Public Finance

The mining laws of mediæval Europe were affected by feudal ideas; they placed the right over minerals in the ‘Lord’ or ‘Seigneur,’ and the influence of this system can be traced at present in the English law as to gold and silver mines. The desire to encourage mining industry, and the need of gaining revenue for the sovereign, both tended to restrict the rights of landowners with respect to what lay beneath the surface. Hence the system of ‘free mining,’ under which the discoverer was entitled to open a mine against the landowner’s wish, subject to the payment of royalties to the State (
Bergregal), became usual.
*66 Notwithstanding this growth in Continental States of a separate property in mines, some countries retained much of their mineral wealth as public property, more particularly where the landed domain also was extensive. The various parts of the German Empire are noticeable for their state mines, though the distribution of these sources of wealth is far from uniform. Prussia owns coal, iron, lead, silver and copper mines, which (including the value of the partially worked-up products) contributed in 1901-2, 192,316,000 marks
gross revenue. Austria, Russia, Spain, and India also possess some mines as state property, though they are practically conceded to private owners. The financier is not much concerned with this part of the public possessions, as the
net revenue obtained is small. The mines and mining works of the Prussian government in 1901-2 gave only 33,794,000 marks (about £1,690,000) as their
net yield. Salt, which in many countries contributes very largely to the public resources does so through taxation.

Whatever be the net return from mines, it should—economically considered—be divided into two parts, (1) the rent of the mine, and (2) the profit on its working, including the gain of elaborating the raw material obtained from it where this is done at the mine. The former is essentially the same as the rent of land, though possessing some peculiarities due to the exhaustible nature of mineral products, and is generally levied in proportion to the gross yield. Without state ownership it might be applied as a special tax on private owners of mines.
*67 The second element is plainly the result of the employment of capital, and should therefore comprise both ordinary interest and employer’s gain. The use of capital in mining is a highly speculative one, being most uncertain in its returns. The receipts from the Prussian mines have varied much, and of course are dependent on the prices of the minerals produced.
*68 It therefore seems desirable to give up this source of revenue by selling the mines to private individuals or companies, and applying their price to the reduction of debt; and from the financial point of view the wisdom of the policy of sale is indisputable. The continuance of mines as state property is due partly to the survival of the older forms of public economy in which taxation was subordinate to quasi-private receipts, and partly to views of economic policy. The danger of mineral supplies being worked in a reckless and extravagant manner without regard to the welfare of future generations, and the dread of combinations by the producers of such commodities as tin, copper, and salt, with the aim of raising prices, have both tended to hinder the alienation of state mines. There are fortunately other and more effectual methods of warding off these by no means imaginary evils.
*69 The disposal of state property does not carry with it a surrender of the right of state regulation where public interests require it. It is also possible to retain the ownership (
dominium) in the State, giving long leases to the capitalist workers, by which system the risk of market fluctuations is in a great measure avoided; or, finally, the net receipts from mining industries may be specially taxed.

In one case the policy of sale may not be a wise one. When the particular product of a mine is taxed, the necessity for supervision compels the public officials to watch the process closely; and under such conditions to place the whole business in the hands of the administration or of a powerful company may be the best course and prove the least inconvenient to all concerned. The principal example is in the case of salt, which is taxed in most countries, and monopolised by the State in some. Where the supply is obtained from mines there is an obvious advantage in keeping them in the hands of the State.
*70

§ 3. The modern State has not confined its activity to extractive industries. In the seventeenth century, France started some of those model manufacturing establishments which continue to the present, and possess so varied a character.
*71 The German States followed a similar course, and during the eighteenth century many artistic industries were founded under official management. The object was not financial; it was rather to supply a standard for private producers and to discharge the functions now supposed to belong to exhibitions. The more costly products were intended for court use, or as gifts to foreign princes.
*72

This class of state factories has preserved the original type, and is important only as giving examples of superior work or supplying some state need for a certain commodity. But though financial aims are not prominent in this department of public economy, there are opportunities for realising a moderate revenue by careful management and securing a superior class of products.

The latter consideration becomes of great importance when we pass to the method of supplying the larger public services such as the military and naval forces. The difficulty of deciding on the best mode of meeting the manifold needs of modern armies and fleets is chiefly due to the conflict of financial and technical reasons.
*73 As we shall see, there are strong economic and financial objections to direct manufacture by the State. But in some cases it is essential to secure a high standard of excellence in the products. Guns that will not go off at the right time and bayonets that bend under pressure are dear at any price; and state establishments for the production of these articles are defended on the ground that in no other way can goodness of quality be guaranteed. The state clothing factories and flour-mills have been supported by like arguments, since it is assumed that complete supervision of private contractors is practically impossible. On purely financial grounds state industries of the kind are open to serious criticism, owing to the very defective system of keeping accounts which is characteristic of such establishments. The amount of invested capital is hardly ever properly estimated; receipts that should go to capital are assigned to revenue, and expenditure that ought to be met from revenue is defrayed from other state funds or by borrowing.
*74 To meet this evil it seems best in a developed industrial community to trust to private enterprise for the supply even of warlike implements. The growth of such factories as those of Elswick and Essen ought to enable Government to dispense with the troublesome institutions that require so much attention and vigilance to prevent the grossest abuses. Where there is not a fully grown system of industry it may be necessary to keep up state arsenals, dockyards, and factories, to supply wants that would otherwise remain unsatisfied, and it is, perhaps, partly to this earlier condition that we owe the erection of the state industries in question. Moreover, the possibility of keeping down prices, by having an alternative source of supply in the not unknown case of there being only one private factory in existence, may be allowed in favour of state industry, though against it there is the risk of political corruption in towns that are largely supported by public outlay. Admitting then that the State’s manufactories for its own use are necessary only in the earlier stages of development, and ought to diminish as society advances, we may go on to assert that the same proposition is true of public industry in general. The government of a backward country may rightly undertake works that would be quite uncalled for in more advanced nations. British India gives us numerous illustrations. The most promising agricultural industries have been taken under state management and costly experiments have been tried. The best available evidence, however, leads to the conclusion that the greater part of these well-meant efforts have been unsuccessful, and they have in some instances been abandoned.
*75

§ 4. Though any very large system of state-directed industries is not likely to be a financial success, and is besides open to other weighty objections both social and political, there are some exceptions to the general statement. There is no validity in a plea of
laissez faire set up in opposition to special cases of state industry, when it can be shown that the interests of the community will be furthered by interference. The rule of non-intervention is nothing but a generalisation from experience, and holds good so far only as experience supports it. Where special reasons justify the action of the public power there is no ground for objecting to its employment. To avoid the opposite and more dangerous extreme, we should add that the advantageous conduct of certain industries by the State is no argument in favour of extending its activity to other and dissimilar cases.
*76

In addition to the direct supply of the needs of the public services, which in some cases is a good ground for the State undertaking industrial functions, there is the important class of cases in which the production of certain articles is subject to heavy taxation. In such cases the placing of the absolute control of the process of production in the hands of a state department may be a financial necessity, as the only effectual remedy against fraud and evasion. The French tobacco manufacture is probably the best example of this system, which is also exemplified in the Bengal opium regulations. But the large receipts obtained from these industries are not in reality industrial. Scientifically speaking, they are a part of the revenue raised by taxation, the state monopoly being only a particular form.
*77 The ordinary gains of a business are all that should be credited to it as ‘earnings,’ unless the extra amount is due to the superior efficiency of public management.

§ 5. The remaining cases, where the industrial action of the State may possibly be useful and has in practice been largely applied, may be grouped under two heads, according as they exhibit specially one of two characteristic features; viz. (i) those industries in which there is a tendency to the creation of monopoly, or in which the establishment of monopoly is likely to prove economically advantageous, and (ii) the large and important industries that deal with communication and transport. This classification is unfortunately not completely distinctive, since the last group in many instances exhibits the features of the first-mentioned one, but it is sufficient as a guide in discussing the principal points of interest.

(i) The first group is not easily characterised and separated, but there are some general marks that may be taken as common to all the industries in question; they are:—

(1) The products are much required, and in some cases absolute necessaries, or of high sanitary importance. (2) They are connected with special localities, and situation is an element in their advantages. (3) They are usually subject to the ‘law of increasing returns,’ and thus concentration and unity in management tend to cheapen the product. (4) Competition is not steadily operative even where no legal restrictions are imposed.
*78

On coming to collect the industries that belong to this group, we further notice that they in great measure fall within the domain of local rather than that of general government, and are moreover chiefly due to the conditions of city life. The oldest, and one of the most important, is the supply of water. Under ordinary circumstances this indispensable commodity is valueless in the economic sense, and has usually been the stock example in economic text-books of objects that possess utility, but are not wealth. The growth of population in certain confined areas at once creates a greater demand than can be supplied from natural sources, and at the same time pollutes that limited amount. Fresh supplies must be obtained from a distance, and often necessitate heavy outlay. In earlier times, this of itself made it incumbent on the State to do what no private individuals’ association could accomplish, a policy extensively carried out by the Romans. In the modern period, the business of water-supply to cities has been placed in the hands of private companies, who have invested large amounts of capital for the purpose. The rise of the sanitary movement of the nineteenth century, and the danger of monopoly on the part of the holders, have led to an extension of public activity, and to the purchase of waterworks by the municipalities. This tendency has been clearly shown in the United Kingdom during the last thirty-five years. Of the larger towns, London, Bristol, and Newcastle only are supplied by private companies, and the purchase of the London water companies is actually proposed. The receipts for water-supply by English local bodies in 1897-8 were over £2,600,000. In the United States there has been a like movement. Out of 135 towns of about 10,000 inhabitants, 91 had municipal waterworks, the remaining 44 being supplied by companies. Continental cities also, in many cases, have acquired full charge of this industry: this is true of Berlin, Paris, and Vienna, not to mention smaller towns.
*79

The business of lighting has not as yet been so largely entrusted to public agency, but several leading British towns have acquired their gasworks: Manchester, Birmingham, Leeds, Glasgow, Edinburgh, and Belfast may be mentioned as examples. The United States have hardly entered effectively on this branch of state industry. The most remarkable example of municipal gasworks was that of Philadelphia, where they only had taken over the business in 1887, but abandoned this system in 1897 by leasing the works to a company for the term of thirty years. This change in policy was the subject of much discussion and somewhat severe criticism, as it seemed to be opposed to the prevailing tendency towards extension of public control.
*80 There are a few other cases of municipal management in the smaller American towns. Out of the forty-four largest German towns, twenty-nine (including Berlin, Leipzig, and Breslau) own their gasworks, while Paris is supplied by a privileged company.
*81

Drainage and the removal of refuse, as well as other sanitary arrangements, are usually regarded as a public function involving expense, though scientifically these operations are on exactly the same plane as the supply of water and light, and might be carried on as a private business; but in practice, as the service is a general one, its cost is defrayed from taxation.

The actually existing forms of these public industries, and the line of development that they are following, are easily explicable. The rapid increase of public waterworks is due to the great importance of a pure supply of that necessary, to the large quantity of it that is required for public purposes, and finally to the absence of invention in the industry. Lighting, while it possesses some of the features just mentioned, is very different in the last respect. Until the contest between gas and electric lighting is closed, the acquisition of either of these industries will be a financial risk that no prudent body will care to incur.
*82

§ 6. Without dwelling on further details, or considering the politico-social aspect of the movement, we need not hesitate to say that a new public domain, yielding large gross returns, has within the last fifty years become established in most civilised States. The gas and water works of the United Kingdom under municipal working give an estimated yield of about £7,000,000, and the similar German industries afford a considerable net return to the local budgets.
*83 It is quite possible that in the present century such industries will give substantial aid towards meeting the heavy expenditure that town administration requires.
*84

On the other hand, there are some financial aspects of the case which reduce this apparent gain to much more moderate dimensions. The purchase or construction of the needed public works has involved municipal governments in heavy debt. Thus the returns of English municipalities for 1897-8 show an outstanding debt for waterworks of £41,578,000, and of £15,800,000 for gasworks; there is further a debt of nearly £,3,000,000 for market buildings. Adding these figures together, we get over £60,000,000 of actually existing debt, besides what has been already paid off.
*85 According to the United States Census of 1890 about £38,500,000 of local indebtedness was incurred for waterworks. The interest on these loans has to be deducted from the gross receipts of the industries before a full estimate of their financial position can be made; and though the actual debt-charge is enhanced by the sinking funds attached,
*86 there is on the other side the cost of renewing the works after a period. Another deduction has also to be made. On the assumption that the different public industries were left open to private enterprise, it would be possible to tax their profits, or, as most of these industries are monopolies, to levy a special charge on their gains. The right of supplying a large city may be sold to a company or let for a term of years, and the revenue thus obtained without risk or trouble applied to the use of the municipality. By granting a long period, with the ultimate reversion to the local governing body, a large revenue would be provided for the future, and the difficulties of public management escaped.

As in the case of mines and their products, any charge for municipal services that exceeds normal profit must be regarded as taxation. The profit of capital expended on public works is a part of the earnings or industrial receipts: so is any further amount gained by the low interest at which well-managed towns can borrow, or the savings that monopoly, with the consequent check to waste by competition, may cause; but any additional charge for the supply of water, gas, or other services is in fact a tax on the consumers or users of that service.
*87 We have noticed before this mingling of earnings and taxes in public economy. Another financial evil may possibly result from municipal industries. Instead of taxing the consumers by heavy rates, the administrators may reduce the charges below the profitable level, and so give what is in fact a bounty on the commodity at the expense of the taxpayers. Where the article is required by the poorer members of the community, the temptation to adopt this course is very strong, but it really involves the transfer of the industries so dealt with to the head of expenditure; from being a source of revenue they become a charge on the municipal budget, and their development only adds to the public burdens.

§ 7. (ii) The second group of industries leads us back to the finance of the central power, and includes amongst its ranks the best known and most generally accepted of all state employments. The Post Office has been regarded, even by the older economists, as an exception to the general rule against state interference in trade and industry. ‘It is, perhaps,’ said Adam Smith, ‘the only mercantile project which has been successfully managed by, I believe, every sort of government,’
*88 and his opinion has been accepted by all his English followers, none but the extremest advocates of state abstention ever questioning the public management of this department.

State postal service originated in the claim of the sovereign to monopolise whatever affairs closely affected public interests, and in the need of communication between officials. Its development has been the same in its general features in all European countries. At first the service was rendered by private persons, or by some specially privileged body (
e.g. in France the messengers of the University of Paris), and was finally taken by the State, though in most instances it was farmed out to a company.

The English Post dates from Charles I. (there being little evidence for the earlier dates of Edward IV. and Henry VIII.), and became a strict monopoly during the Commonwealth. After the Restoration, it was bestowed on the Duke of York, who retained it on his accession to the throne as James II. in 1685. The net annual revenue was at that date about £50,000.
*89 The growth of revenue during the eighteenth century was steady, and various improvements, such as the introduction of mail-coaches in 1784, improved its position. The invention of railways and steamships further aided the expansion of postal service, until in 1840 the introduction of the penny letter-post, on Rowland Hill’s proposal, widely distributed the advantages of cheap communication. Without in the least denying the wisdom of this reform, it should be said that its real financial result was not what is popularly believed. So far from improving the net revenue of the service, it actually lowered the gross revenue, and so far reduced the already deficient income of that period. In 1839 the gross revenue had been £2,390,000, and the net revenue £1,630,000. In 1840 the former fell to £1,360,000, and the latter to £500,000, showing a loss of over £1,130,000; and this loss continued for several years: the gross receipts did not exceed those of 1839 till 1855, and the net revenue did not recover its losses till 1864. Taking into account the growth that would have taken place even under the older system, it is plain that the immediate adoption of the penny post involved a sacrifice of financial resources.
*90

Even during the last thirty years, though the mass of business has grown enormously, the net receipts have not shown a proportional increase. They amounted in 1872-4 to £3,060,000, in 1883-4 they had risen to £3,222,500, in 1893-4 to £3,749,000, and in 1901-2 to £3,999,000.
*91

The French Post Office was instituted by Louis XI. in 1464, and carried on irregularly, till in 1627 the service was better organised and improved. The business was farmed out in 1672, and the competition of the agents of the University of Paris was prohibited; the yield increased from 100,000 livres in 1661 to £1,200,000 in 1677, and 1,400,000 livres in 1683. In 1699 the postal income was 2,800,000 livres, in 1750 it had increased to 4,500,000 livres, and in 1788 it reached 12,000,000 livres. The method of farming, so common under the
Ancien Régime, made it in fact a monopolised private industry, on which the State levied a gradually increasing rent.

The Revolution separated the carriage of letters from the other duties of the old ‘
Poste,‘ and in 1792 placed the former under the direct management of the State. The heavy financial pressure, and the general mismanagement of the revolutionary period, caused a great increase in the charge for letters, destroyed the receipts from the business, and even left a deficit on the working. The postal service did not gain much during the Consulate and Empire, but several improvements were introduced after 1815. The rates were better adjusted, and the increased facilities of transport allowed of a better service. The example of England, whose adoption of the uniform penny post attracted much attention and was eulogised by Bastiat, led to the establishment in 1848 of a charge of 20 centimes (2
d.), which has been raised to 25 centimes in 1850 and again in 1871, restored to 20 centimes in 1854, and finally reduced to 15 centimes (1½
d.) in 1878.
*92

The same fact of financial loss through reduction presented itself in France in 1848 as in England in 1840. The gross revenue fell from 45,000,000 francs to 32,000,000 francs in the first year after the change (1849), and only recovered the earlier amount in 1855.

The postal history of other States is very similar. Germany, owing to its political disorganisation, was in part served by the house of Thurn and Taxis, which managed the carriage of letters for several of the smaller States. The Prussian post began in 1646, and was under direct state administration. Its net yield in 1685 was less than 40,000 thalers; by 1740 it had increased to 220,000 thalers. The financial necessities of the government caused an increase in the tariffs, and in 1806 there was a clear surplus of 667,000 thalers. The amount in 1856 had risen to nearly 1,760,000 thalers, and in 1862 to over 2,200,000 thalers. The events of 1866 and 1870-1 changed the Prussian post into that of the German Empire—Bavaria and Würtemberg only retaining separate establishments. The net revenue of the imperial post was, in 1874, 5,000,000 marks (1 thaler = 3 marks); in 1879, 17,500,000 marks; in 1892-3, 21,000,000 marks, and in 1901-2, 40,320,000 marks.

The postal systems of Austria, Russia, Italy, and those of the smaller European States need not be examined in detail. Nor does the postal development of the United States, India, and the Colonies present any special features of interest. One general fact is the smallness of the revenue obtained. England, France, and Germany are the only countries that derive a substantial amount from the postal service.
*93

§ 8. The so-called ‘Post Office’ is in fact a collection of different, though connected, industries. The earliest state posts in both England and France carried passengers as well as letters, and this function lasted in the latter country till the Revolution, when the state passenger service became a separate organisation, and endured till 1870. But the conveyance of patterns, books, newspapers and small parcels forms an extensive part of the postal service, and is the least profitable side of its endeavours. The rates for these separate classes are below the ordinary letter-charges, since otherwise the amount of business would be much reduced. The State is compelled to adopt the principle familiar to railway managers of charging what ‘the traffic will bear,’ but it necessarily obtains very little over the cost of its operations. So far as the conveyance of parcels and newspapers is concerned, the English Post Office does not possess a monopoly, and is therefore a true industrial agency, whose earnings contain no tax element. The German post has specially developed the conveyance of parcels, a part of the business which is left entirely to private companies in the United States, and is a comparatively recent addition in England (only since 1882).
*94

To secure a proper adjustment of rates on the many classes of articles, and to duly apportion cost and service to the several items, is beyond doubt a most complicated problem. Such solutions as have been reached are for the most part empirical, and are the outcome of innumerable changes. The mere recapitulation of the diverse charges of the various state letter-posts would fill many pages with figures that could hardly be explained on any definite principle. There are, it would appear, three elements that might be taken into consideration, two of which depend on definite physical facts, viz. (1) the weight of the communication or document; (2) the distance over which it has to be carried; and (3) its nature; to which (4) the mode of conveyance may be added. The first is at present the basis of the charge for letters. The second element has lost most of its importance. Since 1839 the question of distance has entirely disappeared in the postal charges of the United Kingdom. A letter from Penzance to Wick pays the same as one posted to a person residing in the same street as the sender. France has with one exception adopted the same policy since 1848, and the United States have also a uniform rate, practically the same as that of England (2 cents). The reason for this at first sight curious system is found in the fact forcibly urged by Rowland Hill, that the actual cost of carrying letters is small enough to be ignored. At the rate of one penny per ounce, a ton of letters all up to the full weight would produce almost £150, while the mere cost of conveyance would certainly not be £5, or one-thirtieth of the receipts. The real charges are those of collection and distribution and the maintenance of offices, the cost of which is equal on all letters. The uniform charge irrespective of distance is thus easily explained, and proved to be sound as well as equitable. It is in the extension of this principle to international postage that the greatest advance in the future may be expected.
*95

One of the principal distinctions now turns on the character of the articles transmitted. Circulars and postcards would not bear the same charge as ordinary letters. The transmission of newspapers gives a yet smaller fund of utility on which to levy a tax, and is affected by the competition of carrying agencies. The result is shown in the lower halfpenny rate. The mode of conveyance might be used as a measure of the relative value of the service, speed in transmission being a very important part of the advantage of communication; but in fact this test has been little used.

§ 9. The question of the retention of the postal business by the State is hardly an open one. Long experience seems to have decided altogether in its favour. No country has adopted the method of private industry as regards letters, though the state parcel post is not so general. The reasons for this remarkable unanimity are to be found partly in the facts of governmental administration, partly in certain special features of the employment. Before the rise of the economic schools that opposed industrial action on the part of the State, the method of public postal service was firmly established, and was seen to give, on the whole, sufficiently satisfactory results. It therefore escaped the hostile criticism that economists freely bestowed on the less efficient public departments. Mr. Herbert Spencer himself has hesitated to condemn the continuance of the English Post Office. The peculiar nature of the service supported the evidence of facts. It requires as a first condition that the agency shall cover the whole territory to be served, or be universal. Next, it must be uniform and regular, and conducted on a definite routine; and, thirdly, the necessary capital is very small in proportion to the recurring expenditure and receipts. All these conditions favour state management, while its close connexion with everyday life secures a constant supervision on the part of the public, who are the consumers interested in the efficiency of the service.
*96 It is, therefore, expedient as a matter of policy to place the work in the hands of the State, and the bestowal of a monopoly is justified on the double ground that otherwise private agencies would compete for the more profitable parts of the business, leaving the supply of sparsely peopled and backward districts to the official post office, whilst the waste involved in rival establishments would hinder the reduction of rates below their actual level.

On the purely financial side the gain from the service must generally be a small one; the return for capital employed is little, and the only remaining element would be the economy that results from the application of monopoly, and the consequent unity of the service. Any further charge is really a form of taxation, and requires to be tested by the rules applicable to that mode of procuring revenue.
*97 The resources to be obtained are in any case not important, though good management may easily prevent a deficit, and unduly high charges will by their reaction on industry prove seriously detrimental to other financial resources.

§ 10. The telegraph as a state business forms a natural appendage to the postal system. It is generally connected with it, owing to the resemblance in the work to be done. There are, however, some serious differences. Unlike the letter-post, telegraphic work has been successfully carried on by companies, and international telegraphy is still largely in their hands.
*98 The capital expenditure is much greater in the case of the telegraphs, and therefore leaves room for that tendency of official bodies to confuse capital and revenue, which we have already noticed,
*99 and which is so detrimental to sound finance. Not only is the original cost of establishment or of the purchase of pre-existing rights comparatively speaking large, but incessant renewals and extensions are required in order to meet wear and supply new demands. The saving by unity of management is, besides, not so great, and the cost of transmission forms a larger proportion of the expense, which increases with increased work more rapidly than in the letter-post.

All the circumstances suggest that state telegraphy is not likely to prove financially successful, and such is apparently the result as shown by experience. The intermingling of postal and telegraphic business makes it hard to establish this proposition, but where a strict separation is kept up the telegraph balance is generally on the wrong side. The English state system has suffered financially, first from the excessive purchase money given to the companies who held the business, and secondly through the pressure on Parliament for lower rates, as shown in the adoption of sixpenny telegrams.

If full power to regulate its rates on economic principles be given to the department, there seems to be no reason why it should not at least meet expenses, including interest on capital, or perhaps give a small surplus, sufficient to clear off the first charges in a series of years. Behind the fiscal question there remains the more difficult one of the effect of state management on the development of improvements. To retard the progress of an essential modern auxiliary to commerce for the sake of adding a sum to each side of the national budget is not a desirable achievement. The dealings of state agencies with new inventions are the worst blot on public administration, and it seems that there is this risk in the state telegraphs, that though they are quite up to the standard at their inception, they almost insensibly fall behind as it advances with growing knowledge. This consideration belongs to economic policy rather than finance, which, however, suffers from any hindrance to commercial expansion and is certainly not likely to gain by state telegraphy.

§ 11. The agencies of transport and the different facilities for the movement of goods have in modern times acquired much greater prominence, and have to some extent come to occupy a different financial position. Adam Smith regards the maintenance of roads and canals as one of the duties of the State, requiring expenditure that ought to be defrayed out of the special receipts obtained from the users. His recognition of the so-called ‘fee-principle’ (
Gebührenprincip) is qualified by his discussion of the taxes on communication, and is further weakened by the modern development of the transport system.
*100 To understand the financial position of the industries in question, we have to separate the different forms and examine them in order.

The maintenance of ordinary roads can hardly be regarded as a quasi-private industry. It is a part of the functions of the State, and preferably of the local governments. The principle of particular interest assigns this task to the smaller divisions, unless in the case of great main lines of traffic, but in no way does it fall within the industrial domain, unless the antiquated method of tolls is employed, and even then such charges have more resemblance to taxes.

The canal system has better claims to treatment under the present head. Private companies have in many instances reaped large profits from this form of investment, and there seems to be no reason why the State should adopt a different policy when it is the owner. In practice the usual tendency has been to keep the rates down to the amount necessary to cover expenses and meet the interest on the capital charge. The introduction of railways has put an additional strain on the canal finances, since rates have to be kept below those of the more rapid competitor, until finally in many cases all dues have been abandoned, and the canals have been maintained at the public expense. Such has been the position in France from 1880, when, in opposition to expert opinion, the last remnant of the canal dues was abolished. The Erie canal constructed by the State of New York, which at first gave very large surpluses, had to be relieved from all tolls in 1882. The German rates have also been lowered, and at the same time large expenditure has been incurred for new works; so that it appears that no assistance to the national or local revenues can be derived from this source so long as present industrial conditions continue.
*101 The system of purely gratuitous service is certainly unjustifiable. A canal ought at least to pay its working expenses, otherwise its maintenance is a direct loss. The charges needed for this purpose would come from the utility that it affords, and the assumed impossibility of levying them is a proof of the comparative inutility of the service.

With regard to capital expenditure the case is different. The tendency of all improvement is to displace fixed capital previously in use by newer and better forms, and state agencies cannot expect to escape this influence. But the existence of the danger is a good ground for seeking to get the maximum net revenue in the earlier years, in order to wipe off the capital charge, and in the period of decline for keeping the rates at the highest profitable level.
*102

§ 12. In social and financial interest and importance railways far surpass the other agencies of transport. The creation of the nineteenth century, they have contributed largely to promote its special characteristics. Existing political and economic arrangements depend for their successful operation on the modern railway system, supplemented by steamboats and telegraphs. Accordingly we need not be surprised to find that the principal financial problems of the public industrial domain centre in the treatment of railways. Every country has had to consider in what mode it might best utilise the invention, and in each the influence of national peculiarities and historical conditions has produced different effects. The railway legislation of England, France, Germany, and the United States affords many interesting examples of this statement.

Confining our attention to the financial aspects of the subject, two divergent modes of treatment are broadly contrasted.
*103 The policy of England and the United States has been to regard railways as merely one particular form of industry taking a place beside banking, insurance, shipping, mining, or other companies, but dependent for any special privileges on the direct exercise of the legislative power. The railway company on its first appearance was regulated by enactments curiously similar to those devised for the earlier turnpike trusts and canal companies. The liberal laws of the various American commonwealths with reference to the formation of companies, while giving certain advantages to promoters, were based on the same principle. Such a policy reduced the public financial interest to a minimum. Railway companies were indeed taxed for local purposes in the same way as other proprietors of land and buildings. A passenger duty intended to balance the older stage-coach tax was imposed on them. Various corporation taxes were raised by the American States, lavish grants of land were given to new companies, some advances of money were made, but in all other respects the public powers and the railways were separate. The various changes of English and American legislation have not infringed on this complete isolation. The restraints of the Interstate Commerce Act and the Railway and Canal Act (1888) have had no financial aim or effect. They are confined to the field of economic policy.
*104

Continental countries have started from a different condition of things, and have all been willing to recognise a much closer connection of the State and the railways. The earlier transport agencies had been under state direction. The carriage of passengers was one of the branches of the French post before the Revolution, and the administration of both roads and canals had been carried on by a state department. The German States had the same general conception, but did not possess the centralised organisation of France. There was thus a predisposing cause for the recent movement towards state railways, which has been encouraged by the ablest theoretical writers. The direct action of the State in the construction and working of railways has been restrained by economic conditions too potent to be set aside by legislation. England was the birthplace of the railway, and its mode of procedure had some effect on other countries, but the principal check was found in the absence of sufficient capital for the work. It was only by severe pressure on the English middle classes that the rapid progress in railway construction of the years 1845-50 was accomplished,
*105 and the motive power was the extravagant hope of gain. No such force assisted Continental governments in procuring funds, and they were therefore compelled to fall back on the support of private companies, whose shareholders were actuated by the ordinary economic motives.

§ 13. The different circumstances of the different countries affected the railway system. France with its strongly unified government aimed from the first at establishing a well-arranged series of lines on a systematic plan, with the reservation of the ultimate property in them to the State. This course, when considered
a priori, had much to recommend it. It preserved the routine policy of the administration as to the older communications, and it promised at the end of the periods of concession to the companies to add a valuable property to the public domain. The earlier concessions under the legislation of 1842 were for short periods, not in any instance exceeding forty-five years. The result was, however, to hinder the investment of capital, and to gradually force more favourable terms from the Government. To encourage the construction of new lines a guarantee of interest was given to the older companies who opened them, and the time of the concessions was extended. Special legislation was applied to induce the construction of local railways either at the expense or with the aid of the local governments. The war of 1870-1 and its effects made the improvement of the service a matter of great interest. In 1878 some railways were acquired and worked directly by the State, and a plan for the creation of state railways on a large scale was proposed. Owing to the impossibility of procuring the necessary capital, a new arrangement was made with the companies in 1883, by which the state railways became only one, and that the least important, of the seven groups into which the main lines are divided.

The financial results are decidedly unsatisfactory. The surplus from the government group after the working expenses are paid is small (for the year 1885, 4,257,000 francs), and by no means equals the interest on capital, which for the same year (1885) was over 40,000,000 francs. The local lines are a further charge on the central and local governments, and they have been proved to possess little earning power. Under the various conventions between 1859 and 1883 large advances have been made in the form of guaranteed interest, amounting for the eight years 1867-74 to over 290,000,000 francs. As these charges are repayable out of the future increments of value, they have under the newer system been separated from the annual budget charge.
*106 To state shortly the outcome of French railway policy on its financial side, we may say that as yet the expenditure of the State has been considerable, for which the returns so far have not been a sufficient recompense, but that the method of limited concession, which checks the development of railway enterprise, and almost forces the State to give subsidies or guarantees, has the advantage of creating a large state property in the future. The terms of the six great companies who possess the main lines of France all expire between 1950 and 1960, when nearly 16,000 miles of railway will revert to the State, besides the new lines, amounting probably to about 6,000 miles, for which public money is by the arrangement of 1883 being gradually advanced. The net revenue of the French lines for 1899 was 690,000,000 francs, so that, without taking the prospects of increased revenue into account, there would be an addition of £27,600,000 annually to the state resources. Whether undue sacrifices have been made for the sake of this distant benefit is a difficult question to answer but we may conjecture that a simpler and more consistent method would have been better for French finance.
*107

§ 14. The earlier German railways were developed chiefly by state assistance or in some cases by state construction, but on no uniform plan. Each of the smaller territories formed its own railway system to meet local needs, without paying attention to the through lines of communication. Prussian railway policy was somewhat exceptional. Private companies were allowed to take part in the work of supplying needed lines, and guarantees of interest were given as encouragement. On military grounds several railway lines were constructed and worked by the State, and thus a basis was laid for the later policy.

The creation of the German Empire and the unification of its monetary and banking legislation could not fail to influence the position of the means of communication. State ownership and management were decided on, the only question of difficulty being the determination of the bodies who were to undertake the duty. At first the central or imperial government was to have been the owner. When, in deference to the sentiment of the smaller States, this plan was abandoned, the Prussian administration proceeded to buy up the chief private lines and work them by state officials. The magnitude of this process, which commenced about 1870 may be judged from the fact that in 1878 the state-owned railways were about 3,000 miles against 11,000 miles owned by private companies. In 1893 the lines owned or worked by the State had 16,900 miles against 1,467 miles owned and worked by private companies. The smaller States have also purchased most of the few private lines in their territories. Hesse alone has a greater length of private than public mileage.
*108

So far as Prussia is concerned, the financial results have been extremely favourable. The prices paid for the purchase of the several lines were high, but nevertheless there has been a good surplus in each year after meeting all expenses and paying interest.
*109. The services given to the imperial post by the railways form another gain, which is hardly ascertainable, since it is mixed up in the postal receipts, which are thereby increased. To obtain a clear revenue of over £15,000,000 is an undoubted proof of financial success, though it may partly be derived from limiting the facilities for goods and passengers, and be in fact a tax on industrial activity. The great amount of public debt contracted as the purchase money of the private lines should be taken into account in considering the policy of Prussia. All pre-existing debt makes the terms of future loans more onerous, even when there are assets sufficient to meet the earlier charges, and it may be that Prussia’s railway debt will injuriously affect her credit should she need it for war.

In the smaller German States the financial advantages of state ownership are not so great. In Baden the estimate for 1893 assumed a surplus over working expenses of 14,297,000 marks, while the interest and sinking fund on the railway debt was taken as 18,370,000 marks. Würtemberg is in a similar situation. The net revenue for 1893-4 was estimated at 13,000,000 marks, the interest on the railway debt being over 16,000,000 marks. The Bavarian railways have only now come to yield more than the interest of their debt, and the lines of Saxony just balance. The reasons for this relatively inferior position are not clearly established. The greater activity and the wider area covered by the Prussian railroads probably allow of more economical management than can be applied to the smaller lines. The system of state management is of longer standing in the other States, and it is possible that sufficient time has not elapsed for a proper judgment on the merits of the state railways of Prussia.

§ 15. Both Austria and Hungary have in recent years increased the number of their state lines. In consequence of the financial troubles of 1873, and to avoid the heavy payments for guaranteed interest, several leading lines were purchased by the State, though more than half remain in the charge of private companies. The surplus of the Austrian Ministry of Commerce, so far as the state railways are concerned, for 1902 is estimated at 39,220,000 crowns, which does not meet the interest on the railway debt. The Hungarian state railways also have been in an unsatisfactory financial condition, but show an improvement, the surplus for 1892 being taken as 31,563,000 florins, a large increase over the preceding year.
*110

Belgium illustrates perhaps better than any other European country the operation of state and private railways. The earlier lines were created by the State with the object of developing the transit trade, for which the country was so well suited. Additional lines were afterwards constructed by private enterprise, which competed with the state railways and with each other. To avoid this struggle a large part of the company-lines has been purchased by the government, but with the unfortunate result of reducing the receipts below the profitable point. In 1870, before the era of purchase, the surplus was nearly 20,000,000 francs, and the interest on debt nearly 13,000,000 francs, giving a net gain of almost 7,000,000 francs. Ten years later the surplus had risen to 45,750,000 francs, but the debt charge had reached 45,795,000 francs, giving a deficit of 45,000 francs, or, speaking broadly, the total receipts and expenses balanced. By 1883 the surplus was 48,500,000, francs, the debt charge having grown to 52,500,000 francs thus making a deficit of 4,000,000 francs. Higher rates were imposed as a remedy for this evil, and in 1891 the surplus over working expenses reached 58,000,000 francs.

The experience of other European countries in regard to the financial effects of state-owned railways does not materially alter the conclusions that the cases already examined suggest. Holland and Italy (since 1885) have preferred to lease the state lines to private companies. Russia has conformed to the general tendency in favour of railway nationalisation. In January 1887 the state railways were only 4,418 verstes in length as against 21,045 verstes in the hands of companies. In September 1892 the relative lengths were 11,536 and 17,152 verstes. On September 1st, 1901, the state railways comprised 34,998 verstes, only 14,913 verstes remaining under private control. The financial results have not been satisfactory: for the fifteen years 1886-1900 the expenses have exceeded receipts in twelve, but a part of the outlay is properly assignable to capital. The excess of receipts over working expenses on the state lines amounted in 1900 to 114,500,000 roubles. Roumania, Norway, Sweden, and Denmark have most of their lines under state ownership, which in the former countries does not give sufficient surplus to pay interest on capital charges. Spain, Portugal, and Switzerland have as yet substantially adhered to the system of private enterprise.
*111

§ 16. Outside of Europe the railways have been mainly an item of state expenditure to the various governments. Both in North and South America large grants of land and guarantees of interest have been given as inducements to the undertakers of railways. Brazil and Chile possess some state lines which do not pay the interest on their capital. The government lines of Canada have not even paid working expenses for any year since 1871, and the accumulated excess of expenditure over receipts since confederation in 1868 amounts to over 7,800,000 dollars, besides the capital expenditure of 58,000,000 dollars.

The Australasian colonies have entrusted the work of railway construction to their governments, who have borrowed largely for the purpose. In the year 1892 the total receipts from the Australasian state railways were £10,040,000 and the working expenses £6,533,000, showing a surplus of over £3,500,000. The debt contracted for railway service, however, amounted to £123,100,000, with an interest charge of over £4,600,000. Thus the railway system, so far from being a source of gain, really involved expenditure to the amount of about £1,100,000. In all the colonies except Victoria the administration has been placed in the hands of an expert commission, with satisfactory results, especially in New South Wales, where the surplus nearly pays the interest on railway debt.
*112 It may reasonably be expected that the growth of population will in future largely increase the railway receipts in all the colonies without proportionally raising the working expenses.
*113

Indian railway policy is financially interesting as affording a further proof of the readiness of English administrators to adopt a system quite different from that of their own country. As in Australia, the State has taken a great part in the extension of railway communications. The first method was that of securing or guaranteeing interest to private companies, under which stimulus some of the main lines were constructed. Then came the pressure of military necessities and of famine relief. A number of smaller and less important lines were established, and for the most part worked by the government. Finally, financial conditions have made it desirable to return to the guarantee system, but at a lower rate of interest and for a limited time. Though the receipts from the state railways are large (195,517,000 rupees for 1893-4), the expenditure is still larger (215,458,000 rupees for the same period), so that if the net balance only be taken into account, there is an annual outlay for the service.

§ 17. The statistics of state-railway finance have been given at some length in order to facilitate the formation of a correct judgment on the system. Within the last thirty years the movement towards ‘railway nationalisation’ has been increasing in force, and though the grounds on which it has to be decided belong mainly to economic policy in the widest sense, financial considerations cannot be altogether neglected. The one conspicuous financial success of state-managed railways is found in Prussia, of which the minor German States, as Cohn points out,
*114 fall very far short. France, Belgium, and Russia in recent years have not profited financially from their state lines. Those of Australasia and Canada afford on the whole no direct addition to the public revenues, a statement which is also true of India.

If the question is to be determined on these definite facts, the conclusion ought, we believe, to be against state property in railways. Many other considerations are, however, to be taken into account. Advocates of state property dwell on the future increase from the growing movements of both persons and goods, and regard construction or purchase as a profitable investment for the future. Transport agencies act powerfully in the promotion of industrial and commercial development,
*115 and hence it is argued that even unremunerative lines may so benefit the community as to increase the productiveness of other sources of revenue. Again, unity of management, only to be obtained under the state, would reduce working expenses and leave a larger surplus as net profit. The superiority of state credit is alleged as another reason for believing that its ownership would be financially successful. The English Government could some years ago borrow at 3¼ per cent. (and now at less than 3 per cent.), and, buying up the railway shareholders’ interests at their market value, would, it is supposed, secure for itself the difference between the return on railway shares and that on Consols. By an extensive investment of borrowed capital a margin of profit would be obtained for the discharge of other public services. The objections to such a policy are obvious enough. There is no financial reason for investment in railroads that might not be applied to other forms of industry. If the advantages of unified management are important, the dangers of attempting to deal with a varied and complicated business are grave. Railway nationalisation as a financial measure is open to the risks that attend similar proposals for land nationalisation. Without accepting Jevons’s view that the supposed gain from purchase through the higher credit of the State is wholly a fallacy,
*116 it is certain that it depends on a series of events which are uncertain and incalculable. Depression in trade, appreciation of the standard of value, or new inventions would reduce very much the value of the fixed capital of the railway system. The policy of state acquisition exposes the public finances to all the chances of loss that these possibilities open up. At best the system of state owned and managed railways thus appears to be a speculative employment of financial resources, and, judged in the light of experience, to be of more than doubtful advantage to the Exchequer. The general difficulties of state industrial enterprise are besides very likely to occur in this case. Defective accounts of capital and revenue expenditure and receipts cannot be escaped any more than in the dockyards or arsenals. With the best intentions it is not easy to distinguish clearly between the different sources and applications of the funds with which a railway administration has to deal; and yet to get a perfectly trustworthy statement of the financial position of state railways is essential for a correct judgment on the policy that has created them.

§ 18. What the railway system is to the nation tramways are to the town, and therefore it is quite in accordance with the general course of policy that there should be an effort to ‘municipalise’ these means of communication. English legislation places local governments in an exceptionally favourable position, either for establishing tramways themselves, or, after the expiration of a period, purchasing the rights of companies. A large number of British towns own their local lines, but up to July 1st, 1899, only seventeen municipal bodies worked their lines; in other cases the lines are leased to companies. Capital to the amount £3,200,000 has been applied to this object by about thirty towns. In the United States ‘a few municipalities manage their own street-car lines,’
*117 but the number is small.

Though classed in accordance with their nature among the industries of transport, the tramways resemble in their economic and financial aspects the other industries discussed in an earlier part of the chapter.

§ 19. The proper administration of the railway system, assuming it to be owned by the State, is a further problem. Shall the lines be leased to a company, as in Holland, or be managed directly by state officials? The former seems the solution that offers the greatest financial advantages. The full value of the line can be obtained and the chance of loss in a great measure avoided. Unfortunately the objects for which state railways are often desired cannot be accomplished in this way. The lessees will doubtless use their privilege to gain the highest possible returns, and the evils of competition and unequal rates will continue.

State administration is so much desired by the opponents of private companies that, as in Germany, private lines are leased to the State. In this way great outlay of capital is avoided, and as the management of a railway line may be reduced to a system of routine, there at first appears to be a fair analogy with the Post Office. This resemblance is only apparent. Instead of the simple tariff and limited classes with which the Post Office deals, there must be very elaborate grouping and frequent adjustment to new conditions. The management of a great railway is an industrial ‘undertaking’ of peculiar difficulty, and is almost certain to suffer from the want of capable direction. The financial success of state-managed railways will be affected by the efficiency of the management of so complicated a business, and it is more than doubtful whether the gain through unity of direction and system will compensate for the lack of energy and zeal that state industries display.

A great deal will depend on the particular constitution and situation of the country. The good financial results of the Prussian railroads are largely attributable to the skill and care of the trained officials in the service of that State. Countries where the public service is not so well organised and with governments more subject to popular control cannot hope for equal success. ‘I tremble to think,’ said Jevons, ‘what might be the financial results if a property exceeding the National Debt in nominal value, and requiring in every part of it constant repairs, renewals, and extensions, were in the hands of a Parliamentary minister who might find some day that he had been illegally and ignorantly signing away great sums of money at the bidding of his subordinates.’
*118

The financial working of the system would be particularly exposed to danger; for, in addition to the risk of errors in management, there would be the pressure of public opinion in favour of low fares and rates. If a substantial surplus were realised in any year, it would be impossible to escape reductions that would effectually prevent its recurrence. Victorian experience is instructive on this point. Any increases in the gross receipts of the Colonial lines have been ‘absorbed by the additional working expenses’ due to extra facilities and lower rates. The Railway Commissioners declare that ‘No department controlling state-owned railways can expect to be allowed to realise more than a small margin beyond the amount required to pay the interest upon the capital invested, as immediately that point has been reached the public request and insist upon concessions in rates or increased facilities, both of which are practically an amelioration of taxation.’
*119 It remains to be seen whether Prussia will succeed in maintaining her high revenue from railways when once a movement for remission of taxation sets in. Cohn, for example, justifies the railway surplus on the ground that it is derived from the well-to-do classes, and makes the distribution of public burdens fairer, but if the duties on commodities of general use, which are so heavy in Germany, were modified, the claim for lower railway charges could not be met in this way.
*120

The question of compensation for loss is another serious financial point in railway administration. State post offices escape the difficulty by repudiating all responsibility, no matter what loss they inflict, but railways could not follow this most objectionable method. Over a large system it is probable that the cost of accidents and other losses could be averaged from year to year, though some variation would still occur. Smaller countries would not have this refuge from loss. A single heavy accident would disturb the balance, and turn profit into loss. The Victorian railways had for a single accident to pay claims to the amount of £128,988; but the total expenditure under that head for the year in question (1887-8) only amounted to £142,562, while for the preceding year it was but £6,655. It is moreover highly probable that if the amount of compensation were assessed, as at present in England, by juries, their bias would be altogether against the railway administration, and to a greater extent than it is now against private companies.

§ 20. One difficulty common to most forms of state industry arises from the necessity of dealing with large numbers of employees. The tasks of the modern State are sufficiently varied and comprehensive to take up all the ability and time of administrators, without adding unnecessarily to their duties. Public industries, however, require for their efficient working a body of organised hands, obtained by free contract. An unavoidable consequence is the possibility of disagreement between the State and its helpers, culminating perhaps in the last weapon of industrial war—strikes.
*121 The position of the public powers is in such cases a trying one. The agency that is bound to enforce order and fair play is one of the parties to the dispute; the natural disposition of an administrator in a popular government is to make things smooth by yielding to the demands of the discontented, a course that involves additional expense and injuriously affects the financial position. The pressure of the consumer—that is the community—for low rates, and that of state officials for better conditions of service, is the most serious financial risk that the industrial activity of the State is likely to encounter. The Prussian railway service controls its 80,000 employees on an almost military system, aided by the organisation of the national army. But any attempt to direct the railway system of the United Kingdom on a similar plan would be hopeless.

§ 21. But whatever be the judgment that we form as to the expediency of the policy, there can be little doubt that it has had important effects on public finance. In most European States a new branch of the public domain has been called into existence, with very large gross receipts. The weight of public indebtedness has moreover been increased, and the real nature and results of that burden have been obscured.
*122 A large section of private industry, that would otherwise contribute to the public resources through taxation, has come into the charge of the State. The broader social and political results do not concern us here. But the purely financial consequences of a continuance of the movement have much interest. One inevitable result will be the comparative reduction of tax-revenue as contributing to the gross receipts. The addition of English railway expenditure and receipts to the national Budget would far more than double its already portentous sum.
*123

Under such conditions the ordinary method of interpreting financial returns would prove defective. At present the Post Office unduly affects the balance of the Budget, but its effect is insignificant compared with accounts of the magnitude of the railways. The Indian Budget, as Fawcett very clearly showed,
*124 is open to misinterpretation on this ground. Until the gross and net figures are separated and arranged, there are no correct data for discussing the financial situation.

Of more weight is the fact that this great increase of gross receipts and expenditure would leave the real power and burdens of the country almost unchanged. The financial condition might be a little better or a little worse, according as there was a net gain or loss from the new state domain; but in substance the public wants would still have to be met from taxation, and the pressure would fall on private income, since the large revenues from quasi-private possessions would have corresponding charges against them.

The system of creating a state industrial domain by the policy of granting long concessions, with ultimate reversion to the State, is by far the most plausible. It appears to be a form of saving by securing advantages in the distant future at a small present sacrifice. For we cannot believe that the concessionnaries do not endeavour to compensate themselves for their shorter term by increased charges, the result of limitation of advantages. Such is apparently the case in France, where the railway companies, if their tenure is limited, derive a counter advantage from the very high dividends guaranteed to them.

From one point of view the formation of a state property may be regarded as a mode of saving, somewhat analogous to the treasures accumulated by sovereigns in earlier times. A long-continued process of judicious investment might succeed in raising these accumulations to a very large amount, but under modern conditions it is better to trust to taxation for the needed revenue, and allow the investment of capital to proceed from the action of individuals. It may be further remarked that each extension of state ownership and management is a step in the direction of Socialism. That the growth of public industries, if carried on unchecked, would ultimately transform society into the type desired by the more thoughtful Socialists, is undeniable; and, whatever may be the merits of this kind of social organisation, it is utterly incompatible with the continuance of the conditions which existing financial theories assume. During all changes of social life, the fundamental economic and financial categories will survive, but their form may be so changed as to render entirely new expositions essential. We are not called on to discuss socialistic proposals, but, to all who recognise their impracticability, the encouragement to Socialism that attends the extension of the industrial domain of the State may be noted as a further objection to it.