Railway Nationalisation

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It is claimed, that railway valuation for privatisation in the 1990s proves that the 1948 nationalisation terms were generous.[1]  During Privatisation debates, Opposition MPs claimed [2] that privately owned railways were pleading after WW2 for a state takeover. This claim has been more recently been reiterated [3]. Railway companies and their 1.25m stockholders vehemently opposed takeover.

The Construction of Future Railways Act, 1844 registered a nationalisation marker by empowering the State to buy any company for 25 years’ profits based on an average of the preceding three years. The Act held down averages by empowering the Treasury to revise tolls to limit profits to 10%.[4]  Unlike the French, German and Belgian governments, UK had no route masterplan. Route selection was left to companies.[5]  Objections to routes which might be beneficial increased legal & land costs, making UK railways more costly per mile than foreign systems. 

In 1871, government enacted powers to sequestrate railways during a war, and used them in 1914, having not put one penny into railways, undertaking only to maintain profits at 1913 levels. Operations were left to companies. Government profited hugely, leaving railways in a rundown state after the war. Government froze railway charges during the war, and had all war materials and personnel carried free! In contrast, industry, shipping and road transport were uncontrolled. Railway costs were increased by industrial inflation, leaving receipts well behind. In 1919, to resolve losses it had caused, government set up an Inquiry to decide fares and charges. It limited future railway profits to 1913 levels, regardless of inflation – further limiting potential nationalisation costs. In 1919, Churchill told the Dundee Chamber of Commerce that it might pay the State to run railways at a loss to develop industries and agriculture. Government underpaid railways for free carriage of everything connected with that war, and for the ensuing abnormal wear and tear, etc., by reneging on their legal obligation in an 1871 Act to submit compensation claims to arbitration.[6]

In 1921, 123 railway companies were forcibly merged into four groups – the Big Four – to prevent bankruptcy of smaller companies whose finances were deeply undermined in the war. By linking them with the profitable main line companies, government blocked closures which would have been a serious vote loser. It took the Big Four about ten years to recover from their unrewarded Herculean efforts during the 1914-18 war.

Meanwhile, the infant road transport industry went into overdrive powered by ex-military vehicles sold at knock-down prices. The War Office sold 80,000, many brand-new, without reserve, and with hire-purchase. The US Army sold 9,000 in Britain. Lorry drivers’ hours exceeded limits imposed on railways by government in 1919.[7]  For years, hauliers paid little or nothing towards road costs. They could expand at will; railways needed an Act of Parliament to expand. Therefore, railway companies sought – in their 1938 ‘Square Deal Campaign’ – equal commercial freedom or equal regulation of road transport. Government measures to regulate road transport expansion were circumvented by more trailers and overloaded vehicles. It has been claimed that government was about to concede railways’ demands when World War 2 started. Government files [8] reveal that they had no intention of conceding railway demands.

In World War 2, government sequestrated railways - but no other transport or industry – and swept aside its statutory 1913 profits limit: £51m, and imposed £43m. When railways objected to this iniquitous action, they were threatened with nationalisation.[9] Government had decided to allow railways to match prices to costs, subject to approval by the Railway Rates Tribunal.[10]  All others could increase wartime prices to match cost increases under the Prices of Goods Act, 1939. After a few months, Churchill froze rail fares and freight charges for the duration. By the end of the war, industrial-fuelled inflation opened a huge gap between costs and income. During the war, the conservative majority in the Cabinet decided they must consider post-war reorganisation of transport – road and rail.[11]

After the war, railways were nationalised, which it was believed would take away the profit [12] aspect, keeping down fares. Publicly, Ministers justified nationalisation by their post-war condition. That was nonsense. They suffered the same fate during WW1, and recovered after a few years without any government help. After WW2, railways were in a stronger position, ‘having enormous sums at our disposal – to spend as soon as conditions, and the Cabinet permits’ said Sir Ronald Matthews, LNER Chairman, (The Times, 4 April 1947)

Nationalisation was a long held Socialist policy. It was opposed by the General Council of Shipping, the Association of British Chambers of Commerce, CBI, National Union of Manufacturers and the Traders Coordinating Committee for Transport. The LMS chairman stated: “We intend to oppose nationalisation by all lawful means”, (The Times, 2 March 1946). On 17 July 1946, the railway companies and hauliers submitted a plan for integrating long distance services - with some freight wagons used solely by hauliers.

Opposing nationalisation, Anthony Eden stated: “in the war, the USA sent experts to inquire into railways and see if they could send help. They were so impressed with the management and the way railways were run, that they had absolutely no suggestions to make”. (Hansard vol. 431, col. 2065). This is in marked contrast to visits by USA industrialists who were very critical of UK coal and steel industries which they said were too small and ought to be amalgamated into large units.

On 12 December 1946, the Railway Companies Association “reiterated opposition to nationalisation and demanded a public enquiry. The proposed terms were unjust: £42m dividends and interest were paid in 1946 by railways; and £35m average between 1928-38 (including several years of acute depression). British Transport Stock will pay £23m at 2.5%.[13] They called for an independent Tribunal as in the 1921 Railway Amalgamations. The scheme submitted by railways and hauliers had not received proper consideration. Changes would involve great administrative and financial dislocation and impede restoration of transport for years”.

Keesings Contemporary Archives (8365A) reported: “A Railway Stockholders Union meeting on 13 December demanded a public enquiry & condemned the confiscatory nature of the terms. Churchill – now in Opposition – promised support in the “fight for justice”. Letters in The Times objected to the ‘confiscatory terms’.”

The LNER Chairman told the AGM that the arbitrary compensation terms “would bring a blush of shame to the leathery cheeks of a Barbary pirate”. Railway Directors and others in Parliament vehemently objected to the terms, for which there was to be no arbitration as: “confiscation”, “disregard of the real value of assets and fear of arbitration”, “the acquisition did not represent a sale by a willing seller”, “the intended basis [retrospective share prices] did not reflect the value of the assets even in their run-down condition”.

 

In Nationalisation of Industry, (p222), Sir Norman Chester stated: A Select Committee had dismissed share value as a basis for coal nationalisation, opting for ‘Net Maintainable Revenue’. The Chancellor said that principle would value railways at £1.6bn. The Opposition proposed arbitration as was to apply with road transport, despite it forming part of the British Transport Commission along with railways. The Times, reported (2.12.46): ‘If railways were compensated on the same basis as hauliers, they would get double that proposed.’ No other nationalisation terms were dictated: the Bank of England had prior agreement on compensation of 25 year’s profits; coal, gas and steel were subject to arbitration; Cable & Wireless was decided by independent tribunal; civil aviation was negotiated by a willing seller; electricity was on a fair value of assets plus loss of future profits. On 12 March 1947, the Minister stated that ‘negotiations were proceeding with Wagon Companies for new terms’. He had earlier stated that 35% of these 0.58m wagons were over 35 years old, and over 20% obsolete! This contrasts with the brusque treatment of railway companies, whose more reliable 0.64m wagons were not subject to negotiation. Ironically, some Wagon Companies used their compensation to create Credit Companies funding hire purchase of consumer goods, especially cars! No objection was voiced by those companies which Keesings Contemporary Archives (9283A) notes:  were owned by collieries, factors and traders! BTC 1948 Accounts (Table V14 & p.15) record: ‘they received £42m of 3% Stock redeemable in only 25 years and £1m cash’.

An Economist Leader, (23.11.46, p836): “There is a single buyer, which for seven years fixed railway revenue, and now determines its current value. It is nationalisation on the cheap and comes near to expropriation”. The Stock Exchange took the “unprecedented step of making representations that stock exchange quotations were not related directly to the value of company assets or profits, but more the result of factors such as hope, fear and guesswork on the part of investors and could not form a fair, equitable or rational basis for compensation. The only fair basis was arbitration”, (Keesings Contemporary Archives 8365A ).

“On 16 December 1946, the Minister rejected demands for an enquiry. He said that overworking during the war without opportunities for replacement or repair necessitated large capital outlay to bring it up to an efficient standard”, (Keesings Contemporary Archives 9283A). Government failed to live up to this inferred promise. In their first seven years, nationalised railways were directed not to restore assets to pre-war condition, but do the minimum necessary on safety grounds [14]. In contrast, hauliers were getting new vehicles in excess of government limits [15]. Railways had substantial capital in hand, and were also due to receive the money in the Maintenance Trust Fund [16] – created during the war and held by the Treasury. These were sums chargeable to expenditure but not spent due to shortage of materials or labour. It amounted at the end of the war to £152.4m. These sums had been correctly treated in Accounts as Expenditure and were not, therefore, profits [17], which were calculated by deducting all expenditure, depreciation etc, from income. Before tax and Excess Profits Tax (EPT), Government took £127.5m of profits. Government made even more from railways, by enforcing unique discounts on all war traffic, which did not apply to road transport. In 1941, the Chancellor promised, as a ‘statutory right’, to refund 20% of EPT after the war to industry – but not railways. All industries excluding railways were allowed to increase prices during WW2 [18] to reflect increased costs. Had railways been allowed to do likewise, profits would have been £1bn higher [19]. Treated as EPT, this would have warranted a post-war refund of £200m.

In 1948, the government nationalised £1bn worth of railway assets without paying a penny [20]. They issued IOUs – British Transport Stock - redeemable 40 years later from railway receipts. “For each £100 of Railway Stock, the holder would receive such an amount of Stock as in the opinion of the Treasury is the equivalent value of Government securities”[21]. It was a master stroke. However, the Act decreed that a Court of Law would decide fares and freight charges [22]. This system applied to no other industry – nationalised or private – and produced deficits [23]. If government had funded acquisition, and railway prices had not been below inflation, it may have had social merit. However, they were well below inflation, having been frozen for five years of war, and only increased 30% in 1946, when industrial fuelled inflation reached 116%. Government had planned to avoid repetition of the same ruinous policy of WW1 by allowing rail prices to match wartime costs. It reneged, after objections from those freely increasing their prices and wages, even though increases would have been submitted – even in wartime – for approval by the Railway Rates Tribunal.   

It is claimed that ‘shareholders got more favourable terms for stock as result of an anti-nationalisation campaign’ [24]. It had no effect; the valuation terms in the Transport Bill were never altered from the basis of share prices on dates specified by government. With nationalisation threatened, share prices were low and the Financial Times said it was not a fair basis. Had railways been acquired by buying shares, prices would have risen on news of a take-over. Shares could have been quickly sold for cash. After 40 years, the value of IOUs would be halved by inflation. Treasury valuation for five railways (i.e. including London Transport) was £1.0bn compared with the value of securities on the Stock Exchange of £1.1bn [25]. Assets transferred from the five railways, were valued in BTC Accounts on 1 January 1948 at £1.7bn! [26] When the Minister was asked, in February, for the value of Assets, he didn’t know,[27] and he didn’t find out.

It is alternatively claimed that shareholders enjoyed favourable arbitration. There was no arbitration. Credit for arbitrating was erroneously attributed to Stanley Hill [28]. He did not make this claim. He told the Transport Tribunal’s 1951 Hearing into rail fares, and repeated it at a line closure Hearing in 1953, that “his firm - not he - was involved in the 1933 London Transport arbitration”. That was for a few buses and trams, not railways - for which there was no arbitration. “He had acted as Advisor to the Railway Rates Assessment Authority”. Its sole duty was to assess the rateable value of railway property. He later admitted that the senior partner was the Authority’s Advisor, ‘but he had access to the papers in the office’ [29]. He claimed no personal role in railway costs or nationalisation, which was crucial to his locus standi in Tribunal Hearings.

Comparisons between nationalisation and privatisation overlook the value of assets, subsidiaries and land divested long before privatisation: London Transport, railway owned road transport (about 20,000 vehicles), railway-owned docks (about 30% of the country’s total), workshops, power stations, the world’s biggest hotel group, 130 ships, 1,000 miles of canal, air services, 52,000 houses, 35,000 acres of non-operational land, 10,000 miles closed routes, closed marshalling yard & depot sites. Subsequent trading revealed that privatised shares were ridiculously low [30].

 

It is claimed that “Directors lost interest in day-to-day operations and concentrated on fighting for favourable compensation” [31]. Directors had no day-to-day operations role, which was the responsibility of managers. Their primary responsibilities were policy and financial, including investment (which was restricted by the Minister from 1939 to 1948). Fighting against a takeover, and/or obtaining the best terms for their shareholders was their legal duty – a duty which has been exercised frequently in other businesses.

Between the end of the war in 1945 and nationalisation in 1948, the main line companies – with Ministerial approval – made some improvements and resumed modernisation works stopped by the war. Some schemes were held up by the inability of manufacturers to supply materials, and by government restrictions [32].

In November, 1945, the Minister was told of overcrowded trains and asked to return railway-owned rolling stock sent abroad by Government. He said that about half had returned (in poor condition) and the rest would come as soon as possible [33]. In 1947, railways wanted to build 3,070 coaches, but were limited to 1,200. Inferior coal led to heavier consumption and reduced efficiency [34].

 

The Minister dictated the organization of nationalised transport, including the composition of the Railway Executive and the boundaries of the Regions, which did not have General Managers nor Boards of Directors [35]. “The organisation will be highly centralised. Railway Executive Members will directly control Departmental subordinates in the Regions. Chief Regional Officers will not be GMs. Regions will have no collective responsibility and little autonomy” [36].  The British Transport Commission took over the role of Railway Boards, and the Railway Executive assumed the role of General Managers [37]. Hence, the Regions did not have ‘General Managers and Boards of Directors’ and were not ‘virtually autonomous’ [38].

Railway owned trunk road haulage: Hays Wharf , Carter Paterson and Pickfords transferred to BRS on Day 1. Road hauliers – in the new guise of BRS did not ‘take on Collection & Delivery for BR in 1953’, as claimed [39]. Over 11,800 C&D vehicles transferred to BR in 1948, which retained control until 1968, when government created NCL to take over BR and BRS road transport. BR also inherited 8,793 horses [40] from privately owned railways, of which 97% were on town C&D, with 238 shunting wagons in small goods depots [41]. The latter declined annually, finally disappearing by 1958.

It was claimed that ‘the BTC rushed to buy 0.5m decrepit colliery-owned wagons’ [42], when they were directed to do so by the 1947 Act, passed before the BTC existed! The Act specified the price, according to age and size, for each of these antiquated wooden ‘Private Owner Wagons’, mostly of 10 ton capacity [43]. The total came to £43m. There was no option not to buy. Government had tried for 20 years to persuade railways to buy and replace them with a modern fleet, to cut unemploy­ment, but railways refused. They were not in good condition before the war and limited, even then, to lower speeds than railway owned wagons. Within a year, 55,000 had to be scrapped, and replaced by new 16ton capacity steel wagons at BR cost. Scrapping continued annually. With limitations on BR expenditure and inequitable economic policies limiting steel allocations, 27% were still in use 10 years later causing delays. Wagon fleet reduction was limited by inefficient use by collieries, industry and traders. Companies, which employed 10,000 staff building and repairing these wagons at 280 private works & 900 siding repair depots [44], were not nationalised. BR was required to pay them to maintain ‘ex-Private Owner Wagons’. In 1951, when BR gave notice to end this practice, they appealed to government and BR had to withdraw [45]. 

Government also forced BR to buy the handful of assets funded by government early in the war to facilitate war traffic, mainly to avoid areas vulnerable to air attack, because government had irresponsibly left the country with inadequate air defences. During the war, railway managers told government that these assets would not be required by them post-war. ‘Negotiations’ with the Treasury were conducted on behalf of the BTC by ex-civil servant Sir Reginald Wilson, who agreed that BR would pay. The assets were over-priced [46].

The first Chairman of the Railway Executive (aka British Railways) was Southern Railway’s General Manager Sir Eustace Missenden [47]. The first chairman of the British Transport Commission (the ‘owners’ of British Railways) was retired civil servant Sir Cyril Hurcomb, who had personally led the anti-rail sequestration, and whose department had devised the unwieldy organisation.  

 

[1] C. Wolmar – On the Wrong Line, page 24

[2] Hansard, 29 October 1992, cols. 1173-4; 2 February 1993, cols. 199/200

[3] Last Days of Steam, BBC 4, 16 October, 2008, historian Terry Gourvish said: ‘privately owned railways snatched government’s hands-off when nationalisation was announced’

[4] Canal dividends were not restrained. Trent & Mersey paid 75% in 1825, 32% in 1838.  [‘Manifold’, page 13]

[5] John Pollock claims in Kitchener that Lintorm Simmonds, a Railway Inspecting Officer in 1846, masterminded the British railway system. There was no master plan, and Inspectors did not have those powers. Even after the first systems opened, it was not too late to follow the European lead.

[6] ‘Compensation’ was set by a committee meeting in camera. Railways were not present. Media estimated compensation at £400m. Railways received £60m less tax. Wolmar’s On the Wrong line, page 17, said the £60m was paid ‘to discharge an obligation to maintain receipts at 1913 levels’. Not so. It was to cover deferred maintenance, abnormal wear & tear, replenishment of stores, ships sunk whilst on war duties, etc.  Government’s obligation was to maintain profits at the 1913 level, not receipts. Decades later, MPs claimed it was a ‘generous subsidy’! Privately owned railways were never subsidised as audited Accounts prove.

[7] Government decreed an 8-hour day for rail staff. Burton, Great Days of Canals, page 161: ‘road drivers were working 100 hour week’.

[8] Memo to Cabinet, CP 109 [39], see Square Deal Denied by E.A.Gibbins, page 114

[9] PRO, Rail 424/18, see also Square Deal Denied, page 137

[10] A legal body set up in 1921 to rule on railway prices, on the premise that railways would be a monopoly. It continued long after their monopoly had ended, and was renamed in 1948.

[11] WP[41] 173, see also Square Deal Denied, page 172

[12] Paradoxically, it claimed in later years, that pre-war railways were unprofitable!

[13] The figures were not disputed by Ministers, and destroy the myth that pre-war railways were unprofitable. Critics cite poor dividends on Ordinary Stock, but large sums were paid annually on Preference Shares and Debentures. In 1948, the Treasury reluctantly issued Stock at 3% which was, then, the prevailing rate, (The Times 5 March 1948), increasing the total to £27.6m, well below pre-war.

[14] BR was criticised for building steam locos, which, unlike diesel or electric, were permitted under these rules. By 1955, BR had replaced 10%, cutting the fleet by 11%, to handle virtually the same traffic vol­ume.

[15] Government Economic Surveys 1947-51, see Britains Railways – the Reality, E.A.Gibbins, pp54-55.

[16] Keesings Contemporary Archives 6404C: ‘Railways pay money unspent on maintenance into the Maintenance Trust Fund. This Fund was to be returned to railways after the war to restore assets’.

[17] C. Wolmar, Fire & Steam, page 263: ‘in compensation for profits taken out of railways, government created a Trust Fund for investment in railways & most of it, about £150m was handed over to the BTC’. These funds were not profits, but were for deferred maintenance which were owed to railways.

[18] Prices of Goods Act, 1939

[19] Britains Railways – the Reality, E.A.Gibbins, page 18

[20] ibid page 23, Canal and other assets increased the total.

[21] This long life surprised the City when the Treasury announced it, 24 hours after taking railways over. 3% Savings Bonds had a 12 year life’. (Times 2 Jan). Treasury Stock for Bank of England was 3% over 20 years.

[22] In 1997, Labour forgot its 1948 masterstroke, rejecting re-nationalisation ‘which would cost £200bn’. It did not repeat its 1948 pricing blunder, leaving privatised railways to cash in on economic expansion and rising motoring costs.

[23] The President of that Court admitted this to the Minister’s Advisory Committee, see Britains Railways – the Reality, E.A.Gibbins, page 176

[24] C. Wolmar, On the Wrong Line, page 23

[25] Keesings Contemporary Archives 8267A.

[26] BTC Accounts, Tables V-8 & V-10.

[27] Hansard, 16 February, col. 161.

[28] D. Henshaw, The Great Railway Conspiracy, page 67

[29] Proceedings of the Transport Tribunal, 1951, Q.4819. (Manchester Central Library PF380.1622.T1)

[30] Public Accounts Committee 24th Report concluded Railtrack was undervalued 400%. Rolling Stock companies re-sold for large premiums.

[31] Henshaw, The Great Railway Conspiracy page 37, quoted by Wolmar in On the Wrong Line page 26

[32] Times 14 February, 7 & 9 March, 1946; 1, 7, 8 March, 1947; 5 & 6 March 1948.

[33] Hansard, vol. 415, col. 1604

[34] Nationalisation of Industry by Sir Norman Chester, page 726

[35] ‘The organisation was entirely the work of civil servants & bore every sign of bureaucracy’. (Sir John Elliot, On & off the rails, page 67)

[36] The Times, City Notes, 27 November 1947

[37] PRO: AN 85/17. The BTC frequently interfered with the Executive’s ‘general management’ role – see Britains Railways – the Reality, E.A.Gibbins, page 25

[38] As stated by C. Wolmar On the Wrong Line, page 23

[39] Railway Blunders by A.Vaughan, page 60

[40] BTC 1948 Accounts, Table VII-7. Many businesses used horse drawn vehicles in the 1940s & early 1950s

[41] BTC Accounts, 1948, Table VII-7. Wolmar’s On the wrong line (page 25) states 7,000 horses were employed in shunting yards. A horse could pull one or two loaded wagons at most. In shunting yards, whole trains were propelled from arrival sidings into sorting sidings. This was beyond the capability of horses. Their use in moving wagons was limited to small goods depots, where shunt engines were uneconomic.

[42] Stewart Joy, The Train that Ran Away, page 77; C.Wolmar On the wrong line, page 28, also criticises ‘£40m paid for the wagons’. David Wragg Signal Failure - Politics & Britains Railways p142 ‘A brighter spot was the bete noir of BR – private owner wagons’. Railway companies had never opposed POWs – only government wanted to be rid of them.

 Keesings Contemporary Archives 8362A: ‘The Transport Bill says 585,152 privately owned wagons will be compulsorily acquired’. The wagons were owned by 5000 companies – collieries, factors and traders, who were individually compensated. 76% had grease lubricated axle-boxes, (Railway Study February 1944, PRO: Rail 1098/39).

[43] The price was based on depreciated values – not condition (PRO: MT47/223), nor on ‘pre-war new prices’ as stated by Vaughan in Railway Blunders, page 60. The prices were in the Transport Act, 1947, 6th Schedule.

[44] Reader’s letter, Modern Transport, 22 June 1946

[45] Evidence to Special Advisory Group - PRO: MT132/82

[46] Britain’s Railways – the Reality, E.A.Gibbins, page 12

[47] Not General Sir Brian Robertson as stated in The Time of my life, by Denis Healey, page 118

 

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