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THE CHIEF CAUSES OF THE FAIL-
URE OF MUNICIPAL TELE-
PHONES IN GLASGOW



BY



V. M. BERTHOLD



REPRINTED FROM

TBE QUARTERLY JOURNAL OF ECONOMICS
VOL. XXII., FEBRUARY, 1908



. . . THE . . .

QUARTERLY JOURNAL OF ECONOMICS

Published for Harvard University

Is established for the advancement of knowledge by the full and free discussion
of economic questions. The editors assume no responsibility for the views of
contributors, beyond a guarantee that they have a good claim to the attention of
'well-informed readers.

Communications for the editors should be addressed to the Quarterly Journal
of Economics, Cambridge, Mass.; business communications and subscriptions
($3.00 a year), to Geo. H. Ellis Co., 272 Congress Street, Boston, Mass.

CONTENTS FOR NOVEMBER, 1907

I. MORTGAGE TAXATION IN WISCONSIN . . ^ . . . . T. S. Adams
II. THE NATURE OF CAPITAL: A REJOINDER E. Bohm-Bawerk

III. THE RENT CONCEPT, NARROWED AND BROADENED . . Frank T. Carlton

IV. AN ILLUSTRATION OF THE CONTINUITY OF THE OPEN

FIELD SYSTEM P. Vinogradoff

Appendix : Court Roll of an Oxfordshire Manor

V. THE TAXATION OF THE UNEARNED INCREMENT IN GER-
MANY . . Robert Brunhuber

Appendix : The Cologne Ordinance levying an Increment Tax

VI. THE TEXAS STOCK AND BOND LAW AND ITS ADMINIS-
TRATION E. T. Miller

NOTES AND MEMORANDA:

Political Economy and Business Economy: Comments on Fisher's

Capital and Income J. R. Commons

The Meetings of British and of American Economists T. N. Carver

The Massachusetts Inheritance Tax of 1907 F. W. Taussig

RECENT PUBLICATIONS UPON ECONOMICS.



CONTENTS FOR FEBRUARY, 1908

I. PROFESSOR CLARK'S ECCNCMiCS Thorstein Veblen

II. THE TAXATION: C?f .INT^NG-IF-LE, WEAL-TH IN MARYLAND . Jacob H. Hollander

III. MACHINERY*" AtVi> -TKE, LAfcORE:R&\. s T. N. Carver

IV. THE STREET RAILWAYS OF PHILADELPHIA .... Frank D. McLain

V. THE COST AND THE PROFITS OF STEEL-MAKING IN THE

UNITED STATES . J. Russell Smith

VI. THE QUANTITY THEORY AS TESTED BY KEMMERER . Warren M. Persons

VII. HOARDING IN THE PANIC OF 1907 A. P. Andrew

NOTES AND MEMORANDA:

A Proposal for securing the Maintenance of Bank Reserve . . . Charles W. Mixter
The Chief Cause of the Failure of Municipal Telephony in Great

Britain V. M. Berthold

RECENT PUBLICATIONS UPON ECONOMICS.



THE CHIEF CAUSE OF THE FAILURE OF MUNIC-
IPAL TELEPHONY IN GREAT BRITAIN.

Mr. A. N. Holcombe has recently discussed in this Jour-
nal 1 the reasons that led to the abandonment of munici-
pal telephone service in Great Britain. Having explained
the situation antecedent to the establishment of municipal
exchanges, governed largely by the vacillating policy of
the British Post-office, which might be fitly described as
having played a game of "blind-man's-buff" both with the
National Telephone Company and the municipal corpora-
tions, the author reaches the following conclusion: "the
general abandonment of the municipal telephone under-
takings (thus) cannot be adequately explained by any
technical or financial weakness for which their managers
are responsible, but that the explanation must be sought
elsewhere."

The "elsewhere" in the opinion of the writer of the above,
or the real cause of the failure of municipal telephone
service, was its discouragement by the British government
through the failure of the Post-office to enter into an active
competition with the National Telephone Company, which,
it will be remembered, was its lawfully created licensee and
representative.

I do not desire to deny that the action of the British
Post-office hurt the municipal telephone traders. But
it served only to accentuate the troubles in which they
found themselves and hastened the final step, the abandon-
ment of an unprofitable and losing business. In other
words, the managers of the Post-office soon perceived that
municipal telephone service was neither a financial nor
technical success, and that a triple service would impede
instead of assisting the development of telephony in Great
Britain.

1 In Quarterly Journal of Economics for August, 1907, p. 645.



273050



Mr. Holcombe's conclusion, that the general abandon-
ment of the municipal telephone undertakings cannot be
adequately explained by any technical or financial weakness
for which the managers were responsible, is a new message
to those who have watched and followed the rise and fall
of the British municipal telephone service. The inception
of that service was not as enthusiastic as might have been
inferred from the charge of pronounced and general dis-
satisfaction with the existing system; for after the pasage
of the Act of 1899, when any municipality could have
applied to the Post-office for a telephone, only 59 out of
the possible total number (1,334) wrote to the Post-office
for information, 41 after searching investigation abandoned
the scheme, 13 took out a license, and only 6 of these actually
proceeded to establish a telephone exchange. Of the latter
Tunbridge Wells sold out to the National Telephone Com-
pany after an experience lasting but a little over a year.

Of Glasgow, as the largest municipality and making
the largest investment and possessing weaknesses common
to the other five municipalities, the question may specifi-
cally be asked, what were the technical or financial weak-
nesses for which the managers of the municipal telephone
business were directly responsible? Briefly, the answer
is:

(1) Errors in organization. The adoption of exchange
system and equipment long discarded as inefficient by
progressive telephone engineers.

(2) Errors in estimates and plans. Here the most
glaring mistake was the underestimations of the cost of a
subscriber's line, an error due to the advice of the expert,
Mr. A. R. Bennett, who in 1896 figured the average cost
of a subscriber's line as 17, and changed later on to 18.16.

In May, 1904, the cost per subscriber's line had grown to
34 in the Glasgow exchange.

(3) Errors in rates. Again relying upon the same
expert, the municipalities adopted an annual flat rate of
5.5, about one-half that charged by the National Telephone
Company. At the Glasgow Telephone Inquiry held by



Sheriff Jameson (September 28-October 4, 1897) Coun-
cillor Alexander, member of the Glasgow Corporation Tele-
phone Committee, deposed that:

Before making the application for a license, the Corporation Com-
mittee had laid before them expert information which satisfied them
that an efficient telephone service could be supplied in Glasgow for
5 within a mile.

In response to a question by Mr. Ashe, M.P., if the com-
mittee intended to supply this telephone service without
imposing any burden on the rates, the committee answered
"It is." 1

(4) Errors in providing none or insufficient amounts for
depreciation and sinking fund.

The managers were not without warning, for as early as
December, 1901, when the Glasgow exchange had been in
operation but seven months, the Marquis G. de la Touanne,
a well-known telephone engineer of the French Telegraph
<fe Telephone Department, also a foreign member of the
Institute of Electrical Engineers of London, wrote as
follows to the London Electrical Review (December 13,
1901):

The statement of Mr. Provand in the Times of November 30, that
Glasgow is earning a profit on 5.5 subscription leads us of the metier
to seek further information, for no other large city has been able to
maintain so low a rate. . . . 5.5 less 10% Post-office royalty leaves
4 14s. 6V1 net. I take the ultimate capital cost per subscriber
as given by Mr. Provand at 16, but I think no telephone manager
will accept 3*>% per annum as a sufficient depreciation. My expe-
rience is that if the service is to be kept up to the mark, the instru-
ments and switchboards must be replaced every eight years, which
means, say, 12% depreciation. ... A little more arithmetic shows that
every (Glasgow) subscriber who calls forty-seven times daily uses up
his subscription price in operator's wages alone.

Then we have also management, technical staff, repairs, rent, light-
ing, heating, and all the multifarious expenses of a large business
enterprise still to come. But that is not all. The subscriber who
calls 20, 40, or 80 times daily costs more than 16 in plant. He may
cost 25 or 50, and the depreciation on that head is 12%, making

1 London Electrical Review, October 8, 1897.



with interest 15%. The 5 subscriber will thus cost about 7 per
annum for interest and depreciation, say one and one-half times
his subscription fee. . . .

Let us now consider the several sorts of error more in
detail.

(1) Errors in organization. Immediately after the pass-
ing of the statute known as the Telegraph Act (1899), the
Corporation of Glasgow, which in 1893 had asked the Post-
master-General for a license, renewed its request for an
exchange to embrace the whole of the city of Glasgow and
four outlying districts, covering approximately 143 square
miles. This license was granted March 1, 1900, and (a
fact which should be well borne in mind) at the Corpora-
tion's own desire it was made terminable December 31,
1913.

Immediately thereafter the Corporation, under the
chairmanship of ex-Bailie James Alexander, an ardent
advocate of and believer in municipal telephone service,
organized a telephone department and appointed Mr.
Alfred R. Bennett chief engineer. By his advice the
committee adopted what is commonly known among
United States telephone engineers as the Law or call-wire
system, in which each subscriber does his own ringing up.
As operated in Glasgow, a maximum of twenty subscribers
used one wire in common for giving their orders to an
operator who, with a receiver held to the ear, watches for
calls and makes the desired connection, leaving, however,
the ringing up of the party called to the calling party.
Omitting a lot of technical troubles inherent in such a
system, it is evident to the layman that one line fault
might affect as many as twenty subscribers. The common
call wire left means of signalling at the mercy of irresponsi-
ble persons who considered it a joke to hamper operating
work as much as possible. Moreover, whenever the insula-
tion of a subscriber's line became even slightly defective,
his line was inoperative.

The Law system was well known in the United States,



where it had been in use in several large exchanges, notice-
ably Philadelphia and St. Louis. On account of its tech-
nical defects it was speedily superseded by the common
battery system, with which the Philadelphia exchange was
reconstructed as early as 1897. Ever since the Law system
has been obsolete in the United States.

It took but two years to demonstrate the inefficiency of
the Glasgow plant. Driven by general complaints of bad
service, the Telephone Committee, as early as March, 1904,
let it be known that a general change of the system was
under contemplation. 1 To carry out the reconstruction,
the Telephone Committee at the next meeting of the Cor-
poration recommended that they be authorized to borrow
an additional 250,000.

The reconstruction of the exchange became so imperative
and required such large unremunerative additional invest-
ment that the Telephone Committee 2 (July, 1906) recom-
mended the sale of the undertaking to the Post-office for
305,000, the actual expenditure at that date being 360,-
000. In spite of considerable political pressure the Post-
master-General refused to pay more than 305,000, and
added that he could not keep even that offer open for a
long time. 3

That the inefficiency of the plant was one of the main
causes that drove the enterprise on the shoals is corrobo-
rated by the remarks of Mr. James Alexander. In mov-
ing the adoption of the recommendation to sell the tele-
phone undertaking, he said:

Another objection to the Corporation continuing to work the tele-
phone service was that it would be necessary to apply to the Secretary
of Scotland for power to borrow at least 100,000 in order to make
necessary alterations on the switchboard and to cany on the system
and meet the capital expenditure necessary in view of the increased
number of subscribers. ... At present the Postmaster-General would
acquire all the plant of the undertaking, but if the Corporation con-
tinued till 1913 the latter would buy only such plant as was suitable

1 London Electrician, July 8, 1904. 2 ibid., July 6, 1906.

3 Ib5d., July 13, 1906.



6

for actual requirements at that time of the Post-office. They must
therefore keep in view the fact that if they did not now sell to the Post-
office, the Postmaster-General in 1911, when he acquired the entire
National Company's undertaking, . . . might say to the Corporation
that the greater portion of their plant was not suitable for the actual
requirements of the Post-office at that date, and that therefore he
was not going to acquire it." *



(2) Errors in estimates and plans. As has been stated
heretofore, the municipal expert had figured at first the
cost per subscriber or subscriber's line at 18.16. This
appears from the evidence given by Mr. Bennett, in June,
1898, before the Select Committee on Telephones. 2 In
spite of the firm persuasion of the municipal expert, the
actual cost per subscriber's line after two years' operation
of the exchange had risen to 35, 3 exceeding the original
estimate by nearly 100 per cent. And at that time the
Telephone Committee was already seriously considering the
reconstruction of the obsolete system!

On May 31, 1905, the London Electrician published a
complete analysis of the Accounts of the Glasgow Corpora-
tion Telephone department from 1901 to May 31, 1904,
showing that the capital account stood at 350,273, and
remarked that "the capital expenditure has, therefore,
risen to 36.13 per subscriber, as against 35.8 on May
31, 1904. This increase is intrinsically small, but if the
matter is looked into close it is more significant."
k (3) Errors in rates. The biggest feather in the munici-
pal telephone cap has always been the offer of a low flat
annual subscription. Indeed, without this it is very
doubtful whether even the Scottish rate-payers would
have taken kindly to the novel experiment. No one person
has more persistently advocated low flat rates and asserted
that these are remunerative to municipal exchange work

1 London Electrician, July 13, 1906.

r 2 See the Minutes of Evidence taken before the Select Committee on Telephones,
June[l4, 1898.

'London Electrician, March 11, 1904.



than Mr. Bennett, and it is due to his advice that Glasgow
adopted the 5.5 flat rate for unlimited use.

Referring to the first annual report of the Glasgow
Telephone Committee (September 11, 1903), Mr. Russell
seriously warned his fellow-members:

Last year's working expenses reached 21,000, making a total ex-
penditure of 47,000 per annum. Now last year's revenue was
35,000, and assuming that they could increase this year's revenue
by 5,000 without any increase in the working expenses, they would
only bring this year's revenue up to 40,000, leaving a deficiency of
7,000 per annum. Mr. Bennett in Hull, which was a much less
expensive place to telephone than Glasgow, recommended the Cor-
poration to make some such annual charge as 5.15 or 5.17, but the
Corporation of Hull were going to charge 6.6. It must be evident
that it was quite impossible to continue supplying the telephone at the
present rental, except at a serious loss to the rate-payers. He advised
an advance to 6.6 or 8.8 per annum instead of 5.5 at present. 1

Again, at the March meeting of the Glasgow Telephone
Committee (1904) the subject was forced by Mr. Russell
upon the unwilling ears of his fellow-members, the speaker
affirming that "the accounts had been kept in a way that-
even the auditors, for their own credit, had to protest
against it." 2 A few months later (February, 1905) the
palpable inefficiency of the plant made a new loan for
reconstruction imperative, and here Mr. Bruce Murray
came to the front, exposing the situation: 3

The whole method adopted by the committee from the day they
began had been one of secrecy from both the Corporation and the
public. . . . They expected to distract attention from the gross inac-
curacies of their preliminary estimates and from the fact that the
5 rate was not paying.

The same urgent demand that the Telephone Committee
" should immediately give notice of an increased rate"
to avoid a serious loss on the undertaking was reiterated

i London Electrician, September 11, 1903. 2 Ibid., March 11, 1904.

J Ibid., February 3, 1905.



8

by Mr. Russell at the meeting of the Glasgow Corporation
(September, 1905), and, as usual, went unheeded.

Finally, in July, 1906, came the denouement. The
London Electrician (July 13, 1906) editorially commented
on the sale of the exchange as follows:

From the reports that have now come in, it appears that the Corpora-
tion has been in a difficult position. . . . From the negotiations that
have taken place it appears that the Glasgow Corporation have a deep-
rooted objection to anything in the shape of a private monopoly. . . .
It is a question, however, whether the objection is worth paying
for; at least heavily. The purchase price to be given by the Post-
office for the telephone system is 305,000, involving the Corporation
in a loss of about 15,000, whereas the National Telephone Company
seems to have made an offer to buy the system at such a price that
no loss would fall on the Corporation. But the idea of the municipal
telephones forming part of a private monopoly was not to be tol-
erated, . . . and the Corporation are to sell at a loss. 1

There is but one other fact worth mentioning, that the
Postmaster-General refused point blank to bind himself
to continue in future the low flat rate, the great drawing
card of the Municipal Telephone Committee, the corner-
stone of the enterprise. 1

(4) Errors in providing none or insufficient amounts
for depreciation and sinking funds. That a body of
Town Councillors, entirely unacquainted with the intri-
cacies of managing a telephone exchange service, should
have erred in neglecting to provide a proper depreciation
is not astonishing, though the expert adviser would have
done well to instruct the Telephone Committee. On the
other hand, it was Mr. Bennett who decided on the period
for which the sinking fund should be calculated. At the
Glasgow Telephone Inquiry (October 5, 1897) he was asked
by Mr. Salvesen, the attorney for the Corporation:

"What was the sinking fund which you had in view to cover?"
Answer. " It was intended to cover the capital expenditure at the
end of twenty-one years."

Q. by Mr. S. "But the license had only fourteen years to run?"

1 London Electrician, September 14, 1906, p. 869.



9

Answer. "But it is not regarded as probable that at the expiry
of the license the Corporation's plant would become valueless. It is.
not at all certain that the Post-office would refuse to take over the
Corporation's plant at a reasonable charge."

As a matter of fact, the license, as has already been men-
tioned; at the request of the Corporation, had been made
terminable December 13, 1913. In spite of this the Tele-
phone Committee wrote down the enterprise on the basis
of a thirty years' sinking fund. 1 The necessity of a proper
depreciation and sinking fund was clearly pointed out by
Bailie Burrell, at the discussion of the first Annual Report
of the Telephone Committee (September, 1903). 2 He called
attention to that clause in their license which contained
the conditions of purchase by the Post-office of the plant
of the licensee December, 1913. The Postmaster-General
bound himself to buy only such plant as would be suitable
for the actual requirements at the expiration of the license.
The speaker then asked the pertinent question:

Were the Government, for instance, likely to take over the switch-
boards, which, as the engineer informed them, had a life of but 10
years? The corporation had exactly 10 years of their license to run.
The life of the instruments might also be well placed at 10 years
But the cost of their present switchboard and instruments was 80.000,
and for this they could not reasonably expect to get anything from
the Government. Figuring in other similar items, the total amounted
to 101,000 for which not a single farthing might be received at the
sale of the plant. Deducting this from the Capital Value 271,000
left 170,000, and how much of that sum might the Government
find suitable in 1913? By that time the plant would be 10 years
old. Taking the average at 11 years, and applying a depreciation
but 3% over 11 years, this meant a reduction of 33%, and deducting
one-third as depreciation (57,000) left 113,000, and this amount
they might expect to receive from the Government in 1913. Con-
sequently, they should write off between 1903 and 1913 in some way
the difference between the cost of the undertaking 271,000 and the
amount they were likely to receive. In other words, they should
write off 158,000 or 15,800 on an average for 10 years. The accounts
for the year showed that they had but 9,800. How then could they
do that out of the profits of the undertaking? Surely the time had

1 London Electrician, March 11, 1904. 2 Ibid., September 11. 1903i



10

come when either a depreciation fund ought to be started or a much
more adequate amount be placed to reserve.

Such sane counsel fell upon deaf ears, the chairman
of the Telephone Committee replying "that all they were
called upon to do was to write down, by sinking fund, by
depreciation, or by reserve, a sum sufficient to meet such
depreciation as would exist in the opinion of the representa-
tives of the Government when the time for selling came."

From the above it is evident that up to September, 1903,
the Telephone Committee had not seen fit to charge the
accounts of the enterprise with one cent of depreciation.
The London Electrician (October 23, 1903, p. 3) editorially
referred to this grave error, both in the case of the Hull and
the Glasgow municipal exchanges:

The Hull Corporation should write off heavy sums for depreciation,
sufficient to pay off the greater part of its capital by 1911. But if it
does this it will be difficult, each year, to make both ends meet, and
the undertaking will become a burden on the rate-payers. . . . This
difficulty has been evaded for the present in Glasgow, for instance, by
writing off nothing for depreciation (in fact there the capital account
was even swelled by including in it the cost of canvassing), but evi-
dently this is merely deferring the day when the rates w r ill be called
upon to pay the cost of an unsuccessful experiment.

When the Glasgow Telephone Committee issued the Third
Annual Report of the undertaking for the year ended
May 31, 1904, the auditors felt compelled to state in their
certification as to the correctness of the accounts, "The
foregoing Capital and Revenue Accounts and Balance
Sheets are correct, subject to the question of the sufficiency
of the provision for depreciation." l

After the issuance of the Annual Report of the Glasgow
Telephone Committee for the year ended May 31, 1905,
the last report prior to the sale of the municipal exchange,
the London Electrician published a complete analysis
of the accounts of the Glasgow Corporation Telephone

1 The Corporation of Glasgow Telephone Department Capital Account
and Balance Sheet, 31 May, 1904, p. 10.



11 ../.:

Department. From this only a few lines need to be quoted:
"Out of the balance of 20,746, 19,242 has to be paid
as Interest and Sinking Fund, leaving a net balance of
1,504, which is all that is set aside as depreciation. This
is less than % of the Capital Expenditure." 1

As has already been stated, the inevitable result due to
the failure of setting aside a sufficient annual depreciation
and sinking fund was a dead loss to the tax-paying com-
munity of 55,000.

The Glasgow Telephone Committee up to the last moment
refused to learn from the experience of expert telephone
engineers. In the words of their chairman, they "re-
gretted that the Chancellor of the Exchequer and the Post-
master-General had not seen their way to give the Corpora-
tion back every penny of their money, but if the Corpora-
tion continued till 1913 the Postmaster-General would buy
only such plant as was suitable for actual requirements, . . .
and then in 1913 (he) might say that the greater portion
of their plant was not suitable for the actual requirements,
of the Post-office, at that date." 2


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Online LibraryVictor Maximillian BertholdThe chief causes of the failure of municipal telephones in Glasgow → online text (page 1 of 2)