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MUNICIPAL OWNERSHIP



MUNICIPAL
OWNERSHIP-

FOUR LECTURES DELIVERED AT

HARVARD UNIVERSITY

1907



BY LEONARD DARWIN

AUTHOR OF "MUNICIPAL TRADE"




NEW YORK

E. P. BUTTON AND COMPANY
1907






Printed in Great Britain.



DEDICATED, IN GRATEFUL REMEMBRANCE

OF THEIR KINDNESS, TO MY FRIENDS

ACROSS THE SEA IN CAMBRIDGE.

L. D.



LONDON,

October 1907.



213155









CONTENTS



LECTURE I

OWNERSHIP NOT THE MAIN QUESTION

THE words municipal ownership do not suggest
the real points at issue. When should labour
be directly employed by municipalities is the
vital question



PAGE



THE REGULATION OF PRIVATE INDUSTRY

Municipal monopolies must be controlled for
the sake both of the consumer and of the tax-
payer. The unearned increment of value can
be captured by the issue of short-period fran-
chises to private corporations. With well-
considered franchises, private industry can be
efficiently controlled; though the exact con-
ditions to be imposed are not easily deter-
mined. The grant of franchises on too hard
terms has damaged the electrical industry in
England. The terms of franchises must be
sufficiently liberal. Further reform of the laws
affecting municipal monopolies in private hands




CONTENTS

is much needed in the United States and in
England. This enquiry concerning private
industry is a necessary preliminary to a study
of municipal ownership ; because, in cases
where municipal ownership would now be an
improvement on private industry, it would not
necessarily be so if private industry were better
controlled



MUNICIPAL OWNERSHIP AND LOCAL TAXATION

The financial questions connected with muni-
cipal ownership will first be considered. In
studying the English statistics of municipal
ownership, we are in effect studying the
financial effects of direct employment. Gain
and loss, which are defined, are of far more
importance than profit and deficit. It cannot /
be directly proved that English cities, where /
there is much municipal ownership, are either /
more or less heavily taxed than those where /
there is but little . -,' , . . . .^J 24



LECTURE II



MUNICIPAL STATISTICS

THE gain may be estimated by deducting the
income foregone from the profits. Neither
individual cities nor industries should be con-
sidered. English statistics indicate the prob-
ability of a small net deficit on new municipal
ventures. The probable loss is more than the
probable deficit for various reasons : including



CONTENTS xi

PAGE

the inadequate charge made for depreciation,
and the possibility of obtaining rents from
private corporations. The loss is probably
more than the charge for the sinking fund ;
and, if so, English cities are losing by their
municipal policy 33

PRICE AND QUALITY

It cannot be proved that goods are made
more or less cheaply by municipal industries,
because of the difficulties connected with such
comparisons connected with prices. In com-
paring the relative qualities of goods, difficulties
of the same kind are also met with. Statistical
results are thus not refuted, but rendered more
doubtful 48

A PRIORI ARGUMENTS

The inherent probability of profit - making
should be considered. The reward of capital
is much the same in municipal as in private
industry. This is frequently denied ; because
the difference in the conditions is not ap-
preciated. A slight gain from the greater
credit of cities is possible. But the manage-
ment is likely to be less economical for various
reasons. The net result to cities is, therefore,
probably a loss f . . . . 52

FINANCIAL CONCLUSIONS

These a priori conclusions are not refuted
by statistics. English statistics are, however,



xii CONTENTS

PAGE

only relevant if the English methods are being
followed. A priori arguments are alone to be
relied on in judging of the effect of more
advanced policies. Certainly no great gain is
made by municipal ownership in England ;
and general financial considerations tell dis-
tinctly against the direct employment of labour
in all circumstances ..... 64



LECTURE III

MUNICIPAL CORRUPTION

WILL municipal ownership tend to purify civic
life? English civic purity has not increased
concurrently with municipal ownership, but is
of older growth. Municipal industry is bene-
ficial by adding to the importance of local
administration. But it deters busy men from
serving on councils, and it tends to demoralise
the electorate. Corruption with reference to
private franchises would cease with the aban-
donment of private industry. But the risk
of corruption cannot be avoided as regards
any part of the expenditure incurred under
municipal ownership ; and municipalisation
makes the disease less easy to cure. Muni-
cipal employees are not likely to be dis-
franchised 67

WAGES IN MUNICIPAL INDUSTRIES

The pay of municipal workmen is better
than that of private workmen. The direct
employment of labour affords no reason for



CONTENTS xiii

PAGE

this superior treatment ; and the extra taxation
thus thrown on private workmen cannot be
justified. All industry, municipal and private,
should be subject to regulations. The higher
pay of municipal workmen, on the whole,
affords an argument against direct employ-
ment . , 83



THE CASE FOR DIRECT EMPLOYMENT

The fact that municipalities can regulate
prices best if they manage works themselves,
tells in favour of municipal water supply.
Private proprietors must strive to make pro-
fits ; and this fact justifies the municipal
operation of certain services, but not the con-
struction of the works. The question at issue
is whether industries owned by municipalities
should also be directly managed by the civic
authorities. The foregoing arguments on the
whole tell against direct employment in the
case of ordinary industries. But other
questions relevant to municipal ownership
generally remain to be considered, which may
strengthen the case against direct employment. 91



LECTURE IV

MUNICIPAL OWNERSHIP

THE merits of municipal ownership without
reference to direct employment now, therefore,
remain to be discussed. No risk is thrown on



xiv CONTENTS

PAGE

citizens when franchises are granted, and the
interest of the public can be safeguarded in
terminable franchises quite as well as in leases.
The following are the main objections to
municipal ownership : The national dividend
will be diminished. Municipal indebtedness
will be increased. Municipal management will
be lacking in initiative ; and it will increase
the tendency for industries to become mono-
polies. On the other hand, socialists hold
that modern industrial methods are wasteful
and cruel. Where the balance of argument
tells against municipal ownership, there the case
against direct employment is strengthened . 104



GENERAL CONCLUSIONS

No formula can be laid down indicating the
limits of municipal ownership. General con-
clusions only can be stated, and each case of
municipalisation must be judged on its own
merits . . ^ . . . , 122



SOCIALISTIC IDEALS AND MUNICIPAL OWNERSHIP

To what extent is municipal ownership a
realisation of the ideals of socialists? It
cannot be laid down, as a general rule, that
either the richer or the poorer classes will
be thus benefited. Part of the burdens and
benefits are shifted on to the landowners, and \
municipal ownership is certainly, at best, a
clumsy method of redistributing wealth. Cities



CONTENTS xv

PAGE

with debts should pay them off rather than
invest in municipal enterprises. Direct em-
ployment makes employment generally some-
what less regular. At present we should study
existing municipal industries before adding
largely to their number , . 125



LECTURE I

OWNERSHIP NOT THE MAIN
QUESTION

HAD this course of lectures been delivered in
England, " Municipal Trade" would probably
have been selected as the descriptive title ;
because these words would best have brought
to the minds of Englishmen the range of the
subjects to be dealt with. Municipal trade is,
however, an ill-selected phrase ; for it focuses
the mind too exclusively on questions connected
with profit and loss. When I had the honour
to receive an invitation to deliver a course of
lectures in the United States, in order to indicate
their scope, I decided to entitle them " Municipal
Ownership." But, even though a title may not
be misunderstood, it may do harm by giving an
initial bias to the mind ; and it is, therefore,
worth considering briefly whether " Municipal



2 LEGAL OWNERSHIP

Ownership" is a more happily selected phrase
than its English equivalent " Municipal Trade."

What we wish to ascertain is whether the
word " ownership" gives a true indication of
the main aims of the advocates of municipal
ownership. In ordinary conversation this word
is somewhat loosely used. In speaking of the
owner of a farm, we often mean the individual
who leases the farm to a farmer, and who, during
the currency of the lease, has no power to deal
with the land, his action being confined to the
extraction of a rent. On the other hand, when
we speak of the owner of a shop or a manu-
factory, we more often mean the person who
conducts the business, and consequently makes
the profits or sustains the losses. Ownership
having, therefore, different meanings, it is pos-
sible that the advocates of municipal owner-
ship may have very different ideals in their
minds.

Although questions connected with the techni-
cal legal ownership of the land on which are
built the municipal industries we are about to
consider are no doubt important, yet I am
convinced that this controversy in England
does not, and will not, in truth, rage round
this question of legal ownership. In order to
illustrate this point, a brief allusion must be



NOT THE MAIN POINT 3

made to the way in which in England water-
works, gas-works, electric lighting works,
and street railways are owned and managed,
these being the industries most commonly
municipalised. But first let me say, in a
parenthesis, that if all my examples are chosen
from Europe, it is not because I fail to see
that much is to be learned on these subjects
on this Continent. It is simply because it
would be folly, if not worse, for an English-
man to come to preach to Americans about
America.

In all the industries just mentioned there is
seldom any direct effective competition ; and
for this reason they have been described as
municipal monopolies. We are all familiar
with the fact that each urban district is as a
rule supplied by only one gas-works. Now,
as regards English legislation, these municipal
monopolies may, broadly speaking, be divided
into two classes, which may perhaps be
described as the older and the newer muni-
cipal monopolies. Water-works and gas-works
belong to the former class, being subject to
laws framed many years ago. The newer
monopolies include electric lighting works and
street railways, the Acts of Parliament by
which they are controlled having been passed



4 LEGAL OWNERSHIP

somewhat more recently. These later Acts,
therefore, serve to indicate, in comparison with
the more old-fashioned legislation, the drift of
modern ideas ; and it will therefore be best
for this reason to confine our attention for the
present almost entirely to these newer municipal
monopolies.

Taking street railways as an example for
discussion, we find that they may be managed
in three distinct ways in England. In the

//first place, they may be owned and worked by
municipalities, the employees being directly
paid by the civic authorities. This is analogous
to the case of an owner, who farms his own
land.

Again, English cities, whilst retaining the

2 legal ownership of the street railways, may
lease them out for terms of years to private
corporations 1 for management, a rent being
received which would usually be included
in the ordinary municipal revenues. Here the
municipality plays the part of the landowner who

1 Where there is a difference in the words used in
America and in England, the American example has
been followed. For "corporation," "street railway," and
" franchise," the English reader should read " company,"
"tramway," and "concession." "Industry" and "local
taxation " have also been used where " trade " and " rates "
would be the more usual equivalents in England.



METHODS OF MANAGEMENT 5

lets out his land to a farmer, and only benefits
from his possessions by receiving a rent.

In both the foregoing methods of manage-
ment, the municipality is the technical legal
owner of the industry. Lastly, street railways
may be both owned and managed by private
corporations, in which case they have, as a
rule, been constructed under the Tramways'
Act of 1870. In accordance with the provisions
of this Act, corporations can obtain franchises
which enable them to build and manage street
railways, the municipalities concerned, however,
retaining the right both to purchase the works
at the end of a period of twenty-one years,
and in the meantime to draw from the corpora-
tion an annual payment or rent. When the
franchise period of twenty-one years has elapsed,
a municipality may either undertake the manage-
ment of the street railway itself, in which case
it ceases to belong to the class of street rail-
ways now under consideration ; or it may
permit the same private corporation to con-
tinue to manage the business under similar
conditions to those obtaining during the first
term of the franchise. In this case the
municipality adheres strictly to its original
functions namely, those of an administrative
body.^



fc rTHE



6 LEGAL OWNERSHIP

Thus street railways in England may be either
owned and managed by municipalities ; or owned
by municipalities and leased out to private
corporations for working ; or, lastly, owned and
managed by private corporations under conditions
imposed by the State. But it is the comparison
between these two last methods of operation to
which attention is now called : that is, to the
contrast between railways owned by munici-
V palities and leased to private corporations, and
railways owned and managed by private corpora-
tions. In both cases the municipality is for the
moment doing nothing whatever with regard to
the street railway but extracting a rent from its
managers ; and in both cases there are definite
stated periods at which the municipality may
either take possession of the railway or make
fresh terms with the managing private corpora-
tion as to rent and fares. There are no doubt
important differences between these two methods
of operation. But in these, the most important
respects, there is a close similarity between them ;
although in the one case the municipality is, and
in the other case it is not, the technical legal
owner. One is a case of municipal ownership
and the other is not. Yet the choice between
these two methods arouses but a very feeble
interest in England, and it appears, therefore,



QUESTIONS PROPOSED 7

that t^mcaMega^wnership^is^ not the funda-
mental point at issue.

The contrast which does excite interest is that
between industries in which the employees are
paid by the municipalities and those in which
they are not so paid,; and from this it follows
that the direct employment of labour is, in
truth, the pivot about which this question
turns.

The expression " municipal ownership" is
now so well understood that its use cannot be
avoided. But we must not be led by its use to
divert our enquiry from its proper course. The
foregoing considerations lead me to believe that
the following two questions will indicate the
points to which our attention should be mainly
directed, and will bring us straight to the heart
of this controversy. At all events, the following
are the questions which are now proposed for
your consideration :

1. What is the best method of controlling

those municipal monopolies in which
the employees are paid by private
proprietors ?

2. What .are the urban services in which it

is on the whole best that the work
should be performed by employees
directly paid by the civic authorities ?



PRIVATE INDUSTRY

This is nearly equivalent to asking in
what cases should we abolish the con-
tractor, that word being used in its
widest sense.



THE REGULATION OF PRIVATE
INDUSTRY

Although at first sight this first question may
appear to have no connection with municipal
ownership, yet good reasons can be adduced for
dealing with it in connection with this enquiry.
One of the main functions of education should be
to make us take broad views of every subject ;
and certainly few sources of error are more
common amongst uneducated persons than those
which arise from regarding only one side of a
question. Here, in the United States, you are
asking yourselves whether it would be a beneficial
reform to municipalise a considerable number of
industries. But it is surely not enough merely
to consider whether municipal ownership would
be an improvement on private industry as it now
exists. Enquiry should be made concerning all
possible methods of reform in order to decide
which would produce the best results. If the



METHODS OF CONTROL 9

discussion is not conducted in this spirit, the
result may be a proposal to start reforms in a
wholly wrong direction. Municipal ownership "
might be better than private industry as the law /
now stands, whilst private industry under wiser
regulations might be better than municipal
ownership. Reforms in both these industrial
methods must therefore be considered.

The subject now to be discussed is therefore
the best method of controlling private industry, i
A great deal might be said on this question ; but
my remarks will be brief in order to enable me
to revert to other questions more directly con-
nected with municipal ownership. In fact, my
only object will be to show that much remains
to be done in the direction of improving the laws
affecting the control of municipal monopolies in
private hands.

In order to shorten this enquiry, reforms
desirable only in the case of monopolies in
private hands will alone be considered. Many
reforms may perhaps be desirable with regard
to all industry, whether in private hands or
whether conducted by civic authorities ; but
these reforms may now be dismissed, because,
being applicable both to municipal and private
industry, they would not affect the comparison
between the two. Again, although it is true

B



ro PRIVATE INDUSTRY

that municipal ownership in England is not
always confined to monopolies, yet no legis-
lative safeguards are required to protect the
consumer where competition is both free and
effective ; because the power of rapidly changing
his source of supply at any time gives him
in these circumstances the best possible safe-
guard. Thus, as regards public interests, the
enquiry may safely be limited to the reform
of monopolies in private hands ; and, if so
limited, the main points to be considered are
the methods of ensuring to the consumer the
best possible return for his money not only
immediately, but in the long run ; and, as
regards the taxpayer, what is usually known
as the capture of the unearned increment of
value.

As to the capture of the unearned increment
of value, here again we have a phrase from
the use of which we can hardly escape, although,
in truth, it is somewhat objectionable ; because
it tends to make us, like gamblers, think only
of gains and be blind to possible losses. In
rapidly - growing towns, franchises for the
establishment of gas-works, for example, are
very valuable possessions : possessions which
frequently keep increasing in value year by
'year. The causes of this increase of value of



UNEARNED INCREMENT 11

municipal monopolies need not here be dis-
cussed ; but certainly they are largely beyond
the control of their private proprietors. Is it
right, then, that these private proprietors should
reap the bulk of the benefit of this increase of
value? Obviously not, especially if, like the
gambler, we may be blind to their possible
losses ; and arrangements should always be^
made, when new franchises are being granted,
for the capture of this unearned increment of
value for the benefit of the public.

In the case of the industries here described
as the newer monopolies, this end is gained
in England by making the franchises granted
to their owners terminable in a given number of
years ; twenty-one, as already remarked, in the
case of street railways, and forty-two in the
case of electric lighting works. At the termina-
tion of these franchises, the cities in question
can enter into possession of these works, and
thus acquire for themselves any growth of
value which had occurred during these periods ;
or, if the private corporations be then permitted
to retain the management, the same result can
be equally well obtained by the rents paid to
the cities then being raised. It is true that,
during the currency of a franchise, a private
corporation may gain somewhat on account of



12 PRIVATE INDUSTRY

any unexpected growth of the city. But this
is in reality a comparatively small matter ;
especially if unexpected losses be taken into
account. Thus, if a system of terminable
'franchises be adopted, the capture of the un-
earned increment of value from the private
proprietors of municipal monopolies in reality
^ presents no serious difficulties.

We are, however, discussing private industry
mainly with the view of comparing it with
municipal ownership ; and it is obvious that
this increment of value (as well as any
decrement of value) of municipal monopolies
will fall undiminished into the lap of any city
which actually builds and manages such
industries. Moreover, if a city owns its own
street railways, for example, but, instead of
managing them, leases them out to a private
corporation for management, it can capture the
unearned increment of value at the termination

fqf the lease by raising the rent. Thus, under
any system of municipal ownership, the un-
earned increment can be captured ; and in this
respect there is little to choose between muni-
cipal ownership and private industry : pro-
vided that with private industry the private
proprietors are granted franchises for short

\ v periods only. Unfortunately, both here and in



PRICE AND QUALITY 13

England perpetual franchises have frequently
been granted; and, as long as this mistake
continues to be made, so long will municipal
ownership undoubtedly continue to present
advantages as regards the capture of the un-
earned increment.

Most citizens will, however, be interested,
not so much in the dry bones of a future
unearned increment of value, but rather in
present prices : a point as yet untouched. The
owners of monopolies would doubtless, if
permitted, charge the price which would bring
them in the greatest profits ; and this price
would, as a rule, be considerably higher than
that which would be charged by the same
corporations if subject to free competition.
How, then, is the owner of a franchise of a'
municipal monopoly to be forced to charge com-
petitive prices? If perpetual franchises are
to be granted, the difficulty of controlling the
private proprietor appears to be insurmount-
able ; because it is impossible to include,
within such franchises, provisions framed to
meet all the many alterations in the conditions
affecting prices which must occur as years roll
on. In the franchises for English gas-works,
sliding scales of prices dependent on the
dividends paid are, it is true, always included.



14 PRIVATE INDUSTRY

Some provision of this kind should always be
inserted in franchises ; but it is quite impossible
thus to solve this problem completely.

If, however, franchises are granted for short
periods, as in the case of street railways in
England, comparatively little difficulty need
be experienced in regulating prices or fares.
During the currency of a franchise, the threat
to expel the private proprietor at its termination
is a powerful weapon in the hands of the civic
authorities, greatly assisting them in making
unreasonable corporations see reason ; and at
the expiry of a franchise, a new scale of prices
could always be arranged. This is, in truth,
but another way of indicating the advantages
with reference to the capture of the unearned
increment of value which cities may obtain by
retaining the right to terminate all franchises
granted to private proprietors.

Thus far only the price of the goods
supplied, and not their quality has been con-


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Online LibraryLeonard DarwinMunicipal ownership; four lectures delivered at Harvard university 1907 → online text (page 1 of 8)