Page 5, 26th May 1939

26th May 1939
Page 5
Page 5, 26th May 1939 — SPOTLIGHT ON THE

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SQUARE DEAL 4, DURING the past few months our four main line railway companies have expended thousands of pounds on a campaign for a Square Deal," their main object being to obtain release from statutory restrictions governing their charges, which they claim are obsolete and discriminate unfairly against them in their competition with road transport.

Impressive statistics of falling traffic receipts greet the eye at all the railway stations, and attractively printed brochures setting out the railways' grievances are distributed gratis to all passengers. The general

public, however, are somewhat hardened to propaganda, and it, is questionable whether the campaign is likely to arouse interest sufficient to make it become a vital Issue of our individual affairs.

At the same time the railways are an integral part of our national economy, and they aro governed by legislation regarding their tariffs, and it is essential that their position should receive some consideration if it is unsatisfactory.

TILE PROS AND CONS We are told by the companies that they are losing money, and that the shareholders are not getting a fair return on their invested capital. On the other hand, we are informed by the railway trade unions, whose claims for better working conditions have been refused on the foregoing grounds, that the companies' contentions are untrue in so far as the capital of the railways is in excess of real assets, being " watered," and that this capital needs writing down to bring it into conformity with the present day position.


To understand the financial structure of the railway companies it is necessary to go back a lot farther than the average balance sheet does. The 1937 returns showed an issued capital of £1,082,418,938, to which is added 144,579,345 " nominal additions," making £1,126,998,283 altogether. Now this " nominal addition " sum is really not capital at all. It is subscribed, and consists mainly, so far as one can trace, of bonus shares that have been issued at various times. It is definitely arguable that this " capital " at any rate has a questionable claim to dividends, although the practice of issuing such shares is quite licit under existing company law.

It Ss interesting, too, that since the passing of the Act giving the railway companies right to stake financial interest in road transport concerns they have invested some 113,675,0001 in it, being connected with 80 odd passenger concerns2 covering about 45 per cent. of road passenger traffic, and in addition controlling or being shareholders in a number of road goods transport companies, notably Carter Paterson.


YEAR Now, so far as dividends are concerned, these are expected to be produced by the whole of the capital, and are restricted by the 1921 Act to a rate of 4.7 per cent. To pay this a net revenue of about 151,000,000 per year would be necessary.

In 1938 the net revenue was only approximately £28,000,000, and represented a return of only 2.64 per cent. The 1938 net revenue was nearly 19,000,000 less than that of 1937.

Not all of the shareholders, however, suffered equally from this recession of earnings.

Loans, debentures, and guaranteed stocks have prior rights to dividends, and these categories of stockholders represent 42.6 per cent. of the subscribed capital. After they have had their rake-off, the ordinary shareholders, who are themselves sub-divided into " preference " and " ordinary " ordinary shareholders, have the leavings.

In 1937 the " preference " ordinary shares collected an average dividend of 3.84 per cent., while the " ordinary " ordinary shares got 1.79 per cent. Last year, however, conditions were very much worse, and neither class of ordinary shareholder saw much return on their investments, which total 57.4 per cent. of the subscribed capital, of which 32.51 per cent. is preferred. Actually £360,000,000 .of railway capital, representing about one-third of the whole, went dividendlesa last year.3

At the same time, despite several depletions during the present century, railway reserves still stand at about 158,000,000, after deducting superannuation funds, a little fact which seems to be conspicuously absent from all the posters pleading for a Square Deal.

101,000 EMPLOYEES AT 50s. A WEEK

Now there will be many who will say, why worry about capital not bearing an interest, that this is as it should be, and what about the 101,000 railway employees rated at less than 50s. a week ?4 I am coming to this later on.

What it is imperative to remember is that not all the shares in our railways are owned by unscrupulous capitalists.

The 834,000-odd shareholders include, in addition to numerous corporate bodies such as insurance companies and unit trusts which draw their funds from the working and lower middle classes, many individuals whose positions may be quite as bad as the under 50s employee, e.g., the invalid or widow dependent upon the earnings of shares bought with perhaps small legacies or savings. Such little investors are not a myth.

They do exist, though undoubtedly in a minority of the 834,000. If you permit a system under which these individuals are asked to lend their money to industry in order to get some return for it, then they are doing no wrong in expecting such a return to materialise. If anything is wrong, of course, it is the system.

The future prospects of the railways at the moment are anything but bright.

The first ten weeks of this year already show a drop of £1,672,000 in traffic receipts compared with the corresponding period of 1938. It is obvious that we are heading for disaster unless something is done to rehabilitate the finances of the railways. What can be done?

STAFFS CUT BY 12,000 IN 1999 Well, one could cut wages and reduce labour costs, and there is very little doubt that this would be done if the railwaymen had not the good sense to keep their unions strong and militant. As it is they are suffering in many ways. " Savings" aggregating 13,275,000 were effected by three of the companies in 1938.5 Lord Stamp, chairman of the L.M.S., informed an inquiring shareholder that there were 12,000 less on the pay roll in February, 1939, than a year previously.6

Labour conditions on the railways have always been a source of friction, and taking the position generally, one can say definitely that the unions are in the right in proving obdurate in their demands for improved conditions.

We have already referred to the 101,000 employees rated at under 50s. These are roughly 19 per cent. of the total. Apart from the key grades, and the directors, of whom more anon, there are good grounds for dissatisfaction among the staff at the way things are going. " Rationalisation " is proceeding apace, entailing not only dismissals where possible, but, what is almost as bad, stagnation of lower grade railwaymen in inferior positions owing to the slowing up of promotion, and also there is taking place the substitution of cheaper female labour for male in a great many instances.

Certainly labour is getting a better share of the railway takings now than it was before the war, but the big rise in living costs that has occurred since then has practically offset the improvement.

Of every £1 revenue labour now gets lie. 8d.,7 compared with 7s. 3d. in 1913.5 Loans, debentures and guaranteed stocks still get their full dividends, but the ordinary stocks, which in 1913 claimed 2s. 8d, out of each £1, in 1935 only got 3d.,9 and last year about lid.


And what of the directors? Altogether there are 81 of these. They draw salaries averaging £1,150 each per annum. Their average age is 63, 21 of them being 70 or over, five being octogenarians.10 Now there are those, particularly leaders of railway trade unions, who from time to time somewhat rudely suggest that reorganisation of the boards mightn't be a bad thing, and that a considerable economy could be effected by dispensing with expensive directors who, they aver, serve no useful purpose. Stung to the quick by such a reprehensible view, a writer in the Daily Mai/11 recently was at great pains to show what really hard-working individuals railway directors are. He pointed out ghat they attended lots of committee meetings—about 60 a year—and had to digest innumerable reports, all for a mere £750-11,000 a year, chairmen being paid more, of course.

To the ordinary person, and especially the under 508. a week employee, these conditions would not appear unduly oppressive. But for the benefit of those who may be solicitous about these poor directors, it might be added that in the majority of cases railways are not the only things they are interested in Between them these 81 directors have over 500 directorates,12 covering such varied interests as coal, newspapers, insurance, brewing, banking, oil, tobacco and steel, as well as some others. Verily a versatile body of men!

It is not to be wondered at if, in the midst of all these activities (12 of them are M.P.s as well),13 railway management may not get quite the attention it should, and indeed even the defender of the directors in the Daily Mail admits somewhat naively that the method by which they elect each other to the boards has the defect of not apparently requiring a knowledge of travel as a qualification (sic).


Leaving out the possibility of materially reducing labour costs or general expenses sufficiently to put the financial position right, it remains to be seen if the capital itself ought to be written down, and if the unions' contention that it Is " watered " is true.

Well, there is very little doubt, if one goes well into the question, that there is still plenty of " water " that wants squeezing out. The history of railway development is one of wholesale corruption and fraud. Fabulous sums, provided by shareholders, have been frittered away in legal actions, the " financing " of parliamentary Bills, and particularly in the buying up of land at criminally inflated values. We are told that 112 miles of the London and Birmingham Railway cost 18,450 a mile, of which £6,300 went to the land-owners. Of other railways, the G.W.R. and L.N.E.R. paid, it is estimated, for land, 16,300 per mile, the London and Brighton £8,000, and the London and Bristol 16,696.14 Lloyd George once stated that the land-owners got from the companies ten times the value of their land,15 a statement which he is subsequently reported to have amended to fifty Altogether it has been computed that the railways paid for land the colossal sum of 1120,000,000,17 of which, if we accept a modest half of Lloyd George's first estimate, an amount of £96,000,000 was paid in excess value to the landlords.

LEGAL EXPENSES To this astronomical figure we have to add others. First, legal and parliamentary costs. These were absolutely incredible.

One parliamentary Bill alone was stated to have cost 1436,226. Between 1829 and 1860 legal expenses in connection with the railways were estimated at 17,000,000, while Sir William Ackworth put the grand total as altogether being about 190,000,000.18 Taken with the excess cost of land, this makes 1186,000,000.

To this must be added the price of insane competition. This became so rife during the latter part of the last century as to be pure lunacy. Leeds was served by five different railways, of which four went to London. Glasgow got three trunk lines to the South. In 1845 there were 118 lines in the course of construction and 1,263 projected, some 40 per cent. of which, however, did not materialise,10 though " promotion " costs, of course, were incurred in most cases.

One dispute over a right of way culminated in the two disputing railway companies solemnly running two locomotives into each other, though whether this solved the point at issue is not stated.20

In addition, considerable sums of money changed hands between the rival companies as payments for rights of way not taken advantage of, such as the 124,000 paid by the London Brighton & South Coast Railway to the South Eastern Railway in appreciation of their not taking advantage of their rights to run to Eastbourne over the former company's lines.21 When the railways first entered the field of transport they had a serious and well-established rival in the canals.

In order to deal with competition from this source shares in the various canal companies were purchased by the railways, or some other means found of " controlling " the waterways in favour of the iron roads. This all cost money, which had to be subscribed. Every £150 share obtained by the railways in the Don Navigation Canal was stated to have cost them 13,000.22 All told, the cost of competition is estimated at about 1100,000,000.23 Added to the figures computed for legal costs and land profiteering, this gives us a sum of something like 1286,000,000 of unproductive capital expenditure. While this estimate cannot be accurately verified, it is certainly, if wrong at all, wrong in so much as it is too low a figure, bearing in mind for one thing that our computation of excess land values was very modest indeed.

Has any of this " watered " capital been squeezed out? Some of it has, definitely. 1111,000,000 was written off at the 1921 grouping, and previous to that innumerable small amalgamations had undoubtedly effected a further reduction. It was nothing, however, like the 1175,000,000 that is left if we deduct the 1921 capital diminution from the 1286,000,000 estimated as unrepresentative expenditure, and most of this is undoubtedly still being carried forward as money demanding a hire-rate, or dividend. Thus we might, I think, truthfully say that 10 per cent. of the railways' present capital is "water," which, if remunerated at, say, 3 per cent., an average for up to 1935, would cost annually 13,378,000.

LABOUR WILL NOT BUDGE From the foregoing statistics it will be seen that had the railways not been so over-capitalised during their early days much of the present trouble might have been avoided.

As it is crisis faces them from more than one direction. Revenue is slumping back to the 1931 " depression " level, when wages were cut to meet the recession. On this occasion it is apparent, however, that labour is not disposed to tighten its belt, and indeed has made it quite clear that in the near future it will expect an even bigger share of the wealth it produces than it has hitherto been obtaining.

There is no denying that the railway trade union leaders of to-day are shrewd, capable men, with a remarkably comprehensive grasp of economic and financial problems. It was Mr Marchbank of the N.U.R. who pointed out the cogent fact, when presenting his case for wage increases recently, that while it might be true to say that railway capital only produced an average of 3.4 per cent., this was supposing that all the shares were at par value. Actually this was not so, and shares were purchasable at, in many instances, well below their nominal value, and this should be taken into consideration. Actually, Mr Marchbank indicated, the 11,102,016.586 which was the nominal value of all railway shares on December 31, 1937, based on the Stock Exchange quotations for that day, was reduced to 1840,088,509, and reckoned on this figure, the dividends paid represented a return of 4.47 per cent,24

Since 1937, of course, railway shares have further depreciated, and their actual value at the present moment is probably equivalent to a write-down of 25 per cent., but, of course, this does not reduce the amount still expected as dividend which is calculated on the full capital value.


So what are we to do ? There would seem to be three solutions.

One, we can give the railways the " freedom " they are campaigning for, i.e., remove legal restrictions on tariffs of charges and let prices be adjusted in accordance with the economics of railway workings.

Or, secondly, we could make up the standard revenue fixed approximately at £51,000,000, with a Government subsidy.

Or, finally, we can co-ordinate road and rail traffic under public ownership, doing nationally and for all forms of commercial transport what the London Passenger Transport Board has done for one class in a defined area, and buying out the stockholders in the same manner.

Of the three possible solutions only the last can effect a permanent and equitable settlement. To let the railways compete with the roads, or vice versa, as we are doing now, is just plain stupidity. It means multiplicated transport services, unnecessary overheads and wasteful competition, all of which have to be paid for either by the consumer in inflated charges or else by the wageearners in deflated wages. A Government subsidy is only a palliative, and (Continued on Page 12.),

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