The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface
• Translator's Note
• Where and Why Public Ownership Has Failed
• Book I: Public and Private Trading Operations
• Chapter I: Two Precepts
• Chapter II: The Three Mainsprings of Human Action
• Chapter III: Determining Motives of Private As Against Public Enterprises
• Chapter IV: Government and Municipal Trading Operations
• Book II: Financial Results of Government and Municipal Ownership
• Chapter I: Bookkeeping In State and Municipal Trading Enterprises
• Chapter II: The Belgian State Railroads
• Chapter III: Prussian Railroads
• Chapter IV: State Railways of Austria and Hungary
• Chapter V: Italian Railways
• Chapter VII: Railways of New Zealand
• Chapter VIII: Government Railroads In France
• Chapter IX: Public Vs. Private Operation
• Chapter X: The Holy Cities of Municipal Operation
• Chapter XI: Operation of Gas and Electricity In the United Kingdom
• Chapter XII: Tramways In Great Britain
• Chapter XIII: Housing of the Working Classes and Public Ownership In Great Britain
• Chapter XIV: Housing of the Working Classes On the Continent
• Chapter XV: Government Control of Food Supplies
• Chapter XVI: Victims of Government Ownership
• Chapter XVII: Charges, Debts and Credit
• Chapter XVIII: Fictitious Profits
• Chapter XIX: Fiscal Monopolies
• Chapter XX: The Alcohol Monopoly In Switzerland and Russia
• Chapter XXI: Financial Disorder
• Chapter XXII: The Purchase Price
• Chapter XXIII: Delusions of Profit and the Life Insurance Monopoly In Italy
• Chapter XXIV: The Fiscal Mines of the Saar District
• Chapter XXV: Public Versus Private Enterprise
• Book III: Administrative Results
• Chapter I: Administrative Results
• Chapter II: The Safety of Travelers Upon State and Private Railway Lines
• Chapter III: Disorders, Delays and Errors
• Chapter IV: Official Conservatism
• Chapter V: Labor
• Chapter VI: The Consumer
• Chapter VII: Programs of Organization and Regulation
• Book IV: Political and Social Consequences of Public Operation
• Chapter I: Socialist Programs and the Facts
• Chapter II: Bluff
• Chapter III: Results of Experience
• Chapter IV: The State a Dishonest Man
• Chapter V: Corruption
• Chapter VI: Nationalization of Public Utilities and the Foundation of Great Fortunes
• Chapter VII: Disintegrating Character of Public Operation
• Appendix %u201ca%u201d: Alcoholism In Russia
• Appendix %u201cb%u201d: the Financial Year In Australia
• Appendix %u201cc%u201d: the Shortcomings of the Telephone In England

BOOK II

FINANCIAL RESULTS OF GOVERNMENT AND MUNICIPAL OWNERSHIP

CHAPTER I

BOOKKEEPING IN STATE AND MUNICIPAL TRADING ENTERPRISES

1. I have already quoted from the report to the International Statistical Institute, compiled by Gustave Schelle, former minister of Public Works, wherein he discusses the financial situation of the various state and municipal trading enterprises, from which he has received reports, with all the authority of his official position, and with a mind which has remained both alert and independent throughout his administrative career. The difficulties in the way of estimating and comparing the value of such enterprises are very great.

In Denmark, for example, railway outlays for pensions and general administration and inspection costs are borne by the railroads themselves. For other enterprises such costs are met by the general budget.

Before 1904 and 1905 the postoffice and the telegraph yielded no net proceeds. In 1908–1909 this was also true of the mint.

No report is made regarding the interest charges upon loans for the establishment of such enterprises.

In 1908–1909 the results of municipal operation of gas, electricity and water were as follows:

In Holland, according to information furnished by M. Methorst, director-in-chief of the Central Bureau of Statistics, the cost of constructing the postoffice, telegraph and telephone systems amounted, on January 11, 1909, to 24,854,000 florins ($9,941,000). This capital bears an interest charge in favor of the public treasury of 3½ per cent., for the systems were established by means of public funds. Repayments are made periodically at a rate varying from 1 to 12½ per cent. The enterprise has a special double entry system, and no account is taken, in reckoning up receipts, of either free railroad transportation or official correspondence.

The funds for the operation of the Wilhelmina and Emma mines are supplied by the budget.

No information is given in the report concerning the financial results of municipal enterprises in Italy.

2. I quote literally the observations of M. Schelle concerning France:

A. Receipts and Expenses of Operation:

“In the case of the mints, the National Printing Office and the state railroads, the receipts and expenses of operation are placed opposite each other in budgets annexed to the general budget, and the difference in gain or loss is indicated only in this latter budget. The records of expenditures, however, as well as of receipts, are incomplete.

“In the case of the fiscal monopolies, the postal service and the official journal, the receipts of operation are included in the general receipts of the general budget, while the expenses are charged to the department under whose jurisdiction the enterprise may happen to be, without any comparison being made between receipts and expenditures.

“As for the other and less important industrial enterprises, the provisions of the general budget furnish no indication whatever of their condition. Tentative receipts are mixed with the receipts of other enterprises under different headings.

“Sometimes the expenses are deducted from the gross receipts, and the net proceeds alone figure in the budget; sometimes they are included in the expenditures of the department concerned, now and then without being in evidence. Information on the subject of these enterprises is impossible except in the final accounts.”

B. Costs of Construction:

“The costs of construction, in the case of certain enterprises, are so mixed in the accounts with other expenses as to make it utterly impossible to disentangle them. Even where enterprises have been made the subject matter of the budgets called annexes, the budget documents and the final accounts for each year indicate only the increase in the expenses to be incurred during the year under consideration, without regard to the expenses of former years. In order to get at the amount of capital employed, it is necessary to examine the final accounts of all the years. The resulting labor sometimes recalls that of the Benedictines, and, moreover, is far from always yielding satisfactory results, whether by reason of the antiquity of the expenses or the impossibility of disentangling them.”

C. Receipts and Expenses Outside of the Budget:

“Government undertakings keep no daily record of the requisitions made on them by other departments, so that important financial transactions do not appear.

“Certain utilities profit gratuitously from services rendered them by other public or quasi-public enterprises; thus the postal and telegraph departments pay the railroads for but a small share of the services which they receive from them.

“Public enterprises do not pay rent for the use of government property, for the real estate they occupy, nor are they charged with the materials they use. On the other hand, the National Printing Office includes among its receipts, at a rate which is generally considered high, the amount of work which it does for other departments. It does not include among its expenses, however, the interest on the capital sunk in the buildings in which it is installed.

“The postal and telegraph facilities granted to ministers and various public departments do not figure among the receipts of the postal enterprises.

Finally, among the annual expenses of the post and telegraph offices are included the subsidies paid to packet boats prompted, at least in part, by considerations altogether foreign to the mail service.”

D. Special Accounts:

“When an enterprise possesses a technical equipment or a stock of merchandise, no document ever shows the true value of such equipment.

“Exceptions to the above are the special accounts published at the close of each fiscal year: 1st, in the match and tobacco monopolies; 2d, in the case of the state railroads. However the value assigned in these special accounts to stock and equipment is not a commercial value. It is a simple difference between the expenses of purchase and manufacture and the proceeds of actual sales.

“Moreover, the fixed capital, buildings, real estate, etc., of the enterprises enter into these accounts in the same manner as the stock of manufactured products, so that it is impossible to get at the capital really involved.

“Finally, the amount realized from sales of real estate, when there are any, is not deducted from the capital, such sales being made by the Government Lands Department.

“The accounts of the Government Railroad Department published each year are no more satisfying. Statements as to the costs of construction are to be found among them, but these include only those expenses contracted directly by the department, and no mention is made of the very considerable expenditures which are covered by the budget of the ministry of Public Works.

“The Statistique des Chemins de Fer is the only document which gives an approximate idea of the actual costs of construction of the state railroads and that of the small line of Saint Georges de Commiers à La Mure.”

E. Capital Charges:

“It is not sufficient to know the amount of actual capital invested in an industrial enterprise in order to be able to form a correct judgment as to its management. It is also necessary to be informed as to the capital charges. Exact computation is impossible unless the expenses relative to each enterprise have been covered by special loans. We must be content, therefore, with an approximation difficult to make at this late day, because no care has been taken to make such an estimate each year since the enterprises were established. In order to make any progress, it would be necessary to estimate the applicable rates based on the price of government bonds or of bonds guaranteed by the government at the time when the various construction expenses were incurred. Expenses for building materials, etc., and for the installation and equipment of the various government enterprises have been a burden upon the Treasury since that date. This is evident in the case of the costs of construction defrayed with funds from loans not yet paid off. But it is true also of expenses paid for in this or that year out of the ordinary resources of the budget. These expenses may not be considered as paid off while a perpetual public debt exists, even though resources are at hand which might have been employed toward their extinction.”

3. The municipalization of public utilities has considerably increased the expenses and debts of British local governments. M. Schelle declares, however, that he has been unable to obtain the data necessary to a compilation of statistics as accurate in character as the purposes of the International Institute would naturally require.

A portion of his report is devoted to the financial condition of the Belgian state railroad, of which we will speak later in detail.

In Sweden the principal state operations are the postal, telegraph and telephone services and the government railways. The receipts from the railways represent 1.30 per cent. of the average annual capital.

The City of Paris municipalized the service of burying the dead in 1905. In 1906 the receipts were 5,242,000 francs ($995,980), while the labor and equipment expenses were respectively 2,500,000 francs ($475,000) and 2,135,000 francs ($405,650), or a total of 4,635,000 francs ($880,650).

In 1910 the receipts were 4,660,000 francs ($885,400). The labor expenses had risen to 2,760,000 francs ($524,400) while those for equipment had been reduced to 1,765,000 francs ($335,350). At the same time there was an outstanding loan of 348,000 francs ($66,120)—a total expense of 4,873,000 francs ($925,870).

In the case of the quarry operated by the City of Paris the results are still more unsatisfactory, according to a report to the Municipal Council in 1908. The labor expenses are very much higher than in neighboring quarries.

4. An important part of the report is devoted to Austria, and is based upon a previous report drawn up under the direction of J. G. Grüber, by Dr. Rudolph Riemer, secretary of the Central Bureau of Statistics.

Outside the usual monopolies the Austrian government owns docks and mines and operates lotteries.

In most of these enterprises the costs of construction and of equipment are indicated separately in the final accounting, but only those expenditures made during any one year are to be found there, regardless of those of the preceding years. The items for determining how much of the original debt has been paid off are lacking. Interest and sinking fund charges on loans contracted in view of government operation do not figure in the final accounting in the chapter especially devoted to the particular industry concerned, but in a chapter issued by the ministry of Finance under the heading, Public Debt and Administration of the Public Debt. Special information in regard to the auditing of the public debt may be found in the annual report of the special committee (Commission de Contrôle) managing the debt. But in this report the information touching interest and sinking fund charges does not inform us as to the actual application of the loan.

The same conditions prevail in the case of the public debt contracted for the benefit of the railroads. Our information covers only interest and sinking fund charges on the amortizable debt. But even that portion of the debt does not represent all the loans contracted for the benefit of the railroads.

According to the Statistique des Finances de la Haute-Autriche et de Salzburg (8th annual report) the expenses of all the towns of Upper Austria arising from the operation of their utilities amount to 4.44 per cent. of all their expenses. The costs of construction are quoted en bloc in a special chapter.

The result of M. Schelle's investigation proves that almost everywhere the data necessary in order to determine exactly the profits or losses upon state or municipal industrial operations are insufficient.

“Whatever be the end in view when states or municipalities organize industrial enterprises—whether the object be fiscal or economic, for the sake of the consumer or even in the exclusive interest of employees—it is indispensable to know whether these enterprises are actually resulting in profits or losses, and the amount of each.

“As far as the essential functions of the state are concerned, such as providing for public safety, public highways, etc., the establishment of special accounts would be impossible and without much value, inasmuch as these services provide no opportunity for direct payment on the part of consumers. Such services derive no receipts, properly so-called, nor can they be abolished. When it is expedient to know whether the management of these activities is not too extravagant, it is necessary to proceed by contrasting one year with another, or by comparing certain items of expense with similar items in other countries, or in other localities.

“Public industrial enterprises are almost never essential, since they may be intrusted to private operation. They resemble private enterprises and provide opportunity for special receipts. It should, therefore, be possible to furnish to the taxpayers, in whatever concerns them, means of knowing the amount of income, just as opportunities for such information are afforded to the stockholders or creditors of any private concern. To pretend that the financial side of state or municipal enterprises should be neglected because such undertakings are created for the public interest is only an effort to side-track possible criticism. Public management, like any other, can be good or bad. If it is directed toward securing advantages, justly or unjustly, to this or that class of people, whether consumers or employees, it is at least necessary that those who are to foot the bills, that is to say, taxpayers, should know, personally or through their representatives, whether the contributions demanded are not exorbitant. Such a requirement should not be questioned in any country.

“From another point of view, how can the pretention be sustained that, in certain cases, the state or municipality can serve the public to better advantage than private companies when such states or municipalities do not furnish the public with adequate information concerning their administration.

Conclusions

5. “In fact,” concludes M. Schelle, “the efforts made to organize special accounts for state and municipal industrial enterprises have failed. Public documents sometimes furnish precise enough information as to receipts or expenses of operation, but it is nearly always difficult to discover the amount of the costs of construction, and it is impossible to get any adequate idea of capital charges, interest and amortization.” His observations, in regard to Denmark, Holland, France, and Austria, prove that in no respect do the accounts ever bring out the real gains or losses of state enterprises.

The difficulties encountered arise from the fact that a state or a municipality cannot have more than one budget. Moreover all the receipts should be entered on one side, all the expenses on the other. In this respect at least public organizations should be managed like private corporations. If these latter fail their creditors demand the amount of their claims at so many cents on the dollar. A well-organized state should have only one purse, nor should any distinction be made between its various loans. All should be secured upon one single guaranty—its credit.

Without a unified budget sound finance is out of the question. A special account for a state or municipal industrial enterprise can have only a fictitious value.

In other words, sane budget regulations and public management of trading enterprises are contradictions in terms.

CHAPTER II

THE BELGIAN STATE RAILROADS

1. Railroads are the most important industrial enterprises undertaken by a state. What, then, are the financial results of their public operation?

The Belgian state railway was established by the organic law of June 1, 1834. By reason of the length of time it has been in operation it has a right of precedence.

Marcel Peschaud has published in the May and June numbers of the Revue Politique et Parlementaire a remarkable study of the Belgian railways, but his analysis would lead us too far astray. I must confine myself, therefore, to a résumé of what M. Schelle has to say on the subject in his report to the International Statistical Institute.

The law of 1834 provided that a complete account of the operations of the railways be presented to the Chambers annually, by which account are understood the receipts and expenditures, together with the use of the funds for the construction of lines placed at the disposal of the new department. The accounts thus rendered soon proved to be altogether inadequate.

In 1845 estimates of interest and sinking fund charges were added to the previous requirements. Controversies arose over these estimates, and it became necessary to change the system several times in order to settle the rate question. At the close of 1878 it was decided that the management of the railroads should make up a balance sheet in the form of commercial balance sheets. This was done, but capital charges were computed at a uniform rate based on a period of retirement of ninety years.

Moreover, according to M. Nicolai (Government Railways of Belgium, 1885) the cost of replacements and reconstructions was charged to the construction accounts without deductions for renewals and repairs. On the other hand, the annual payments for the purchase of lines which should have been charged to construction were charged to operation.

“Never,” says the minister of Public Works (Report for the year 1905), “have the railway accounts, that is to say, the accounts prescribed by law, been found other than defective. On the contrary, the statements of conditions, the statistics, the estimates and reports, relating in part to such items as interest, sinking funds, pensions, etc. (which are not within the legal powers of the railroad department to pass upon), have never ceased to be the subject of the most lively discussions. Charges have been made in turn, or sometimes simultaneously, that the profits were swelled and concealed, that there was too much red tape, even to the point of disregarding the essential rules of a business enterprise, or that there was not enough control, because the accounts were separate from those of the Treasury. The subject has furnished an inexhaustible theme of argument.”

Of late years it has been decided that the data contained in the annual reports ought to be kept with the Treasury accounts, and that the balance sheets should be made up between the department of Public Works and that of Finance. The accounts for 1905 and the years following have been established upon this new basis.

As for capital charges met by enlarging the public debt, a rate of issue was adopted, which varied from 4.90 per cent. to 3.11 per cent. Then the government proceeded to publish, under the title of “annexes” to the financial report: 1”. A general balance sheet for the year ending December 31, showing on the credit side construction costs since the beginning of the undertaking and the gross operating receipts and on the debit side the capital already retired and remaining to be retired, the amount of charges upon this capital, the dues and rents paid by the state railway system to other railroad enterprises, operating expenses and the profit and loss balance. 2”. A separate account of operating receipts and expenditures for the preceding year. 3”. A provisional account of operations for the current year, and of profit and loss, comprising, on the one hand, operating expenses, pensions charged to the general budget, fixed charges, including yearly installments, and the portion of receipts due to companies whose lines are operated by the government; and, on the other hand, the profits of operation, properly so-called, together with various other profits. 4”. A table recapitulating the financial results since the establishment of the system (1835) setting forth the annual balances in profits or in losses. 5”. A table of interest and sinking fund charges from the beginning. Finally, tables of operating statistics.

As a result of the new system adopted the profit shown in a large number of the previous reports was transformed into a deficit.

The report for the year 1909 gives the following results, computed in francs:

Interest and sinking fund charges were computed, for 1908, at 94,015,000 francs and, for 1909, at 97,020,000 francs.

“To sum up,” concludes M. Schelle, “if, from the very beginning, we compare the positive with the negative balance of each year, and add the sum, we find in 1908 a final net profit of 30,966,000 francs and in 1909 one of 24,938,000 francs.”

The maximum net gains were 44,975,000 francs in 1910, and the maximum net losses 73,998,000 francs in 1886. During many years the summaries which now show deficits would have shown profits in the years previous to 1885.

The fancy that the state budget can ever be repaid for its outlay through the profits of the railroads no longer exists in Belgium.

M. Helleputte, minister of Railways, says in his preliminary note to the operating report of 1908:

“The operation of Belgian railways has undergone various fortunes. Since 1835—74 years—the balance has shown a deficit 36 times and 38 times a profit. Since the beginning of these operations the total profits exceed the total deficits only by the small sum of 31,274,000 francs, or an annual average of 422,600 francs for an average active capital of 778,733,000 francs, or .05 per cent., all of which amounts to saying that, up to the present day, the railroad has operated at cost.”

The report goes on:

“If we take into consideration the accumulated interest upon the deficits, the amount of which had to be borrowed from the Treasury, and, if we deduct the debit balances, the apparent surplus gives place to a deficit of 86,836,000 francs, or an average annual loss of 1,173,000 francs—0.11 per cent. of the average working capital.”1

During the great convention of Belgian manufacturers and merchants, on November 29, 1911, M. Cannon-Legrand said:2

“The Belgian government acknowledged a loss of 6,965,000 francs in 1907, more than 7 millions in 1908, and 6 millions in 1909. In 1910 we were promised a profit of 4,500,000 francs, which has now dropped to 2,790,000 francs.

“On the other hand, the capital investment has reached 2,731,000,000 francs, showing an average increase for the last three years of 50,000 francs per kilometer for the whole system (4,329 kilometers—2,706 miles).

“Thus, during the year 1910, the capital invested by the government in its railways realized exactly 0.10 per cent. This was an absolutely exceptional year, both in volume of traffic and in freight and passenger receipts. It brought into the coffers of the railroads 27,725,000 francs more than in 1909, in which year the system had earned approximately 12,230,000 francs more than in 1908.”

We are thus justified in concluding that the budget of the Belgian government has derived no advantage from the operation of railways.

2. But does not such operation redound greatly to the advantage of travelers and shippers?

The partisans of ownership and operation of railroads by the state are constantly harping upon the cheap rates of state railways, as opposed to the high rates established by private companies.

By an order issued on the 25th of October, 1911, the minister of the Belgian Railway department raised the rates on pit coal on the strength of a law of 1910, which, in its turn, found support in another law, passed April 12, 1835, which says:

“Temporarily, and while waiting for experience to guide to a final adjustment of the rates to be levied by the aforesaid road, in conformity with Article 5 of the law of May 1, 1834, these rates shall be regulated by a royal decree.”

Now, Article 5, of the law of May 1, 1834, under which the Belgian system was established, reads: “The profits of the road accrue from the rates which are to be regulated annually by law.” Thus, the law of 1835 is only a temporary expedient, which must be renewed at certain dates. Although this experiment has lasted since 1835, the ministry considered that it needed a new lease of life.

Freight rates for pit coal were increased from 1 to 2 centimes per ton kilometer by tariff No. 61, which replaced tariff No. 31. The convention of Belgian manufacturers, on November 29, 1911, entered a protest against this increase in a series of resolutions from which we quote the following:

“The state is managing its railway lines from the sole point of view of making them serve as purveyors to its insufficient resources. It is operating in defiance of rules essential to the prosperity of all commercial enterprise, without any rational accounts of such a nature as will tend to keep it fully informed as to net cost.”

In view of this resolution, toward the close of 1911, the conclusions in the 1907 report of M. Hubert, committee reporter of the railway budget for the third time, are evidently as true to-day as they were then:

“The management of the Belgian state railways has committed itself to a policy of political expediency which is sacrificing the general interest to interests purely local and electoral.”

“The personnel is too large, ill paid, unwisely selected, and works overtime.”

“Passenger service is both lacking in comfort and very slow.”

“From the standpoint of rates, passenger service is favored at the expense of the shippers. The department repudiates all responsibility for the acts of its employees or the failure of its equipment.”

“Far from trying to meet its patrons half way, the Railroad department maintains rates which are purely arbitrary, and shows itself violently opposed to any possible competition.”

Finally, as spokesman of the Central Railway Division, M. Hubert concludes:

“It will become necessary to do what has been done in Holland,—viz., lease the railways, with conditions attached to the lease safeguarding the rights of employees and the interests of passengers. And it is certain that private enterprise would derive far better results from our immense railway resources than the government has been able to do. It is advisable that this outcome be seriously considered, since future possibilities indicate that such a course is unavoidable, if expenses continue to increase at the same rate.”

Yet French engineers are unanimous in praise of the skill with which the Belgian lines are managed by the minister of Railroads and his distinguished co-workers.

CHAPTER III

PRUSSIAN RAILROADS

1. In Germany, as everywhere else, the railroads inspired mistrust in the various state governments. There, also as everywhere else, the credit for their initial construction belongs to individuals. Up to 1843 the railroads received no subsidy whatever from any of the federal states. General state aid was withheld until about 1845, when a policy of government railways was introduced. In 1850 a number of states took over certain lines which were struggling under pecuniary embarrassment.

In 1874, amid an utter confusion of state and private roads, Bismarck conceived the idea of organizing an imperial system, of which the lines of Alsace-Lorraine, which had been already declared imperial, were to form the point of departure. In the desire, however, to prevent such a system of national railway lines, the southern states hastened to buy up the independent lines within their borders.

Bismarck then proceeded to concentrate all his efforts upon nationalizing the Prussian railways, trampling the private companies, which at that time possessed 44.5 per cent. of the system, unscrupulously under foot. As a result, there are to-day in Germany independent railways, state lines and lines belonging jointly to two or more states. The only imperial lines are those of Alsace-Lorraine. Private companies now possess only lines of secondary importance.

Bismarck had all sorts of reasons for acquiring the railways of Prussia. For example, he hoped to render himself more independent of the Prussian Diet it he had the railroad receipts at his disposal. The government had already begun a military line, but was encountering political difficulties in completing it. Bismarck's proposed state system was one way of putting an end to opposition of precisely this character. Finally, railway rates are an excellent protectionist instrument, actually serving the German government in that capacity. Rates are raised on importations and lowered on exportations.

It has been asserted frequently that the profits on Prussian railroads have been as follows:

The lowest percentage was 4.68 per cent. in 1883, but the operating expenses included no capital charges on the railway debt. If interest at 3 per cent. were included, and, if a small sum for a sinking fund were added, the profits would fall, for the period 1881–1895, to 2 per cent., and for 1897–1906 to 3.75 per cent. German government railways are exempt from all general taxation and are taxed locally only to the amount of 1,100 francs per mile, whereas, in Great Britain, the local taxation is more than 5,250 francs per mile.

The cost of construction of German railways has not been very heavy. The north of Germany is entirely flat. Not a single tunnel is to be found there. The cost per mile in 1907 was about 277,121 marks, while the average cost in Europe was 336,000 marks.

2. It is customary to speak very glibly in France of the harmony existing in Germany between railways and waterways.

An article which appeared in the Revue des Deux Mondes, in 1902, entitled Les Voies Navigables de l' Allemagne, by Alfred Mange, and two articles entitled Le Rhin Allemand, published by Paul Léon, in the Revue de Paris, on the first and fifteenth of February, 1903, show that the facts completely contradict these assertions.

In the first place, in Germany, even more than in France, both the railway lines and the waterways follow a north and south course. It is not alone from this point of view, however, that traffic disputes may arise. Nearly every one of these rivers crosses several states whose interests are frequently diametrically opposed. The lower Rhine competes with the Prussian railways; but the railways of Baden, of the Palatinate, and of Alsace, says M. Mange, favor navigation on the upper Rhine by greatly reduced rates of transshipment and transit, in order that shipping may be diverted from the Prussian lines. The same condition of affairs exists in the case of the Elbe. In its lower course it competes with the Prussian lines, and in its upper course it is favored by the railways of Bohemia.

When railways thus favor ports of transshipment, they are not moved by an altruistic sympathy for the ship companies, but entirely by their conception of their own interests. The government railways of Prussia have established rates to fight such private companies as still manage to exist. When the Rhine was navigable only as far as Mannheim, the Baden government established there a port of transshipment, opened in 1875, for the purpose of diverting, in its own interest, Prussian and Alsatian traffic toward Switzerland. The Bavarian government made use of the Main to bring its railroads into connection with the ports of the North Sea, and to avoid making use of Prussian railways. The ports of Riesa and Dresden were established at the expense of the railroads of Saxony, that of Aussig at the expense of the railroad from Aussig to Teplitz; that of Tetschen and Lauda at the expense of the Austrian North West railroad; in each and every case to divert traffic from Prussian railroads.

M. Léon has outlined the complicated struggle of the Prussian railroads against the navigation of the Rhine. The differential tariffs established in 1863 are still employed by the state, and not tacitly, but openly. A circular, on the 30th of October, 1884, established the theory. The end in view, it says, is to “facilitate the importation of first-class material and the exportation of the products of national industry, as well as to protect the commerce of German ports against the ports of Holland.” In order to divert from Rotterdam products of the iron and steel industry the government does not hesitate even to be incoherent.

“The Prussian railway,” says M. Léon, has not contented itself with opening the Westphalian markets to its maritime ports by rate reductions, but it has closed them to Rhenish ports by raising the transshipment rates upon those lines which lead to them.

In order to divert from Rotterdam to Bremen the cottons destined for Derendorf, 6 kilometers from Düsseldorf, the railway charges 10 marks 50, or 17 pfennigs per ton kilometer. To divert the iron of Westphalia from Rotterdam a ten-ton load pays from Hagen to Hamburg, a distance of 388 kilometers, 72 marks, or 1.8 pfennigs per ton kilometer. From Hagen to Düsseldorf, or 59 kilometers, the railway charge is 31 marks 50, or 5,3 pfennigs, per ton kilometer.

Is patriotism the sole motive which drives the Prussian railroads to struggle in this way against the navigation of the Rhine? Then why do they weaken the effect of such an argument by favoring importation into Holland if use is made of their cars? From Rotterdam to Bochum, 23 kilometers, a car of 10 tons pays 35 marks, or 1.5 pfennigs, per ton kilometer. By way of the Rhine only 13 marks is paid as far as Ruhrort, or .8 pfenning per ton kilometer, but for the 35 kilometers from Ruhrort to Bochum the railroad charges 16 marks 50, or 4.7 pfennigs, per ton kilometer.

The Prussian railways favor navigation on the Holland canals for the transportation of the coal that they deliver to the frontier. At the same time, in order to put obstacles in the way of mixed transportation, partly by rail and partly by water, as well as for the purpose of deflecting traffic from Baden railways, they grant to Mainz and to Frankfort transshipping rates that they refuse to Ruhrort or to Düsseldorf. Then there are mineral rates for Bavaria, iron and steel rates for Switzerland, petroleum rates for Württemberg, sulphur rates for Nüremburg, etc.

The exceptional tariffs of the Prussian system affect 63 per cent. of the total kilometric tonnage and 46 per cent. of the total receipts of the Prussian state. Their average rate is 2.6 pfennigs, instead of 5.11 pfennigs, the regular tariff figure.

The chambers of commerce of the Rhenish cities protested against such discrimination, and the chamber of commerce of Duisburg scored the policy of the Prussian railways in the following terms:

“We admit that every group pursues with energy the defense of its own interests; we do not admit that such a policy may hide behind the fig-leaf of national interest.”

Such, when examined in detail, are the facts which utterly contradict the legend of harmony between the Prussian state railways and the waterways.

3. In the Journal of Political Economy, of Chicago, Hugo Meyer has cited a fact which shows how accommodating it is possible for a government railroad to be. The rate upon milk had been so established as to prevent any shipment of milk to Berlin from a distance greater than 75 miles. As a result of this tariff the milk supply for the capital was concentrated within an average radius of 50 miles. This rate was established in the interest of the Berliner Milch Central, founded by members of the Association of Farmers (Bund der Landwirte), one of the most powerful political leagues of Germany. In order to conciliate this organization, the government remained deaf to the complaints of the retail merchants. A plan was formed to bring milk to Berlin from Denmark by tank cars. The government declared, however, that milk was not among those articles for which transportation in tank cars had been provided; and it imposed such conditions and such formalities that the originators of the scheme were compelled to give up the attempt.

The Prussian government acts upon the principle that it is not necessary to obviate “the natural disadvantages of the distant producers.” According to this rule, in the interest of the market gardeners of Paris and its suburbs, Parisians should be forbidden to consume, or at least should be made to pay exorbitantly for, the fruits and vegetables coming from the south or from Algeria.

The Prussian railways have a fourth class, lacking in almost every comfort; although the average length of travel in the third and fourth class is from 20 to 24 kilometers (13 to 15 miles). In 1907, during a temporary embarrassment of the budget, the government laid a duty upon railway tickets and abolished return tickets on all German roads.

In the discussion over the budget of 1911–1912 the minister of Finance described the effect of these innovations on the Prussian railroads. They had produced a reduction in the amount of first-class travel, the total receipts having fallen from 23,250,000 francs, in 1905, to 20,125,000 francs, in 1909, while, in the way of normal development of traffic, an increase equal to this reduction of 3,125,000 francs might have been looked for. There was also a reduction in the amount of second and third class travel, and a drop from the third class into the fourth class, which is exempt from taxation. Third-class passengers were paying a rate 50 per cent. higher than the fourth class, while first-class passengers were paying 300 times more.

In Belgium and Germany, since 1907, the railways have not carried any free baggage. During a journey in Germany my traveling companion and myself had each to pay in round numbers 180 francs for our tickets; but to this sum must be added nearly 60 francs for the 40 kilos (88 lbs.) of baggage of my traveling companion, and more than 72 francs for my 50 kilos (110 lbs.). This additional charge raised the cost of transportation in my friend's case 33 per cent., and in mine 40 per cent. When the price of tickets upon German lines is compared with those upon French lines it is necessary to take into account the 30 kilograms (66 lbs.) of exempt baggage allowed the traveler on the latter.

The charge on all checked baggage has another inconvenient aspect. It drives the traveler to carry by hand as much baggage as possible. Such a practice, of course, crowds the carriages and incommodes the passengers. This condition has made necessary a new rule, applied with rigor in Switzerland, forbidding a passenger to bring into railway carriages baggage exceeding specified weights and dimensions. Edwin Pratt1 quotes a letter, which appeared in the Daily Telegraph, of February 22, 1908, signed by an Englishman, Mr. W. A. Briggs, who had lived in Germany:

“The service is only half as frequent as ours and the fares only a trifle lower. They have been raised twice during the last few years. If anyone thinks that a government runs railways for the benefit of the public he is much mistaken. Goods (freight) trains are both infrequent and notoriously slow. Urgent goods are not recognized unless one pays double freight. Cheap excursions are unknown.

“Finally, the red tape is atrocious. Any unfortunate wight who rides past his station is mulcted in the difference and fined 6 shillings on the spot. No excuses are available. If you overload a goods wagon you are fined pounds for a few hundredweight put in on a dark winter evening to empty a rulley. Demurrage is relentlessly enforced and you are made to feel that you are dealing with permanent government officials who do not give a straw for your convenience. I once had a parcel of 1 cwt. sent from Strassfurt to Hamburg and when it arrived the note was stamped and countersigned by no fewer than 22 different persons.”

On February 23, 1912, the Prussian railway administration decided to refuse all parcels during several days. The administration has relieved itself of all details of commerce. Goods must be delivered in bulk and removed as such. There is no interval of grace allowed either at departure or at arrival.1

By express the transportation of merchandise requires one day for shipping formalities, and one day to transport it 300 kilometers (187½ miles), or any part thereof, however small the fraction. That is to say, it would take three days to transport a package from Paris to Laval, a distance of 301 kilometers (188 miles).

Special tariffs are the rule in Germany. They form a collection of 915 volumes, which cost from 5 pfennigs to 6 marks each. Seven hundred and eight are devoted to merchandise, 120 to live stock, 367 to coal. This great variety of rates drives the shipper to commission houses and insurance agents for information and protection.

Ordinary merchandise is not considered as wrapped unless it is contained in strong wooden boxes, or very solid hampers. Unless he complies with these conditions the German shipper is forced to sign a declaration that his packages are either not wrapped, or are insufficiently wrapped, in order to relieve the railroads from all responsibility.

Although by slow freight the ton kilometer of merchandise pays to the Prussian state railways an average rate of 4.59 centimes, while in France it is 4.57 centimes, do not be deceived by the .02 centime difference, which is due in part to the bulk and long hauls of heavy and cheap commodities; and also to a custom of grouping which brings together merchandise of various sorts and ships it in full cars, thus saving the railroad department expenses of handling. The department disclaims any responsibility whatever, the shipper having to insure himself with some company. Moreover, in order to discourage future claims, the department imposes a tax of 1 mark on each complaint.

When British and German railway rates are compared it is usual to forget the short distances covered by the British rate, an average of 35 to 40 miles.

Edwin Pratt is my authority for the following typical example of the tactics employed by the partisans of railway nationalization in Great Britain.

Mr. William Field, a member of the Railway Nationalization Society, founded in 1907 in the United Kingdom, published, during the same year, a pamphlet entitled, The Nationalization of Irish Railways; Defects of the Present System. In it he has reproduced a little table previously published in a tract of the Fabian Society in 1899, and borrowed originally from a work by Sir Bernard Samuelson, published in 1886. Yet the fallacies on which Sir Bernard Samuelson's report was mainly based had already been thoroughly exposed in the same year in which it was issued by the late Mr. J. Grierson, general manager of the Great Western Railway, in the appendix of his book, Railway Rates, English and Foreign.

Grierson says:

“Sir B. Samuelson's report contains many errors of detail. Comparisons throughout have been made without due regard to the conditions attaching to the rates, or to the different circumstances under which the traffic is carried.... In almost every instance Sir B. Samuelson has taken the lowest rates in Germany, Belgium, and Holland, which are applicable only to full truck loads of 5 and 10 tons, and, in some cases, viz., Belgium, to a minimum weight of 8 cwt. These he has used for the purposes of comparison with English rates for any quantities over 500 lbs.... In some instances Sir B. Samuelson has not included in the foreign rates the charge for loading and unloading.... Such are some examples of the errors vitiating the comparison.”

Now, even though accurate, 22-year-old rates would have no value. When they are applied to transportation operated under conditions altogether different they are used either in ignorance or bad faith.

Lord Avebury, in his book, On Municipal and National Trading, says of the German railroads:

“It is a mania to harp on the cheapness of German rates. Dr. Benmer, editor of Stahl und Eisen, has calculated that the transportation charges in England are 10 per cent. of the total cost of producing iron, as against 23 per cent. in Germany.”

M. Kaufman, in his remarkable work upon the Politique Français en Matière de Chemins de Fer, opposed to the refusal of the Prussian government to lower the rates of transportation, “because of the financial situation of Prussia,” the reduction upon express rates accomplished in France in 1892.1

In 1909 the German Centralverband, numbering representatives of the largest industries of Germany, expressed its discontent with the fact that, while private companies were reducing rates, the Prussian government lines were raising them. In the discussion over the budget of 1911–1912 Deputy Mano said:

“For forty years I have followed the fluctuations in the rates on merchandise. During prosperous years, when industry and the railroads are thriving, the department says: 'Your business is all right, therefore you have no need of rate reductions.' In times of depression it answers: 'Business is as bad for the railroads as for you; therefore we cannot reduce the rates.'”

To the above criticism the minister of Railroads contented himself with the reply that, as the increase in the capacity of the cars introduced within late years had sensibly diminished the net cost of transportation, the time had not yet come to consider a general reduction of freight rates. In any case, “Rate reductions ought not to be based upon financial results favorable to operation. Rate reductions can be considered only when the annual revenues shall have reached such a sound basis as to offer a sufficient guaranty against unfavorable years.”

Let us see what this sound basis of annual revenues is: The profits of the railways were formerly used to pay the interest on the government debt, of which 88.4 per cent. in 1899, 82.38 per cent. in 1905, 74.72 per cent. in 1909 was caused by the railroads.

Up to 1910 the Prussian general budget received nearly the entire net earnings of the railways, with insecurity, instability, and trouble in the whole budget situation as a result. In 1907 the net earnings fell below the preliminary budget estimate by 96,000,000 francs and in 1908, 190,000,000 francs. For 1909 on the contrary, following a pressure of freight traffic, the receipts improved by 130,000,000 francs. This improvement was due, in part, to an actual saving of 25,000,000 francs.

According to a report for the preceding year the increase of traffic during the period between the first of April and the end of November, 1910, was 5.97 per cent. for passenger traffic, and 7.34 per cent. for freight, or an average for all traffic of 6.66 per cent.

Railway receipts are dependent upon the economic activity of the country. As a compensation for this contingent and disturbing element in the Prussian budget it was decided, at the beginning of 1910, that out of the profits available after paying for interest and the amortization of the railroad debt there should be devoted: first, to the special budget of the railroads, 1.15 per cent. at least upon the reported capital of the system, or actually 150,000,000 francs ($28,500,000); second, to the general state budget, in order to make up its deficits, 2.10 per cent. of this same capital, or 275,000,000 francs ($52,250,000).

The surplus was to be devoted to a regulation (or compensation) fund destined to complete the payments to the general budget in the bad years, when the net income would not be sufficient to meet fully the above-mentioned payment of 2.10 per cent. to the general state budget.

M. Friedberg (a National Liberal), before the Chamber of Deputies, and M. de Gwinner, director of the German Bank, criticized this reform before the upper chamber. Looking at the situation from the point of view of a state budget with a deficit, obliged to have recourse to a loan, probably to a tax, they demanded why so important a special railroad budget should be constituted at all. The Minister of Finance, M. Lentze, observed that every year the railroads demand reconstruction, improvements, additions, rolling stock, transformation of secondary lines, etc. Either the railways must live on their resources or they must have recourse to a loan. The state budget will be protected from excessive fluctuations in receiving 2.10 per cent. of the capital in support of the general budget. For 1910 it was due to receive 35,000,000 francs ($6,650,000).

The ministerial plan was adopted.

The operating ratio was 61 per cent. in 1900; it rose to 74.62 per cent. in 1908. M. Lentze considered it a triumph when it fell to 68.99 per cent. in 1909, to 68.50 per cent. in 1910. It was computed at 68.63 per cent. for 1911. The Minister of Railways asserted that, in face of growing demands on the part of employees and of traffic, another rise must be anticipated.

Despite the high operating ratio certain economies have been criticized. Naturally the department has been reproached with not having treated its employees fairly. Its answer has been that 60 per cent. of the total expenditures of the railroad are absorbed by employees. Thirty-seven thousand employees, or 12.3 per cent. of the total number, are earning from 1,875 francs to 2,250 francs a year, and 86,000, or 29.2 per cent., are earning from 1,500 francs to 1,875 francs. Six thousand new positions were created in 1912.

In Prussia the administration is strong and Parliament is weak. Therefore it is the minister who says: “Our action will continue to be energetic with regard to those groups trying to foment agitation.” The Department of Railways jealously guards its employees from any spirit of disorder capable of bringing about a strike. As for the employees they are bound by the clauses in their contracts, which each man reads and signs, to hold themselves aloof from all agitation hostile to order.

CHAPTER IV

STATE RAILWAYS OF AUSTRIA AND HUNGARY

1. The policy of Austria in regard to the railways has undergone many variations. In 1850 the government owned 61.38 per cent. of the railway lines. In 1855, however, imitating the example of France, which came to terms with the important companies, and, having need of resources, it sold its railways. Hence in 1860 it owned not more than 0.44 per cent., and in 1870 only 0.21 per cent. The economic development of Austria was slow; the railroads not very prosperous. The crisis of 1873 drove the government to constructing railroads. In 1880 it owned 17.23 per cent. of the lines; in 1890, 43.51 per cent.; and, in 1906, 67.95 per cent., or 21,600 kilometers (13,500 miles).

The operation of railways has been a serious drain on the state. In 1906 they yielded 2.85 per cent., and, in 1907, 3.01 per cent. But this sum includes neither interest nor sinking fund charges. In fact, operation of the state railways has not paid expenses, and has been a burden upon the Treasury. The lack of receipts is chiefly due to low freight rates.

Charles Lee Raper says:

“They (the freight rates) have been much higher than in the United States, though the character of the traffic of the two countries has had much in common. Both have had a large volume of the low grade commodities. It would, therefore, seem to be fair to say that the Austrian state service has not been notably successful in its cheapness.”

The superiority of private enterprises in Austria has been established by an investigation conducted by the British Board of Trade. Four private companies have never had to resort to a guaranteed reserve fund. During the period 1902–1906 one of them did not earn dividends on its capital; the second earned from 4 per cent. to 5.25 per cent., the third from 5.4 per cent. to 6.6 per cent, while the fourth earned from 11 per cent. to 12 per cent. And all these companies pay taxes to the state.

2. In 1889 Minister Baross established the zone system in Hungary. Bitter adversaries of the mileage (paliers) system were enthusiastic over the idea of introducing the zone system. The zones are only more extended units of distance than the 10 kilometer (6 miles) section of the Paris-Lyons-Mediterranean railway line of France—a privately owned line. The introduction of the system was simply a political move, for the real object was to attract to Budapest those Hungarians who lived in the far corners of the land, in order to make them admire the capital, and thus give them an exalted idea of the greatness of their country. In 1896, at the time of the Millennial Exposition, the railroads carried for nothing, and, I understand, lodged and fed entire families at Budapest. However, as a species of compensation for its complaisance in thus accommodating the country-folk, the railroad had increased the price of tickets for short distance traffic during the preceding year.

In 1903 other changes took place. As it has failed to yield the anticipated results, Hungary recently, in large measure at least, has abandoned the system introduced by Baross.

The average receipts per passenger per kilometer in six European states have been: (One heller equals $0.002.)

Financial returns upon the Hungarian state railroads were as follows (in 1,000 crowns; 1 crown equals 20 cents):

The service upon the state lines of Hungary during late years has given rise to numberless complaints: lack of comfort, insufficient rolling stock, too frequent delays, and numerous accidents.1

The former secretary of the ministry of Commerce, Joseph Szterenyi, in an address delivered before the Chamber of Deputies in 1912, stated that from 1890 to 1909 the number of passengers on the railways had increased about 300 per cent. During this period there have been years in which the increase of traffic has corresponded to the increase in the number of cars in the following ratios: 9.5 per cent., as against 2.5 per cent.; 8 per cent., as against 4 per cent.; 10.6 per cent., against 0.5 per cent.; 9 per cent., against 0.5 per cent., and even 11 per cent. against 0.1 per cent.

The available number of locomotives is even less satisfying. While the volume of traffic has increased about 51 per cent. the number of locomotives has increased only about 21 per cent. In 1909 it was estimated that 606 more locomotives would be necessary, in order to take care of the normal traffic. A number of locomotives then in use were over 35 years old. Although passenger traffic has increased in Budapest, at the eastern terminal about 550 per cent. and at the western terminal about 900 per cent., and although freight traffic has grown approximately 100 per cent., it is only recently that any particular effort has been made to improve the conditions mentioned.

From 1865 to 1907 the operating ratio increased from 55 to 77 per cent., and amounted to 80.6 per cent. in 1908.

Beginning with 1893 the cost of labor has increased by leaps and bounds. In 1904 the employees went on strike and stopped the trains, asserting that the increase of salary voted by the Chamber of Deputies was too small. Two separate awards of an increase in salary, the one in 1904 the other in 1908, have brought the total amount to 22,000,000 crowns.

Following changes in the locomotive service in 1906 there has been an increase in the consumption of coal of about 13 per cent., representing 4,000,000 crowns, and equaling a work increase of 30 per cent.

Maintenance expenses of locomotives and cars give the following figures: per locomotive, in 1905, 3,003 crowns, and, in 1909, 4,530 crowns; per passenger coach, from 640 to 820 crowns; per freight car, from 96 to 134 crowns. The working efficiency of the average car has fallen from 48 per cent. to 37 per cent.

In 1909 the excess of receipts over expenditures was less by 43,000,000 crowns than the sum necessary for interest and sinking fund charges. The zone system has recently been altered, in the hope of realizing more than 15,260,000 crowns.1

CHAPTER V

ITALIAN RAILWAYS

At the outset Italy was induced by political motives to become a railroad proprietor. Before 1860 the lines were only local. After the adoption of the constitution of the kingdom, the state bought up the stock which was owned by Austria in the northern railways, and took over the issue of the preferred stock to continue the construction of them. But the government had no capital at its disposal, and had pressing financial needs. In 1865, therefore, a law directed the sale of the state lines to private companies. Two hundred million lire ($38,000,000) was realized by the state from the sale.

The existing system was distributed among four companies, known respectively as the West, the East, the North and the South, but the division of territory between them was ill defined, and they were at odds and enemies. Moreover, the railways of upper Italy proved to have been handed over to two companies with neither resources nor credit. These lines were therefore repurchased by the state in 1875–1876 for political reasons, and the state took possession in 1878. The proprietors of the southern lines became known as the Adriatic Company in 1885. For a time these lines were not interfered with.

In 1878 3,000 kilometers of the 5,100 kilometers of railroad in Italy belonged to the state. The ministers (Minghetti and Spaventa) who had negotiated the purchase, had intended that the state railways should be operated by private companies acting as government agents. In 1878 a new ministry appointed an investigating commission which, at the end of three years of work, submitted a monumental report (1881) containing the recommendation that the state railways be leased to private companies for a fixed period. The commission declared most emphatically that the state ought not to operate them itself:

• 1.° Because the state performs very few functions with greater efficiency or at a lower cost than private enterprise is able to do.
• 2.° Operation of railways by a state is more difficult than by private companies, a conclusion clearly established by the investigations made by the commission.
• 3.° The state is far more apt than are private companies to force changes in industry rather than to foster natural development by offering more efficient service.
• 4.° The danger of political interference in the administration of the railroads is very great.

The secretary of the commission above referred to, who became Minister of Public Works in 1884, leased the state lines to three companies, the Mediterranean, the Adriatic, and the Sicilian, for twenty years, with a possible extension of the lease. Of the 10,066 kilometers of railways in Italy at that time, 9,364 kilometers were thus allotted. In 1905 the system covered 12,827 kilometers (8,017 miles).

The companies had paid the state 275,000,000 lire ($52,250,000) for their equipment, but on condition that at the expiration of the lease this equipment should be repurchased from them. They guaranteed to devote the 5 per cent. which the state had been paying on the original loan toward the upkeep of the equipment. The ordinary expenses were to be borne by the state, the extraordinary expenses by the company. This distinction provoked numberless discussions.

A division of profits between the companies and the state was arranged for, and a reserve fund established as a provision for extraordinary works. But, after 1884, in place of an increase in receipts, there was a deficit. Hence the government, instead of taking in, was obliged to pay out.

In doubt as to the future action of the state regarding them the companies were working under the worst possible conditions in a country deficient in agricultural and industrial products. The taxes were heavy and the returns small. Then among other causes for the decreasing receipts was the rate reduction imposed by the state upon the companies, although theoretically it had no legal right to propose such a step. In the end it was required to make up the difference which resulted. Transportation had been thus ruined and at the expense of the taxpayers. Moreover, by continuing its intervention in the fear of a strike among the railroad employees, the government proceeded to impose new burdens upon the companies, and incidentally introduced a spirit of insubordination among the men.

Conditions were now ripe for the Socialists in Parliament, and they passed without much discussion the law of the 22nd of April, 1905, ordering the immediate return of the railroads to direct operation by the state. This law had been prepared by a commission appointed in 1898, whose report, in nine volumes, had appeared in 1904–1905. A law of 1907 now provided for the purchase of 2,300 kilometers (1,438 miles) of the southern system.

The total cost of the railroads in Italy had reached, in 1907, more than 6,000,000,000 lire. In order to rehabilitate the system thoroughly, Parliament voted a further sum of 910,000,000 lire, which had to be spent in Italy before 1911. This made a total of 6,910,000,000 lire ($1,312,900,000). These Italian lines, for each 100,000 square miles of territory, had a length of 4.19 miles in 1875; 5.8 in 1885; 8.8 in 1900, and 9.3 in 1907–08, when Great Britain had 19.06. For every 10,000 inhabitants there were 1.7 miles of Italian railway in 1875, 2.17 in 1885, 2.9 in 1895, and 3.16 in 1907, in which year, in the United Kingdom, the figure was 5.58.

From the very outset the disadvantages of state operation made themselves felt. The roads were never free from unwarrantable political influence and the equipment was woefully defective for lack of proper supervision.1

It had been expressly declared at the time of purchase that the state system should have a management entirely free from governmental and parliamentary interference. L'Italia, on the 28th of May of the same year, observed that Bianchi, general manager of the state railways, manifested the utmost skepticism regarding the possibility of organizing state railway operation in any effective and positive manner in Italy.

His fears proved well grounded. Among other reforms the department was anxious to introduce a code of discipline among the workmen in its shops. The deputies, however, murmured. They took their grievance to the Minister of the Interior, who referred it to his colleague, the Minister of Public Works. Ultimately M. Bianchi was informed that it would be necessary to revoke such measures as he had already taken. Naturally, feeling themselves thus supported, the workmen redoubled their insubordination, which spread also among the mechanics and the other employees.

At the end of a year M. Bianchi stated that the affairs of the railroad were worse than they had been in the beginning. Instead of being held to account for the good of the service, he was completely under the thumb of all those whose interests were opposed to the real interests of the railroad, provided they had sufficient influence in Parliament.

The net returns of the state railways, passing over the year 1905–1906, when conditions were abnormal, are as follows:

The increase from 1908–1909 to 1909–1910 is to be credited to bookkeeping artifices designed to conceal the real condition of affairs.

Have the improvements been proportionate to the expenditures since the passage of the law authorizing the purchase?

The purchase was coincident with several years of economic activity. Operating receipts increased 29 per cent. in 1905–1906 over 1900–1901; 11 per cent. in 1906–1907 over 1905–1906; 11.5 per cent. in 1907–1908 over 1906–1907. But this increase in receipts was completely absorbed by the increase in expenditures.

Before 1905, when a reduction was made in the rate of taxation, the companies were paying to the government 65,000,000 lire. To-day they would be paying 80,000,000.

The law of 1909 exempted the state railways from certain expenses, which, according to Engineer Ancona, who is also a deputy, amounted to a relief of 24,000,000 lire. This makes it necessary to reduce the 37,000,000 lire—the last figure in the above table—to 13,000,000 lire. A further lessening of the expenses for 1909–1910 comes from a reduction in the charges for renewal of equipment of from 4 per cent. of the gross receipts to 2 ½ per cent. This makes another reduction of from 8,000,000 to 10,000,000 lire, which, added to the 24,000,000 mentioned above, amounts to a reduction of from 32,000,000 to 34,000,000 lire. There were similar reductions in the expenses during 1910–1911.

The state has received no revenue from its capital of 6,000,000,000 lire expended for construction, purchase, and restocking the railroads. To this sum must be added, also, 1,000,000,000 advanced by the Treasury for their benefit. The railroads have been paying interest and sinking fund charges on the loan, but the department intends to be relieved from this responsibility. It has recently demanded 30,000,000 lire a year for the purpose of doubling its lines.

The law governing the operation of Italian railroads recognizes very distinctly that the fundamental duty of state operation is to furnish work for the national foundries and lumber yards. Naturally, the Railway department must fulfill this duty rather than consult the real needs and resources of the railways.

Contractors bring all possible influence to bear upon the deputies, who care for nothing but public opinion. If there are no orders there is no work for the employees for whom the state is bound to furnish work. Moreover, shutting down shops means ruin for the manufacturers. Therefore, the minister orders rolling stock without troubling himself to provide sidings. Whereas, in 1899, the companies possessed an average of 62 meters of siding per empty car, the state, in 1909–1910, lowered the proportion to 25.1 meters, although 50 meters had been considered indispensable for each of the 9,000 cars forming the reserve. Quantities of cars were falling to pieces on the tracks for lack of use; nevertheless, the department contracted for an annual delivery of 5,000 cars. The manufacturers persuaded Minister Luzzatti to raise this order to 8,000 cars. The general budget committee, however, had the courage to reduce it to 4,000 cars, costing 29,000,000 lire ($5,510,000).

Experts have estimated that all this expense might have been spared by a more rational use and better care of the existing cars; 15 per cent. of the freight cars are constantly under repair, and 33 per cent. of the passenger cars.

The Italian taxpayers pay a full third more for their rolling stock than if they bought it abroad. Moreover, there is no redress for delays in construction and other errors on the part of the contractors, because political influence returns all the fines provided for in the contract. The law says that orders are to be divided as equitably as possible among the various manufacturers of the same product. As a consequence of this provision we find a legally organized trust, although such coalitions are forbidden. Naturally, this trust is not interested in insuring an economical expenditure of the state finances.

Here are some facts which have never been denied in parliamentary debates: Old locomotives repainted are bought for new. Concrete ties, which break at the passing of trains, and soft spruce ties, the objects of useless attempts at reënforcement with the aid of injections of creosote, are bought by the tens of thousands. Orders of 15,000 kilograms (33,000 lbs.) of gum arabic, 200 kilometers (218,733 yards) of red velvet, a million straps, etc., are recorded, and so on.1

Of course, labor plays an important rôle in the increase of expenses, and in Italy, as in France, the Railway department congratulates itself upon this state of affairs, an excuse being thus presented for ever new demands on its part. The report for the fiscal year 1910–1911 says:

“During the period 1902–3–4 there was an average of 104,833 employees, both regular and special, earning an average of 1,360 lire a year, while in 1910–1911 we have had, on an average, 143,295 employees, including those engaged in repair work but excluding those on the navigation service lines in operation on the 16th of July, 1910, with an average outlay for each of 1,622 lire. If the employees in 1910–11 had been paid at the same rate as in 1902–4 the expenditures would have been lessened by 37,700,000 lire ($7,163,000).”

This might be a regrettable state of affairs, from the point of view of the railroad employees, but less so from the point of view of the taxpayers.

The operating ratio has fluctuated as follows: 1885, 67 per cent.; 1890, 68 per cent.; 1895, 75 per cent.; 1903, 68 per cent.; 1906–1907, 73 per cent.; 1908–09, 78 per cent. For distances up to 150 kilometers (94 miles) passenger rates, per kilometer, according to the revision of 1906, are (in lire):

Over 150 kilometers the rate is established by zones. In the case of slow freight the rate has undergone few changes since 1885, and rather in the way of an increase.1

Italian railways make all sorts of rebates to shippers, according to the amount of political influence which the latter can bring to bear. Seven hundred and seventy-six special tariffs have been promulgated, and 1,509 regulating clauses in favor of special firms.1 As for deputies and senators they have a right to free transportation for themselves, plus eighteen complimentary tickets a year, twelve of which are sent them without their even having to take the trouble to ask for them.

There are free tickets of every kind and every color, destined for functionaries, great and small, civil and military. Still others, of a special color, are reserved for journalists and for people who find it convenient to claim that title when traveling.

The law of 1905 established an independent staff for the ministry of Public Works, composed of a general manager and a council, consisting at first of six members, but later increased to eight. Five of these latter are attached to the department and three represent the citizens. Members of Parliament are not permitted to be members of this council. The Minister of Public Works can annul the decisions and acts of the council, but he cannot substitute his own initiative.

According to the nationalizing party it had “placed the government railways outside of politics.” But a subsequent law of 1907 provided for a superior committee of control, composed of six senators and six deputies, active members of the two chambers of Parliament, a proceeding which places the minister in a singular political situation.

In 1907 M. Giolitti nominated a committee of vigilance, which was perhaps vigilant, but which did not accelerate the speed of either passenger or freight trains. In a response to a Parliamentary interpellation he assumed entire responsibility for the unsatisfactory condition of the railway system. Parliament did not want him to resign; therefore, the majority endorsed his administration. Hence, we have the following peculiar state of affairs:

If a minister is so satisfactory to the majority in Parliament that it desires to keep him in office it must endorse all the shortcomings of his administration. If, on the other hand, it has a mind to overthrow a minister, it may cause his downfall for a delay of five minutes.

CHAPTER VI

THE RAILWAYS OF THE SWISS FEDERATION.1

The promoters of the existing Swiss railroad monopoly declared most emphatically that the new régime was not expected, primarily at least, to yield financial results, but rather advantages for passengers and shippers. The actual purchase, however, was limited to the four great systems, the government passing over the lines of secondary importance, which were less productive. Thus two classes of railway service were established: a first class, consisting of patrons of the more important roads and a second class, composed of users of the small roads, which could be safely neglected. The purchase price of the four great systems was estimated at 964,000,000 francs ($183,160,000). The Confederation has actually paid 1,195,000,000 francs, or 231,000,000 francs more than the figure first quoted.

On December 31, 1912, the general construction account amounted to 1,472,000,000 francs, to which must be added 45,824,000 francs representing divers expenses, reduced by sinking funds to 28,177,000 francs. The total amount of capital sunk is therefore 1,500,469,000 francs ($285,089,000). This does not include, however, the cost of the St. Gothard line.

Excluding the St. Gothard line, the profit and loss accounts are shown in the following table:

The cost of the St. Gothard line has exceeded by 34,000,000 francs ($6,460,000) the provisions of the estimate of 1897. The expenses for completed works and new acquisitions, which on December 31, 1909, already amounted to 218,000,000 francs, had jumped in 1912 to 292,000,000 francs, or 74,000,000 francs more, and at that time there still remained unfinished works to the extent of 69,000,000 francs, while expenses in the near future for other lines are in sight, amounting to almost 100,000,000 francs. In their report to the budget of 1912 the board of managers of the Federal railroads stated that they were anxious to reduce the yearly expenses by 24,000,000 francs, but such a reduction is out of the question.

The capital stock of the four old companies was 280,000,000 francs ($53,000,000). The dividends paid to stockholders had been reduced, or altogether discontinued, during the losing years, in order that the interest upon the outstanding debt might be paid.

In the case of the state railways there is only one stockholder, the state; and, if its railways lose, it is the state, that is to say, the taxpayers as a whole, who must make up the deficit.

In 1903 the consolidated debt was 1,075,152,000 francs. In 1909 it had risen to 1,344,221,000 francs. On December 31, 1912, it had again increased 399,000,000 francs, or 37 per cent. The interest on the debt, which was 36,000,000 francs in 1903, amounted to 54,000,000 francs in 1912. Sinking fund charges on the capital invested in the enterprise rose from 4,300,000 francs in 1903 to 7,840,000 francs in 1912.

The surplus should have been transferred, at least in part, to a surplus fund. But the department, considering the unreliability of future operations, has refused to put in force the provisions of the law governing the purchase, and has simply carried it over. Some special expenses, represented by no actual value, such as abandoned installations, etc., were still carried on December 31,1912, to the amount of 28,000,000 francs ($5,320,000). As long as this balance is not disposed of, it is out of the question to talk about surplus of receipts.

The annual appropriation of special funds, to defray the expenses of maintenance and renewals not already covered by operation in 1906, was 7,084,000 francs. In 1912 it was 9,325,000 francs.

There has been no miscalculation in regard to receipts. They were estimated on the basis of an average annual increase of 3 per cent. The increase has been 4.8 per cent. for passengers and 4.5 per cent. for freight.

During the last three years the gross earnings have jumped from 174,000,000 francs, in 1909, to 206,000,000 francs, in 1912, or 18 per cent. But these earnings will be reduced after the opening of the Loetschberg line, and as a result of the St. Gothard agreement, which has just been accepted.

Moreover, the expenses of operation have increased on an average of 6.2 per cent., consequently at a proportion greater than the receipts, up to 1908. Since 1909 this proportion has decreased. The operating ratio appears as follows:

During the same period the highest operating ratio of the Paris-Lyon-Mediterranean line of France (operated by a private company) was 53.5 per cent.

In 1909 the secretary of the department observed that, taking into account the increase of interest, extensions, and all those charges which, at the beginning of 1912, bore so heavily upon the railway, the annual increase in expenditures would ultimately reach 20,000,000 francs. This year (1913) it has been 11,270,000 francs.

After 1906, following an average rise in wages, together with an increase in the number of employees, the ordinary labor expenses of the railroad exceeded by 4,280,000 francs the figure of the preceding year.

Beginning with April 1, 1912, a new law concerning salaries went into effect, which has brought about an annual increase of 8,200,000 francs in the expenses, without counting supplementary payments to be made in the way of pensions and sick and other benefits established on the basis of full pay. Nor does it include the increase in the salaries of laborers paid by the day. The total increase is estimated at 10,000,000 francs.

From 1904 to 1910 the increase in labor expenses was 14,370,000 francs, or 51 per cent. For all other expenses the increase was only 36 per cent. In 1902 there were 23,030 employees; in 1907 the number had risen to 31,300. On the 1st of April the tri-yearly rise in salary took effect, as provided for by a law fixing higher maximums. This law has increased the annual expenses by 10,000,000 francs.

With the object of balancing the expenses in favor of the employees, certain economies were effected at the expense of passengers and shippers, such as withdrawal of reduced fares on holidays, decreased inspection of the road, fewer trains, speed of freight trains lessened, a certain number of improvements postponed, and resistance to demands for improvements which were not too urgent. Finally the department determined to increase the rates when the industry and commerce of Switzerland are already paying internal transportation taxes double those in force in neighboring countries.

The nationalizing of the Swiss railways has certainly proved of advantage to the employees. But, are state operations carried on for the benefit of employees or for the public? Present conditions justify the following prophecy of Numa Droz:

“Through this purchase our railroad policy is in course of stiffening into a set of rigid regulations prescribed by a poverty stricken department incapable of solving the great problems of the future for lack of resources.”

CHAPTER VII

RAILWAYS OF NEW ZEALAND

In 1860 the first railway of New Zealand was constructed by the provincial government of Canterbury, to connect the town of Christchurch with the port of Lyttelton, separated from it by a chain of high hills. In 1863 the provincial council of Auckland and Drury conceived the idea of extending the line to Wellington.

The capital then and subsequently sunk in the railways of New Zealand, amounting, according to the accounts, to £27,762,592 ($135,203,823), on the first of March, 1909, is far from representing the whole expense of the project. £1,289,840 ($6,281,520), the cost of lines not yet opened on the 31st of March, 1909, should have been added to this sum. The total amount would thus reach £29,052,432 ($141,485,343). Moreover, no account was taken of the interest paid on the capital sunk in lines not operated during the thirty-nine previous years.

Before 1882 the amount of the deficits can only be surmised; since that date they have aggregated £4,500,000 ($21,915,000). The total capital invested from 1870 to 1909 has been about £40,000,000 ($194,800,000), of which £23,305,009 ($113,495,000) was paid out of borrowed money. The rest has been raised by the sale of public land, and, above all, by the aid of taxes—direct or indirect.

Since 1895 the capital cost per mile of open line has risen from £7,703 to £10,351. This increase is due in part to improvements upon the roadbeds. In order to explain further such an increase in cost it is said that the country of New Zealand presents unusual difficulties—that it is situated far from the industrial centers of the world, and that construction is on a small scale. We might add that railway construction is considered as a species of national workshop, designed to give employment to laborers out of work; that none of the modern mechanical methods are employed; and, finally, that “the work is done by the government and not by private contractors.”1

The gross earnings of the railways increased from £1,150,851 in 1895 to £2,929,526 in 1908–1909. But the expenses rose in even greater proportion. They increased from £732,160 in 1894–1895 to £2,114,815 in 1908–1909. And, if there had not been a reduction of the rate of interest on government loans, the deficit of 1909, based on the “capital cost” of the open lines, would have been £323,555, instead of £212,468.

The railway statement, presented annually to Parliament by the Minister of Railways, always shows a “net working profit,” without any indication that this profit is always insufficient to pay the interest upon the cost of construction at the average rate of interest paid by the government upon the public debt.

During the year ending March 31, 1909, the railways earned a “net profit” of 2.93 per cent. on a capital of £27,762,592 ($135,203,823), the cost of construction of the open lines. But, since the average rate of interest paid on the public debt was 3.7 per cent., the “net profit” is absorbed in interest payments, and a deficit amounting to £212,468 ($1,034,719) emerges, if interest is reckoned on the cost of the open lines only. But real cost of construction includes the cost of the unopened lines, making a total of £29,052,432 ($141,485,343), reducing the “net profit” to 2.80 per cent., and increasing the deficit by £262,760 ($1,279,641). If the interest upon the open lines only is considered the total deficit from 1882 to 1909, in round numbers, is £4,500,000 ($21,915,000).

But as a matter of fact, according to the conditions of its investment, interest at the rate of 4 per cent. should have been paid on the railway debt. In such case the deficit in 1908–1909 would have been for both classes of lines £347,386 ($1,691,769); while the total deficit since 1881–1882 would probably amount to at least £8,000,000 ($35,160,000), and perhaps £10,000,000 ($48,700,000).

The deficit is due, above all, to the principal line of the South Island, 1,299 miles long. The political influence of this part of New Zealand, formerly much greater than it is to-day, contributed to the unprofitable railway construction in that territory. Sir Joseph Ward, however, in explaining in Parliament the deficit on the lines of the southern province, announced that the lines of the northern province would presently need repairs, and that these lines would present in time to come the same deficiencies as the others.1

Such accounts as these show the necessity of reckoning on large sums for repairs. Moreover, as the Minister of Railways, Hon. J. A. Millar, said, in 1909:

“The enhanced price of materials, increased rates of wages, and expenditures incurred on the works enumerated (track renewals) have had a marked effect on the maintenance expenditure, which has steadily increased during the past 10 years.”

Further, the public is exacting, and the government must sacrifice economic considerations to those of a political nature. Since 1895, according to Sir Joseph Ward, rate reductions have reached £850,000, while the value of increased train service has risen to £883,000. This reckoning takes no account of the concessions in pay given to the railway staff, which amounted to another £375,000.

Although from 1895 to 1907 the salaries of railway employees were increased £375,000 ($1,826,250) the Amalgamated Society of Railway Servants complained that they were receiving lower salaries than those paid by private companies, while their hours were often much longer than would be tolerated in any private business subject to the jurisdiction of the Arbitration Court.

The causes of the deficit on the railways are:

• 1. The construction of lines in advance of requirements.
• 2. The high cost of all lines.
• 3. Delays in construction, principally due to lack of funds.
• 4. Unprofitable concessions in service, fares, and freight.
• 5. Rigid system of rates.
• 6. High cost of operation and maintenance, owing, in part, to a certain lack of discipline, initiative, and efficiency in the railway service.

One of the most serious causes of inefficiency is the system of promotion, which is based principally on seniority in point of service, in the hope of abolishing favoritism and other abuses.

Government employees have often been accused of making use of the so-called “government strike.” The general manager of railways wrote a letter in 1909 to the chief mechanical engineer at the Addington workshops, making serious charges of inefficiency. But, when the investigating committee assembled at Christchurch on March 11, 1909, that same general manager made a pitiful recantation. Yet the investigation had clearly demonstrated, among other things, the difficulty of discharging useless men; of finding capable men to replace them when discharged; the lack of encouragement of skilled labor because of the absence of all opportunity for advancement or increase in salary; the utter absence of initiative shown by the superintendent of the workshops and the lack of up-to-date appliances in certain lines of work. The board of inquiry, the chairman of which was a distinguished engineer, Professor R. J. Scott, of Canterbury College, arrived at the conclusion that the cost of production was greater at Addington than in private workshops, and that the amount of production was relatively much less in proportion to the number of hands employed.

The Evening Post, of Wellington, said on June 17, 1909:

“Here, in miniature, we have the evils depicted which are rampant more or less in every branch of the public service; and, if the result is that at Addington we are paying from 30 to 60 or 70 per cent. more for the work done than it would cost us elsewhere, it is natural to infer that the public service, as a whole, is also costing far beyond its value.”

For the reasons given above and a number of others the railways of New Zealand have never earned the full amount of interest on the capital cost.

However, the state has frequently declared that it does not wish to make the railways pay. That far and above such a consideration should be placed the service rendered to the country in providing cheap transportation of agricultural products to the markets.

This theory gives rise to two questions:

• 1. Why consent to recover 3 per cent. interest, instead of 3.72 per cent. (the rate on state funds), and why not, if this theory be just, consent to recover only 2 per cent., or even less?
• 2. Is the system rendering all the service that it ought to render considering its cost?

Moreover, arguments based on such a theory have the prime defect of lacking a just standard of measurement. They are marked by that vagueness which so often envelops political conceptions and fosters the worst abuses. They serve to enable makers of electoral platforms and members of the most influential groups to instigate expenditures which weigh heavily upon all their fellow-citizens, in order to increase the value of their own property. Thus they make their own political strength increase the “unearned increment” so violently denounced by the partisans of nationalization of the soil and of state operation of railways.

Messrs. J. S. Le Rossignol and W. D. Stewart have demonstrated very clearly the disadvantage of railway operation at a loss.

A railway line is opened in a country which cannot support it. It is therefore a parasitic line, which serves only to injure other lines, or to be a drain on the whole body of the taxpayers of the country. Because of its cost it stands in the way of rate reductions and improvement in the service of other lines. It operates at the expense of either passengers and shippers or of the taxpayers of other regions.

How about the development of the country? But railroads cannot be constructed everywhere. When the fundamental rule is lost sight of, that a region ought to pay and to pay enough to compensate for losses during the first years of operation, there can be no further limit to extravagant expenditures. Indeed, the financial failure of the railways has been one of the chief causes of the arrested development of the whole system. It took twenty-three years to construct a section 200 miles long on the principal line between Auckland and Wellington; and this line is self-supporting. Then apart from the fact that this dilatory method of construction has added enormously to the cost, it is appalling to think of the huge sum which the country has paid in interest during the construction, to say nothing of the returns which might have been gathered in and the settlement which would have been promoted had the work been completed with reasonable dispatch.

The resulting interest charges on the whole line may be readily conceived. Instead of concentrating the funds upon one line, and completing it, they have been frittered away in various parts of the country, in order to conciliate political groups. The government, unable to borrow more than a certain sum annually, was at a standstill. If, on the contrary, it had been given an opportunity to finish the profitable lines, it might have been able, with the resources that these latter would have yielded, to pay the interest on the capital already borrowed; its credit would have been improved, and, possibly, the resources thus at hand might have permitted it to provide for interest on sums to be borrowed for the further development of the system.

Such a wasteful policy, far from aiding in the development of the country, has actually retarded it. The districts deprived of a railway have paid for those in other places, while the slow rate at which these railroads have been constructed, together with the excessive amounts which have been paid out to build unproductive lines, have deprived other districts of any hope of a railroad of their own. New Zealand has at last begun to comprehend that the construction of lines which do not pay is “bad policy.”

The government has recently adopted a system of forcing the railroads to earn their own interest on the capital invested. Sir Joseph Ward, at Winton, on the 5th of May, 1910, even mentioned the necessity for amortization. “The time for continued borrowing is coming to an end, and that of repayment is approaching.”

Unfortunately the government finds itself between districts which are demanding railways, districts which have them, and which are demanding rate reduction, improvements of transportation and other favors, and employees demanding increase of salaries and shorter hours. The department of labor insists that railways be constructed in order to give work to the unemployed; while finance critics demand that the railways be compelled to provide for the interest on the capital invested in them, and that they earn enough to pay for the new lines.

Yet, despite all the disadvantages connected with government operation of railways, no one dares suggest that the lines may be leased to a private company, although a provision for such lease exists in the act of 1900 (section 34), and such a proceeding would undoubtedly be the best means of putting the finances of New Zealand on a sound basis. It has been suggested that the administration of the railways should be confided to a commission of experts who would be independent of the influences to which public officials are exposed. Even this system, however, would not completely insure freedom from political interference, were it only by reason of its origin and the necessity for its renewal. Such a commission is also practically certain to fall into all the errors of a bureaucracy. The system has been employed in the Australian states, notably Victoria, and in New South Wales.

The government of New Zealand is anxious to make use of the railways to carry out a certain policy relating to the distribution of population. The “stage system” of railway rates worked out by Samuel Vaile, and discussed with much approval in 1882, was especially designed to prevent the concentration of population in cities and to keep it distributed over a vast territory, by establishing very low rates in rural districts and high rates in the urban districts. The experiment, however, was never made.

New Zealand is developing. Little by little the profitable lines have been completed, and some abuses have been more or less checked. In fact, the government has gone so far as to ask, as a condition of completing the Lawrence-Roxburgh railway, that the people of the district guarantee at least 3 per cent. interest on the capital cost. But although the results of railway operation are improving, and will probably continue to improve, and although partisans of state operation have been untiring in their attempts to draw conclusions favorable to their argument, an unbiassed history of the railways in New Zealand only condemns it.

Government property in New Zealand is exempt from taxation. At each extension of its activity the amount of property subject to taxation diminishes, and, if these enterprises fail, the burden of the taxpayers is increased. The principles of sound private and public finance are the same everywhere, and profit from public enterprises is indispensable in order to establish the fact that they are an advantage as public investments.

It is not so many years since the state of New Zealand undertook the operation of two coal mines, known respectively as the Seddonville and Port Elizabeth mines. In 1905, 1906, and 1908 the first was losing money. In 1911 it lost £3,219. In 1910 it made a profit of £194, and in 1912, of £863. The mine of Port Elizabeth brought in profits as high as £21,313 in 1906. But its profits have greatly diminished during the last few years, and in 1912 were only £3,964.

The explanation of these profits is simple. Up to 1908 the government had bought 166,000 tons out of a total production of 237,300 tons for the railroads. But it apparently found its own coal too expensive. It began to buy coal from private dealers. In 1912 it bought only 58,000 tons, out of a total production of 244,500. Its mining profits, therefore, have been mainly derived from its own railroad.

CHAPTER VIII

GOVERNMENT RAILROADS IN FRANCE

1. In Book I, Chapter 2, I referred to the political motives underlying the purchase of the Western Railway of France. In order to do a good turn to the Socialists, Georges Clemenceau socialized this system.

The Minister of Public Works, Louis Barthou, saw in the purchase a double advantage. It would be a sop to the Radicals and Radical Socialists, for one thing, and, in addition, it might serve to cover the deficits of the so-called old government system, that is to say the lines already under public management. The deficits were not to be hidden, however. Therefore, Minister Barthou, who had at first repudiated the charge that such deficits existed, openly demanded that the sum of 26,600,000 francs be set aside for the benefit of the old system from the special treasury account established by the law of December 18, 1908.

In November, 1906, the government introduced a bill for the purchase of the Western Railway, although it confessed “that no papers relating to such a project were on file in the office of the Minister of Public Works,” a provision required by law. Nevertheless, the government demanded that a law authorizing the transaction be passed by the Senate and the Chamber of Deputies, before the end of the year, in order to prevent the Western company, which had had a profitable year, from increasing its net profit.

The Senate, however, refused to be intimidated by threats. Its committee, through the secretary, M. Prevet, who assigned the strongest possible reasons for such action, rejected the purchase bill, although it had already passed the Chamber of Deputies, by 364 votes against 187, 76 out of the 80 deputies from the districts touched by the Western road having voted against the purchase. Out of 46 senators, 44 were emphatically against the bill. Nearly all the chambers of commerce in France were also opposed.

The argument advanced in favor of the purchase was that the Western company would never be able to repay the advances that had been made it under the name of guaranty of interest, that thus it was running on government money, and hence it was neither more nor less than a state department engaged in an unprofitable operation.

Yet the results of its operation indicated that the company was making the greatest possible effort to extricate itself from the crisis of 1901. The receipts, net profits and interest guaranties for 1901, 1904 and 1906 were as follows (in francs):

But the charge was made that the company had obtained its reduction in expenses only at the cost of its employees. I give below the number of employees and the increase in their salaries:

Thus we see that the number of employees had increased, as well as the individual salaries, in spite of the difficulties facing the company. Moreover, during this same period, the sick and other benefits, bounties and allowances of various kinds had grown from 2,188,000 francs to 3,580,000 francs, or an increase of 1,392,000 francs.

The other argument, harped on ad nauseam by partisans of the purchase, was that on December 31,1905, the Western railway's debt to the state amounted to 302,569,000 francs, and the interest on it to 117,300,000 francs, a total of 419,869,000 francs.

But the Western company had equipment estimated at 350,000,000 francs. By forcing it to submit to a deduction of 30 per cent. the price the government would then have to pay for the road would be 245,000,000 francs. The difference between 419,869,000 and 245,000,000—or 174,000,000 francs—was the clinching argument on the part of the advocates of the purchase to hasten action in order to safeguard the interest of the state.

And how did this purchase safeguard the interests of the state? The government took over the road at once; but it increased its investment in the Western company. The guaranty of interest to the stockholders would come to an end in 1935 if the company continued to operate the road, while, in case of purchase by the state, it would continue to the end of the franchise, in 1956. As a result the chief beneficiaries by the purchase of the Western road were the stockholders. On the day when the road changed hands its stock was quoted at 830 francs. It subsequently fell to 810 francs, but the Cote de la Bourse et de la Banque, the Moniteur des Intérêts Matérièls, and I myself immediately pointed out that the advantages resulting from the purchase would raise the value of the stock to more than 1,100 francs. At the present time, June 17, 1913, it is quoted at 870 francs.

What did the purchase cost the state? The official in charge of the financial end of the purchase (Directeur Général du Mouvement des Fonds) declared that “it was not possible to determine it even approximately.” Yet the Minister of Public Works declared that the whole transaction could be called an “opération blanche.” That is to say, it would cost the state nothing.

We have already referred to the fact that the Senate rejected the bill authorizing the purchase of the Western line. But the Clemenceau ministry brought so much pressure to bear upon the senators that the purchase was finally voted by a majority of three. Thus the state found itself charged with the duty of furnishing service on a system of 9,000 kilometers (5,625 miles). In the drafts and reports of the committee in charge of the purchase, various settlements of the points at issue between the government and the company were discussed, but these were all summarily eliminated by the law of July 13, 1908, which ratified an agreement with the Western company. The guaranty of interest, which was to expire in 1935, was extended to 1951.

The remainder of the sums due from the company upon bonds, certificates and guaranties of interest was fixed by law at the sum of 7,122,000 francs ($1,353,180). There was no discussion of the 419,869,000 francs, nor even the 174,000,000 francs. The real amount of the sums due the company is determined by annual estimates. The sum total amounts to 4,972,334,000 francs ($944,743,000).

2. What are the expenses resulting from the operation of the system by the state?

The state took over the Western Railway January 1, 1909. During the five years of its operation by the company, from 1904 through 1908, the average annual net profit was 78,540,000 francs. In 1909, the first year of state operation, this net profit fell to 69,970,600 francs; in 1910 to 57,169,200 francs; in 1911, to 30,180,900 francs; in 1912, to 21,932,900 francs. From this last figure a forecast may be made of what the profit of 1913 will be. Therefore, and taking into consideration the probabilities of 1913, we have an annual average of 41,071,000 francs for the net profit from state operation, instead of the 78,540,000 francs from operation by the company.

In a statement outlining the special features of the budget of 1912, M. Klotz estimated that the deficit on the operation of the Western Railroad would not exceed 24,000,000 francs ($4,560,000).

On the other hand M. Chéron's report upon the application for supplemental credits in favor of state railways, submitted March 29, 1912, declares:

“The demand for supplemental credits, which we are about to examine, constitutes a confirmation of the estimates of the budget of 1912. It was, as we see now, anticipated. The figures are none the less very disturbing.”

It was not anticipated in the explanatory statement of the budget of 1912. Some lines further on M. Chéron adds:

“Progress has already been made in bringing order into this department. It only remains now to control the conduct of the enterprise with such vigilance and severity as will reduce the truly exorbitant deficit in the profits of operation.

The Honorable Secretary states that the supplemental credits granted in 1912 have decreased the net profits of the old system by 3,813,400 francs and increased the deficit of the Western line to 23,389,900 francs.

Following the reduction effected by the commission in the ordinary expenses of the Western line, the increase in the deficiency of the profits of the system affecting the budget of the ministry of Public Works is discovered to be 22,389,900 francs instead of 24,529,900 francs. The total deficit in the profits from the operation of the system will thus be found to be for 1912, and, including the original provisions, 81,535,900 francs, instead of 83,675,900 francs allowed by the government. If the deficit on partial operation be added, or 739,000 francs, we have a total deficiency for 1912 of 82,874,900 francs.”

M. Chéron is basing his comparison on the year 1908, the last year of the company, with the present condition of the state railway. But the purchase had been voted by the Chamber of Deputies in December, 1906. The company had no more authority over its employees, and its condition was altogether abnormal. Moreover, during the fiscal year 1908 expenses had to be met which, if the purchase had not been made, would normally have been carried over into the year 1909.

The unfortunate situation of the Western company serves rather to bring out more clearly the seriousness of the increase in the expenses of the system after its purchase by the state.

It should be noted further that the actual deficit of the company in 1908 was only 28,522,675 francs 68, to which M. Chéron adds 3,300,000 francs, representing additional charges resulting from the agreement regulating the sums due annually on the purchase.

As far as the old government railway system is concerned, we can speak only of the receipts and expenditures of operation, since the costs of construction have not yet been determined. Since 1908 the net profit of operation has considerably diminished.

The receipts thus rose 8,000,000 francs, while the expenses increased 15,000,000 francs. Thus the same condition is reached as in the case of the Western line.

M. Chéron, after having reported an annual increase in the receipts of 3.50 per cent. “as merely satisfactory,” remarks: “The progressive increase of expenses is the true cause of the decrease in the net profit of operation.”

The following table presents the expenses of operation:

These figures drew the following criticism from the secretary:

“It would be regrettable if the results of the public operation of the Western line did not convince the department of the necessity of keeping down the general expenses of the old system. We are anxious in this case also to reach, or rather to return, to a more favorable net profit. Outside of justifiable improvements in the position of the employees, there are expenses which could be reduced or checked.

3. “Moreover, we would say that, in the case of the old system, as in that of the Western line, the extraordinary works which for some years have been in course of construction (involving an outlay of more than 21,000,000 francs since 1909, together with the 31,000,000 francs demanded, and with the same excuse, in 1912), ought to result in a development of traffic, and, as a direct consequence, a corresponding increase in the net profit.”

From the foregoing extracts it would appear that the greater part of the increase in expenses came from the raising of the wages and salaries of an enlarged working force. The proportion varies for the two state railway systems from 72 to 73 per cent. of the total increase in expenditures. On the newly acquired Western line, the improvements in the situation of the employees and the regulations governing promotion represent together more than two-thirds of the total increase in labor expenses.

While operating expenses from 1908 to 1912 have increased 72,304,000 francs the gross receipts have risen from 217,645,000 francs to 244,335,000 francs—a gain of only 26,690,000 francs. The difference is at least 45,614,000 francs.

Moreover this deficit must continue to increase, because this year the state railways have just issued 300,000,000 francs ($57,000,000) of 4 per cent. bonds, on which the state must pay interest in the future.

Foreseeing this bond issue M. Rouvier observed, in a speech on the 26th of January, 1904:

“You will have to create a special issue that you will probably term 'railroad' or 'public works' bonds: and, in spite of your delusion that, because you are going to call it by another name, this new issue will be sold on the market under the same conditions as are private bonds, you will have made a serious attack upon the credit of the state.”

The prophecy has been realized. The Minister of Finance did issue the 4 per cent. bonds. The 3 per cent. rentes fell immediately to 92.65. In October they were quoted under 91 francs. To-day (June 18, 1913) they are 83. The amount of depreciation thus forced upon the 3 per cent. rentes has been greater than the 300,000,000 francs borrowed by the state for the railroad.

Optimists prophesied that these state railway bonds would pull up the rentes; they have been pulled, but they have been pulled down.

The question has been asked: How can a bond issue of 300,000,000 francs have any influence upon a market of 22,000,000,000 francs? But there are not 22,000,000,000 francs in circulation. A portion of this sum is tied up in savings banks, insurance companies, benevolent associations, the property of minors, etc. There is only a limited amount left to bear the entire weight of this issue of state railway bonds. The 4 per cent. bonds, issued at 503 francs, have remained at about this figure.

Some improvements have been made in the Western line; but in five years, from 1909 to 1913, the cost of construction has been 718,000,000 francs ($136,000,000). According to the partisans of the purchase, “this is the fault of the Western company, which delivered a system in poor shape.”

But at the end of 1911 M. Colson, formerly Director of Railroads in the ministry of Public Works, and now councillor of state, declared:

“According to such information as we are able to gather from engineers, whether those of the late Western company or in our own service, it is clearly apparent that, down to the final day on which it remained in the hands of the company, the whole system was in excellent shape.”

While his final statement could not well be more explicit:

“The state of the roads at the time of purchase would neither endanger the safety of travelers nor impose abnormal financial charges upon the new management.”

Whereas, the net profit per train kilometer varied in the case of the private companies from 1 franc 75 to 2 francs 71, it was only 0 franc 53 upon the Western (state) line, and 0 franc 44 on the old system. In other words, the state was operating its new purchase at a figure four times higher than the operating cost of private lines, and its old system at a figure five times higher.

From 1909 to 1912, that is to say, in three years, the decrease in net profit upon the Western line has been 66 per cent., and the operating ratio has increased to 91 per cent. This is bad enough, but the situation is even worse on the old system. During the same period the decrease in the net profit was 73 per cent., while the operating ratio reached the enormous figure of 95 per cent.

Conclusions

• 1. The purchase of the Western Railway was a political measure, designed to conciliate the Socialists.
• 2. Presented in the light of an operation that would cost the state nothing, an “opération blanche,” it has wrought serious harm to the state. The sole beneficiaries have been the stockholders of the Western company.
• 3. The employees of the state railway instituted a strike, and their exactions have resulted in increased expenses, which have not been offset by improvements in the service.
• 4. The issue of state railway bonds at 4 per cent. has caused a fall in 3 per cent. rentes.
• 5. The operating costs are even higher on the old state system than on the newly acquired Western line.

CHAPTER IX

PUBLIC VS. PRIVATE OPERATION

The advocates of State Socialism say with admirable assurance: “Wherever private initiative has proved inadequate the state must step in.”

Has the spirit of initiative been lacking in private management of railways? Private companies have been forced to struggle for a long time against government opposition, but to-day, although Prussia is a flat country, where not a single tunnel is to be found, and where the lines are much easier to construct than in Great Britain, the British have a system of more than 19 miles per 100 square miles, while the Prussian system has only 16 miles, or 11 per cent. less.

Did the United States government build the daring lines which have joined the two oceans?

Edwin Pratt, in his Railways and Nationalization, has demonstrated that private companies possessed more than 69 per cent. of the entire length of line of the existing railways in 1908.1 And, following a series of debates with German publications, he brought his figures up to date in the London Times, of October 1, 1912. Here they are:

Thus, over two-thirds of the railways of the world belong to private companies. Moreover, of the 24,500 miles of railway belonging to the state of British India, 18,000 miles are operated by private companies. In Holland all the lines are operated by companies. In Belgium the tramway lines are longer than the state railways, and they are operated by private companies. Lines in Great Britain, which have three, four, or even more tracks, are included in these figures on the line and not the track basis. The total length of line is 23,287 miles. The length of main track, however, is 39,851 miles, and of main track and sidings, 54,311 miles.

The greatest system in the world, that of the United States, is owned by private companies. Mr. Bryan, on returning from Europe in 1903, introduced nationalization of railways into his platform, without informing any of the members of the Democratic party of his intention. This brilliant inspiration helped to destroy his chances for the presidency.

The operating ratios suffice to show that superior administrative capacity is not to be found on the side of the several states which exercise it in this direction.

We have seen that the state railways of Prussia have yielded revenue to the state budget. But in Belgium, Italy, Austria, and Hungary they have only been a burden. The partisans of socialized railways in France have neglected to tell us what the French government railways have contributed to the state.

In the various countries state railways are exempt from general taxation. The amount, however, that would be collected from them were they private enterprises should, in all justice, be added to their expense account. In France passengers and shippers upon the state railway lines are taxed for speed. They pay a stamp tax on baggage and other receipts, and way bills, taxes upon vouchers, and custom duties on pit coal. The saving resulting from economies in transportation, as given in the following table, are reckoned, and with reason, among government profits:

The following sums represent the contributions made by the French (private) railway companies to the state:

This burden per kilometer is a very heavy one.

Such contributions to the state are not to be despised, and, in any comparison between the profits per kilometer of the government railways and those of the railways operated by French companies, they should be taken into account.

The following example, borrowed from the history of the British railways, shows the necessity of granting large freedom of action to railways.

The railways of Great Britain had a certain commercial policy. Their general freight rates, much more profitable than special rates, represented 75 per cent. of the total traffic. They had only one regulation which applied equally to all shippers, and this regulation was enforced. Before the rigid law introduced in 1891–1892 the railways, by way of experiment, had made a rate reduction, worked out with care, but allowing for changes in its provisions. If there should be no increase in traffic as a result, the rate was to be raised. To-day such action is no longer possible except by the authority of the Railway and Canal Commission. As a consequence, where during the decade 1882–1892 rates had been reduced 14 per cent., in the decade that followed they were reduced only 2 per cent.

All state railway systems hold themselves more or less absolutely free from any responsibility. We have already described the point of view of the Prussian administration in this regard. The Italian railways have adopted the point of view that any accident involving loss to their passengers or to shippers is a dispensation of Providence. In France we have seen a verdict of the Court of Brest, and an opinion of the Court of Rouen, deciding against the State Railway department, in its attempt to escape liability for damages by appealing to “circumstances beyond their control” in cases in which no private company would dream of offering such an excuse.

After having studied in detail the great European systems, an American, Mr. Charles Lee Raper, concludes:1

• (1) “That government operation of the railways has, with a few notable exceptions, as, for instance, the Prussian, not paid all of its expenses, and that it has consequently been a burden upon the taxpayers.
• (2) “That government operation, though it has been a burden to the citizens as taxpayers, has not supplied them with a particularly excellent service—that its freight service especially has lacked in efficiency and practical adjustability to traffic and industrial conditions.
• (3) “That government operation, though it has not been particularly efficient, has not been especially cheap—that its freight rates have not been, after all allowance for difference in traffic conditions has been made, as low as those upon a number of the privately managed railways.”

State railways may find themselves in one of three situations:

First: Where they are profitable, and their profits are absorbed by the public treasury. In this case the interests of the shippers and passengers are being sacrificed to those of the state. This is the case in Prussia.

Second: Where they lose money and the taxpayers make up the deficiency. Here the interests of the tax payers are being sacrificed to those of shippers and passengers.

Third: Finally there is a third case, in which the interests of the taxpayers, passengers, and shippers are sacrificed to the demands of employees. In such cases the railroad is being operated for the benefit of the employees and not for that of general transportation. This condition appears more or less in all state systems.

CHAPTER X

THE HOLY CITIES OF MUNICIPAL OPERATION

The delusions of the advocates of state and municipal ownership are generally set forth with that same naïveté that we have already seen displayed in the reports upon the Western (state) Railway. Whenever they are at a loss for examples of satisfactory results from state monopolies they point to the municipal operations of British cities.

They say with emphasis: In the country of Adam Smith, and of Cobden, in spite of the Manchester school, the cities have shown themselves the boldest in the world, in entering upon the path of municipal Socialism. London, Birmingham, Glasgow, and even Manchester are holy cities. Could a more decisive argument exist for the purpose of proving the inadequacy of private initiative, or that every industry which is a monopoly in fact ought to become a legal monopoly? Have they not achieved a success which proves that municipal authorities can administer as well as, if not better than, private enterprises?

The importance given to British municipal experiments forces me to treat it in special chapters.1

CHAPTER XI

OPERATION OF GAS AND ELECTRICITY IN THE UNITED KINGDOM

1. In Major Leonard Darwin's remarkable study, entitled Municipal Trade, I find the following figures, indicating the number of British municipalities which have undertaken to supply gas. During the period 1820–1839 only three municipal plants appear. During the period 1870–1879 thirty-eight municipalities adopted the system, and from 1890 to 1892—fifteen. Not until the gas industry had been firmly established by private companies did municipalities take a hand in the game, having then at their disposal the labor, buildings, equipment, mains, and consumers already provided for them by their competitors. Nor was this change of proprietorship always attended by immediately disastrous results. In such cases, however, a disaster would have been a miracle.

An incident relating to Manchester, which has supplied gas since 1824, betrays the sang-froid with which municipal authorities are capable of treating certain financial questions. On the occasion of a royal visit to that city, in 1905, the gas reserve fund was called upon to provide £8,897 ($43,300) to defray the expense of the king's entertainment.

A Birmingham municipal gas plant was the grand municipal ideal of Joseph Chamberlain. In 1874 he bought out the two existing companies for £2,000,000 ($9,740,000). The measure was regarded at the time as a purely fiscal one. In 1905 Birmingham was charging 2s 6d per 1,000 cubic feet of gas, when a private company at Sheffield was charging 1s 5d.

Vince estimates that the favors granted to employees represent an expense to British taxpayers equivalent to an increase in taxation of 4 shillings on the pound, or 20 per cent.1

Sixty-three per cent., or almost two-thirds of the public gas lighting service of the United Kingdom, is furnished by private companies; the proportion is the same for private gas consumption. In England and in Wales the proportion of gas furnished by private companies is 69 per cent. In the United Kingdom the consumers supplied by private companies represent 59 per cent.; in England and Wales 65 per cent.

The capital of the companies has increased £2,017,000 ($9,822,790), while that of local authorities has decreased slightly. The gross receipts of the companies are a little higher than those of the local authorities, but the net returns are less. It is easy to grasp the reason for this. In the furnishing of gas local authorities have certain privileges not accorded private companies. The price of gas furnished by private companies is 2s 9d, by local authorities 2s 6d. Yet the local authorities acknowledge a net revenue of 9 ¾ per cent., while the companies show only 5 5/6 per cent.

According to a parliamentary report of January, 1912, the capital invested in gas works in the United Kingdom amounts to £134,000,000 ($653,000,000). The following table summarizes the accounts and operations of these gas undertakings:

We have no detailed report permitting us to follow up the comparison between the results of operation by private companies and by local authorities. But, in any event, although municipalities have been furnishing gas in Manchester since 1824, and in Beverly and Carlisle since 1850, their example has not been followed generally, since private companies are still supplying gas to two-thirds of the population.

2. The first electric installations were established at Eastbourne and Hastings in 1882, and in London in 1885. Bradford created the first municipal plant in 1889.

An act of 1882 authorized local authorities to buy up companies at the end of twenty-one years, and afterward, at the end of successive seven-year periods. In determining the purchase price only the market value of land, equipment, material, etc., was to be taken into account. No other compensation was to be paid. The object of the act was to prevent the construction of any more private plants.

The local governments were naturally anxious to protect their gas plants against any possible competition. The testimony of Mr. S. Chisholm, provost of Glasgow, before the committee of 1900, offers a typical example of this policy. Municipalities wanted authority to construct electric plants only in order to prevent private companies from doing so.

The City of York obtained a provisional order in 1892, but it did not supply electricity until 1900. Birkenhead waited from 1886 until 1900; Bristol, from 1883 to 1893; Greenwich, from 1883 to 1889. Four years appeared to be the average delay, according to the table submitted by Campbell Swinton, which includes a list of fifty-four municipal electric lighting orders. The local authorities were evidently more anxious to prevent action by others than to enter into the business themselves.

In order to protect the interests of its gas plant Birmingham required, as the condition of its approval of the Birmingham electric supply company in 1890, that the latter should supply only the principal streets of the city. In 1898, however, the company being prosperous, the city decided to purchase.1 At the time the negotiation was completed the market price of each share was £10 10s 0d, a figure which would naturally form the basis of the purchase price. The municipality paid £420,000 ($2,045,000). Lost taxes and sinking fund payments amounted from the beginning to £17,000 ($82,800); that is to say, to £4,000 ($19,000) more than the profits realized by the company in 1897. In March, 1901, after fifteen months of operation, the deficit was £4,175 ($20,332); in 1902–1903 it had reached £4,813 ($23,239). The number of consumers was 5,000, out of a population of from 600,000 to 700,000; and this small number was being supplied at the expense of the whole body of taxpayers.

It is not enough for an industry to be municipalized in order to bring in customers. Bath1 bought out, for £24,500 ($119,315) an enterprise which had cost its founders £43,000 ($209,400); but municipalization did not furnish it with consumers. In 1900–1902 the plants upon which the municipality had expended £7,800 ($38,000) were out of use, and the engineer estimated the sum necessary to put them back into condition at £70,000 ($341,000). The town found no company willing to take up the business. It therefore continued to operate, but at a loss. In 1909–1910 it had lost £1,335 ($6,500) and in 1910–1911 £157 ($764).

A local government board return has been devoted to accounts of municipal enterprises during the four years from 1898 to March 31, 1902. We give below the results of the gas and electrical enterprises to March 31, 1902:

Gas, then, yields a profit. The gross profit was £1,289,000, or 5.4 per cent. on the capital invested. Any municipality might hope to obtain this gross profit.

But if we deduct the amount necessary to pay off the capital and pay interest, we would require a net revenue of 4.8 per cent. on the capital invested. This is allowing 3¼ per cent. for interest and an amortization period of 32 years. Then, if 4.8 per cent. be deducted from the 5.4 per cent. of gross profits, we find that the profit to the municipalities is about 0.6 per cent. Thus, the municipalities can reckon that they make a profit of a little more than 0.5 per cent. Such are the dazzling “results of numberless experiments” in England.

But Major Darwin shows that an interest rate of 3¼ per cent. is very low, and that it has a tendency to increase. It is true that the period of amortization can be lengthened, but a long period of amortization would be only an added burden.

Further, Major Darwin makes a relative calculation, based upon the gross profit of municipal operations of gas plants for several periods.

In these calculations the gross profit for the last period is lower than that during the years 1898–1902. Major Darwin therefore concludes:

“If we consider that local governments will have to pay 4.8 per cent. during the 32 years of amortization of capital, it can then be said that the profits on municipal operation of gas plants will vary from zero to a trifle more than ½ per cent. at the maximum. In any event, the later municipalizations of gas are less profitable than those which preceded them.”

On March 31, 1904, out of 190 municipal electric enterprises 116 claimed a profit, while 74 reported losses amounting to £80,504 ($392,054). The last report of Municipal Trade is dated June 2, 1909, and it includes only a few Scotch cities. It gives no details regarding capital, and only the annual receipts and expenses. In Edinburgh, in 1902–1903, the excess of gas receipts was £3,303; in 1903–1904 the deficit was £3,397; in 1904–1905 the excess was £5,965, but it fell again in 1905–1906 to £1,460.

For electricity the excess of receipts was £14,532 in 1902–1903; in 1903–1904, £23,997; in 1904–1905, £21,143; in 1905–1906, £16,539.

In Glasgow excesses of receipts occur regularly, but they are subject to extreme variations.

The municipalities which operate electrical plants have an excellent customer in their tramways, to the operation of which electricity was first applied in 1885.

According to the Municipal Year Book for 1912 local authorities to the number of 140, having obtained from the Board of Trade the “orders” provided for by acts of 1882, 1888, 1889, and 1909, turned them over to private companies, whereas only 20 municipalities had made use of the privilege to buy out companies and substitute public for private operation.

In London the City Corporation, the Camberwell Borough Council, and the Lambeth Borough Council have the right to buy existing plants in 1927, and the London County Council in 1931.

In 1910–1911 the following 47 local authorities, which were operating 16 electrical installations, were doing so at a loss:

Acton, Alloa, Bangor, Barking Town, Barnstaple, Bath, Batley, Beckenham, Bury St. Edmunds, Buxton, Cambuslang, Clacton, Cleckheaton, Dorking, Dudley, Elland, Farnsworth, Frome, Gillingham, Gravesend, Hastings, Hereford, Heywood, Hove (Aldrington), Kendal, Kingston-on-Thames, Kirkcaldy, Leek, Loughborough, Maidstone, Middleton, Morley, Paisley, Rathmines, Redditch, Rhyl, Stalybridge, Hyde, Mossley, Dukinfield, Surbiton, Todmorden, Torquay, Wakefield, Weymouth, Whitby, Whitehaven, Wigan, Wishaw, Worcester.

A number of local authorities were operating at a loss during the preceding year.

CHAPTER XII

TRAMWAYS IN GREAT BRITAIN

When in 1870 Mr. Shaw Lefevre (the present Lord Eversley) introduced a bill granting to municipalities the right to construct tramways, he declared that his object was not to “authorize municipal operation.”

However, certain municipalities gave the bill a significance that its author never intended, and by interfering with the construction of tramways by private companies, further action on the part of the towns themselves was, of course, indirectly promoted. The bill gave to local authorities the right to purchase at the end of 21 years, “by paying the value of the tramways, buildings, lands, etc., but making no allowance for past or future profits of the enterprise, nor any compensation for forced sales and other considerations.” It was to no purpose that it was demonstrated to the committee of Parliament that a period of only 21 years was too short.

As a result the tramways already constructed suffered a heavy depreciation, and English capital, which might have been devoted to enterprises of this character, was invested in foreign countries. The large cities, anxious to keep their citizens within their own limits, for fear of losing taxpayers, not only forbade any extension of the tramway lines, but likewise set their faces steadily against the introduction, first of steam tramways, then of electric tramways.

The act of 1870 did not apply to Ireland. Therefore a certain contractor, named Murphy, was able to make a proposition to Dublin to establish electric tramways there, purchasable only at the end of 42 years, at an increased valuation of 33 per cent. He even offered to hand over a fixed percentage of the receipts. But the partisans of the municipalization of tramways in England and Scotland had sent delegates to combat these proposals—a proceeding which retarded their acceptance for two years.

The municipalities appealed to the act of 1870 to prevent the construction of tramways by private companies, and, as has already been said, opposed every method of transportation which might compete with their own enterprises. In 1905 the town of Newcastle fought the introduction of omnibus automobiles which the Northeastern Railway Company intended to operate on the streets. The committee of the Municipal Corporations' Association granted the desired authority, but with the restriction that passengers could not be taken up en route. Mr. Bonar Law, parliamentary secretary of the Board of Trade, opposed this reservation, remarking:

“Even though municipalities are engaged in an industry, is this a reason for giving them a monopoly which would not be granted to anyone else in the business? The question whether the House of Commons is to govern the municipalities or whether the municipalities are to control the House is beginning to present itself.”

The restriction was rejected by 127 votes to 110.

In 1896 Parliament adopted the Light Railways Act, designed to facilitate construction of such railways in Great Britain; its duration, however, was limited to five years. After that the law would have to be repassed each year. The act did not define the light railway, and, as a result, tramways have been included under this title. Therefore, they could no longer be purchased as provided in the act of 1870. At the end of 1903, 244 requests had been received for the application of the Light Railways Act, involving 870 miles of lines, and the committee had authorized 127 tramways having a length of 592 miles. This small proportion indicates the pressure brought to bear by the municipalities upon the government on the one hand, and upon their own citizens on the other.

Nevertheless, when in 1901 Mr. Gerald Balfour, president of the Board of Trade, submitted a bill, asking that this act be extended for a further period of five years, he met with the violent opposition of the Municipal Corporations' Association, an organization designed to extend municipal powers and to intercede for the towns with the government and Parliament.

The Municipal Journal, the organ of the Municipal Socialists, observed: “We will not permit this bill to take a permanent place on the statute books. The astute promoters of tramways have simply found in it a means of escaping the restrictions of the Tramways Act of 1870, and to avoid the embarrassing purchase clause.” The Journal continues: “When, at some future time, the rural districts are able to obtain their current at half the price that it costs to purchase from the municipal corporations, the consumers in the large towns will no longer be willing to continue to pay the present high rate. They will demand to be placed in the same category as the consumers outside the city, and they will have justice on their side. What, then, will become of the municipal electric plants?” After two attempts Mr. Balfour withdrew the bill, the government not daring to enter into conflict with the association.

In 1870 Glasgow was granted authority to construct and operate its tramways. It did not decide to do so, however, until 1894. It then introduced a fare of ½d, and raised the wages of its employees. In 1899 it exchanged horse cars for electric cars. Finally the municipality decided that it had an interest in owning all the property along the tram lines beyond its own immediate limits, and in articles in the Times, for 1902, the town was accused of having devoted to real estate transactions profits which should have been applied to paying off the debt on the tramways.

In 1902–1903 Mr. Hugo Meyer, an American, formerly a professor in the University of Chicago, made a comparison between the tramways situation in Glasgow and that of the street railways in Boston, the latter owned by a private company. The street railways in Boston were paying the city a sum of $432,500, or 13.1 per cent. of the gross receipts, equal to 44 cents per inhabitant. The Boston elevated railway, serving a smaller population than that of Glasgow, pays to the city in cash and in services $1,550,000, or nearly 13 per cent. of its annual income, which is at the rate of $1.67 per inhabitant. In 1904 Boston had one mile of street railway for every 2,300 inhabitants, while Glasgow could boast of only one mile for 6,700 inhabitants.

Birmingham imposed such conditions upon the company to which it had granted a franchise that, at the end of 1904, it had only one mile of tramways for 8,700 inhabitants.

In 1890 the cities of the United States having more than 50,000 inhabitants had 3,205 miles of street railway; England alone, proportionally, ought to have had 3,190. The entire United Kingdom had only 984 miles. In 1896 the United States had 10,000 miles of electric railways; the United Kingdom had 20. It is admitted that the urban population of the United States and that of the United Kingdom are the same. In June, 1902, in the United States there were 14,000 miles of electric railways within the limits of cities. In March, 1904, in the United Kingdom there were only 3,200. The inhabitants of British cities thus have at their disposal less than one-quarter of the facilities afforded to the citizens of the United States by this method of transportation.

Mr. Meyer sums up the situation in his book, entitled Municipal Ownership in Great Britain:

“The paralysis of private enterprise by reason of the doctrine that the profits which would be made by public utility undertakings established in the streets should belong to the public and not to 'private speculators' has been complete and permanent. Equally complete and permanent has been the powerlessness of municipalities to fill the void that has been made by paralyzing private enterprise.”

They keep others from doing what they do not do themselves. Such is the true result of the efforts of municipal Socialists in England.

Municipalization involves an arbitrary policy combined with a régime of privilege. On the one hand, we have taxpayers who are making contributions in order that a minority of users may have gas and electricity, or that the passengers in the street cars may ride below cost; on the other, we have consumers of gas, as at Nottingham, who complain that they are forced to pay an exorbitant price for their gas in order that the municipality may lower the taxes.1 At Sheffield the town proposed to apply the profit realized from the tramways to cover a deficit in the local taxes, a proceeding which would have necessitated a rise in the general district rate of 2d on the pound. The workingmen, however, declared that, being the true users of the tramway, the alleviation of the local taxes would be at their expense—a policy tending to rob the poor to help the rich.

Certain tramways were taken over by London by virtue of acts of Parliament. The courts interpreted these acts in such a manner that the stockholders found themselves despoiled, while the London County Council was in a position to become proprietor for a sum very much less than the real value of the stock. It was thus easy enough to draw at least temporary profits from the enterprise. The Council subsequently leased the tramways north of the Thames to a private company, but decided to operate the tramways south of it on its own account. The value in capital of the two systems is very nearly the same, £850,000 being invested in the northern system, and £896,000 in the southern. The northern system is rated for tax purposes at £18,000 more than the southern system.

In 1900 the profits of the northern system were £39,000, and those of the southern £51,774, a magnificent result, which might well be cited in favor of direct operation of tramways by the city. But this state of affairs lasted only a year. During the following years it was reversed:

At the time when the London County Council undertook the operation of the southern system it was yielding a net profit of £64,000 ($311,680).

Why this substitution of loss for profit? The following reasons have been given: Increase in salaries of employees; establishment of the 10-hour day; rate reductions; and, in 1903, a slight increase in the income tax.

From 1900 to 1902 the profits of the southern system were £75,161; those of the northern, £116,601—an advantage on the side of the private company of a difference of £41,440. The Statist finds a greater difference. In an article upon the tramways of London it observes: “Since 1894, the date on which the council became interested in tramways, out of total profits of £326,581, £314,347, or 96 per cent., have been made by the private enterprise.”

In order to justify this decrease in the receipts of the municipal undertaking the partisans of municipalization say: “The situation of the employees has been improved.” Very good; but if this improvement places municipal employees on a different footing in the way of salary from that of the employees of private companies, these municipal employees become a privileged class at the expense of the whole body of taxpayers; a small number of people thus profiting at the expense of everybody else.

“But transportation rates have been reduced.” Again, very good; but, if transportation constitutes a loss, the gift that the London County Council is making to the passengers it transports is being paid for by all the taxpayers.

Finally, the loss has been ascribed to the methods of electric transportation recently introduced. But the private companies have also had to introduce this change.

Municipalities operating tramways show the same weaknesses as the states which operate railroads.

In 1905–1906 the southern system claimed a profit of £4,000 ($19,480). But Mr. Haward, treasurer of the London County Council, admitted before the committee of the Municipal Corporations' Association that, if the payment of the penny tax per car mile for renewal had been enforced, there would have been a loss of £4,000, or a difference of £8,000.

Now the London County Council has declared that, since 1900, the southern system has brought in £23,900. The difference just quoted of £8,000 would then reduce this profit to £15,900.

The report of the auditor of the Local Government Board (referring to the accounts of 1904–1905) called attention to the inadequacy of the fund devoted to renewal, as well as to the custom of holding the tramways responsible for only a third of the expense of maintenance of that portion of the streets which they occupy. This latter custom of charging the expenses of one account to another is an easy method of increasing apparent profits, or of diminishing actual losses. In any state or municipal enterprise it is very difficult to obtain honest and intelligible accounts.

The Statist, of June 30, 1906, proves that the amount set aside to provide for wear and tear (depreciation), even during a satisfactory year of operation, is only 1.1 per cent. The sinking fund is 2 per cent. This makes a total of 3.1 per cent. a year. The figure is clearly inadequate; but, if it were increased, the apparent profits, small enough at best, would be changed into losses.

The following table shows the situation of the London County Council tramways at the end of the fiscal year 1910–1911 (The Municipal Year Book, 1912, page 618),1 when the debt was £9,455,500:

Capital charges amounted to £662,231, leaving net receipts amounting to £232,727, of which £129,229 was reserved for the renewal fund and £103,498 for the general reserve fund.

Results clearly prove that the London County Council is always operating at a loss. The report of the Highways Committee of the London County Council (see The Municipal Year Book, 1912, page 618) states that the tramway receipts for the year ending July 10, 1912, are £633,588, instead of £659,274, the figure for the preceding year, a relative decrease of £26,000 from the previous corresponding period.

The report declares that this decrease is owing to an increase in the competition of other methods of transportation. The tramways carry passengers only during two periods of the day, while the railway tubes and the motor omnibuses travel through crowded districts during the middle of the day. Therefore the committee demands the extension of its system upon these streets. It has submitted a preliminary plan which provides for an added expenditure of £600,000 ($2,922,000).

Last year the Highways and Improvements Committee proposed the construction of a tramway upon St. Paul's bridge, extending to the west end of Cheapside. The London County Council demanded that the bridge be used to connect the northern and southern tramway systems. The cost of the project was estimated at £1,631,200 ($7,943,900), to which must be added £350,000 ($1,704,500) demanded by the city for the enlargement of St. Paul's churchyard. The committee insisted upon a shallow underground tramway between the southern end of Cannon street and Cheapside.

The whole report and the plans that it includes reveal the mentality of these administrations. An enterprise is not successful. This unpleasant state of affairs is due to private competition. Then drive out private competition. The decrease in the receipts is not disquieting, so long as the expenses are increased. Consequently all sorts of extravagant plans are proposed.

Such being the financial results of the operation of the London County Council tramways, its partisans enumerated the following advantages (see The Municipal Year Book, 1912, page 619):

• a The relief of the tax rates from the profits of the enterprise.
• b Institution of all-night service.
• c Workmen's cars.
• d Rate reductions upon many lines. But, above all, they insist upon the advantages obtained by employees from:
• e Establishment of the 10-hour day for all employees.
• f One day's rest in seven. g Increase of salaries.
• h Furnishing free uniforms.
• i Annual vacations of six days with full pay.
• j Since 1909 the establishment of a conciliation board.

Whence we may legitimately draw the following conclusion: Municipal service must, above all, confer advantages on its employees. Such undertakings of right belong to them.

The Municipal Year Book, of 1912, publishes the following summary of the situation of the tramways and light railways in the United Kingdom, according to the latest reports of the Board of Trade:

The following table gives the figures for the tramways owned by private companies:

The losses reported on tramways operated by local governments in 1910–1911 affected the following 27 municipalities: Birkenhead, Blackburn, Bourne-mouth, Colchester, Darlington, Dover, East Ham, Edith, Ilkeston, Ipswich, Kilmarnock, Lancaster, Leith, Lincoln, Lowestoft, Maidstone, Nelson, Oldham, Perth, Pontypridd, Rawtenstall, Southport, Stalybridge, Hyde, Mossley, Dukinfield, Widen.

The above tables do not give the rates of depreciation. It is a pity that The Municipal Year Book has not included them. But, besides the 27 local governments which have reported their losses, there are no amounts recorded for depreciation and reserve for Derby, Halifax, Walthamstow, West Ham (in 1909–1910), Yarmouth.

In one of the best administered municipalities, Birmingham, the amount set aside for depreciation and reserve is £24,413 out of total receipts of £318,882, which is a little more than 7.6 per cent.1 At Glasgow it is £202,579 out of receipts amounting to £949,488, or more than 21 per cent. This difference between the two figures proves that the first is too small. The advocates of municipalization will not fail to point out the Glasgow figure, because it looks well and increases the average, but it is altogether exceptional.

CHAPTER XIII

HOUSING OF THE WORKING CLASSES AND PUBLIC OWNERSHIP IN GREAT BRITAIN

In a bill introduced by M. Siegfried, and passed by the French Chamber of Deputies, on the 22nd of April, 1912, as also in a similar bill providing for the condemnation of property for sanitary reasons, introduced by M. Honnorat, reference was duly made to the example of England by a citation of the Housing of the Working Classes Act of August 18, 1890.

By this act local governments are authorized to demolish houses adjudged unsanitary, providing compensation therefor, it is true, but with deductions in the amounts allowed, based upon the different degrees of existing overcrowding and lack of sanitation. Later the legislators made up their minds that they were not doing their duty by simply putting the inmates of such houses into the street in order to improve their condition. Therefore, they proceeded to authorize the towns to construct and even to manage houses for the working classes, granting them a right of condemnation in order to procure the necessary land. If the towns failed to provide as many lodgings as they had destroyed, or if they were not provided until a long time afterward, so much the worse for those who had been dispossessed.

The energy in this direction of the London County Council is pointed to with admiration and enthusiasm by all interventionalists.

According to its report of October 7, 1911, the London County Council had carried out altogether 35 plans of expropriation and reconstruction from 1893 to March 11, 1911. It had demolished buildings containing nearly 23,000 rooms, occupied by 42,000 persons, and furnished rooming houses occupied by about 3,000 people, or in all 45,000 tenants. It had constructed buildings aggregating 6,428 rooms, 2,519 cottages, and three lodging houses with 1,849 bedrooms for single men. Counting 2 persons to a room in these houses the Council had thus lodged 51,836 persons.

During the period mentioned a capital of £2,879,000 ($14,021,000) had been invested in these undertakings, bringing in a gross income of £207,340 ($1,009,700). Interest and sinking fund charges on a 60 years' basis absorb 49.60 per cent. of the receipts. The expenses of management, including repairs (7.52 per cent.), taxes, water, light, etc., represent 39.78 per cent. of the gross receipts, uncollectible rents, 0.19 per cent., and losses on worthless paper 9.51 per cent. Thus, we dispose of 99.08 per cent. of the gross receipts, and reach the following imposing result:

“This gigantic housing undertaking is entirely self-supporting, without resourse to the general resources of the budget. It even yields profits which vary from £500 to about £1,100.”

But all the expenses for these municipal lodgings were not charged to the municipal lodgings account, as the following fact shows:

When the London County Council paid £200,000 ($974,000) for the site of the Reid brewery, it entered the property on the housing account at £45,000, and charged the remaining £155,000 to the general improvement account.1

For the year ending March 31, 1911, the total expense for condemnation and construction was £2,015,833, and the income £1,876; that is to say, less than nothing. With the addition of £120,242 for administration costs, the deficiency of revenue is £3,950, which, of course, more than absorbs the small surplus noted above.2

All right, say the advocates of municipalization. Business is bad, from the financial point of view, but, from the standpoint of sanitation, a service has been rendered for which too high a price could not be paid.

Out of a population of 4,537,000 people the London County Council has dispossessed about 45,000 individuals. It has housed 51,856. It has not created new homes; it has only brought about displacements. For it is scarcely probable that the victims of these forcible evictions occupy the new or reconstructed municipal lodging houses.

In the report of the Commission of the Municipal Council of Paris, on the subject of cheap housing, M. Rousselle and his collaborators say:

“We can testify to the fact that for several years the mortality due to tuberculosis, which in Paris is still 34 out of every 1,000 inhabitants, has fallen in London from 60 to 19 inhabitants per thousand. This outcome is owing in large measure to the work undertaken by the London County Council, a work which this single result would serve to justify, if such justification were necessary.”

In other words the London County Council moves 1 per cent. of the population and the mortality from tuberculosis immediately drops 66 per cent.

This result is truly miraculous, but the most striking feature of the whole statement is the tremendous disproportion between given cause and effect.

In connection with municipal housing in Plymouth The Municipal Year Book1 gives the following data:

This reduction equals, we may add, 325 lives saved annually.

Now, the Council of Plymouth has constructed:

Without overcrowding, not more than two persons can well be counted to a room. This gives us 1,740 inhabitants housed out of a population of more than 125,000. It is a little difficult to see how the housing of 1,740 people can possibly save the lives of 323 persons each year.

At Birmingham buildings were demolished under pretext of sanitation, but the land was not used to build new houses for the working classes.

Mr. J. S. Nettleford, president of the Housing Committee of Birmingham, testified, in 1905, that the rents of the houses on Ryder and Lawrence streets were far above the means of the unfortunate tenants dispossessed by the improvement committee. The result of these improvements has therefore been the taxation of the many for the benefit of a few individuals, “a detestable commercial operation.”

The Estate Committee published accounts in which there was no mention whatever made of the value of the land upon which the houses were built. But a little note appeared at the bottom of the page, saying that the credit balance was equal to a ground rent of x per yard. At the conference of June 7, 1901, a councillor demanded the price of the land; where-upon it was found that an investigation would be necessary in order to discover it. Mr. Nettleford1 quotes the results obtained from this investigation:

Birmingham does not appear to have kept up the experiment.

Glasgow (802,000 inhabitants) commenced razing buildings in 1866. Naturally, it soon found itself saddled with an over-supply of land which the authorities were anxious to sell at exorbitant prices. As no purchasers were to be found under such conditions the corporation decided, about 1888, to build on its own account.

Instead of houses designed for workingmen the corporation constructed types of buildings more in keeping with the costly sites on which they were to be built. On May 31, 1905, the net cost of these structures amounted to £1,244,033 ($6,058,440), while the value of the lands and of the buildings was estimated at £923,165 ($4,495,800). A deficit of £320,868 ($1,562,640) was the final result. Fifty thousand people were driven out of the slums, but the city did not furnish them with lodgings. Instead, it constructed imposing houses and shops. Moreover, while awaiting the destruction of the condemned buildings, the improvement trust continued to rent the most unsanitary of these buildings.

In 1911 the net result of the whole movement was 2,149 lodgings for the families of the laboring classes. The income from them is £25,000 ($121,750), which allows a payment of 3 ¼ per cent. interest and one-third of the amortization.

Liverpool has 759,000 inhabitants. It has constructed buildings representing a total of 2,686 lodgings. Condemnation and reconstruction have cost £1,000,000. In 1909 the net income was £21,711, or 2.17 per cent. The losses on worthless paper amounted to 6.74 per cent. Taking into account repairs, costs of administration, etc., the city of Liverpool collects 1 ½d per pound sterling invested.

In Manchester (865,900 inhabitants) the financial results have been similar to those of Liverpool. Between 1845 and 1905 the city has rented 7,432 houses, 3,334 having been reopened after being renovated. The net income in 1910–1911 was £7,262 or 3.80 per cent. on a capital investment of £189,366. After deducting interest and sinking fund there is a loss of one penny per pound.

Leicester (227,242 inhabitants) has constructed two buildings, containing 42 apartments.

Richmond (36,493 inhabitants) has built 135 houses, which are bringing in £2,455 annually to offset an outlay of £38,683.

Folkstone (36,000 inhabitants) constructed 50 houses and then stopped.

At Sheffield the corporation bought a three-mile tract of land on the side of a hill, in the neighborhood of very valuable real estate. It was said that the object of certain municipal councillors was to play a good joke on the owners of this property. In the end the city was not only forced to buy more land, in order to construct a roundabout road, but, by an order of the King's Bench Division, it had also to pay a considerable indemnity to the aforesaid proprietors for the depreciation in value of their property.

Salford (231,380 inhabitants) has displayed very great activity along the direction of housing the working classes; 2,236 houses have been declared unfit for habitation, and 2,982 others have been reconstructed. In addition to these efforts, one building containing 69 apartments, 405 four-room houses, 134 with five rooms each, 95 with 6 rooms, or in all 703 lodgings, have been provided. Then a cheap hotel, with 285 rooms, and a building containing 32 shops have been also built. The average rent is 1 shilling 4 pence per week, while in the rest of the city 5s and 5s 9d are paid for a 4-room lodging.

But since the motives which actuate committees appointed to select tenants may be of various kinds and more or less complex, it is customary for such bodies to favor tenants who are willing to offer a higher rent.

Here we have the sketch of the great municipal work of cheap housing in Great Britain. The London County Council has evicted 45,000 persons and lodged 51,000. Fortunately there are still a few individuals or private groups who construct houses, otherwise the 4,486,000 inhabitants of the city of London, for whom municipal lodgings are not provided, would be condemned to dwell in the open air.

But the action of the London County Council has at least brought about one result, for, since 1889, no more great associations are being formed in London for promoting public housing.

But has any service been rendered to the people by this attempt to paralyze private initiative?

“Every house which is built by public authority,” says Mr. Nettleford, “prevents the construction of at least four houses which would have been built by individuals,” and he cites striking examples from Birmingham.

“The partisans of municipalization conduct you,” says Edwin Cannon, “past thousands of houses, lodging tens of thousands of inhabitants, to a half dozen houses built at a loss by the municipality and then say to you solemnly: ‘Private initiative is weak’; when all the time the facts are demonstrating the strength of private and the weakness of municipal initiative.”1

When the inhabitants of the slums do not go to live in the municipal houses the advocates of Municipal Socialism say: “But they can occupy the lodgings left vacant by those who do come to live in them.”

The dispossessed are simply driven from hovel to hovel; they are not housed.1

Lord Rosebery, in a speech delivered at Shoreditch, at the ceremony of the opening of the workmen's houses, said: “You have lodged 300 families, but you have dislodged many more. That seems to me a droll way to house the poor.”

Socialists are acknowledging the defeat of the movement. Bernard Shaw, however, while pointing out the practical impossibility of establishing municipal lodgings, concludes that the only solution to the problem is the municipalization of the soil.

CHAPTER XIV

HOUSING OF THE WORKING CLASSES ON THE CONTINENT

1. There are men who, full of sympathy for their fellow men, wish to house them, feed them, and dress them, but at whose expense? The trouble is they want to house people of one class at the cost of another.

Of late years the activity of the partisans of municipalization and socialism has been turned toward the housing of the working classes, as if the term “working classes” alone were not sufficient to indicate the retrogressive character of such measures. They are instrumental in creating a class apart, who are to be protected by other classes, utterly oblivious of that spirit of equality inculcated by the motto of the French Republic.

The interventionalists denounce the weakness of private initiative, as though up to the present it had not been responsible for the development of the cities which these same individuals, from an entirely different standpoint, so bitterly deplore. It never seems to occur to them that, by deluding the people of the rural districts into thinking that they will be offered desirable and more or less gratuitous homes, they are influencing them to leave the farms for the city. Their real motives are concealed within such vague terms as “public health,” and “the housing crisis.”

Nor are French interventionalists of all kinds ever at a loss for foreign examples. In their report to the Municipal Council of Paris (1912), upon the housing crisis, and the creation of cheap homes, concluding with the recommendation for a loan of 200,000,000 francs by the city of Paris for the purpose of constructing cheap lodgings, MM. Henri Rousselle, F. Brunet, E. Desvaux, and D'Herbécourt review the legislation and practice of foreign countries. We congratulate them upon having at least made the attempt to support their thesis upon facts.

2. Germany:

In Germany it is customary for municipalities to ask for a direct loan from private associations and individuals and to supplement the sums so raised by municipal loans.

Düsseldorf borrows up to 60 per cent. of the value of its investment, with a 0.20 per cent. premium in the rate of issue.

Frankfort (414,400 inhabitants) has constructed and rents 65 houses, containing 366 apartments.

Ulm (57,500 inhabitants) has provided separate houses, of which the family lodged therein becomes proprietor. During the years since 1891 it has owned 2,131 hectares (5,263 acres) of land. It has managed to dispose of 35. The city of Ulm congratulates itself upon the results it has achieved. Everything depends upon your point of view.

In 1896 Strassburg (173,280 inhabitants) began to construct houses and to manage them directly; it now owns 11 buildings, containing 98 apartments, occupied by 372 people.

Berlin (2,064,000 inhabitants) has done nothing along these lines; nor has Hamburg (802,800 inhabitants) any municipal lodging enterprises.

Freiburg im Breisgau (85,000 inhabitants) owns 77 houses, containing 266 lodgings, and costing 1,225,000 marks ($294,000), which sum was advanced at 3.75 per cent. interest by the savings banks. It was estimated that the rent should bring in 5.25 per cent. on the capital.

Magdeburg (279,600 inhabitants) has constructed 7 buildings, containing 50 apartments.

Barmen (170,000 inhabitants) has constructed 7 buildings, containing 50 apartments.

Emden (20,000 inhabitants) has constructed 228 houses. The capital invested by the village brings in 3.50 per cent. to 4 per cent.

Dresden (547,000 inhabitants) has constructed “out of resources provided by the Krenkel Fund” a model group of 5 houses, each containing 34 separate rooms. “In this work the question of financial return has been considered as wholly secondary.” As a result, the inhabitants of these houses are a privileged class, who enjoy all sorts of advantages and pay 25 per cent. less than the usual rents. With the help of the Krenkel Fund the city has also undertaken the construction of two other buildings, containing 36 apartments.

Munich (595,000 inhabitants) has devoted 1,040,000 marks ($249,600) to the construction of 15 houses, containing 167 apartments, for laborers and other employees of the city.

3. Italy:

Louis Rousselle quotes these words of Garibaldi, spoken at the time of the conquest of the two Sicilies:

“A government sprung from the people is before all else bound to provide for the first necessity of the people—commodious and sanitary homes at a moderate cost.”

Certainly, if any people were ever badly housed it was the Neapolitans. I saw some of their hovels a long time after Garibaldi had pronounced these words. No change had been wrought by them in the filth and misery of the majority of the population. However, the true home of the lazzerone is the shore. The children swarm in the sun, and the sea air counteracts the pestilential atmosphere of the home.

The Italian law of May 31, 1903—modified in 1907 —has constituted an autonomous institution, “a sort of financial organization with social intentions,” to quote the expression of Luigi Luzzatti, recently Minister of Foreign Affairs.

Public construction and control of such works are in force only in Venice, Parma, Reggio, Emelia, Vincenza, Sestri-Ponente, and Carrara.

Venice (167,000 inhabitants) owns 396 houses, lodging 2,000 persons.

Parma (51,300 inhabitants) has 82 houses containing 508 rooms, and sheltering 130 families, or 724 people.

Sestri-Ponente (23,100 inhabitants) has 11 houses, each containing 20 apartments.

4. Belgium:

Brussels (195,600 inhabitants) has appropriated sums for housing purposes amounting to 2,500,000 francs ($475,000). But our report declares that it is necessary to subtract half as devoted to sanitation. Thus, 1,250,000 francs ($237,500) remained to be applied to the experiment. On this basis the net cost of one rented room is 3,575 francs ($679). It is all quite simple.

The Commission estimates the total charges at from 15 to 30 per cent. of the rent. The bonds of the city of Brussels were issued at about 2.70 per cent., interest, premiums and amortization included. The annual rent of one room, taking into account the higher rent of small shops, will be about 98 francs 51 ($18.72).

Saint Gilles-près-Bruxelles (63,000 inhabitants) began in 1894 with 5 small, one-story houses. Later this system was abandoned, and the town now has a group of tenement houses, comprising 130 lodgings.

The loans contracted by the municipality are issued at 3.25 per cent., with an amortization charge of 44 centimes (9 cents), or 49 centimes (10 cents). This appears about to equal the average income.

5. Holland:

A law of 1853 permits officials entrusted with the duty of looking out for house sanitation to enter any building, even in the night. The law of June 22, 1911, confers upon municipal councils the right of preventing the occupancy of unsanitary buildings and of regulating the number of people to a house. But no city has constructed or rents houses.

6. Switzerland:

Geneva (145,000 inhabitants) has constructed buildings containing 43 apartments and 111 rooms.

Lausanne (65,000 inhabitants) has constructed 8 houses, containing a total of 24 apartments.

Zurich (191,200 inhabitants) began by building houses for its municipal employees. In 1907 it erected 25 buildings, containing 225 apartments; in 1910 it constructed 228 apartments, and 76 attic rooms. It is now planning to construct 370 new houses.

Bern (85,000 inhabitants) built 134 small houses, containing 182 apartments in 1895, and, in 1898, 25 new houses.

Neuchatel (23,600 inhabitants) has built houses containing 47 apartments.

7. Austria:

In 1911 a plan was discussed in Vienna (1,999,900 inhabitants), involving an outlay of 480,000 crowns ($96,000), for the construction of temporary homes for the homeless.

8. Hungary:

In 1908 the Hungarian government proposed to the Chamber of Deputies to build a group of houses in the suburbs of the city of Budapest (791,700 inhabitants) capable of sheltering from 8,000 to 10,000 families. A credit of 12,000,000 crowns ($2,400,000) was opened to the ministry of Finance, and a tract of land, containing 169 hectares (417 acres), was bought at Kispest, while in the tenth district a second tract, containing 77 hectares (190 acres), was purchased. On May 1, 1911, 970 apartments were finished. In 1912, 2,000 other lodgings were to be open to rent. The work is to be finished in 1914. As tenants the preference is given to laborers and subordinate employees of the government. These houses are exempt from state taxes.

In 1909 the burgomaster of Budapest asked for an appropriation of 69,000,000 crowns ($13,800,000) for the construction of cheap lodgings. In all the city has constructed 26 buildings, containing 1,600 apartments, and costing 27,000,000 crowns ($5,400,000). On September 19th of the current year, it was decided to construct 1,000 more.

A special feature of the lodging schemes of Budapest has been the establishment of temporary settlements, containing 3,000 apartments, and expected to last 20 years, at a cost of 8,100,000 crowns ($1,620,000). Still another special feature has been the construction of a furnished hotel, containing 500 beds. The city is planning to build others.

9. Sweden:

Stockholm (344,000 inhabitants) owns 12,000 apartments. According to the memorandum of M. Gunichard, one of the municipal directors of the city, 10,136 lodgings are to be considered as housing 21,000 persons, almost 7 per cent. of the entire population of the city. But “these apartments are situated in old houses, about to be demolished, and the city is trying to sell the land.”

The government has also built houses for the benefit of government laborers and employees, especially for those connected with the railroad and telegraph services. In the city of Stockholm 443 apartments are reckoned to 1,700 people.

Norway:

Christiania (227,600 inhabitants) has built and rents two buildings, containing 152 rooms.

10. After their review (summarized above) of municipal housing in general, M. Rousselle and his collaborators on the Municipal Council say, with emphasis:

“The conclusion of this rapid review of the work accomplished abroad in the matter of housing the working classes is that in all the great cities the officials in power have approached the problem squarely and have attempted to solve it by the most direct and energetic means.”

Wherefore, there is bitter indignation against “France, which, alone among the great modern nations, obstinately refuses to municipalities the right of direct interference, despite the failure of private initiative and in the light of universal experience.”

It is curious to note the different interpretations to which a single fact is susceptible. These municipal councillors speak of the failure of private industry and universal experience. But, without private initiative, where would ninety-nine one hundredths of the population of London be living? The irrefutable facts already enumerated show that, in most of the cities which construct and rent apartments, the privileged classes who occupy them form but an infinitesimal portion of the population. If individual owners had not housed for a long time, and were not still housing, less favored mortals, the great cities would not exist at all. And still another fact that should be observed in this connection is that, in a certain number of these cases, municipal lodgings actually constitute supplemental wages for employees and laborers.

From no possible point of view is the desire to house so many people justified, and, moreover, it threatens both political and social dangers in the future. For example, the Hungarian government establishes settlements of small homes near Budapest. Then the municipality of Budapest, in order to meet this competition, builds houses in its turn. I gaze with awe on those states and cities which, while confronted with the necessity of husbanding their resources, have the courage to launch out into such extravagances.

According to the advocates of municipalization, all great cities should construct and manage workmen's houses. But when they cite facts in support of their contention, their facts prove precisely the opposite from what they intended them to prove. The majority of the great cities of the world neither construct nor administer houses for the benefit of the working people.

Nor have such cities as have undertaken this kind of work displayed the courage of their convictions, as the oft-quoted example of the London County Council proves. In cities containing hundreds of thousands of inhabitants lodgings are built for a few hundred people. Yet we French are airily urged: Imitate them! If we should imitate them in the same degree our undertakings would certainly not amount to much.

However, the following circumstance proves that the efforts of the promoters of municipal lodgings are bearing some fruit. The prefect of the Seine is demanding the creation of a public bureau of cheap lodgings, to which the city of Paris shall hand over the millions set aside according to the law of December 12, 1912, for that purpose. The plan provides that the bureau shall attend to the payment of interest, and the reimbursement—after 75 years—of the capital thus invested by the city.

But at what rate of interest can the city of Paris borrow now (June, 1913)? The bonds issued at 3 per cent. on May 21, 1912, and rated at 285 francs, are now 250 francs; moreover, the housing bureau must be responsible for capital and all general expenses of administration, rental and up-keep at a gross rate of 2 per cent., as well as the expenses of control by the city of Paris at a gross rate of 0.15 per cent. It must set aside 0.50 per cent. for a reserve fund to cover the more costly repairs and unexpected expenses. We have thus a rate of over 5.65 per cent. Under such a system the city is supplying capital to an association which pays interest, builds, maintains, and rents, it is true, but which, at the same time, is neither more nor less than a monopoly, suppressing all competition, since it frightens private capital away from just such investments.

Conclusions

1. The laws concerning unsanitary buildings are a new violation of the right of property.

2. The establishment of sanitary lists is designed to keep diseased inmates out of these buildings. But, in order to circumvent such regulations, proprietors will contrive to make all prospective tenants pass before a special examining health board.

3. Sanitary statistics of apartments belonging to municipalities are of no value, because the towns may choose their tenants.

4. We see the London County Council dispossessing 45,000 people and lodging 51,000. These latter are seldom or never the same people, and, therefore, between the destruction and construction of houses, the unhappy tenants have found themselves housed under no better conditions than before.

5. Those cities which buy real estate increase the price of that which remains; consequently they are helping to achieve such an end. In constructing houses at all they are withdrawing this branch of industry beyond the reach of private enterprise, and, while they are driving individuals out of business by their competition, they are showing themselves incapable of providing for the needs that they are pretending to care for. In reality they are working in the interest of higher rents.

6. Then such cities are practically subsidizing associations more or less financial and philanthropic. These are frequently granted special privileges, as in France under the law of 1894, reinforced by that of 1906. Léon Bourgeois himself described the results of such laws as “sporadic.” The departmental Committee on Patronage of Cheap Houses declares that: “The number of philanthropic associations is unimportant, and they are not modifying hygienic conditions in the housing of the workmen of Paris.”

7. The law of 1906 has had at least one result: While philanthropic associations were showing their inefficiency individuals and contractors have hesitated to invest capital in the construction of small houses, fearing to see their property decrease in value by reason of the competition of privileged associations or of the city.

8. Statistics prove the conclusions above drawn. The excess of buildings constructed in Paris over buildings demolished has been:

Or a difference between the two periods of at least 22 per cent.

The following table applies to tenements of 500 francs per year and under. These buildings are not taxed.

Or at least 31 per cent.

As a matter of fact the housing crisis in Paris has been provoked by legislative and municipal intervention.

9. On the 11th day of July (1912) the Chamber of Deputies passed a resolution modifying the law of 1906 concerning cheap lodgings. In this law there is no mention of construction and direct public management by municipalities. Nevertheless, the Journal Officiel, of July 30, 1912, duly proclaimed the law as authorizing the city of Paris to borrow 200,000,000 francs ($38,000,000), in order to facilitate “the construction of cheap houses, or to acquire and make sanitary buildings already existing.” The law as modified was placed on the statute books December 1, 1912.

In part compensation for this enormous outlay the prefect of the Seine proposed to levy taxes to the amount of 11,000,000 francs ($2,200,000) upon tenants, owners, and billboards. He has been compelled to abandon the scheme, but meanwhile necessary work on the city streets has been at a standstill.1

CHAPTER XV

GOVERNMENT CONTROL OF FOOD SUPPLIES

To a questionnaire sent out to Swiss towns by Edgar Milhaud concerning markets operated by them1 74 towns responded; 33 returned purely negative answers; 41 have made some headway against the high cost of living; Glarus has leased a fish market to a merchant who has been authorized to raise his price from 10 to 20 centimes (2 cents to 4 cents) a pound above cost. Oerlikon had given to certain families the right to reductions of from 10 to 20 per cent. from all retail dealers, at the expense of the commune. In 1908 Romanshorn opened a public fish market: “No gains and few losses.” Saint-Imier, Herisau, Rorschach, Schaffhausen have renounced similar attempts. Thun has leased a fish market.

At Saint Gall the sale of fish yields several hundreds of francs profit to the city, and has lowered the price of fish in the private market. The market is patronized, however, only by wealthy families or those in easy circumstances.

Zurich, three years ago, entrusted the sale of sea fish to a coöperative society, the Zurich Lebensmittel-verein; the fish were sold at cost, plus a percentage to cover expenses. The administrative council of the society declared that “the attempts made to accustom the Swiss population to the use of fish food must be regarded as having failed.” Zurich then organized cooking classes. The results of this latter experiment are not yet known.

Zug has established a municipal slaughter house. Freiburg bought and sold, in the autumn of 1910 and the spring of 1911, 193,000 kilos (474,600 lbs.) of potatoes, at a loss of 2,833 francs ($538). Lucerne, in 1911, sold 13 carloads of potatoes, 4 carloads of apples, and 2 carloads of carrots, for cash. The shipping costs were met by the town. In addition 43,750 kilos (96,250 lbs.) of coke were sold by the city. The undertaking ultimately resulted in a loss of 2,842 francs. In any event, the authorities of Lucerne can hardly be accused of supplying over-substantial nourishment to their fellow-citizens!

The town of Saint Gall caused vegetables to be sold by a coöperative society at cost price f.o.b. Saint Gall at the receiving point (the railroad station). The city paid the difference, which amounted to 400 francs a month. The sale was limited to “that part of the public without income.” The total sales amounted to only 1,700 francs, the expenses to 6,131 francs, and the attempt lasted only from the first of November, 1911, to February 29, 1912.

During the winter months 1910–1911 and 1911–1912, Bern undertook to purchase potatoes at wholesale and to sell them at retail. In the latter year, it added the sale of white cabbages. As a matter of course the experiment resulted in losses.

Lausanne, during several days in 1910, sold potatoes with a profit of 230 francs 15 centimes, and distributed a balance of 1,340 kilos (2,948 lbs.) gratis.

In 1911–1912 Zurich sold 550 kilos (1,210 lbs.) of potatoes at a loss of 901 francs 25 centimes which was reduced to 569 francs, following a reduction in the freight costs of 332 francs 25 centimes made by the Federal railways. “A reduction of the freight rates has been granted for the transportation of food supplies from October 1, 1911, to May 31, 1912, if the supplies are to be utilized for the public good.”

Anybody who ships potatoes ships them for the public benefit since they are destined to provide food for those who buy them. This reduction, therefore, simply gave a subsidy to municipalities as against individual merchants. The figures that I have just reproduced prove that, if the Swiss, in order to live, had been forced to rely upon the municipality for their food in 1910–1911, they would all be dead of starvation.

As a matter of fact, 18 communes have made attempts at public regulation of food supplies, in order to combat the high cost of living. These are: Brugg (3,000 inhabitants); Weinfelden (4,000); Baden (6,050); Grenchen (5,202); Romanshorn (6,000); Thun (6,030); Herisau (13,853); Le Locle (13,197); Rorschach (13,481); Schaffhausen (17,148); Freiburg (20,300); La Chaux-de-Fonds (39,497); Lucerne (38,467); Saint Gall (35,000); Basle (129,600); Bern (78,500); Lausanne (59,327); Zurich (180,000).

Milhaud concludes his article with this enthusiastic statement:

“As a result of these public services we have remarked the following cost reductions: Potatoes, from 12 per cent, to 24 per cent.; fuel, 15 per cent. to 50 per cent.; fish, 30 per cent. to 50 per cent.”

Or in other words free competition is making a losing fight against public operation, and Edgard Milhaud considers this a most desirable state of affairs.

If the custom of providing government food should ever become general, it would be necessary for an individual to have great courage in order to engage in any similar undertaking in view of the prospect of being undersold by the municipality. The town can lose with impunity; the taxpayers will make up the loss. On the other hand, loss to a merchant means his whole financial standing in the community and that of those who may have placed confidence in him, all of whom have a right not to anticipate such disturbing factors as result from the intervention of municipalities turned merchants of potatoes, apples, cabbages, carrots, and fish.

The towns concerned would answer that their action was only one form of philanthropy. As a matter of fact, several of them did limit their sales to the poor. Others, however, did not take this precaution, and, in the majority of cases, they did not seek any justification for the measures they took.

I do not believe that the results of this investigation would encourage very many towns to follow the example of the 18 Swiss communes. They are such that it is not even necessary to furnish further arguments for an amendment to the law of 1884 prohibiting municipalities from going into business.

In 1911 there were several attempts in France to regulate the food supply. The mayor of Denain, M. Selle, opened a municipal slaughter house. Cattle decked with ribbons were conducted there solemnly to the tune of the “Internationale.” At the end of one week the undertaking developed the following figures (in francs):

The mayor called a halt. The indignant populace, whom he had promised to feed below cost, broke into his house, from which he managed to escape under the protection of the police. Thereafter neither the mayoralty nor the municipal council knew him more.

At Montpellier an attempt at a municipal slaughter house was made, which resulted in a loss of 6,000 francs.

Edgard Milhaud, who sees all attempts at public ownership through rose-colored glasses,1 has declared that at Eberwald, Thionville, and Freiburg-im-Breisgau the attempts at municipalizing a slaughter house were successful. According to the director of the abattoir of Freiburg, M. Metz, the experiment, which took place in 1895, was only temporary, and a burden while it lasted. The enormous waste, which may and does occur in such enterprises, renders management very difficult.

At Thionville experiments were made with pork in order to force the butchers to lower their prices. “The meager profits realized were divided between two old butchers who had been entrusted with the purchase, slaughter and sale of the meat.” In 1905, at Vienna, four municipal abattoirs were established, which disappeared after a short period.2

All these undertakings are direct attacks on commercial freedom. In Italy3 such attacks are made without scruple. Udine opened a municipal oven in order to ruin the existing bakeries. Verona sells fish to the injury of other fish merchants.

CHAPTER XVI

VICTIMS OF GOVERNMENT OWNERSHIP

A high school professor of Elbeuf, M. Mouchel, afterward mayor of that city for 17 years, and finally deputy, was attacked by the municipalization mania. He municipalized water, electricity, gas, the collection and disposal of garbage, and the burial of the dead. February 28, 1911, there appeared in the Dépêche de Rouen a highly eulogistic article extolling his work. On October 15 of the same year the mayor was obliged to confess that his attempts at municipalization were causing a deficit of 180,000 francs ($34,200) in a budget of 800,000 francs ($152,000). A sum of 250,000 francs ($47,500) would be necessary to cover the losses.

After confessing his delusions and deceptions before a meeting of the municipal council M. Mouchel committed suicide in the cellar of the town hall.

The serenity of the Socialist journals was scarcely rippled by such an occurrence. L'Humanité remarked: “It will be found that the municipal operation of gas will not have cost a sou more nor less than private operation.” Even if that statement were true it would have been bad business.

But the partisans of government and municipal ownership are incorrigible. “What if there are losses,” they say; “the citizens have been gainers.” Not as taxpayers, that is certain.

As for the United States the disorder and waste of its municipal administrations are notorious, and development of public operation has certainly not lessened them.

In Milwaukee, a city inhabited almost exclusively by Germans, municipal Socialism has been a very costly proposition. Before the city had experimented with a single municipal undertaking the annual normal increase of the budget was $250,000. Beginning with 1909 it has increased $1,000,000 in two years. At the April elections, 1912, the Socialist ticket was defeated by a majority of 13,000 and Mayor Seidel prosecuted.

A new Bureau of Efficiency and Economy, costing $20,000 a year, has been organized, but it has thus far failed to make any report.1

CHAPTER XVII

CHARGES, DEBTS AND CREDIT

Let us now take up the question of charges, debts, and credit, in relation to British local enterprises.

The first parliamentary report on municipal undertakings, which appears under the title of Municipal Corporations' Reproductive Undertakings, dates from 1899. It includes accounts of 265 towns of England and Wales for a period of five years, ending March, 1898. The financial results indicated are shown in the following table:

The second document dates from 1903. It is more comprehensive. The Municipal Year Book of 1912 reproduces it in its entirety. It gives the results of the undertakings of 299 municipalities out of 317—not including London—for a period of four years, or from 1898 to 1902.

An apparent profit of .312 per cent. is thus indicated.

In 1907 the Local Government Board published a supplementary statement, showing the results obtained by 192 municipalities out of 324 in England and Wales during the year 1904–1905.

Municipal Trading Returns (No. 171, 1909) gives statistics only regarding the work of the London County Council, the City Corporation, the London boroughs, and 43 municipalities in England and Scotland for the four years from 1902–1906.

Mr. J. H. Schooling, the celebrated statistician, has demonstrated that all the municipal enterprises taken together show, for the period 1898–1902, an annual profit of 6s 3d ($1.50) per 100 pounds sterling of capital invested. He adds, however, that, if the depreciation of roadbeds, equipment, etc., of the various undertakings was taken care of as it would be in private business normally managed, the annual loss would be 5,500,000 pounds sterling ($26,785,000), or, in other words, £4 10s 7d ($22) on every 100 pounds. Among the sources of profits are reckoned the sums collected from private businesses. These sums are very large in the case of some municipalities, but they cannot legitimately be called profits from municipal enterprises.1

The Local Government Board has published a statement of the receipts, expenses, and local loans in England and Wales for the year 191–1911. The number of local authorities included in this work is 2,500, representing about one-tenth of the local governments mentioned in the local taxation returns for the same districts. The financial situation, on March 31, 1911, of these 2,500 local governments was:

The debt of these 2,500 local governments reached, then, the enormous figure of £410,695,000 ($2,000,094,000). The expenses are more than £137,382,000 ($668,850,000). Of the £122,953,000 ($598,780,000) of receipts, local taxation accounts for £64,004,000 ($311,699,500) and grants from the exchequer (including the local share of license fees) for £21,073,000 ($102,625,510), giving a total of £85,077,000 ($414,325,000).

The apologists for municipal enterprises give the impression that such undertakings may be substituted for taxes, with no apparent perception of the fact that, if municipal enterprises were to replace taxation, by reason of their innately fiscal character they would come to weigh heavily on the consumers. The conception of substituting municipal enterprises for a treasury is, therefore, only a delusion.

Local government undertakings have, in some instances, yielded profits which have relieved local taxation. But in others they have created deficits which are met only with the help of taxes.

In 191–1911 the total amount contributed in aid of taxes on gas, electricity, ports, docks, jetties, canals, quays, tramways, light railways, and waterworks undertakings was £1,320,000 ($6,428,400), of which £1,203,000 ($5,858,600) came from town councils.

The total amount of tax funds paid out to provide for deficits on the same undertakings was £971,000 ($4,728,800), of which £631,000 ($3,073,000) was provided by town councils.

Thus, the reduction of local taxation effected by profits from local enterprises amounted to £349,000 ($1,700,000), or, as against the £64,000,000 ($311,680,000) of local taxes and the £23,000,000 ($112,000,000) furnished by the exchequer to 0.41 per cent., or less than one-half of 1 per cent. These figures are a sufficient answer to those partisans of government ownership who are continually reiterating that expense may be incurred with impunity because government monopolies will pay for them. And, moreover, receipts from ports, jetties, quays, and canals, which are not industrial operations properly socalled, are included in these figures.

Moreover to the loans previously noted as granted to local governments, £23,210,000 ($113,033,000) should be added for the Port of London; £25,720,000 ($125,256,400) for the Mersey Docks and Harbor Board; £49,529,000 ($241,236,000) for the Metropolitan Water Board; more than £14,692,000 ($71,550,000) for ports, docks, quays, etc., or a total of £129,288,000 ($625,795,000). The taxable value of all this property was £217,180,000 ($1,057,667,000), from which must be deducted, however, £1,737,000 ($8,459,000) representing government property, which, in lieu of taxes, pays an equivalent sum under the name of “contributions.”

The following figures show the total local tax during the three years 1908–1911:

The pound sterling is 20 shillings. The tax of 1910–1911 represents then more than 30 per cent. of the assessed value of the taxable property just listed.

Municipal enterprises, far from having relieved the taxpayers, have not prevented local taxes from soaring higher in 1910–1911 than they had ever done before.

Municipal enterprises make loans necessary, and the increase of loans involves loss of credit.

The Birmingham Daily Mail, of May 24, 1911, published the letter of a correspondent, who says:

“The town made last year a profit of £132,174 ($643, 687), from which must be deducted a loss of £57,091 ($278,033). The citizens of Birmingham have loaned to the city £12,500,000 ($60,875,000), on which they lose all their taxes and receive in turn about £60,000 ($292,200), or less than 0.45 per cent., whereas if they (the municipal undertakings) were paying 5 per cent. they would yield £650,000 ($3,165,500).”

Hilaire Belloc, during a debate at Memorial Hall, in London, with Ramsay McDonald, the president of the Labor Party in Parliament, said:

“Municipal enterprises have been established by means of loans contracted with capitalists to whom the various local governments offered returns which these undertakings either did or did not furnish. The result has been that municipal undertakings have been bringing in about 1.8 per cent., while 3.2 per cent. interest was being paid out. The debt has been increasing. There has been more and more need of capitalists who have refused to consent to new loans seeing that the debts were growing in an alarming manner.” (Labor Leader, May 12, 1911.)

Major Darwin, in his objective study of municipal industries, reaches the following conclusion:

“Municipalities can manage markets, public baths, slaughter houses, cemeteries, and waterworks. Municipalities may own tramways. But all these enterprises ought to be operated privately. Gas, electricity, tramways, the telephone, ought to remain in the hands of private individuals.”

He further suggests that municipalities be forbidden to manufacture electrical apparatus; to own houses; to engage in construction without contractors. Municipalities should be forbidden to attempt to make money, and their borrowing power ought to be restricted.1

In the United States the debt limit for municipalities is: 10 per cent. of the taxable value in New York, 5 per cent. in many of the western states, and 2 per cent. in others.

This year (1913) the German cities are being much hampered for lack of credit. A loan sought by the city of Carlsruhe has had to be indefinitely postponed The smaller and medium sized municipalities, in the absence of funds, have been obliged to postpone necessary work.

CHAPTER XVIII

FICTITIOUS PROFITS

Private enterprises are subject to certain charges from which state undertakings are exempt. These exemptions create an illusion of profit. Local taxes paid by the government railroads in Prussia amount to £750,000 ($3,652,500), while similar taxes, paid by the railways of the United Kingdom, having nearly the same length of line, reach £5,000,000 ($24,350,000). If both were taxed at the same rate the profit on the government railroads in Prussia would be proportionally reduced.1

Further, the profits of one state undertaking are frequently obtained only at the expense of another. For example, the Victorian state coal mine, in Australia, is called a success; but the director of railroads, Mr. Fitzpatrick, complains of losing 45,000,000 francs ($8,550,000) through being forced to use government coal.2

At the end of 1912 it was announced that the New South Wales government was prepared to nationalize the iron industry, but with the proviso that the Federal government must stand ready to order the material for the new railroads from its mills. “Peter is being robbed to pay Paul. But such are the methods of presenting the accounts that the public does not perceive this fact,” says Liberty and Progress, Melbourne, May 25, 1911.

The National Printing Office of France undertakes to do outside work for editors; at the same time it has a monopoly of the government printing. It farms out its work to private printers, and it adds a charge of its own to the original cost when the work is delivered to the departments, which have no choice but to have their printing done by government printers. In this connection the inspector of the finances, M. Bizot, has pointed out the following facts:

“The National Printing Office furnishes the forms for telegrams. It has contracted with a private company to manufacture and deliver these forms to the aforesaid printing office, cut, folded, perforated, gummed, and turned at a cost of 67 centimes per 1,000 forms in pads of 100, and 50 centimes per 1,000 forms when delivered as loose sheets. Up to 1911 the National Printing Office invoiced these supplies to the postoffice at a cost of 2 fr. and 1 fr. 62, respectively, instead of 67 and 50 centimes. In 1910 this addition of more than 200 per cent. represented a profit to the National Printing Office of 82,000 francs.”

And who was paying this profit to the National Printing Office? Why, the Postoffice department, or, in other words, the government, by submitting to an overcharge of 82,000 francs.

The law of April 4, 1912, has ordered that the insurance monopoly in Italy shall be exempt from postal charges, and that its profits shall not be subject to the income tax.

These exemptions will be accounted on the credit side of the insurance monopoly. They ought to be deducted from the government resources.

CHAPTER XIX

FISCAL MONOPOLIES

• 1. Tobacco Monopoly in France.—Treasury Profits.—Losses to Agriculture, Industry and Commerce.—Use of National vs. Maryland Tobacco.—Opposition of the Consumer.—The Advantage.—Delusions Regarding Regulation.
• 2. The Match Monopoly in France.—No Amortization.—Bookkeeping Artifices.
• 3. Fiscal Profits.

1. It is customary to speak of the results of the tobacco monopoly in France, in force since 1811, as marvelous.

The income appears truly enormous. In 1815 it was 32,123,000 francs; in 1830, 46,782,000 francs; in 1850, 88,915,000 francs; in 1869, 197,210,000 francs; in 1890, 305,918,000 francs; in 1900, 338,872,000 francs; in 1910, 407,330,000 francs.

Without doubt this is a dazzling result from the fiscal point of view, and it also proves that the number of Frenchmen who use tobacco has increased more rapidly than the population.

But there are other ways for a government to make money out of tobacco than by monopolizing the sale of it. In 1908–1909 the United Kingdom realized £13,328,000 upon tobacco, that is to say, 333,450,000 francs, or only 74,000,000 francs ($14,060,000) less than our monopoly has yielded us.

We see what this monopoly has contributed to the Treasury; but we do not see the losses occasioned by it to French agriculture and industry. It is a privilege to be allowed to cultivate tobacco. I have heard a deputy say: “I will guarantee that not a single one of my political adversaries will cultivate one acre of tobacco.” Possibly he was boasting; but that a deputy could use such language is sufficient to prove just how far official authority is capable of being abused.

In any case there are only 27 districts permitted to cultivate tobacco, and these districts are situated in all parts of France, from the North to Landes, from Ile-et-Vilaine to the Var. Therefore, climatic reasons have not determined these concessions, which, as a matter of fact, are wholly dependent upon politics. The number of hectares authorized was 17,955 (44,880 acres) in 1909, and 18,005 hectares (45,000 acres) in 1910. In the first year mentioned 15,037 hectares (37,593 acres) out of a possible 17,955 hectares (44,880 acres), and in the second year, 14,683 hectares (36,708 acres) out of a possible 18,005 hectares (45,000 acres) were cultivated. The number of licenses was, respectively, 48,395 and 47,283.

The quantity of tobacco bought was 23,134,000 kg. (50,894,800 lbs.) in 1909, averaging 23,122,000 francs, and, in 1910, 21,034,000 kg. (46,274,800 lbs.), averaging 22,085,000 francs.

But let us look at the monopoly from a somewhat different standpoint. To-day we may buy scaferlati. Scaferlati is a raw product. Consequently you may imagine that you have the right to use it to manufacture cigarettes. In fact the Court of Cassation1 has made a ruling to that effect. Nothing of the kind. The department of Indirect Taxes (Administration des Contributions Indirectes) intervenes, and says to you: “You, a simple individual, cannot manufacture cigarettes, because I have reserved for myself a monopoly of this article.”

The rival claims of the various parties interested in the sale of tobacco became the subject of a lively discussion between the tobacco monopoly and the Court of Cassation. The Finance Law of 1895 finally put an end to the altercation by justifying the exorbitant pretensions of the monopoly. It decided that, although you can make cigarettes for your own personal use with the tobacco that you buy from the government, you have not the right to sell these cigarettes to your neighbor.

On September 17 and 18, 1903, there was another altogether edifying discussion—this time in the Senate—upon the manner in which the state treats the consumer. Certain senators were anxious to prevent the French smoker from smoking anything but the national tobacco. The Minister of Finance, M. Rouvier, opposed this restriction, but at the same time he proceeded to demonstrate how cavalierly the state may treat the consumer who has no other source of appeal:

In 1900, he declared, ordinary scafeerlati had been composed of 52 per cent. native tobacco and 48 per cent. foreign tobacco. In 1901 the proportion was changed to 54 per cent. native tobacco and 46 per cent. foreign tobacco. The consumption decreased 40,000 kg. (88,000 lbs.).

What would a private company have done under similar circumstances? It would have restored the former proportion, as a matter of course.

What did the government do? It increased the proportion of native tobacco.

In 1902 scaferlati was composed of 63 per cent. native tobacco and 37 per cent. foreign tobacco.

“The number of complaints increased,” added the minister placidly.

But what did the minister do about it? Was any attempt made to satisfy the consumer? Did the department restore the previous proportions? Not at all. The consumer was induced to see the error of his complaints in another way. Smokers had gradually abandoned the degenerate scaferlati for Maryland tobacco. Therefore, the government conceived the happy idea of increasing the price of Maryland tobacco. That would teach the smoker to be content with the government tobacco. Strange that MM. Gomot and Ournac should discover that this proportion of native tobacco was still unsatisfactory!

The example quoted above only serves to prove once more the truth of the following general law:

Under conditions of free competition the producer has more need of the consumer than the consumer of the producer, and it is necessary that the latter give the former the maximum of service at a minimum cost. Under monopolistic conditions the consumer is obliged to submit to the exigencies of the producer.

If the consumer wishes to retaliate he has no other recourse than that species of strike called abstention, which for him spells privation. As the case of the Maryland tobacco proves, the smoker cannot even resort to substituting one product for another. If he makes the attempt he is penalized.

Beginning with May 14, 1910, M. Cochery raised the rates on high-grade tobacco and certain tobaccos especially popular at the time. As a result of this measure an increase in the annual receipts of 18,000,000 francs was anticipated, and for 1910, 13,500,000 francs. The increase was but 10,044,000 francs, or only 998,000 francs more than the average increase for the previous four years. The detailed report of the sales shows that the public had abandoned the use of the high-grade tobaccos, and was contenting itself with scaferlati, the price of which remained the same. Probably it was not without discreet murmurs that the public resigned itself to this change of habit; but at least the passive and silent strife had some effect. The decree of June 26, 1911, reëstablished the former rates on brands the abandonment of which would make serious inroads upon the profits of the monopoly—that is to say, the more expensive scaferlati and the more popular cigarettes made from it.

But now let us suppose that this monopoly on to bacco in France did not exist. We French are extremely skilful in raising products of a refined savor, and we know how to prepare them in the most attractive manner. Let us imagine, then, that the cultivation and sale of tobacco were free. There would be tens of thousands of hectares under cultivation in those districts where the soil is best adapted for it. We would see manufacturers experimenting with skilful blends of native and foreign tobaccos suitable for exportation. We would see in the great cities large and imposing shops for the sale of tobacco like those seen abroad.

The department boasts of the excellence of its products. The foreigner does not share this opinion, because exportation is almost nil—3,547,000 francs ($673,930) in 1910. Yet attempts are made to export the home product, because included in the above figure is the sum of 83,718 francs ($15,906) for commissions paid to special export agents.

If the monopoly contributes 405,000,000 francs ($76,950,000) to the government on the one hand, it is certainly causing a loss of many hundreds of millions annually to French agriculture, industry and commerce on the other hand.

Moreover, but little regard is paid to the net cost of manufacture and sale. As a monopoly the state has, of course, a wide margin.

The books of the monopoly carry a kind of industrial account, entitled Capital de la Régie. On December 31, 1910, the amount was figured at 153,841,482 francs 07 ($29,229,881). Nothing more definite was given. The sum was distributed thus:

This table is supplemented by the following:

But what can the Treasury do with 42,000,000 francs in buildings and 6,000,000 francs in machinery, etc.? Surely there is no indication here of an industrial budget.

The tobacco monopoly bought nearly 32,000,000 francs ($6,080,000) of tobacco abroad in 1910. Tobacco experts visit the places of production, meet at Bremen, and buy tobacco. They are prepared for the business by the Polytechnic Institute. It is the easier for me to say what I am about to say since the probity of these agents has never been brought into question. But what control can be exercised by any legislative body over the millions of francs' worth of tobacco which thus passes from one hand to another? What possible chance is there of fixing individual responsibility?

In fact it cannot be too strongly asserted that legislators have yet to discover how to interfere effectively in trading operations carried on by the state.

2. The accounts devoted to the materials and money sunk in the operation of the chemical match monopoly for 1910 give us at least a certain amount of information. For example, the amount of capital controlled by the department on December 31, 1910, is figured at 10,633,635 francs 92, and is distributed as follows:

Many other details are found in the pages which follow, but there is no trace anywhere of what the English call “depreciation,” that is to say, amortization, on either real estate or equipment.

The monopoly buys matches abroad for 3,206,326 francs 04, upon which it pays 671,608 francs 07 customs duties, together with 3,008 francs 64 in the way of incidental expenses, forming a total of 3,880,942 francs 75.

The Minister of Finance collects theoretically 671,608 francs 07 from the customhouse upon this monopoly, and at least an equivalent sum as profit on the sale of the domestic product. Therefore, his accounts are just that much short at the end of the year. Here we have a bookkeeping artifice so much the more astonishing in that foreign matches are prohibited and cannot be brought into the country except by the government.

3. In the case of both tobacco and matches the term profit is applied to the difference existing between receipts and expenditures. But, from the standpoint of the consumer, this profit is neither more nor less than a reward of extortion, since consumers are unable to procure at the lowest price the goods which the monopoly forces upon them. The word profit is, therefore, altogether a misnomer.

In 1891 a committee of the Chamber of Deputies suggested to the various ministers that government employees be allowed to share in the profits of state operation.

At that time I had under my direction, as an industrial undertaking, the old government railway system. I answered that there were no profits and that consequently they could not be divided. But would it even have been possible to give to the employees and laborers connected with the prosperous tobacco and match industries a share in the “profits resulting from the sale of their products'? There are no real profits; there are fiscal advantages wrung from consumers.

Many of those who demand “industrial accounts” do it with the hidden hope that the departments of tobacco and matches are going to become the property of the employees concerned in their operation, who will thereupon enter into contracts with the government and thereby ensure for themselves “a share of the profits.” But such profits are, as has been already said, only the result of extortion, and, therefore, would inevitably disappear if unsupported by the laws at present in force.

A fiscal profit should never be mistaken for an industrial profit.

CHAPTER XX

THE ALCOHOL MONOPOLY IN SWITZERLAND AND RUSSIA

• 1. Monopolistic Fictions of Emile Alglave.—Monopoly Rejected in Germany.—No Monopoly in Austria.—An Experiment in Italy.
• 2. In Switzerland, the Object of the Monopoly the Abolition of Ohmgeld Duties.—Neither the Distillation of Wines nor Stone and Kernel Fruits Affected by the Monopoly.—Ten per Cent. of the Receipts to Combat Alcoholism.—A Surprise Vote.—Numa Droz.—The Electoral Premium on Potatoes.—Restrictions on Sale in Switzerland.—Fiscal Deception.
• 3. Russia.—Moujik Forbidden to Drink on Premises.—Characteristics of the Liquor Traffic.—Increase of Public Drunkenness.—Declaration of a Moral Purpose.—Fiscal Success.

1. About thirty years ago Émile Alglave was anxious to establish a monopoly on alcohol in France.

Basing his appeal on authority he said, with magnificent assurance, that France would be the last country in Europe to adopt such a monopoly, and he reproached her with a lack of progressive spirit. He cited the example of Germany, where, as a matter of fact, a monopolistic project was submitted to the Reichstag on February 22, 1886. But despite the intervention of Bismarck, who pointed out the financial necessities of the empire and the need for reforming municipal taxation, the bill was rejected on the 27th of March, following, by a vote of 181 to 3.

The great distillers supported the project because the government promised to buy their alcohol at 40 marks, or 10 marks more than it was worth at the time—a proceeding which would have involved an outright gift to them of 35,000,000 marks. But, although these particular manufacturers might contemplate with satisfaction the immediate profit, the question naturally arose as to what would happen if, later, under various kinds of pressure, the government, instead of having at its head a man like Bismarck, himself a prominent distiller, should have statesmen anxious not to arouse any suspicion of favoring these special interests, and who, moreover, might be in need of revenues to balance the budget. It was the general opinion that such a monopoly would increase the power of the government, and convert the retailers into electoral agents. The questions of rectification and exportation were also debated. Since that hour the question of an alcohol monopoly has been dead so far as the Reichstag is concerned.

Before the alcohol monopoly investigating committee of the French government, in 1887, M. Alglave expressly declared that Austria had adopted the policy of monopolizing alcohol. He even gave circumstantial details, such as that the price of a single glass was fixed at o franc 04; that the commission allowed the tavern keeper was 10 per cent., etc. He further declared that in Austria the measure was not a fiscal one, since the budget had a surplus of from 7 to 8 per cent., but purely hygienic. As a matter of fact the sole support for these statements existed in the fertile imagination of M. Alglave himself. There is no alcohol monopoly in Austria.

Finally M. Alglave attempted to invoke the example of Italy. In 1894, or seven years later than the sitting of the committee above referred to, the Italian government had considered the question, but any really serious discussion of the proposition was defeated by the outcry which arose.

Consequently M. Alglave's argument from example proved to be worth no more than all the others.

Belgium reformed its legislation regarding alcohol in 1896, but the monopoly proposed by the Socialist group was rejected without debate. The Belgian government increased the duties upon alcohol and prohibited the sale of absinthe, but the question of monopoly has played no other rôle.

2. Alcohol monopoly is actually found in only two countries, viz., Switzerland and Russia. Louis Marin, who, in 1902, as deputy from Var, took up the project of M. Alglave and presented it to the Chamber of Deputies, said: “You all know that the monopoly of alcohol in Switzerland and Russia is managed according to the ideas of M. Alglave.” I did not know it. But, if either conforms to the ideas of M. Alglave, they at least differ from each other.

The establishment of the Swiss monopoly had for its principal object the abolition of the ohmgeld duties. These were inter-cantonal entrance duties, a species of internal revenue tax at different rates, upon wine, cider, beer and alcohol. Established in 16 cantons out of 22 they had proved a serious hindrance to freedom of trade and commerce in the Swiss Confederation. The constitution of 1848 had prohibited any further increase of them, and, in the negotiations over the commercial treaty with France in 1864, they had given rise to grave difficulties. The Federal constitution of 1874 had ordered their abolition after January 1, 1890.

Article 31 of the constitution guarantees “liberty of industry and commerce throughout the length and breadth of the Confederation.” Article 32 enumerates exceptions to the above in the case of “salt, gunpowder, entrance duties on wines and other beverages”; while the amendment of 1885 adds to this list “the manufacture and sale of distilled beverages.” Article 32 and following gives to the Confederation “the right of establishing, by legislative act, regulations governing the manufacture and sale of distilled beverages”; which declaration, however, is seriously affected by a qualifying clause, the text of which I reproduce:

“The distillation of wine, of stone and kernel fruits and their waste, the roots of the gentian, juniper berries, and other similar materials, is excepted from Federal regulations governing manufacture and taxation.”

This clause was a triumph for the individual distillers of every description—makers of kirsch, bitters, gin and distillers of wine. The restrictions apply only to alcohol derived from amylaceous sources. The second paragraph of the above-mentioned article 32 adds that “trade in non-distilled alcoholic beverages shall not be subjected to any special tax by the cantons.” The third paragraph of the article declares that “the net income of the Confederation resulting from native distillation and the corresponding increase of entrance duties upon foreign distilled beverages shall be divided among the cantons in proportion to their population as established by the most recent Federal census.”

The article concludes with the following direction:

“The cantons are expected to employ at least 10 per cent. of the receipts in combating both the causes and the effects of alcoholism.” Very little attention has ever been paid to this wholesome bit of advice.

It is to be easily gathered that the object of the amendment of October 25, 1885, was to assure free circulation of beverages throughout the Confederation by suppressing cantonal entrance duties. It is a law of liberty.

On the other hand, the mere granting to the Confederation of “the right to establish, by legislative act, regulations governing the manufacture and sale of distilled beverages,” certainly does not imply monopoly. Numa Droz, then minister of agriculture, was opposed to monopoly, but favored the suppression of the ohmgeld duties. If the amendments to the Federal constitution, submitted to referendum October 25, 1885, did not absolutely forbid the monopoly of alcohol they were certainly not intended to pave the way for it. On the contrary, they provided for a system of excise duties by which the suppression of the ohmgeld duties would be more effectually accomplished than by a monopoly.

“In the course of the discussion in the chamber I do not believe that the word monopoly was pronounced a single time,” said Numa Droz in speaking of the surprise produced when the Department of the Interior presented to the Federal council three bills, two of which proposed a monopoly. Upon his recommendation, and by a vote of 4 against 3, the Federal council adopted the first bill presented, which provided for excise duties. The committee of the National Council, however, espoused the bill creating a monopoly. The majority of the Council thereupon capitulated, on condition that the Confederation would not itself distill alcohol, and the law was actually passed December 23, 1886, and approved May 15, 1887, by a referendum vote of 267,000 votes against 138,500.

As the Swiss were the first nation to put into practice free institutions they have shown themselves extremely distrustful of this measure. In fact they have been so anxious to limit their losses that they have decreed that three-fourths of the alcohol controlled by the monopoly shall be put on the foreign market, and only one-fourth sold at home. Nor shall this latter amount exceed 20,000 hectoliters or 25,700 hundred-weight a year.1

It was expected that the monopoly would yield a net profit of 8,840,000 francs, which sum was to be so divided among the cantons that each should receive an amount proportioned to the quantity of alcohol distilled within its borders.

The following table gives the result for the first five years:

Since 1896 the net profit has been distributed among all the cantons in proportion to their population. The following figures represent the amounts distributed from 1906 to 1910:

Thus we see that the monopoly has never reached the figure anticipated. During the last five years it has been 30 per cent. less than what was expected twenty-five years earlier.

As far as Switzerland is concerned this is not a disaster. But if the experiment were to be attempted in France, and its provisions based upon the dreams of Émile Alglave, who prophesied 1,500,000,000 francs revenue from it, or even upon those of M. Guillemet, who prophesied 700,000,000 or 800,000,000 francs, a certain deficit of hundreds of millions must inevitably have been the result.

In France M. Alglave has frequently declared that the Swiss monopoly was established first and foremost for hygienic reasons, and not for fiscal gain. That this is a complete error I have just shown, since the Swiss monopoly was established for the purpose of suppressing the ohmgeld duties.

It is true that at first, under the pressure of hygienists, the administration furnished absolutely pure alcohol. The Swiss, however, accustomed to drinking schnapps, which provokes a strong irritation of the throat, demanded that the alcohol provided by the monopoly should give them the same sensation. The department was forced to add an impure grade to the rectified alcohol in order to give the taste of fusel, without which the monopoly must have gone completely bankrupt.

To-day the Swiss are content with such rectification as the industry which sells the alcohol sees fit to make.

3. According to Peter the Great, “Russia's one joy is to drink.” However, the people consume little enough of the more common forms of alcohol; 2,000,000 to 4,000,000 hectoliters (53,000,000 to 106,000,000 gallons) of wine, 4,000,000 hectoliters of beer, for a population of more than 130,000,000, or about three liters (3 quarts) per capita. When the Russian wishes to indulge in his “one joy” he drinks brandy.

An alcohol monopoly is not a novelty to him. It is an institution which dates from 1598. It has passed through various fortunes. Abolished in 1883, it was reestablished January 1, 1895, in the four provinces of Perm, Orenburg, Samara and Oufa, having a joint population of 10,000,000 inhabitants. This population is consuming 200,000 hectoliters (5,300,000 gallons) of alcohol, or two liters (2 quarts) per capita, less than half the consumption in France.

In Russia the people live under a paternal régime. The emperor is the “little father” of his subjects. He must provide for their welfare; he must watch over them and protect them from evil. The Russian peasant, the moujik, has one great fault. Ill nourished, he loves to drink; and, when he enters a tavern, he demands vodka. This is alcohol brought to 40 degrees by an addition of water. When he has no more money with which to buy, he sells his cart, his cattle, his furniture. He even sells his clothes, so that in winter he would be in danger of dying of cold in the streets if the police did not look after him.

The emperor of Russia says: “I do not object to my subjects drinking alcohol. If they did not drink it irreparable injury would ensue to the finances of my empire. Only I forbid the moujik to drink it in a tavern.” Consequently the peasant is sold a little phial of 6, 12 or 60 centiliters, the cost of which is rigidly proportioned to the contents of the phial. There is no object, therefore, in buying large quantities at one time.

Such is the basis upon which the monopoly of alcohol in Russia is established. What have been the practical results? The alcohol shops are kept by officials who receive fixed salaries of 70, 80 and 100 francs, with a maximum of 150 francs per month. They have no interest whatever in developing trade. It is a very honorable position, about one-thirtieth of these agents being members of the nobility.

These alcohol shops have certain peculiar characteristics. They have neither corkscrew, glass, nor chair. The phial that they sell is sealed with a vignette, and it is absolutely prohibited to uncork it upon the premises. The customer enters, pays, and takes the phial away with him. The shop is in no sense a public house.

The moujik, once in possession of his bottle, goes out of the shop. Arriving in the street he finds a street vendor, who possesses what he has been unable to find in the shop, namely, a corkscrew and a glass. The vendor offers him the use of these, with a crust of bread and a piece of herring. While he uncorks the magic bottle the moujik eats the crust of bread and the bit of herring.

But as the poor fellow is afraid of being disturbed by the police, if he remains too long in the street, he gulps down the brandy and returns to get another bottle. The final result is this: Instead of drinking the liquor under shelter, and more or less slowly, in a public house, in front of a good stove, as was formerly the custom, the Russian peasant drinks in all haste, in the open air, in the street.

I have taken this information from official reports addressed to the emperor by temperance committees, which, strangely enough, are frequently headed by the collectors of indirect taxes (Directeurs des Contributions Indirectes) themselves.

All these reports declare that the present system has provoked an increase in public drunkenness. In one city (Ztatooust) alone, from the 1st of January to the 16th of August, 1895, there were 265 cases of public drunkenness, compared with 155 during the preceding period—an increase of 58 per cent. Moreover, whereas the monopoly is directing its efforts toward the suppression of drinking upon the premises, all these temperance committees are united in the desire to reestablish the former state of affairs under better conditions. For this reason the attempt has been made to open to drinkers so-called traktirs, establishments where cakes may be eaten while drinking warm beverages, but from which alcohol is proscribed. Alcohol is also excluded from breweries, therefore the moujik brings his phial with him and pours the contents into the beer. The efforts of the temperance committees have also been directed toward bettering this condition of affairs.

Serge de Witte once declared that the monopoly of alcohol in Russia had a moral, not a fiscal, aim. Today the moral excuse has been abandoned and the fiscal one openly proclaimed. The receipts from the monopoly play too important a role to be tampered with.

As I have already stated, from the fiscal point of view, the monopoly has been a success. In the preliminary budget for 1912–1913 it is estimated at 763,925,000 roubles ($393,421,000), in a total budget of 2,900,000,000 roubles ($1,493,500,000). It represents more than 26 per cent. of the total revenue. In Russia there are not as many alcoholic drinks as in France. The vodka of the monopoly may satisfy the moujik, but it would certainly never satisfy the majority of Frenchmen.1

CHAPTER XXI

FINANCIAL DISORDER

• 1. Parliamentary Control.—Jules Roche.
• 2. The National Printing Office.
• 3. The Administration of the Navy.— The Work at Guerigny.
• 4. Cost of Naval Construction.
• 5. Postal Service.—Telegraphs and Telephones.
• 6. The Telegraph in Great Britain.
• 7. British Postal Savings Banks.
• 8. Plans and Regulations of Budgets.
• 9. Dissimulated Loans.

1. Jules Roche, contemplating the consequences of the purchase of the Western Railway of France, remarked of the whole transaction:

“I am considering only one detail of the plan, namely, the creation of a special budget of the future system, with its special debt, its loans, and its special titles.

“Are we to have two public debts in France? A public debt pure and simple, such as already exists, secured by the general resources of the nation, and another debt, a new debt, contracted by the state railway, and consequently a state debt, secured by the same resources as the present debt, and secured besides, in a supplemental fashion, by the railroad system itself? If not, the term 'special loans' is without meaning.

“What sort of financial, legal or political idea is this? Is such a conception financial, legal or political at all? Is this bookkeeping? Here is surely something that the decree of 1862 did not foresee! And what would be the future of such a plan if it were ever adopted by the great state railways?

“We should shortly have postal loans, telegraph and telephone loans, match loans, tobacco loans, loans on coming monopolies, such as alcohol, sugar, insurance, and petroleum.”

At present Socialists are abandoning the Marxian theory, as they dropped the theories of Fourier, Cabet, Louis Blanc, Prudhomme, etc. The more progressive are seeking new theories. They assume that, if private enterprise is suppressed, states and municipalities will produce all things necessary to man much more abundantly, and in a much more regular and economic fashion than private enterprise has succeeded in doing. They have made up their minds that all economic activity ought to be transformed into public services. This is their postulate.

But they have neglected to fortify their theories with facts. Universal experience has proved that, whatever a state does, it does at a higher cost than private individuals or groups, and that, far from concentrating its attention upon the true objective point, it always drags in foreign considerations, which ruin the enterprises of which it has assumed the direction. Accounts are confused in such a way as to make it next to impossible to discover either net cost or the true income. Although sheltered from competition, instead of being agents of progress, such undertakings foster nothing but lethargy; and, while accomplishing so little themselves they block the way of the more productive enterprises of others.

Municipalities move along a straighter path, but the same defects are apparent in municipal trading operations that we find in state undertakings. Whence we may conclude that Municipal Socialism is only another condemnation of State Socialism.

Yet has Municipal Socialism, down to the present, at least, abated its energy in the establishment of public tramways, gas, electric lighting, telephones, water works and cheap housing? And, since it has failed in these enterprises, what would be the result of similar experiments with food supplies, dressing, heating and otherwise occupying and amusing the people?

The Chamber of Deputies approved article 70 of the Finance Law of 1912, which created a species of financial autonomy out of the manufactures of Sèvres porcelain in spite of the sound arguments against the measure presented by Jules Roche. The result of such a proceeding would have been a tenth special budget appended to the general budget. If the manufacture of Sèvres is a government enterprise its accounts should not be separated from the state budget; and, furthermore, why separate them from the general budget while the manufacture of Gobelin tapestry remains attached? The article has since disappeared from the Finance Law.

In our studies of the administration of French finances we have frequently had occasion to demonstrate the incapacity of the state to conduct a trading enterprise, despite the undoubted intelligence of its officials. Examples abound in the administration of the principal monopolies. We have shown that they manufacture bad matches at high cost, and that those which come from abroad to eke out our supply are better and cheaper. Officials in charge of these enterprises have neither initiative nor responsibility. They are hemmed in by regulations which do not allow of the coöperation characteristic of private industry. Responsibility for failure or success does not devolve upon these officials. It is distributed among a swarm of agents of the hierarchy, and vanishes finally in some central bureau. Any private business which had to struggle under similar conditions would end in bankruptcy. Nor is this state of affairs the fault of man. It is inherent in the very nature of the institution itself.

We find another opportunity of demonstrating the truth of the foregoing statement in a building enterprise, the history of which deserves to be preserved. Such utter lack of foresight and such an accumulation of mistakes are rarely found in one and the same business undertaking.

The enterprise referred to is the rebuilding of the National Printing Office. If any enterprise could have been conducted by government agents it would seem to have been this particular one; for it was confined to construction work based on rigid specifications. We have, it would seem, enough state architects to bring such a work to a successful conclusion. Yet the failure was complete, and the budget suffered grievously in consequence.

In the beginning the job was as follows:1 To rebuild the National Printing Office upon a newly acquired site, and to sell the buildings and ground in the Rue Vieille-du-Temple previously occupied by the office. The officials in charge presented the following preliminary report to the Chamber of Deputies:

Unfortunately the managers of the undertaking had forgotten to look at their problem from all sides, and Parliament made a great mistake in not perceiving this in time.

In the first place, it was an act of presumption on the part of the officials in charge to think of selling the old palace of the Rohans, then occupied by the National Printing Office. Naturally, protests arose from all sides against the sale of this landmark of the past, which kept alive the memory of the famous Cardinal, and to which were attached so many other historical recollections. Its possession was a hypothetical and contingent asset, it is true, but the attempt to make it balance the expenditure ought never to have been seriously considered. This, however, is not the point of view from which the proceeding is most open to criticism. Where the mistake becomes inexcusable is in the estimate of the probable expense of rebuilding.

The committee declared to the Chamber, when presenting it with the estimate of its architects, that the rebuilding would cost in all, including ordinary miscalculations, a sum of 2,900,000 francs, and that, with this credit, all the work could be carried on upon a generous scale. But in order to reduce his original estimate, which had been 3,734,000 francs, to the figure just quoted, the architect, with the approval of the committee, had had to leave out one story in most of the wings, thus reducing the floor space in the shops by 7,000 square meters (7,708 square yards). Yet, despite this effort, in 1904 the committee had to report a deficiency of 1,500,000 francs in the preliminary estimate for the construction of the new building.

In the following year it was discovered that the estimate contained no provision for the installation of either heat, light, or motive power for the mechanical equipment. Consequently a new item of 750,000 francs had to be added to the previous amount. Then there had been no provision in any of the plans for housing the directorate and the subordinate functionaries. According to the documents submitted by the Budget Committee the expense of rebuilding the property on the Rue de la Convention must ultimately amount to 6,210,000 francs. The Chamber had been told that it would only be 2,900,000 francs. The aggregate difference between estimate and expenditure amounted to 3,310,000 francs.

Finally to this difference of 3,310,000 francs should be added the loss that the budget will suffer by reason of the failure to sell the de Rohan palace. Later several more mistakes were discovered.

At the end of December, 1912, when the expenditure already incurred amounted to 10,445,000 francs, the committee made application for a further credit of 4,336,000 francs to finish the work.

It is understood that no one can be held directly accountable for this state of affairs. The responsibility rests with the committee in charge of the work, which managed the affair badly, and with the other committees, which helped to cover up official blunders. This example is typical of the arrant folly only too common in the conduct of state enterprises, and proves once more that a government is far less skillful than are individuals in the direction of such enterprises.

3. Each year the reports of the postoffice, telegraph and telephone systems, and even of the Navy, show the disorder to which all state operations are liable. Yet, although complaints of maladministration of these systems are incessant, do we not also know that Parliament continues to tolerate insubordination in the arsenals, increases in salaries, decreases in the number of hours of labor, and all those generosities which, instead of being an inspiration to production, amount to so many premiums on laziness? Investigating committees are appointed. Of whom are they composed? Deputies from the ports are placed on Navy investigating boards when they should be disqualified by the very fact alone that the employees of the Navy will be counted among their constituents.

But let the following facts speak for themselves. A commission appointed to investigate conditions in the Navy met at Guerigny in 1908. It had as its president, M. Massé, deputy from La Nièvre, on whose motion a steel plant had been founded at Guerigny in 1900. The commission passed exactly one day in the town, after which exhaustive investigation of conditions there it submitted to the Navy department a report calling for new expenses.

The said steel plant of Guerigny, begun in 1900, has been in operation since 1905. Its prime object is the manufacture of Martin steel, and, according to the authors of the amendment which provided for its establishment, it should produce armor plate at a price considerably less than that paid to private companies. Now M. Rousseau 1 has discovered, and not without difficulty, in view of the complication of the accounts of the Navy, that the equipment for the manufacture of Martin steel must have already cost more than 5,000,000 francs, while the expense of the amortization of this outlay during ten years, according to the custom in the industry at large, is 500,000 francs.

Unfortunately, the investigating committee which visited Guerigny declared (in 1909) that immediately after the establishment of the steel plant the use of Martin steel plate had fallen off considerably. I quote from their report:

“As a matter of fact, the production is 300 tons of armor plate a year. Assuming that this rate could be maintained, the aggregate cost of amortizing the equipment would amount to 1,666 francs a ton. Moreover, it is to be feared that the use of Martin steel is continuing to decline. On the Waldeck-Rousseau there was 37½ per cent. of Martin steel; on the Patrie type there was only 24 per cent.; on the Danton, 17 per cent,; upon the Jean Bart, 14 per cent. (figures disclosed by the official reports).

“This fact is highly disturbing. The capital sunk in the equipment for the manufacture of Martin steel will, therefore, never be recovered. The department unquestionably made a mistake when, on the motion of M. Massé, approved by the Chamber of Deputies, it saddled itself with this equipment.

“But the commission feels that the plant at Guerigny ought to be provided with equipment and machines which will permit the manufacture of hardened steel, or any other kind of steel destined to supplant Martin steel.

“It will probably be necessary to abandon the use of hardened steel in its turn. But if the cementing furnaces were used during only two campaigns, it would be sufficient to pay off the expense involved in installing them.”

The Commission, consistent to itself in its own inconsistency, then reiterates its demand for cementing furnaces, and says:

“Out of a total expenditure of 5,500,000 francs the cementing furnaces only represent a very small sum, since the plan provides for five at the cost of 70,000 francs apiece. Moreover, it is not necessary to begin work with the installation of these furnaces. The construction of the new workshop will take approximately three years. A year is amply sufficient for the installation of cementing furnaces. Assuming that the work will be begun during the next year, or 1910, it will not be until two years after, or 1912, that the value of the new steel manufactured at Saint Chamond and at Creusot will be determined; it will then be known whether hardened steel will continue to be used in the Navy, and whether it will be practicable to provide for its manufacture at Guerigny.”

Thus, and as a result of the report of the Commission, it appears that the government ought to be prepared to manufacture hardened steel at Guerigny, and also to await a definite decision as to the value of a certain steel, before commencing work on the furnaces.

The committee declares that it will take a year to install the cementing furnaces; yet the expenditures are already estimated at 5,500,000 francs.

Following the recommendations contained in the committee's report, the Navy department demanded 400,000 francs credit on the budget of 1911, and the Budget Committee was subsequently urged to raise this figure to 900,000 francs. But, even with this latter credit, six years would be required for the installation of the cementing furnaces. In asking for 400,000 francs, then, the Navy was demonstrating its skepticism, and, in granting such a sum, the Budget Committee was once more displaying its lack of foresight. In any case both were wasting funds in order to appear to be doing something, and not from the point of view of the needs of the Navy, but from local considerations.

Up to 1911 the general expenses at Guerigny were 118 per cent. of the estimated expenses.

The excuse for constructing the plant in the first instance was that such an establishment would “regulate prices.” But, in order to regulate the price of private industry, the government ought to commence by regulating its own.

The Director of the Guerigny works told the Investigating Committee that:

“The saving of at least one franc per kilogram on the cost price of armor plate at Guerigny is also obtained in the manufacture of special steel, and this saving would certainly be continued if we should manufacture hardened steel. In this fact we have a serious argument in favor of the extension of the manufacture of armor plate. By doubling the expense incurred up to the present on account of this manufacture, we can more than triple the production; and each ton of armor plate made at Guerigny would represent an economy of 1,000 francs, taking into consideration the market price. Five thousand tons of armor plate would suffice to warrant the expense of such an enlargement.”

Five million francs have already been expended at Guerigny. Now the management suggests a further expenditure of ten millions. The average annual production of 300 tons is to be increased—allowing a wide margin—to 1,000 tons a year, with amortization at 1 franc per kilogram; or, in other words, 1,000,000 francs a year, or 1,000 francs a ton. “How, upon 5,000 tons alone,” demands M. Rousseau,1 “can such an extraordinary feat be accomplished as to put aside 1 franc per kilogram upon the cost of the industry, that is to say, 1,000 francs a ton, while at the same time the equipment is amortized at 2 francs per kilogram, especially when there is to be an expenditure of 10,000,000 francs?”1

The Investigating Committee declared the net cost per kilogram of armor plate produced at Guerigny to be 1 franc 27 to 1 franc 74, although the charge for amortization alone was 1 franc 66 per kilogram.

The report of this same committee inspired still more caustic comments on the part of M. Rousseau.2

“At the present time it is supererogation to state that the documents emanating from the French Parliament lack accuracy. It is an accepted fact, and is apparent above all in whatever pertains to the Navy. That the information contained in these documents is accepted without sufficient scrutiny has been proven again and again. It has been proven also that investigations are not made with all the care desirable. For example, we read in the report of the Committee appointed to investigate conditions in the Navy that ‘the cost of turbines appears particularly exaggerated.’ In the first place, what is this word ‘appears’ doing in the conclusions of an investigating committee? Why didn't the Committee get to the bottom of the matter? What basis of judgment did it have? The premises were as follows: we quote the report:

“‘Justice, reciprocating engine, 18,500 h.p., 2,614,000 francs.

“‘Voltaire, turbine, 22,500 h.p., 4,800,000 francs.

“‘At the same rate of cost as the engine on the Justice, a reciprocating engine of 22,500 h.p. would cost:

4. In any estimate of cost price there are two factors, direct expenses and general expenses.

In the navy yards general expenses are undivided expenses, uniformly computed at 28 per cent. of labor costs. In the case of the Jean-Bart they were computed at 24 per cent.1 The proportion is a purely arbitrary one.

M. Klotz, then General Secretary (Rapporteur Général), has said in this connection:

“In the cost of work done by arsenals the following expenses appear:

a. Expenses of operating the workshops of the arsenal, etc.—labor expenses and cost of supplies (coal, dynamos of workshop motors, etc.), called undivided expenses.

b. Expenses of equipment, applied especially to new construction: the small equipment used in building (tools, borers, electric apparatus, stationary, construction stocks, and a certain number of machine implements).

Among general expenses are not included:

c. Wrongly, we think, the salaries of technical employees, engineers, and their assistants engaged solely in construction work. These are paid according to regulations contained in special chapters of the budget. The cost of a ship constructed in the arsenal would be increased so much more.

d. Rightly, the expenses of large equipment: An arsenal is necessary in time of war. From this viewpoint workshops, dry docks, derricks, etc., are prime necessities. In time of peace the state must choose between two problems: to leave this equipment unused, or to employ it in new construction. The state has an evident interest in adopting the second solution. As the equipment would exist even if there were no new construction, it is legitimate not to include expenses of this character in the cost of such construction.”

Whatever else he may say M. Klotz at any rate acknowledges that general expenses are not accounted for in the Navy. The distinction which he makes between the material to be accounted for and the material not to be accounted for, in the cost of a ship, is a demonstration in itself of the arbitrary character of construction estimates: As equipment is used and replaced during times of peace, it is only just to add to the original cost of the products manufactured the cost of the equipment used in such manufacture.

The Navy department had fixed the net cost per ton of the three steel cruisers, Jules Ferry, Léon Gambetta and Victor Hugo at 2,211 francs, 2,230 francs, and 2,286 francs, respectively.

The Committee of Accounts on the work raised the general expenses from 12 to 23 per cent., so that the cost per ton came to 2,512 francs for the Léon Gambetta, 2,605 francs for the Victor Hugo, and 2,717 francs for the Jules Ferry, a cost higher than that of similar ships constructed by private companies. We quote in full the two estimates:

In the case of the Jules Ferry a covered stocks was erected, which was used only once, because the Jules Ferry was the last large boat constructed at Cherbourg.

5. In the report of M. Dalimier, on the postal, telegraph and telephone services, for the budget of 1912, repetitions of the usual complaints are to be found: Absence of preliminary estimates, apparent impossibility for the department to furnish any indication as to the total expenditures to be covered, etc.

M. Dalimier says:

“As presented, the budget of the postal, telegraph and telephone services1 is indefinite. It contains certain minute details which make the total absence or the insufficiency of information regarding really important expenses appear the more regrettable.

“The utter lack of coördination results in the juxtaposition of partial accounts, prepared and presented with a disingenuousness which justifies all criticism:—general lack of method; too little attention to financial rules and true bookkeeping principles; no limit to the expenses when the sources of loans are abundant; accounts which are not sufficiently definite; frequent disorder in the preparation and execution of the work as well as in the management of the loans!”

In Émil Dupont's report to the Senate, regarding this same budget, I read:

“Many of these plans were not thoroughly developed when appropriations were asked for. In putting down 200,000 francs as the cost of inaugurating the work of enlarging the administrative offices of the service and rebuilding the Postoffice itself, the department was simply taking a figure at random. It acted in ignorance as to what part of the work the sum was to be applied, nor is the department yet aware, probably, how the money is to be divided between the two buildings which are to be rebuilt.

“The same statement holds good in the case of the baggage department of the Eastern railway station of Paris. The department demanded 100,000 francs and found out afterward that 70,000 francs would suffice for 1912.

“These overestimates in the case of important loans have been going on for some years, and are a direct result of the carelessness of those in charge of building loans. As further examples, we might cite the substations of Martignac, 120,000 francs; Rue Bertrand, 115,000 francs; and, in the city of Lyon, 316,000 francs.”

The report of M. Dalimier shows up an ingenious administrative trick, characteristic of a particular psychological state.

But let us take another very similar example of the same tendency. In 1911 the Postoffice department demanded a loan of 522,135 francs for work on various postoffices. In 1912 it asked again for an absolutely identical amount. The first loan was applied to work then going on; the second had for its object the depreciation of work concerning which there has never been any discussion, and which will require an expenditure of 585,000 francs.

A “passion for spending” is characteristic of all public departments. The Dalimier report states that the work of reconstruction going on at the central telegraph office was started only by the aid of a loan of 100,000 francs obtained in 1908; and that each of the following years saw this figure grow, little by little, until it stopped finally at 979,000 francs, not including the 100,000 francs demanded in 1912 for the installation of a low-pressure heating system.

The report of M. Dalimier also furnishes a certain number of characteristic figures concerning the Postoffice expenditures:

In the case of the telephone office in the Rue des Archives1 the preliminary estimate of expenditures covering purchases of land and construction reached 1,900,000 francs, while the entire building will cost 2,692,202 francs. Assuming that half the building of the Bureau of Archives is to be devoted to a multiple switchboard, designed for 500 subscribers, each subscriber will cost the state 269 francs. It is true that “immense hallways and superb galleries, offices, rest rooms, and rooms open to 20,000 subscribers” are to be found there.

6. The celebrated manufacturer, H. Laws Webb, at a meeting of the London Chamber of Commerce, on February 17, 1911, and the Spectator, as well, have made public the serious embarrassment which the operation of telegraph lines has entailed upon the English government.

Forty-five years ago, in 1866, the government first proposed the purchase of the British telegraph lines, then valued at 57,500,000 francs ($10,925,000). Negotiations lasted about three years, or until 1869, when Parliament appropriated 175,000,000 francs ($33,250,000) for the carrying out of the purchase, or more than three times the original estimate. Moreover, the government was forced to pay a further sum of 100,000,000 francs ($19,000,000) to the railway companies for their rights over the telegraph lines established along the railroad tracks. Therefore, the complete acquisition of the undertaking cost the British government 275,000,000 francs ($52,250,000).

It had been predicted that, during the course of some twenty years, the net returns from the operation of the telegraph would contribute toward a very sensible reduction of taxation. But this delusion quickly vanished. There was, it is true, a small net profit in the first two years of state operation, but afterward the receipts were never sufficient to meet the interest on the capital invested; and, during thirty-nine years, this enormous deficit has been borne by the Treasury, that is to say, by the people.

Finally, under the pressure of public opinion, which had anticipated, as a consequence of such a measure, an increase in business and consequently of receipts, telegraph rates had to be reduced. The result, however, was exactly the opposite of what had been prophesied. On the one hand, the expenditures for maintenance and operation increased enormously under government administration, while the necessary keeping up to date of the installation rendered the receipts more and more insufficient and the demands on the Treasury more and more insistent.

When one takes into account all the elements, and, more especially, the amount of the original capital, which has never been paid off, the advances made by Parliament, which have never drawn any interest, and the annual deficits on operation, the total commercial loss caused to the country by the purchase of the telegraph amounts at least to £35,000,000 ($170,450,000). The English taxpayer has not even the consolation of thinking that the government possesses an appreciable asset to offset this loss, because, in the case of this particular enterprise, each year of its operation entails a supplementary loss of more than 25,000,000 francs ($4,750,000). From a commercial point of view the purchase has been a complete failure.

The English press makes the following comments: The partisans of government ownership invariably reply to the charge that the British telegraph lines have been a heavy financial burden to the taxpayers with the statement that the public has received compensation in the form of a better and cheaper service. This assertion is plausible, but not convincing. Even if it were sound, one would be forced to ask by what right the whole body of taxpayers is made to subsidize people making regular use of the telegraph but constituting a minority of the population? The expense of operation per million telegraphic words is actually more than it was thirty years ago in Great Britain.

7. At a conference of postal employees, held at Leslie, April 18, 1911, Mr. Crossley declared that the Postal Savings Bank suffered an annual loss of 100,000 pounds sterling ($487,000), due to bad administration and bad investments.1

8. When I was a member of the Municipal Council of Paris, of the Chamber of Deputies, and the Budget Committee, I watched with the greatest interest the infinite pains taken by my colleagues to set down on paper (by decreasing the preliminary estimates of expenses and increasing the provisional receipts), a balance in which the receipts would present a more or less insignificant surplus. As General Secretary of the budget I was accustomed to place at the head of my report the estimated figures of the budgets, as voted, together with figures of the supplementary appropriations which usually had to be added during the year.

In a long financial discourse before the Chamber of Deputies Fernand Faure defined the theory of two budgets: the estimated budget voted and the real budget spent.

At the present time the Chamber of Deputies spends weeks in examining the plan of the budget. On October 23, 1884, in one single sitting the accounts of 1871, 1872, 1873, and 1874 were approved. In one single sitting, also, the accounts of 1876, 1877, 1878, 1879, were accepted and this 11, 10, 9, and 8 years, respectively, after the close of the years concerned.

In 1912 the Committee on Final Accounts of the budget decided to examine in detail the accounts submitted to it. The first report, published in July of the same year, and the work of Louis Marin, relates to the accounts of the minister of Foreign Affairs for 1907. It lays bare the following facts:

1. That the various expenditures are often set down in such fashion as to conceal the real object of the expenditure.

2. That inaccuracy in deduction and confusion of matter are the rule.

3. That violations of the regulations in force are chronic.

4. That a great number of sales made in the name of the department are irregular or fictitious.

5. That waste abounds, and that, whereas many employees are paid too little, others benefit by unjustifiable generosity.

Now the department of Foreign Affairs has nothing to produce, nothing to sell. It does not need any special equipment for the carrying on of its work. It does not have to watch the market price of supplies and to buy them under the best possible conditions. In a word, it does not have to do any of the things required of a trading enterprise, in seeking openings, etc. Its staff is easy to manage, and has the reputation of being devoted. What would happen, then, if the department were called upon to manage a commercial undertaking?

9. All extravagant departments try to negotiate appropriations in a more or less round-about manner.

We have worked out a grand naval program, which is to extend over a period from 1912 to January 1, 1920. Its object is to add units to our fleet and to increase the facilities of the ports which are to receive them.

The outline of the plan includes a certain Article 9 which authorizes the government to construct ships enumerated in a certain schedule “A” in such manner as will insure the completion of sixteen men-of-war on January 1, 1920. The two paragraphs read as follows:

“The expenses of carrying on the new construction will be provided for by entering the annual appropriations mentioned in schedule ‘B’ upon the budget for the fiscal years 1912–1919.

“In case the expenditures of one fiscal year should be greater than the provisions of the said schedule warrant, the excess shall be carried over by anticipation to the appropriations for the following year within a maximum limit fixed each year by the Finance Law.”

The construction work to be carried out between January 1, 1912, and January 1, 1920, will involve, according to the original plan of 1910, an expenditure of 1,326,000 francs. The recent loss of the Liberté has increased the amount in round figures to 1,400,000,000 francs ($266,000,000).

The government was anxious, and rightly so, to charge these loans to ordinary expenditures. Yet it resorted to eating its corn before it was ripe, like Panurge. And this roundabout method was finally adopted by the Chamber of Deputies.

Two estimates were made, one indicating the actual amount to be expended per year for new construction; the other showing the distribution of the annual appropriations over the entire period.

The appropriations for 1912, 1913, and 1914 were the smallest for the period, while the proposed expenses were at their maximum in 1913 and 1914. The two estimates in detail were as follows:

Up to 1916 the expenditures exceed the appropriations by 139,295,000 francs ($26,466,050), but the Navy is empowered to carry over the excess by anticipation upon the appropriations of the following years. The sole check to such mortgaging of the future is a provision permitting Parliament to fix a maximum each year in the Finance Law.

Thus the custom of advances from the Treasury, which are to grow from year to year, has been firmly established. The Chamber of Deputies has specified, in the hope of decreasing the figure, “that the excess shall be regulated with the help of supplemental credits'—a practical application of the method of balancing budgets by means of supplementary appropriations.

Senator Gauthier, for the Finance Committee, brought forward strong objections to this system, which he justly described as a “disguised loan, or a loan by annual installments.” He pointed out all the frauds which would result.

“The system of anticipations and that of supplementary credits superimposed upon it, has the advantage of authorizing and legalizing expenditures not covered by the original appropriations; but it does not create any new revenue. The deficit still exists.”

Each man-of-war had been estimated at a uniform cost of 62,525,000 francs, when made in the arsenals, and 64,000,000 francs in private shipyards. As a matter of fact, they have all cost exactly the same, except the new Liberté, constructed by the government, which cost 72,000,000 francs. England and Germany are providing battleships of 26,000 tons. Will we be long content with only thirteen battleships in the dockyards?

The minister of Finance “agreed to insert into the Finance Law of 1913 clauses purporting to cover by corresponding available resources the entire amount of expenditures incurred, which expenses will thus appear, at the end of the period of construction, as arranged for by the law providing for the naval program.” In so doing he acknowledged the soundness of the criticisms of Article 9, made by the finance committee of the Senate. But he had already accepted for himself, and he has made the Chamber of Deputies accept his system.

I cite this case to show by what processes a department may attempt to secure resources by the help of disguised loans. It tries to escape from a unified budget by all sorts of devious methods.

We can judge to what plundering the general budget would be handed over if each department had its own autonomous industrial budget.

CHAPTER XXII

THE PURCHASE PRICE

When there is some undertaking to be purchased the partisans of nationalization and municipalization always start the ball rolling by saying: “Oh, it will cost practically nothing,” and then they proceed to reveal their economic limitations by making estimates which are invariably lower than the facts warrant.

When the French government decided to take over the telephone, it estimated the cost at 5,000,000 francs. The company demanded 18,800,000 francs. The state was finally forced to compromise at 9,313,000 francs, a figure which, with interest and costs added, ultimately increased to 11,334,000 francs, or 126 per cent. more than the first estimate.

Again, when the government determined to purchase the Southern canal, an outlay generally regarded as wholly unnecessary, advocates of the enterprise were unanimous in their enthusiasm over the manifest bargain. “It will cost the state nothing.” But the arbitration commission ordered the state to pay to the Southern company an annual indemnity of 750,000 francs, based on a capital of 25,000,000 francs.

Nor is France the only country furnishing examples of such frauds. Switzerland had similar experiences when she decided to purchase the railways. The Federal government appropriated a sum of 54,300,000 francs for the Central. The line actually cost her 75,000,000 francs, or 20,700,000 francs (36 per cent.) more.

Fifty-four million francs was afterward appropriated for the Northeastern line; 82,000,000 francs, or 28,000,000 francs (51.8 per cent.) more, was the actual price. The original appropriation for the Swiss Union was 31,700,000 francs; 40,000,000 francs, or 26.2 per cent. more, was the final figure.

An account of the government's underestimate of the cost of the Western line—the so-called “operation blanche” of M. Barthou—has already been described.1 The state had appropriated in all 220,000,000 francs to cover the cost of purchase. It actually paid 321,000,000 francs or more than 101,000,000 francs over the original estimate.

CHAPTER XXIII

DELUSIONS OF PROFIT AND THE LIFE INSURANCE MONOPOLY IN ITALY

• 1. The Law of April 4, 1912.—Legal Excuse.—Delusions of Profit.—Private Companies.—The Propaganda.—Officials as Insurance Brokers.—Work for the Sake of Service and Not for Gain.—Contradiction in Terms.—The Commissions paid by French Companies.—Dividends of Private Companies in France.—Probable Advantage to Italy.
• 2. Provincial and State Insurance.—Compulsory Fire Insurance in Germany, Bavaria and Switzerland.—In the Côte-d'Or.

1. In order to be assured that no deceptions would be practiced on it, in buying out the insurance companies, the Italian government put itself quite simply in their place. The resulting monopoly, confirmed by the law of April 4, 1912, had for its principal object the establishment of so-called labor pensions. “The profits drawn from this monopoly will be paid into the National Insurance Fund, upon the books of which any workman engaged in either industry or agriculture may be entered, provided he is not paying an annual government tax exceeding 30 francs.”

The real excuse for the bill was the activity of the French and English governments in passing insurance laws. The Italian government decided that it ought to bestir itself along the same lines. Therefore, instead of taking the sums necessary for its pension scheme from general budget funds, it created a special fund by establishing an insurance monopoly. Moreover, by the destruction of institutions which have been the most powerful agents in stimulating the spirit of individual thrift, the government hoped to promote a system of social thrift. The irreconcilable contradiction existing between free and compulsory insurance could not have been revealed in a more striking fashion, and it is only necessary to couple adjectives and noun in order to show the deceptive character of all enterprises of this nature.

But, it is strange enough that financiers as shrewd as the Italians should allow themselves to be deluded by the hope that the insurance monopoly would yield large resources. They have undoubtedly been seduced by the sight of the profits of insurance companies. But are such profits possible under government administration?

In the first place, in order to recruit policyholders, an active propaganda is indispensable. The policyholders of life insurance companies do not apply in the first instance to the companies. They must be sought for diligently and persuaded to take out a policy by an insurance broker, who demands a good and sufficient reward for his efforts in bringing about such investment. What measures has the Italian government taken to attract policyholders?

In presenting his bill to the Chamber of Deputies, the minister responsible for it declared that the National Insurance Fund “ought to undertake a campaign of education which should penetrate into the farthest and quietest corners of Italy, even where the ordinary business man does not go on account of the improbability of any success attending his efforts. Therefore, the National Insurance department will accept as agents notaries, registrars, tax collectors, municipal officials, postmasters, men who are in constant touch with the people, and who can render valuable services to insurance by awakening the desire to look out for the future needs to a degree never before aroused.” In a word, all public officials are to be ultimately transformed into insurance agents.

But, despite all the enthusiasm that these amateur brokers may be able to arouse, such coöperation will not be effective unless commissions are paid. And then what becomes of the all-important excuse for the substitution of a government monopoly for private enterprise, viz.—service rendered for the sake of the cause and not for gain?

Now the average agent works for the sake of gain; and the biggest cost item of insurance companies is the commissions of these same agents; even the government monopoly itself has preserved them. In the case of sixteen French companies, maintaining fixed premiums, these expenses amounted, in 1911, to 20,912,800 francs, to which sum must be added 16,172,000 francs of general expenses and 1,202,746 francs in gratuities and bonuses.1

What will be the insurance rates under public operation? If the state wishes to use persuasion, instead of force, it ought to make its rates as easy as possible for the policyholders, but the profit to the state will, of course, be just so much less.

I have not at hand the profits of the life insurance companies in Italy, for 1911, but in that year the dividends of the sixteen French companies just mentioned reached the sum of 15,161,331 francs. Great as has been the economic development of Italy no one will pretend that its economic prosperity equals that of France. However, if the Italian monopoly is as efficiently administered as are the French insurance companies, and, if it has as capable agents, it might perhaps be able to realize half or two-thirds of the industrial profits of the French companies, in which case it would yield to the Italian government from 3,000,000 to 6,000,000 lire annually.

Very striking in this connection is the status of the old age pension system in France—a national undertaking. From 1851 to 1889 the amount of first payments was 816,323 francs, or, in 39 years, 20,931 francs a year. The laws of July 20, 1886, and April 9, 1898, increased the activity of the fund, but, even so, its usefulness has been mainly restricted to associations. In 1910 the number of their payments approximated 5,305,447, amounting to 79,982,892 francs, while the number of individual payments was only 82,780, aggregating 9,900,365 francs. In 1909 the private accident insurance companies had 4,856,000,000 francs on insurance policies, while the National Insurance Fund had insured for only 77,494,000 francs, a proportion of less than 2 per cent.

The mathematical reserves and the other funds available are to be employed as follows by the Italian National Insurance Fund:

• 1. In the purchase of bonds of the consolidated public debt of the kingdom of Italy.
• 2. In the purchase of other bonds issued or guaranteed by the Italian government.
• 3. In the purchase of securities issued by title guarantee trust companies.
• 4. In advances upon the guaranty of the bonds just described by numbers 1, 2, and 3, of the present Article.
• 5. In the purchase, by means of cession and subrogation, of annual debts of the Italian government.
• 6. In loans upon national insurance policies within the limits of the value of the policy.
• 7. In the purchase of real estate situated in the Kingdom, on condition that these properties be free from mortgages and all other charges and in a proportion not to exceed a tenth of the reserve.
• 8. In subsidies to employees and workmen of the state, provinces, and municipalities; public and philanthropic institutions; pawnshops; chambers of commerce and banks, on a guaranty of the cession of a share in the profits due them.

Where is the state which can guarantee that its income will constitute a perfectly sound investment when English consols are at 74 shillings? The Italian revenue is susceptible to sudden changes which make predictions difficult for both the monopoly and its policyholders. The government will have to assume all responsibilities and the investments directed by clause No. 8 will be very difficult of execution.

The Fund enjoys privileges which assure it of certain resources, but only to the detriment of other government undertakings. For example, it has free use of the postal and telegraph services. Both these services thus lose revenues which private insurance companies would have yielded them.

Finally, the profits of the monopoly are exempt from the income tax, which private companies would have to pay.

The officials who are to act as insurance agents have their own duties to fulfill. Unable to devote more than their idle moments to the new task, they will always be working at a disadvantage. Nor is every man fitted by nature for the rôle of insurance agent. Not only is the taste for it lacking, but skill, tact, and technical ability will be wanting.

Possibly the officials will gather some personal benefit by reason of the added authority which their new position gives them. They may, perhaps, be able to obtain by main force policies which ordinary agents are not able to get. But, successful insurance is not only a question of affixing a signature, nor even of the first payment on a policy. A policyholder must persevere. What if he slips back after the agent has received his commission?

This is a risk which all insurance companies know. The state will also discover it, but it will find itself placed in a still more difficult position by the necessity of refusing contracts brought in by its officials and employees. It will be forced to choose its policyholders, to accept some and refuse others, and insurance exiles, branded with a sort of discredit, if not infamy, will thus be created.

Italy and Uruguay are the only countries which have experimented with national life insurance. The independence of the National Insurance Fund of Uruguay is greater than that of Italy. It was established by a law of December 26, 1911, and is, therefore, too recent to furnish any authoritative data.

Systems of state fire insurance are found in other countries. In Germany public fire insurance associations “have always been energetically supported by the government.”1 Landed proprietors are compelled to insure their property with public offices in Bavaria, Württemburg, and the grand duchies Baden and Hesse. Private insurance enterprises are limited to personal property and to risks on real property not insured by the state.

Nevertheless, it has not been found either possible or advisable to oust the private companies, as is proved by the following table, giving the insurance situation in Germany in 1906:

The Municipal Fire Insurance Fund of Rostock has reinsured with a private company the total capital insured by itself. It is, therefore, nothing more than an agency for the collection of premiums and the distribution of indemnities.1

The canton of Waad has insured both real and personal property since 1849; insurance is compulsory. Personal property insurance is unknown in any other canton,2 but national insurance of personal property is about to be established in Switzerland.

In the insurance system in operation in the canton of Waad the cost of administration was 13 francs 48 in 1907; in Glarus, from 1895 to 1905, 9 francs 34 per 100, and in 1907, 13 francs 48.

The state must accept all risks, the bad with the good.

December 20, 1907, the French minister of the Interior announced that he would not oppose the creation of a departmental fire insurance fund in the district of the Côte-d'Or. The fund was therefore established, January 1, with an annual subsidy of 15,000 francs from the General Council, and with a central bureau installed in the prefecture.

A clause limited the insurance premium to 10 francs; but this clause, considered “as a slight anti-collectivist barrier,” has disappeared. The advantages extolled are: The annual policy; the opportunity of insuring one's self at the town hall of one's own town; “following a disaster an appraisal of damages devoid of any spirit of quibbling or barter.” The policyholder is always free to withdraw or to modify his policy.

No bargaining; ample satisfaction! Under certain circumstances insurance may well become an opportunity for profit in a sense never intended.

Here are evidently advantages beyond those offered by private companies—at the expense of the taxpayers in the first place. Ten years hence the actual results may be known.

Two French deputies, MM. Cartier and Coudère, have each introduced a bill, establishing a state monopoly on every species of insurance. Both have been reported favorably by Brisson.

In the case of the fifty-four most important French insurance companies, with fixed premiums, life, fire, etc., the profits are estimated at 31,000,000 francs. After deducting reserve and sinking funds, a net profit of 25,000,000 or 26,000,000 francs remains. Let us suppose that, with the help of first-class investments, the state can obtain a net amount greater than this profit and equal to the total dividends distributed by the companies, or, in other words, 35,000,000 francs.

Unless the state confiscates it will have to pay the companies between 1,000,000,000 and 1,500,000,000 francs, in order to buy them out, which sum, at 3 per cent., represents an annual interest of from 30,000,000 to 45,000,000 francs. Then add to this amount a sinking fund of about 10,000,000 francs. We have thus an asset of 35,000,000 francs, with liabilities of 40,000,000 to 55,000,000 francs. The balance of this operation is a deficit of 5,000,000 to 20,000,000 francs.

But how will it be if the state system operate with less favorable results than private companies—an almost certain contingency? The losses might well reach 30,000,000 or even 40,000,000 francs.1

CHAPTER XXIV

THE FISCAL MINES OF THE SAAR DISTRICT

Not only railways, but all other state undertakings are exposed to commercial risks. Their profits do not always increase, as is proved by the fiscal mines belonging to the Prussian government. The following tables show the decease in the aggregate in the accounted profits of Prussian mining undertakings:

The enormous falling off after 1905 is readily seen; the decrease per workman is 48 per cent., compared with the previous period.

A similar decrease is to be noticed in all the mining enterprises except that of salt.

The decrease in the profits in government mining ventures is due, above all, to the coal mines of the Saar district.

The following triennial tables show the changes which have taken place since 1900 in the cost and the selling price per ton of the coal from these mines:

1

The net cost has increased 48 per cent. and the profits have decreased 59 per cent. The budget established by the Prussian Department of Mines, Foundries, and Salt Works, has been worked out on new principles, such as a distinction between the costs of administration and the expenses of operation, reserves for new installations, current expenses, etc. Miscellaneous expenses, figuring heretofore in the general budget of the Prussian government, although really concerning financial operations, have been carried over to the budget of the Department of Mines, Foundries, and Salt Works. Hence, there is a decrease of 8,859,177 marks in the preliminary estimate of the net profit as compared with the budget of 1911.1

The gross profit upon Prussian fiscal mining enterprises was estimated for 1912 at 18,215,000 francs; the net profit at 5,938,000 francs. It should be explained, however, that a certain amount had been previously deducted for the Academy of Mines at Berlin, as well as for the Geological Institute.

CHAPTER XXV

PUBLIC VERSUS PRIVATE ENTERPRISE

• 1. A Priori Reasoning Contradicted by Facts.
• 2. The National Printing Office and the Paul Dupont Printing Company.
• 3. Naval Construction.
• 4. Two Piers.—The Telephone Company and the Postoffice.
• 5. Indemnities for Losses Upon State and Private Railway Systems.
• 6. Public and Private Electrical Plants in Germany.
• 7. Other Results in Germany.
• 8. The Municipal Public Service of Paris.—M. Dausset.—Superiority of Private Enterprises.—Benjamin Welton.—Psychology of the Middleman.
• 9. Reaction Against State Undertakings in New Zealand.
• 10. Letter of a Citizen of Manchester.—Conduct of Industry and Its Regulation.

1. The partisans of socializing and of municipalizing all sorts of public services never tire of the old refrain that state and municipalities manage enterprises for the good of the service, and not for profit, and that, therefore, we ought to get them at a lower cost. We ought to. Here we have a priori reasoning. The trouble is that such reasoning is constantly contradicted by the facts.

2. Some years ago the net profit on the National Printing Office of France apparently represented nearly normal interest on the capital invested. However, an investigation gave M. Colson an opportunity of declaring that this result was only obtained by an “exorbitant” increase in the prices demanded. In proof of his statement M. Colson gave the following significant example:

The Paul Dupont Company had arranged to furnish the Navy with forms and designs at the same cost as the National Printing Office, less the expenses of composition, correction and holding of forms. The National Printing Office maintained that the Dupont Company was working at a loss in order to ruin the credit of the government establishment. An inspector of finances (inspecteur des finances) declared, officially, that this assertion was false, and that the Dupont Company both could and did make a profit on the business, despite the reduction granted to the Navy.1

3. On December 13, 1911, the Assistant Secretary of the United States Navy, Mr. Watt, told a committee of the House of Representatives that the battleship Florida, constructed by the government, cost per ton (hull and engines only), 1,374 francs 50 ($265.28); while the Utah, constructed by a private company, cost 904 francs ($174.47). In 1910 Congress authorized the construction of two battleships, the cost of which it limited to 30,000,000 francs ($5,700,000). The private company did its work according to contract, at a cost of 500,000 francs less than the original estimates; the navy yard required additional appropriations until the actual cost reached over 35,000,000 francs ($6,650,000).

I read in the Army and Navy Journal, January 28, 1911:

“The Committee on Naval Affairs recommends, also, that Congress give to Secretary Meyer the power to construct in a private shipyard the battleship New York, the building of which was authorized during the last session; the secretary having shown that it will cost the government at least eight millions and a half more to construct the New York in the Brooklyn Navy Yard by reason of the eight-hour law.”

It is only in France that the Navy constructs more ships than it hands over to private companies for construction, as the following table shows (1911):

4. In the cities of Portsmouth and Southsea there are two piers: The one is private property, the other the property of the city. The first is a success; the second a “white elephant.”1

Faithful Begg, one of the best-known authorities on business conditions in England, declared before the London Chamber of Commerce, on the 18th day of May, 1911: “The National Telephone Company operates on 58 per cent. of its gross revenue, while the Postoffice operates on 74 per cent. The Postoffice earns 3.5 per cent. on the capital invested, and the National Telephone Company is earning 8.9 per cent.”

5. On the Western (state) railway of France, from 1904 to 1908, claims for loss, damage, and delay amounted to 1,566 francs per 100,000 francs of gross receipts. From 1909 to 1911 this proportion reached 3,043 francs. On the old state system the proportion was 1,426. Since 1909 this sum has increased to 2,055 francs, which proves that the Department of State Railways, while extending its lines, has not improved them. On the Est, Midi, Nord, and Paris-Lyon-Mediterranée—all privately owned lines—the average is 1,175 francs. Thus the claims on the Western are 157 per cent. higher, and on the two other state systems 75 per cent. higher than on the private lines.

I might add that the Western has fallen back on the plea of “circumstances over which we have no control,” floods, strikes, etc., a subterfuge to which the private companies have not found it necessary to have recourse.

6. A German engineer, Wilhelm Majerczik, has published a comparative study of the results accomplished respectively by municipal and private electrical enterprises in Germany.

We borrow the following facts from the analysis of his study published in the Revue Économique Internationale, of July 15, 1912. The figures were taken from the latest available statistics.1

In his survey Herr Majerczik has passed over the Berlin and Hamburg plants, operated by private companies, as their prosperity so far exceeds the average that his comparisons would have been unduly affected by them. Moreover, his study bears only upon electrical plants supplying localities with a population of at least 100,000 inhabitants. These installations number fifty-six, and are subdivided as follows:

(The information given relates only to fourteen of the private plants in question, data as to the fifteenth not being attainable.)

The situation of the private plants is actually less favorable to development than that of the public plants. Yet, out of thirty-eight municipal undertakings, twenty supply only a single locality. The extent of territory supplied by private enterprises is double that of municipal enterprises.

The municipal enterprises are the older; for, in the beginning, such undertakings were considered the special prerogative of local governments.

The superiority of the equipment of private enterprises is demonstrated by the fact that the average productive capacity of municipal plants is scarcely three-fourths that of private plants.

The fewer boilers of the private plants are of a more economical type than those of public plants, and the prime movers are more powerful (Nos. 5 to 10).

In comparing light and power circuits we have 55.3 kw. per 1,000 inhabitants for 33 public plants, and 79 kw. for 11 private plants. If traction be added we have 65.9 kw. for the first, 80.9 kw. for the second. Municipal plants furnish power for traction to a greater extent than private plants, because the great municipal undertakings control all the important tramway systems.

Private enterprises are operated more economically than municipal undertakings.

They can produce greater power per heat unit because they employ boilers and engines of greater unit capacity and the agent of supply is better; that is to say, with a given apparatus, they are called upon to produce more. Their losses are greater, because they operate as central stations at long distances. Private central stations furnish 30 per cent. more energy for private lighting, and 60 per cent. more for public lighting per inhabitant. They also sell much more energy for power.

The financial results are as follows:

The installation costs, on the average, are 1,160 marks per kw., for municipal plants, and 1,240 marks for private plants. The private plants operating at long distances have a more expensive system of high tension lines and transforming stations. Nevertheless, they can furnish 1 kwh. 28 per mark of cost of installation, while municipal plants can only furnish 1 kwh. 12. They also content themselves with lower rates.

The following table gives the difference in rates between municipal and private plants:

For light the average rate charged by private companies is 14 per cent. less than that of municipal plants; for power, 20 per cent. Even for traction there is a difference of about 8.3 per cent. in favor of private plants.

The superiority of private plants is shown above all in the matter of expenditures.

The expenses for fuel, oil and maintenance are less for private plants, because these plants are better equipped and better managed. Yet the labor expenses are higher. The miscellaneous expenses are also higher, because private plants are subject to local taxation from which municipal plants are exempt. If taxes were taken into consideration the gross difference between expenditures and receipts, which is 13.2 per cent. for municipal and 9.5 per cent. for private plants, would be materially modified. The differences would be reversed if private plants did not have lower rates.

H. Marchand, in a summary of the work of Herr Majerczik, concludes that, from every point of view, public ownership and operation of the generating forces of electricity can only be carried on at a disadvantage.

7. In the Journal des Débats and in the Économiste Français Arthur Raffalovich has asserted that public ownership and operation in Germany has been by no means so successful as enthusiastic partisans of government ownership in France and elsewhere have tried to make us believe. Several municipal enterprises have recently been liquidated and a number of electrical plants and tramways sold outright.

Recent reports of the Burgomasters of Strassburg and Rheydt affirm that the operation of great industries by municipal authority is encountering numerous difficulties; that it is lacking in flexibility; that it is exceedingly hard to find competent managers; that the influences brought to bear are frequently far from disinterested, and often conflicting; that the majority of the municipal councillors have no comprehension of industrial or commercial business; that real profits are rare. In 1908, out of 36 municipal tramways, only 9 were operating without loss, while 11 were requiring rather heavy appropriations.

The burgomasters charge that cities which are supplying directly their own gas, electricity, and tramways are being delivered over without let or hindrance to the ringleaders of the various labor associations.

In Germany to-day there is a very marked evolution in the direction of private management, the city retaining the ownership of the enterprise, but leasing the operation to a corporation. Cologne has contracted with a private company to supply the extra electricity needed, and the city has also promised not to enlarge its electrical plants.

8. In his report on the municipal budget of Paris, for 1912, M. Dausset acknowledges the superiority of private enterprise over public administration in the following terms:

“It may as well be confessed that a special mechanical equipment or a skilled staff is only to be obtained by applying to a private company.”

The business man keeps in touch with the latest developments and spares no efforts to select his markets under the best possible conditions. Public management, “even in those rare cases where it ventures to take the initiative and point out to the council the necessary improvements and repairs, is obliged to wait several months, if not several years, to obtain the money or the indispensable authority.”

The same conditions prevail in the case of street cleaning. The City of Paris is unable, with its limited annual resources, scarcely sufficient for current expenses, to bring about a rapid renewal of out-of-date equipment. The contractor, on the contrary, has at his disposal for such a purpose capital that he can pay off at his leisure, and which permits him, moreover, to offer attractive terms. Finally, being careful to reduce the cost of maintenance to a minimum, the contractor enters only after careful consideration into initial expenditures. His chief reliance is in a firstclass equipment.

M. Dausset continues:

“The contract system is equally well suited to the paving and asphalting of the streets, and their maintenance.

“Here again everything depends upon the quality of the material employed and on the process and the care in manufacture, as well as on the way the work is performed. Taking into account the importance of the streets and the traffic they will be called upon to bear, the contractor would know how to make the necessary distinctions and would not hesitate, for example, to increase by a centimeter the thickness of the asphalt bed demanded by the specifications, if the street were much frequented, in order to escape expensive repairs in the near future, and to lessen thus the annual cost of maintenance.

“In the same way, in the case of construction and maintenance of cobbled roads, the government, ill equipped and lacking the flexibility indispensable for performing such work rapidly and economically by profiting by the experience of each day, has every interest in leaving such work to private industry, while reserving for itself the equally important and delicate task of control.”

In his investigation of the efficiency of municipal work Benjamin Welton also shows the superiority of the business man over the public official.1

“The problem that he has to solve is simple, and he considers it as a whole. He is not hampered by all sorts of restrictions. He seeks the most competent men, discharges the incapable, and is able to give bonuses for increase of production. His rule is to compare expenditures and results. He does not hesitate to make necessary expenses which will be economy in the long run. He organizes his units in such a manner that they give the maximum income. Above all, it is impossible to falsify his reports because they are verified by the party with whom he is under contract.”

9. The Socialists would have us believe that from the moment a government or a municipality engages in the nationalization or the municipalization of public utilities it perseveres in the undertaking.

Yet we have seen that such undertakings have been abandoned in Great Britain and Germany, while, as for New Zealand, Mr. Scholefield, in 1909, and Messrs. Le Rossignol and Stewart, in 1912, are united in the conviction that:

“Of late years the whole tendency has been to leave more and more to private enterprise. It is a swing of the pendulum. Ten years ago the government would not have dared to suggest allowing private companies to develop the great assets latent in the energy of the rivers of New Zealand. To-day it is the avowed policy of the state to encourage private enterprise in this direction. It is highly improbable now that New Zealand will make any further pronounced advance toward State Socialism until a new temper succeeds to the present mood of conservative Liberalism.”

The New Zealanders are not theorists, but a certain number are sufficiently shrewd to perceive that, when a loss is resulting from a state enterprise, it affects the whole nation. In other words, that the government in pursuing such a policy is forcing some individuals to help to bear the financial burdens of others.

10. J. C. B. Perry, in a letter to the Manchester City News, of March 4, 1911, said:

“If gas were being furnished by a private company it would have to have a high illuminating power. We cannot force the gas committee to give it, and it does not give it. If the tramways belonged to a company they would not be permitted to monopolize the streets in the center of the city to the detriment of all other species of transportation. Our market committee is losing on its refrigerating plants, while a competing company is a commercial success and is giving ‘cheap food’.”

When political or administrative bodies, whether states or municipalities, operate, they are regulating themselves. This is a sufficient reason in itself for the suppression of all public trading operations, because it is necessary that there be a distinct separation between the forces of operation and regulation.

Industrial operation is inherently adapted to private enterprise. Industrial control is the corresponding function of states and municipalities.

[1]Revue Générale des Chemins de Fer, November, 1911, page 352.

[2]Bulletin du Comité Central du Travail Industriel, December 15, 1911.

[1]Railways and Nationalization.

[1]Report on Railways in Germany, by C. H. Pearson and Nicholas Reyntiens, for the Board of Trade Conference, June 7, 1909 (Cd. 4677).

See for the series of discussions concerning the Prussian railways the collection of Marche Financier, by Arthur Raffalovich, and the Revue Générale des Chemins de Fer, among others, the number for November, 1911.

[1]See Yves Guyot, Trois Ans au Ministère des Travaux Publics.

[1]Der Zonentarif der Ungarischen Staatsbahnen, by Rudolph Remengi, 1912, published by J. Benko, Budapest. Discussed in the Journal des Économistes, July, 1912.

[1]Journal des Transports, September 28, 1912.

[1]See The Economist, November 4, 1911.

[1]The Economist.

[1]Railway Transportation, by Charles Lee Raper, 1912, G. P. Putnam's Sons, New York.

[1]The Economist.

[1]See Journal des Économistes, Dec. 15, 1910, article by M. Favarger, Nov., 1912. The Latest Accounts of the Federal Railways, July, 1913. The Revised Accounts of 1912.

[1]State Socialism in New Zealand, page 72.

[1]July 26, 1907. State Socialism in New Zealand, p. 74.

[1]Railways and Nationalization, by Edwin A. Pratt, 1908.

[1]Railway Transportation.

[1]See Raymond Boverat: Le Socialisme Municipal en Angleterre et ses Rèsultats Financiers (1907), 2nd ed., 1911. Major Darwin: Municipal Trade. Lord Avebury: On Municipal and National Trading. Des Cilleuls: Le Socialisme à travers les Siècles. D. Bellet: Socialisme et Municipalisme. Hugo Meyer: Municipal Ownership in Great Britain. Graham and Warmington: Taxation, Local and Imperial, and Local Government, 1899. Fairlie: Municipal Administration. Davies: Cost of Municipal Trading. Municipal and Private Operation of Public Utilities. Report to the National Civic Federation. Three volumes in octavo. 1907, New York. Municipal Year Book, edited by Duncan, published annually by the Municipal Journal.

[1]Vince, History of the Corporation of Birmingham, 1902.

[1]Raymond Boverat, Le Socialisme Municipal en Angleterre et Ses Résultats, p. 190.

[1]The Times (London), September 5, 1902.

[1]See H. Davies, The Cost of Municipal Trading.

[1]The Municipal Year Book for 1913 not having yet appeared, I must make use of the figures quoted in the edition of 1912.

[1]7.6 per cent. on revenue is approximately equivalent to 1.5 per cent. on capital investment.

[1]The Times (London), October 21, 1902.

[2]Municipal Year Book, 1912, page 752.

[1]Municipal Year Book, 1912, page 775.

[1]A Housing Policy.

[1]The Economic Outlook.

[1]Boverat, Le Socialisme Municipal en Angleterre et les Résultats Financiers.

[1]Since the foregoing statement was made, the project has again been advanced and has been incorporated in the budget of 1914.

[1]Les Annales de la Régie Dirécte, Feb.-April, 1912.

[1]Annales de la Régie Directe, 1908.

[2]The Revue Bleue: La Municipalisation de la Boucherie, by Henri Martel, director of the Veterinary Service of the Prefecture of Police.

[3]See Book 4, The State, a Dishonest Man.

[1]Journal of Commerce, New York, December 22, 1911.

[1]Fortnightly Review, August, 1906: Lord Avebury, On Municipal and National Trading, page 68.

[1]Constitutional Amendments to be added to the Declaration of Rights.

[1]Edwin A. Pratt, Railways and Nationalization, page 3.

[2]For New Zealand see Book 2, Chapter VII.

[1]The highest judicial court of France.

[1]See Numa Droz, Études Économiques.

[1]See Appendix “A.”

[1]The report to the Chamber of Deputies by Emmanuel Brousse on Dec. 12, 1912.

[1]Pour Sauver Quelques Millions.

[1]See above.

[1]L'Informateur Parlementaire.

[2]See above citation.

[1]Rousseau. Pour Sauver Quelques Millions, see Journal des Économistes, Dec. 31, 1911.

[1]See Journal des Économistes, March 5, 1912.

[1]See the Chéron report of May 10, 1911, upon a demand for supplementary appropriations.

[1]The Morning Post, April 19, 1911.

[1]See Book 2, Ch. 8.

[1]Économiste Français, July 27, 1912, reproducing the annual table of the Moniteur des Assurances.

[1]Annales de la Regie Directe, April, 1911.

[1]Annales de la Regie directe, April, 1911, page 169.

[2]Ibid., December, 1909, page 47.

[1]De Monopole d'État. Rapport au Congres de Chambre de Commerce, by M. de Lasteyrie.

[1]Translator's Note—I have been unable to verify these figures, which appear to be incorrect.

[1]Circulaire du Comité Houillères, February 10, 1912.

[1]Communication à l'Academie des Sciences Morales et Politiques, August, 1912.

[1]Truth, April 26, 1911.

[1]Statistik der Vereinigung der Elektrizitätswerke für das Betriebjahr, 1909, Dortmund, 1910, supplemented by the Statistik der Elektrizitätswerke in Deutschland nach dem Stand, vom April 1, 1910. G. Dettmar, Berlin, 1910.

[1]Efficiency in City Government, page III.