The Dangers of Municipal Trading

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Preface To The English Edition

THIS book was written for the American public for reasons set forth in the Preface to the American edition which follows, and was published by the Century Company of New York in January of this year. At the time it was written, the author did not contemplate pubhshing an English edition of the work, nor bad he any wish to appear in the light of submittii^ before the English pubhc bis views on a question so well ventilated in England of late years as the merits and demerits of Municipal Trading.

The book, however, had its origin in England four years ago, when the publishing firm of Messrs Isbister and Co. invited the author to take part in a joint discussion with Mr G. Bernard Shaw on the subject of Municipal Trading in connection with their Pro and Con series of works on questions of the day which they were then publishing. The manuscripts, both of Mr Shaw and of the author, were duly placed in Messrs Isbister's hands, but owing to the liquidation of the firm, which took place shortly after, the contemplated volume never appeared. Mr Shaw sutisequently published his part vi PREFACE TO THE ENGLISH EDITION

of the volume as a separate work, entitled Th^ Common- Sense of Municipal Trading, which hereafter has been occasionally quoted ; whilst the author's unpublished contribution has been freely utilized throughout these pages.

Beyond the alteration of the title from Tke Dangers of Municipal Ownership to The Dangers of Municipal Trading, and the addition of Chapter XVI, ' Nationalization of Railways,' and Chapter XVII, ' Conclusions,' the present edition, though entirely reset and printed from new plates, does not substantially difier from the work published in the United States.

Pressure of other work has prevented the author from recasting the book with the special view of adapting it to appeal more directly to the English public ; but it is hoped that the cogency of the arguments have not sufiered by their having been primarily addressed to American taxpayers, who are confronted with the same problems of local government as those which are now before British ratepayers.

Since the publication of the American edition the mimicipal elections in London and Chicago have revealed a significant reaction, which, if duly supported by those responsible for private enterprise, should lessen, if it does not remove, the dangers of Municipal Trading.

R. P. P.

Tbe Thrbb Gables,

Banbdry Road, Oxford Jmu I, 1907.

Preface To The American Edition

THIS book discusses a question of great public concern on both sides of the Atlantic. Its aim is to give a brief history of Municipal Ownership (or Trading) in Great Britain, and to set out certain serious aspects of the municipal position in that country which have arisen consequent upon an indiscriminate pursuit of the system, with a view of indicating the probable effect of the extension of a similar method of conducting public services in the United States. This method is generally known in England as ' Municipal Trading,' and throughout this volume the two terms ' Municipal Ownership ' and ' Municipal Trading * should be understood to mean one and the same thing.

It has been recognized by thoughtful men that an attempt should be made to bring together, in a volume not too expansive or profound for popular readii^, some of the facts and arguments used by the opponents of Municipal Tradii^ in England. In the present volume the writer has endeavoured to meet this desire, particularly for the benefit of the man who wishes really to study the subject, but who otherwise has no altemaviU PREFACE TO THE AMERICAN EDITION

tive than to seek his information in numerous scattered reports, debates, addresses, and in articles in periodicals and newspapers, many of them extremely able, all of them not easy of access except at the time of publication, and none of them complete in themselves. Literature in favom- of Municipal Trading has, on the other hand, assumed of late years con»derabIe proportions, and is distributed far and wide. In order that their trading policy may be presented to him in the best possible light, every faciUty is afforded to the student of Municipal Govermnent by local authorities in Great Britain. But the defects of the system can only be found after diligent search in an infinite variety of sources. Hence the favourable impressions which some American writers have obtained of Municipal Trading in Great Britain may be accounted for by the fact that, knowli^ little or nothing to the contrary, they have been influenced by the persuasiveness of the local councillors and officials imder whose escort they have visited municipal works, and whose glowing accounts of the undertakir^ have been calctdated to make ready converts. The case against the trading poUcy is less easily ascertained. That can be best presented by the business man ; but, having his own affairs to attend to, he does not generally ventilate his objections, nor is he usually available for interviews. Not so the mimicipal councillor or official, who is always at hand ; for, thrown on his defence by the force of objections to the system, it is his paramount concern to justify his own works to all and sundry. The object of this book, therefore, is

PREFACE TO THE AMERICAN EDITION ix

to set forth that upon which the business man and the municipal official are aUke silent — the former because he has other things to do — namely, the inherent defects of the whole principle of pubUc trading.

The subject-matter of the following chapters has been based mainly upon lectures and addresses delivered l^ the author before various bodies — the British Association, the Society of Arts, the London School of Economics (in connection with the University of London), and the London Chamber of Commerce, as well as upon contri* butions to several American periodicals. In the general design of the work an attempt is made to show, in consecutive order : (i) Trading as an undesirable element in State and local government, and as a menace to progress and to society ; {2) its financial unsoundness ; and (3) that an examination of specific public undertakings supports the general argument.

The facts embraced within these broad divisions of the subject undoubtedly point to the dangers of government (State or Municipal) interference with industrial development, and in the usurpation by public authorities of functions which axe better left to private companies and to individual enterprise. After reading the evidence presented, few will continue to regard the experiments in Municipal Trading in Great Britain as so satisfactory as some of its more enthusiastic advocates have claimed. But if, with these facts before him, the citizen who really has the interests of his country at heart stiU desires the exteaision of the system to American municipalities, with all the attendant disasters, be will at least enter upon

X PREFACE TO THE AMERICAN EDITION

the experiment with his eyes open, and he will have no further ground for being misled by the contention so strenuously promulgated, that in the mother country Municipal Trading has been an unqualified success.

On the contrary, he will be aware of a condition of things which Mr Dixon H. Davies, to whom proofs of the book were submitted, so admirably epitomizes in a letter to the author that his words may be quoted here as serving for a comprehensive synopsis of the book :

' The fact is,' writes Mr Davies, ' that supporters of the trading policy of Great Britain have forsaken the standard of industrial and financial success, and have adopted instead the shelter of legalized monopoly and compulsory subsidy. They have forsaken the service of the public at large, and are catering for any section of the community, however small, who may have influence enough to help themselves to a facility such as telephones, or parcels carriage, or hydraulic power, by the aid of the public purse. They have forsaken the idea of democracy ; their funds are lately derived by taxing those who are not represented, for in many cases the larger portion of the assessable property is owned by companies and others who have no votes at all. They have thrown overboard the standard of justice, for there is no justice in raising a large sum by taxii^, for instance, railway property in order to establish a carryii^ business which can have no purpose except to reduce the just railway eaminp. They have forsaken the idea of local self-government, for there is nothing local in the bureaucratic ring which whips the member . ,. ,L'

PREFACE TO THE AMERICAN EDITION 3d

for a Scotch borough to vote gainst an electric-power scheme tor Ireland. There is nothing autonomous in pladog the community in bonds of debt to outside capitahsts who are placed in the position to dictate the raising of rates in the borough for generations ahead. They have raised the cost of all production by dejwiving the industries of cheap power facilities which, but for their interference, they would long ago have bad. They have raised rents by discouraging the building of working-class houses by private persons who hesitate to compete with the rate-provided houses of the municipaUty. They have lowered wages by draining the capital resources of the country into borough treasuries, thus both diminishing employment by creating an artificial scarcity of capital in the industries, and reducing the share of labour by increasing the price of money. They have destroyed the independence of thousands of workers by turning them into municipal officials. They have lowered the function of the capitalist by relieving him of responsibility, and consequently of the necessity for bold and shrewd adventure. Finally, they have abandoned the idea of the greatest good of the greatest number, and zealously promoted the greatest good of the money-lender.'

It is a pleasure to acknowledge the cordial help afforded by authorities on the subject both in Great Britain and on the Continent. In this connection it may be mentioned that the writer has had the advantage of studying the official, technical, and legal sides of the question in investigations made at various times for several large xii PREFACE TO THE AMERICAN EDITION

undertakings in the United States engaged in street-railway, gas, and electric-lighting operations. These inquiries were made for the purpose of ascertaining the exact rdations between such public works and the municipal authorities in many of the principal cities of Europe ; and upon the data obtained in some of these investigations the conclusions hereinafter set forth have been in part based.

R. P. P.

Tub Thuk Gabus,

Bahbory Road, Oxford, /aaaiary i, 1907.

vjbyCoO'^lc

Contents

■RUSSIA

:. THE BURDBN OF OWNERSHIP OBLIGATIONS . SOLVENCV OF CITIES i TRAiaWAY

R STATE OB MUNICIPAL

L HOUSING . NATIONAUZATION OF . CONCLUSIONS -

Chapter I Municipal Trading As A Pubuc Question ■

THE extension of the functions of municipal government in the acquisition and operation of commercial undertakings is just now attracting considerable public attention, both in Great Britain and America, This form of expansion may be aptly termed exotic, in that it has no proper relationship to the duties for the performance of which governing bodies were expressly created. On the false plea that certain business enterprises are public works, and as such should be publicly owned and managed, municipal authorities have inaugurated a poHcy known as ' Municipal Trading ' on one side of the Atlantic, and ' Municipal Ownership ' on the other, the tendency of which is being studied with considerable interest by economists, politicians, and, in fact, by all concerned in the prosperity and welfare of the two countries.

The question, by reason of the rapid growth of urban population during the last generation, is one of great and ever-increasing magnitude, and to treat it as fully

•S- ■ tHit DA1«5E«S OF MUNICIPAL TRADING

and iin[>artially as its importance demands is not an easy task.

Looking twenty-seven years back (1880), when the writer was commissioned by General Francis A. Walker, the then director of the United States Census, to investigate the methods of municipal government in Great Britain, he was struck with the fact that at that time this phase of loca} administration was not present as an active issue. There was no swollen municipal debt, nor any burdensome taxation to be attributed to this cause. The instructions from the Census Bureau embraced an inquiry into the financial aspects of British local government, but as municipal trading had not then assumed serious proportions, the suggestions in respect to such trading were silent. Equally silent on the subject was the purport of the interviews obtained with municipal authorities ' in Great Britain ; so that the report subsequently made contained no reference to the existence of ' trading ' in this country. As a matter of history, however, it was then (outside municipal water-supply) in a chrysalis stage, wherein it remained more or less for quite a decade before it emerged as a contentious element in municipal politics.

In Birmingham, where the writer called on Mr Chamberlain, he was impressed with the enterprise of the municipal authorities. All manner of insanitary properties — slums and rookeries, and congested, badly-laid streets and alleys — were demolished, and on the clearances made new thoroughfares and modem tenements and houses were built. Similar attention was given to a better water-supply, improved sewerage, and the jwovision of baths, wash-houses, and pubUc recreation grounds. The condition of other British towns at that time — Liverpool, Manchester, Leeds, Glasgow, Nottingham, and Bradford — also bore painful witness to the existence of the then common corporate vice of the poorer districts being allowed to remain a harbouring ground for physical and moral disease, and their authorities were likewise making creditable efforts to remove the reproach.

Hence there could be nothing but praise by the author in his report on returning to America for the direction which municipal work in Great Britain was then taking. It bore a similarity to dvic enterprise in American cities, with the important difference that, while British cities were renovating districts, American cities were creating new ones. The latter had no rookeries to clear ; they had to their hand virgin ground, which spread out round about their small centre — generally a strag^ing village, soon to expand to a considerable city by rapid stakings-out of new thoroughfares. These developments proceeded from the revival of the country after the close of the Civil War. But large and absorbing as they were, they did not appear to provide a sufficient outlet for new-bom civic energies. Nothing would content the citizens but the simultaneous and equally vigorous pursuit of a policy which had not then appeared on the municipal horizon in Great Britain. Waterworks were built, avenues and parks were laid out, and county and municipal credit was indiscrimi- 1—2 nately loaned to railroads. The consequence of all this rash enterprise, imdertaken in addition to the Intimate work of laying sewerage systems and necessary new streets, was soon manifest. There came then into existence an accumulation of indebtedness which almost made the taxpayers bankrupt. Many toAvns could only rescue themselves from such a plight by a resort to the expedient of ' repudiation ' — that is, they boldly defaulted. British municipalities, on the other hand, had confined their policy of reform to street improvements and to sanitary amelioration by the clearance of unhealthy areas. Thus they had not to face such an ignominious incident in the pursuit of their fiscal programme, though the imprudent way in which they have since followed the example of American cities in this and in other directions can only mean that the future has in store for them a similar fate.

From the foregoii^, therefore, it will be seen that municipal enterprise of American and British cities at that time fimdamentally differed. On the one hand, the former were nearly ruined by pushing their activities too far (such as inviting the railways to come to them by paying them large sums as subsidies and by endorsing their bonds), whilst on the other, the latter had kept their policy of civic development within bounds.

The consequences to American cities of recklessly following a policy of acquisition, and of loaning their credit to private enterprise, was so disastrous that they made a volu face, and until recently have kept municipal ownership and operation a.t arm's length. The wisdom of this detemunatioa was sooa reflected in the marked reduction ot their debts and taxation which followed. But just as American cities rehnquished the trading field to its rightful exploiter — private entCTprise — British cities appear to have entered it Whilst, as we have seen, little trace of the existence of municipal trading in the form by which it is now known was revealed in the course of investigations made in Great Britain in 1880, symptoms of it were undoubtedly vaguely present here and there, Glasgow apparenUy had early coquetted with the idea ; but the most concrete form which its development took was in Birmingham, between 1874 and 1876, that is, during the mayoralty of Mr Joseph Chamberlain, the inspirer of the active monidpal life for which that city was then and has since been notaWe. It was that eminent statesman who secured the purchase of the gas-works by the municipality. A few years later they had to s&f^uard their new property, for electricity appeared on the scene as a rival to gas, which brought about (also through Mr Chamberlain's agency) the passing of theElectricLigbttng Act of 1882. Thus was begun the Parliamentary protecticm of munidpalities, fcdlowed by other Acts, by the aid of which local authorities have since spread out their monopolies far and wide. Mr Chamberl^ may therefore be regarded as the father of the new municipaUsm. It is true that, so far as mnnidpal tramways were concerned, the way was opened for tbem by the Tramways Act of 1870, but the efiect of its famous expropriation daose was not generally fdt until the nineties.

The developments which followed this action of the Birmingham municipality soon attracted the attention of the Socialists. The propaganda of the Fabian Society (the of&pring of Mr Geoi^e Bernard Shaw) had been spread broadcast, and there is no doubt that it indirectly urged British corporations to redeem portions of their cities from the stigma of remalQing blots on the face of the civilized world. The success which attended the praiseworthy efforts of the Fabians in thfe direction encouraged them to look to the municipalities for the realization of their desires, especially when they discovered the existence of municipal ambitions which more or less fell into line with their principles. Like their confines in Germany and elsewhere, the Socialists sought the firmest platform from which to propagate their views. They made no impression upon Parliamentary constituents ; their candidates cut poor figures at elections everywhere. At that time, therefore, they abandoned Parliament as the arena in which they could promulgate their collectivist theories with any effect. They saw they could enter their wedge with greater ease through the municipalities — ^who, by the way, appear to be strangely blind to the stimulus the spread of Socialistic doctrines had on the inception of their policy. Municipal trading candidates — model Conservatives in politics many of them — have secured election through the votes of electtws who were won over to Socialism by the attractive pictures presented to them of all property becoming vested in the people, of which municipal institutions were a foretaste. So that, to the extent to which there was any active campaign in favour of the new municipal poUcy, it came from the Socialists. When the Times a few yeare later (1903), in the series of articles it pubUshed on the question, recognized that the aims of the municipahties and the Spcialists were identical, and boldly christened the whole movement ' Municipal Socialism ' pure and simple, it brought forth angry protests from the municipahties ; but the designation was none the less true.

Before the Times, with such telling effect, called attention to the dangerous spread of Municipal Socialism, other criticism, with the same object, had been drawn to the question. In fact, the considerable literature which now exists on municipal trading really began to grow at the close of the eighties. During this period the movement appears to have developed quietly without publicists discovering what it really meant. But its extent and ramifications duly indicated the anti-social courses whither it led all too clearly ; and in 1899 it fell to Mr Dixon H. Davies, of the Chesterfield Chamber of Commerce (now sohcitor to the Great Central Railway Company) to sound the alarm in a paper he read before the Society of Arts, with the then Attorney-General (now Lord Alverstone, Lord Chief Justice of England) in the chair. Moreover, public opinion in the Metropolis at about this time revolted against the extravagant pohcy of the London County Council. The electorate, however, had to wait for the polls of 1895 before they could express their disapproval, when they deprived the Progressive party of their majority. The lavish pohcy of tlie London County Council at this period really gave the impetus to co-ordinating an unorganized disapproval of municipal trading into a strong body of opposition. The London Chamber of Commerce, long before this, had formed a Municipal Trading Committee, and bad risked a battle with the municipal traders in forcing the matter on the attention of Parliament. In this they succeeded in 1900, when the serious increase in local indebtedness, taxation, and assessments, directly traceable to the municipahties carrying on industrial undertakings at a loss, came before the House of Commons, and a joint committee of both Houses was formed to inquire into the whole question. The investigation unfortunately proved too extensive and complex for this committee to make any report upon the merits or otherwise of Municipal Trading. All they did was to wind up their work by a recommendation of reappointment in the next session of Parliament. The close of the session precipitated this abrupt conclusion to the ojmmittee's inquiries, and it was not reappointed during the remainder of that Parhament. A General £lecti<Hi almost immediately followed. But as the polls did not alter the pohtical complexion of the new House of Commons, there was no reason why this committee should not have been at once reappointed, nor, indeed, why it did not reassemble in the final session preceding the dissolution in X900. It was generally understood that the municipal members persuaded the Government to shelve the investigation.

Not until 1903 did Parliament take any further action.

A PXJBLIC QUESTION 9

Then another joint committee was appointed, to continue the inquiry begun by the 1900 committee. But all they did was to report on the proper fonn in which municipal accounts should be }»'epared and published. This limitation to their investigations, of course, merely touched the binge of the question ; so that the committee's due recommendations advocating the abolition of the present system of municipal audits, and the ai^intment of independent auditors, were about as ineffective as they well could be. The committee's deUberations, indeed, were nearly as abortyie as those of its predeceased'. The members were apparently conscious oi the inadequacy of their labours, for they ventured the somewhat colourless opinion that ' it would be advisable to continue investigations into other branches of Municipal Trading in a future session of Parhament,'

Not Parliament, but the outside public, acted upon that opinion. The subject was taken up unremittingly by pubhc men, and opposition to reckless municipal trading schemes was organized. FoUowii^ the appointment of the first joint committee, the Press turned its searchlight upon the municipalities, notably the Times, by its celebrated articles on ' Municipal Socialism ' before referred to. A symposium in the pages of Traction and Transmission, where a number of pubhc men qualified to speak on the subject expressed their views, also attracted atteaition. The preponderance of o|nnion which thus found ventilation through these and other public channels Was strongly in favour of placing some check on municipal aggrandizement.

The friction with private enterprise became so marked that in 1902 the Industrial Freedom League, ' an association formed to free private enterprise from undue interference and from rate-aided competition ', was established, and has since carried on active propaganda throughout the country. The League is consequently the target of constant bitter attacks by the municipal organs. In the Metropolis what may be termed the ' unsteadiness ' of the London County and Boroi^h Councils alike also called forth a similar campaign from a long-established association — the London Municipal Society. This body was compelled to exercise a vigilance r^arding the expenditure of public money beyond the object for which it was originally formed, which had wholly to do with safeguarding the ratepayers' interests in ordinary municipal administration. Thot^h these two organizations did not succeed until lately in thwarting municipal Socialistic schemes, they at least forced local authorities to tread with more wariness than if such antagonism had not been marshalled against them. More than that, their campaign had the effect of stimulating the municipal party to form the Association of Municipal Corporations and Town Clerks — ^now a very powerful body. Their coercion of members of Parliam^it to vote against private schemes which may adversely affect municipal monopohes is notorious. Such influence could only be wielded by the Association by first winning over to their banner that large unstable class of the electorate (including municipal employis) whose political opinions are nebulous, and who are easily impressed

A PUBLIC QUESTION ii

with official municipal utterajices, and with this voting power at their back they have only to indicate to a member that his seat will be in jeopardy at the next election if he does not heed their bidding.

The heightened hostility thus engendered between municipalities and private traders, added to the unjust treatment and repressive measures which the latter had to suffer, more particularly in relation to tramway extensions, attracted attention from another quarter. This was the Royal Conunission on London Traffic, who made some observations in the first volume of their report, issued in 1905, which bear repetition. In contrast with the British tradii^ system, they viewed favourably the method imder which the street railways of New York and Boston were built. In their case the operating companies obtained the necessary capital for construction from the respective municipaUties at a higher rate of interest than that at which the latter raised the necessary loans for the purpose on the credit of the cities. The difference between the rate of iaterest paid to the bondholders by the cities and that paid by the contracting companies to the cities enables the debt created on account of street railway construction to be paid off by the expiration of the franchise, when the tracks and road-bed (but not the equipment) come into the hands of the cities practically free of cost. The companies meantime undertake all risks attendii^ the construction of the lines and of operation. Though the question of municipal ownership was not ' a part of their instruction, the London Traffic Commission expressed the opinion that the relations existing between the municipalities and private enterprise demanded inquiry.

But it would seem bom the present outlook i<a Municipal Trading that, so far as Parliament is concerned, it will proceed on its way unchecked. Such at least is to be gathered from the declarations of at least two members of the Cabinet, the Prime Minister and the President of the Local Government Board (Mr John Bums), taken in conjunction with the fact that the Government majority is prepared to vote for any legislation the purpose of which is to give the municipalities more and more freedom of action. On the other hand, it is by no means certain that the sympathies of the Prime Minister and Mr Bums with municipal ambitions are shared by their colleagues in the Cabinet, British private enterprise, therefore, has reason to hope that a common defect of Radical Govenmients — a lack of solidarity — ^will stand in the way of the municipaUties obtaining from Parliament all the further powers they desire.

So far we have briefly traced the modem tendencies of the movement in both countries correlatively, because its progress in Great Britain has more or less set the pace to the public attention accorded to it in the United States. For this reason it will be convenient now to proceed to survey, in the same relation, the stages through which the question has passed as a debatable proposition in the latter country.

The growth of the movement in Great Britain in the e^bties drew Dr Albert Shaw, now editor of tlie^m«fi(wi Review of Reviews, and then attached to a Minneapolis journal, to that country, and he wrote a series of letters on the subject, which were published in the paper he represented, and afterwards in book-form. His work was the forerunner of the miscellaneous literature which has since appeared in America on the subject. At that period Dr Shaw saw what I saw and have acknowledged, and what impartial critics (with whom he must be ranked) will admit — that the best side of municipal enterprise in Great Britain was then to be seen. That cannot be said now. Indeed, it is probable that were Dr Shaw to visit Great Britain with a like purpose at the present time, he would have grounds for revising some of his early statements made in approval of municipal work in England. But time has left unaltered one important consideration which even then would not escape that brilliant pubUcist, namely, that comparisons between EuropeaJi and American cities for the purpose of elucidating municipal problems were of little value. The fact remains true to-day.