits in 1870, but considerably under seventeen years’ purchase of those profits. The trade of the Electric and International had been found to be growing at the rate of 18 per cent. a year; that of the British and Irish at the rate of 32 per cent.”43

The Chancellor of the Exchequer, Mr. Robert Lowe, was by no means so sanguine. He spoke of the “immense price” which the Government was asked to pay, “a price of which he, at all events, washed his hands altogether. The Right Honorable Gentlemen opposite [Mr. Hunt, Chancellor of the Exchequer in 1868], had accused them of appropriating the honor of this measure. He had not the slightest desire to contest the point with the Right Honorable Gentleman, who was welcome to it all. The matter was found by the present Government in so complicated a state that it was impossible for them to recede; but unless the House was prepared to grant that [i. e. a government monopoly] without which they believed it would be impossible to carry on the business effectively, it would be better that they should reject the Bill altogether.”44

Mr. Torrens moved an amendment adverse to the Bill, but his motion was defeated by a vote of 148 to 23. Before the vote was taken, Mr. W. Fowler, of the firm of Alexander & Company, Lombard Street, speaking of the reversionary rights of the railway companies, had said: “Therefore, for what the House knew, there might be contingent liabilities for hundreds of thousands or millions of pounds sterling more.”45

The measure became a law in August, 1869; and on February 5, 1870, the telegraphs of the United Kingdom were transferred to the Post Office Department. In the course of the year 1870, the Government bought the properties of the Jersey and Guernsey Company and of the Isle of Man Company. Those purchases, together with a large number of minor purchases made in 1869, but not previously mentioned, raised the total sum paid to the telegraph companies to $29,236,735.

Not until 1879 were the last of the claims of the railway companies adjusted. The writer has not succeeded in finding a specific official statement of the aggregate sum paid to the railway companies for their reversionary rights and for the grant to the Post Office of perpetual and exclusive way-leaves over their properties, but he infers that that sum was $10,000,000 or $11,000,000. That inference is based on testimony given in 1888 by Mr. C. H. B. Patey,46 Third Secretary to the Post Office, and on information given by the Postmaster General in 1895.47 It will be recalled, that in 1869, the Marquis of Hartington, Postmaster General, had told the House of Commons that the payments for the rights in question would not exceed $3,500,000. The Postmaster General doubtless spoke on the strength of assurances given by Mr. Scudamore. It will be remembered also that Mr. Leeman, in 1868, had warned the House in strong terms that Mr. Scudamore’s estimates were not to be trusted. Finally, it will be remembered that in 1869, Mr. W. Fowler, a financier of high standing, had warned the House of Commons that “there might be contingent liabilities of thousands or millions of pounds sterling more.”