RAILWAY CAPITAL AND REVENUE.
JOINT-STOCK enterprise of all kinds has presented the simplicity and trustfulness of mankind in a new and striking light. In the first instance, it was an excellent dis- covery that by putting together a great number of small sums of money the trifling savings of ordinary incomes might do the work and share in the profits which before that had been reserved for large capitalists. Trade was no longer to be left in the hands of professional traders. Amateurs, so to say, were to have a hand in it, to provide the money necessary for carrying it on, and to delegate to experts that supervision which the new class of traders had neither the time nor the knowledge to exercise for themselves. If it had been objected at that time that joint-stock proprietors would be exposed to unusual disadvantages by reason of this delegated superintend- ence, it would probably have been answered that the suspicion natural to men who have entrusted their money to others, and re- tained nothing but the right to call these others to strict account, would supply an ample safeguard. The difficulty, it might have been said, is much more likely to lie in the other direction. The representatives of the proprietors will be more closely watched than is consistent with their retaining a proper amount of independence. They will be left no real discretion in the conduct of the Company's affairs, and most of the benefits which might be derived from their superior knowledge will be for- feited, because that superior knowledge will be hampered in every movement and headed at every turn by the fussy ignor- ance of a proprietary which will know how much it has to lose, but will be wholly ignorant how to avoid losing it. This, we say, was what might have seemed probable. What has really happened is the direct reverse of this. Of all con- cerns that are managed by committees, a Joint-stock Company has proved to be the easiest going. Confidence of the most child-like kind, confidence given originally for no sufficient reason, and continued long after there has seemed to be ample reason for withdrawing it, confidence which asks no questions and is perfectly satisfied that it will be told no lies, is the prevailing characteristic of the shareholders. Whether there is something in the carrying trade which specially nourishes this amiable feeling, or whether the fact that by far the largest development of joint-stock enterprise has been in the direc- tion of the carrying trade, we need not inquire. At all events, it is certain that of all shareholders, Railway shareholders are ordinarily the most sheeplike. They buy their stock in much the same temper as they would buy Consols. Few investors ever trouble themselves about the connection between national policy and national solvency, and Railway proprietors are almost as ready as Consol holders to believe that their dividends will be paid or withheld as Providence rather than as their Directors shall decree. It would be interesting to know how many proxy-papers find their way into the wastepaper-basket, how many more are en- trusted to the Directors as a mere act of civility, and how many more are disposed of in the same way because the Directors are assumed, without thought or inquiry, to know best what the Company wants.
Up to a certain point, no doubt, this attitude of unquestion- ing trust acts well. The whole principle of joint-stock enter- prise would be upset if the shareholders assumed the duties and responsibilities of individual traders, and insisted on managing their own affairs or, what would come to the same thing, on interfering personally in every detail of the manage- ment. The question is, however, whether they have not gone to the opposite extreme, and allowed their property to be depreciated, and its future prosperity to be endangered, by the exaggerated freedom which they have allowed to their repre- sentatives. The House of Commons on the Eastern Question is the type of a Railway proprietary. Just as the Government have been left not only to carry out their policy by such methods as seem best to them, but to choose what policy they will carry out, so the shareholders in a Railway commonly allow their Directors to determine on what principles the concern shall be managed, as well as how effect can best be given to principles determined beforehand. Yet, on the former point, there is really no reason why a proprietor should not be just as good a judge as a director. It may take an expert to know what per-tentage of income is needed to keep up the permanent way or to renew the rolling-stock ; but it does not need an expert to know that if the permanent way is left to get out of order, or the rolling-stock to fall below the needs of the line, present economy will lead to future loss. Half the disasters of great leading enterprizes may be traced to the neglect of considerations to the full as simple as this one. It is the major premiss that goes wrong rather than the minor. The Directors have not blundered in their appli- cation of an admitted general principle ; they have somehow persuaded themselves that, for this time at any rate, the general principle need not be applied.
The City article in the Times of Tuesday contained a letter giving some striking examples of the recklessness of railway directors and the apathy of railway shareholders. There can be no plainer doctrine, and none more universally true, than the necessity of keeping capital and revenue accounts strictly distinct.
There may be a doubt as to the moment at which the separation should be effected, and the concern be treated as fairly started on its journey to make or not to make profits. But when the moment has come, there can be no doubt that the separation should be thorough and final. Extensions of business may call for new capital, but the additional capital should be treated in all respects on the same principle as the original capital, and be rigidly and exclusively applied to the starting of the additions to the original enterprise. If a small shopkeeper began business with a capital of £1,000, and showed and spent an income of £100 a year by the combined process of =acing £50 and taking £.50 from his £1,000, every one knows where he would land himself. Accord- ing to the tables given in the letter in the Times, this is very much the system on which English railways are now worked. When dealing with millions the process is longer, and the end is more remote, but in the long run it is equally cer- tain. The writer of the letter calculates that supposing the annual depreciation in the earning power of the seventeen principal English and Scotch lines which began in 1873 to go on at the same rate to the end of the century, " the net earning-power will be 11 per cent., and by the year 1916 the dividend-power will be wholly extinct. In other words, the man who in 1878 invests his money in the ordinary stock of one of these railways will really sink it in the purchase of an annuity for 38 years, which will continually grow smaller as the year of its termination draws nearer. During the year 1877 ten out of these seventeen Companies spent more on their way and works out of capital than they spent out of revenue. The Metro- politan spent four times as much, the Metropolitan District three times as much, the Brighton and the Manchester and Sheffield spent nearly twice as much. With a system of this kind, the proportion of expenditure to receipts becomes worth- less as an index of the earning-power of the line. Thus the Metropolitan managed in 1877 with a nominal or revenue expenditure of 38 per cent. of the gross traffic receipts ; but this extraordinarily low proportion was eked out by an expendi- ture out of capital of 19 per cent. The Caledonian, which is the worst sinner in this respect, spent 55 per cent. out of revenue, but raised its total expenditure to 77 per cent. by drawing upon capital. The South-Western, which shows the highest proportion of expenditure to traffic receipts of any of the English lines, set down 66 per cent. of it to revenue, and 18 per cent. to capital. The process differs somewhat from that pursued in the typical case of the shopkeeper inas- much as he was supposed to have spent old capital to make up income ; while the railways, for the most part, raise new capital for the same purpose. But in both cases the principle of relieving income from charges which ought to fall on it is strictly adhered to, and in both the ultimate results must be identical. Every year there is more capital on which to pay interest, or more capital to claim a share of the interest paid. If it is asked, why do Directors pursue so destructive a policy, the answer must be, because the destruction will not come in their time. They easily persuade themselves that their successors at the Board will have a different set of circum- stances to deal with, and that in the meantime the particular and exceptional circumstances with which they themselves have to deal can be best, as they can certainly be most easily, met by making the revenue accounts pleasant, and throwing' the balance of the charges for this once on the capital account. Unfortunately, each year has its particular and exceptional circumstances, and under pressure of these this once becomes every time. In this way a total capital of more than five hundred millions is in imminent peril of becoming unproductive within little more than a generation, with what disasters and suffering, all who remember how widely Englisth investments in Railways are distributed can estimate for them. selves. As matters stand, or rather are moving, at present, every railway shareholder may expect to lose his money in thirty- eight years' time. That is a consideration which ought to make the half-yearly meetings a little more interesting khan they usually are.
Of course the statements contained in this letter are in the nature of ex parte statements. Much of this expenditure out of capital may admit of justification, on the score that, though nominally spent in repairs and maintenance, it is really spent on new and profitable undertakings. The doubling or quad- rupling of one existing line would be a case in point. But at all events the figures are sufficiently startling to demand an explanation, and if Railway shareholders were more dis- posed to view them in this light, it would in the long run be better for all concerned.
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