The Railways

  Footnotes

  * In practice, pension rights for all staff were not awarded until 1953. In 1906 barely one worker in five was covered, mostly clerical staff and footplatemen.

  ** Named after the adjacent docks, rather than in direct commemoration of the Liverpool MP killed on the railway in 1830, which might have been a bit much.

  – 14 –

  MANAGING

  Whatever their latter-day failings as businesses, it would be wrong to think of the old railway companies as mere victims of gigantism and inertia. The very existence of such large concerns, with all their human and financial convolutions, was itself a novelty; only the army, the Royal Navy and (while it lasted) the East India Company could compare. The industry thus became a kind of forcing house for new methods of management and control, serving in turn as the model for how other large corporations were run. In that sense, every large commercial organisation – and not just those in Britain – is a descendant of the railways.

  One crucial development was the formal separation of management and direction. This was not planned from the start, any more than the railways were planned as a single system, but happened in response to the dilemmas presented by their increasing size and complexity. Most businesses prior to the 1830s were run by those who owned them, either directly or through foremen and deputies. Ironworks, mills and the like were essentially family firms or partnerships. Collieries were run by bosses appointed by the landowner. Joint-stock canal and dock companies and turnpike trusts were among the few exceptions, but these were relatively straightforward to look after because the vehicles and boats that used them were privately owned and operated.

  Railway companies took the game to a new level. They were owned by shareholders, administered by directors and operated by engineers. Shareholders could not be expected to run the show, although they could be vocal and influential on occasion (as Brunel found in the death throes of his Atmospheric Railway). Directors were not necessarily the best managers either; typically they were local businessmen, or rich and powerful figures appointed with an eye to projecting reassurance or aristocratic lustre. Engineers were at once indispensable to the railways and deficient as its chieftains, partly because their experience of handling commercial issues and a highly varied workforce was often limited, partly because so many problems required non-technical solutions.

  In response, the railways gradually established a new class of professional manager. With the passage of time, its membership was drawn overwhelmingly by promotion or recruitment from among their own staff. Programmes were eventually developed to select and train promising employees for service in the higher grades. In due course, the LMS opened a School of Transport at Derby, the railways’ first staff college. Such investment in personnel was practically unknown in other British trades and industries. Railway executives were highly respected men, and a few were even lured away to other plum jobs, most notably Sir Felix Pole (1877–1956). Pole joined the Great Western as a telegraph clerk in 1891 and vacated its general manager’s chair in 1928 for that of the newly formed Associated Electrical Industries Ltd (AEI). By the same token it was unusual that the LMS chose an outsider, Sir Josiah Stamp, as its chairman. But when the young industry was still finding its feet, the flow of able and experienced men could only run the other way. Senior appointments were made from the navy or army, others from the road-carriage trade. Outstanding among this intake was a former captain in the East India Company’s civilian staff, the gifted but domineering Mark Huish (1808–67).

  Huish’s railway career began in Scotland, until a headhunting mission in 1841 brought him south as secretary and general manager of the Grand Junction Railway. There he set about developing a structure of clearly defined responsibilities under salaried junior managers, with firm rules, disciplinary structures and systems of fines and rewards for the men. When the Grand Junction was merged with other lines to form the new London & North Western company, he retained his senior role. The LNWR was the largest joint-stock company of its time, with a capitalisation of over £29 million in 1851.

  There were no business schools to teach the difference between management and direction (or, to put it in military language, between tactics and strategy), and the captain’s time at the Grand Junction showed that even the ablest minds within the railway world had yet to determine where that boundary should be drawn. For example, the board minutes from the early 1840s include a claim against the company for a dead horse and another for a quantity of butter valued at 13s 6d. Such minutiae were gradually steered by Huish towards junior committees, leaving the board’s members free to take larger views, while their senior officer – Huish, again – co-ordinated the various committees and departments. Scrupulous compilation of reports and tight control of expenditure underpinned all this work.

  Huish’s own style was the opposite of the light-touch school. In his biographer’s words, ‘he made strenuous efforts to retain personal control over as many of the company’s affairs as possible’. He sat in on many committees, and his grasp of detail allowed him to present monthly reports to the board in such a way that it was hard to resist his recommendations. Meetings often ended with a scratch committee of Huish and a selection of directors sitting on to thrash out matters arising. He also undertook the opening arrangements of new lines, was the company’s resident expert on the electrical telegraph and had sole responsibility for its Post Office contracts. These extra duties represented an older way of getting things done, by which the most competent person available would tackle problems ad hoc. They also suited Huish’s dictatorial nature. Decisions were made briskly and channels of command were clear. The LNWR had no equivalent figure to the ungovernable engineer-manager Brunel, riding his technological hobby-horses and doing his persuasive best to clear up any messes afterwards.

  One challenge faced by every railway concerned the long-term costs of its operations, as infrastructure and other fixed assets began to depreciate at different rates. Huish stands out for his early understanding of what this might entail. In particular, he guarded the company against any illusions arising from short-term prosperity by means of the double-account system, thus keeping a clear picture of assets and liabilities, including any long-term costs that were moving steadily closer. One of his principles was that rolling stock should be maintained from ordinary revenue, being a fairly constant cost, but that big occasional investments should be matched by setting a share aside in a depreciation fund. What he had in mind were such tasks as the need to make good the permanent way on lines that had been profitably open to traffic for several years. When a railway was built on the cheap, early and costly renewals were liable to follow. The board of the little St Andrews Railway in Fife, opened in 1852 with Thomas Bouch as engineer, were dismayed to discover a few years later that the economical Bouch had built bridges from scanty untreated timbers and made the interval between the sleepers a foot wider than specified in the contract. Huish’s basic point may seem obvious enough, but many companies in the 1830s and 1840s had done nothing to safeguard their futures in this way, preferring to dish out their surpluses in big dividends instead. One contributory cause of the Railway Mania was the mirage of permanent enrichment from railway shares which these payments helped to induce.

  Another creature of the Mania years was George Hudson (1800–71), one of those plausible rogues who rise to the surface of financial bubbles. Hudson used an inherited fortune to build a municipal power base at York, from which he secured election as chairman of the York & North Midland Railway in 1836. Two masterstrokes followed in the early 1840s. The ebullient Hudson was able to persuade the shareholders of eight companies all contending to build a line from York to Newcastle that they should join forces, opening the way to a successful start on the work. Hudson’s second coup was to merge his own company with two other medium-sized concerns to form the Midland Railway, which passed under his control too. The Eastern Counties Railway was added to Hudson’s managerial empire in 1846, the year he was
elected MP for Sunderland. Richer than ever, he bought one estate from a duke and another from an earl.

  Then it emerged that the York, Newcastle & Berwick Railway had been buying shares in another of Hudson’s companies, and paying a startlingly generous price to do. Worse than that, the vendor was Hudson himself. A lot more secrets came to light after that, none of them good news for the so-called Railway King. Many of the reported figures for revenue, traffic and expenditure on his lines proved to be imaginative fictions. Dividends that should have been paid out of operating profits were routinely diverted from the streams of capital that flooded constantly into the companies’ coffers, as instalments became due on partly paid-up shares.

  Hudson’s misdemeanours stopped just short of criminality, which is another way of saying that railway finance had evolved faster than the law’s ability to regulate it. Even so, his exposure left him hugely in debt, and debtors could still be imprisoned under English law at that time. The Railway King would have been a prime candidate for lock and key but for his status as an MP, which brought the privilege of exemption. As soon as each parliamentary session ended, however, Hudson had to remove himself promptly to the Continent to escape arrest. This went on until 1859, when he finally lost his Sunderland seat and retired to France for a while. Tempted back in 1865 by his nomination to contest Whitby for the Tories, he was nabbed at last and detained for three months in England’s most grandiose debtors’ prison, at York Castle. After coming to terms with his remaining debtors, Hudson went on to enjoy a rehabilitated English afterlife for six more years, to the great satisfaction of his old Yorkshire adherents. His last journey, safely encased in a half-ton triple coffin, was made with the railway companies he had helped to create: leaving London by the Midland route from St Pancras, and on to York by the North Eastern Railway (successor to the York, Newcastle & Berwick), whose general manager and passenger superintendent accompanied the funeral cortège through the city streets to a village burial in the family plot at Scrayingham.

  The next financial scandal to rattle confidence in the railways was a smaller affair, its perpetrator obscure by comparison. His name was Lionel Redpath. In 1848 Redpath was appointed registrar of the Great Northern Railway, the very line whose construction Hudson had tried his damnedest to prevent. Redpath had complete personal control of the new company’s stock registers. To avoid any impropriety, he was required not to speculate in stocks or shares. The registrar got round this prohibition by creating imaginary stock on his own account. Sometimes he inflated the amounts of genuine transfers, adding an extra figure in the book so that £500 of shares became £1,500 and so on. Sometimes he invented phantom shareholders and assigned holdings to them that were camouflaged as transfers from the previous register. He could feel safe in doing so because the only person who habitually looked at the books was Redpath himself. The ghost shares were then sold on by Redpath to unsuspecting investors, via his unsuspecting brokers. There were 365 such sales, spread over eight years. That was enough for the registrar to clock up fraudulent gains of around £220,000 (roughly 400 times his annual salary). He took a big house in Chester Terrace by Regent’s Park and bought a country retreat down at Weybridge. Both properties were lavishly furnished, and it was reported that Mrs Redpath ‘had as many dresses as would fill a cart’. Much of the money left over went to good causes, including some showy benefactions; for instance, Redpath donated a rare edition of Milton to the Royal Society’s library.

  By 1854 the Great Northern’s management had spotted that the sum paid out in dividends was mysteriously at odds with the book value of its stock. The registrar was asked to look into the matter. Obfuscating as best he could, Redpath managed to keep his cover intact for two more years. When the story at last emerged it caused a sensation; as with the Hudson case, the public was left wondering how many other railway investments were not what they seemed. As the cell door closed on its disgraced registrar, the Great Northern therefore called in a professional accountant, William Welch Deloitte, to perform a thorough audit. The loss was eventually wiped out by diverting half a year’s dividends to buy back company stock, until the quantity in circulation once again matched the true figure. Selling off Redpath’s property and goods also helped. The man himself was packed off to penal servitude in Australia.

  Deloitte knew his way around railway accounts, having been enlisted in 1849 to assist with the audit of the Great Western. At that time it was still normal practice for the task to be done by representatives from the body of shareholders. As the companies grew larger and more complex, the shortcomings of this method grew increasingly obvious. Although it is not strictly true that the railways’ needs created the modern profession of accountancy, they did more than any other industry to transform a practice previously associated most of all with broking and auctioneering. Railways provided a steady stream of work from regular half-yearly auditing, while also allowing new accountancy techniques to be tested and perfected. In that sense, the systems of external auditing now generally in place owe their genesis to the railways’ custom. One instance is the requirement under the Regulation of Railways Act (1868) to publish a standardised set of annual accounts. Having established a legal procedure, the same rules were later extended to other big joint-stock companies.

  Leading figures in the new profession did much of their most demanding work in the railways’ service. Victorian accountants were like barristers or surgeons, dependent on personal reputation and individual appointments. Deloitte (1818–98) was one such man; among the younger generation, the rising star of accountancy was Edwin Waterhouse (1841–1917).

  Waterhouse was the youngest brother of the architect Alfred Waterhouse, designer of the London & North Western’s mighty hotel that replaced the 1830s frontage buildings at Liverpool Lime Street station. A few years before work started at Liverpool, in 1866, the LNWR appointed Edwin as the public accountant to its own auditors. Despite its vast size, the company still adhered at this time to the system by which the audit was performed by two shareholders elected at the Annual General Meeting on behalf of their fellow investors. One of these shareholder-auditors died in 1873, another in 1882. Waterhouse’s status was raised each time, and in the second case he was formally appointed auditor in his own right. In the following year the Midland Railway asked if he would audit its books too; that the Midland and the LNWR were sworn rivals says much for Waterhouse’s reputation for integrity. He declined, on the grounds that he was too busy. And no wonder, for Waterhouse had already been signed up by the London, Brighton & South Coast Railway (where he put a stop to the Hudsonian practice of paying dividends out of capital) and the South Eastern Railway. The Metropolitan, Lancashire & Yorkshire and Great Eastern railways were later beneficiaries of his attentions. The fees charged seem extraordinarily low: in 1891–2 the LNWR paid £1,199, the LBSCR just £300. The sums reflect the efficiency of the personal working method of this hard-driven and meticulous Quaker.

  As a yardstick of the funds at stake, the railways’ total paid-up capital by 1885 amounted to £816 million, as against £495 million invested in all other public companies combined. Railway shares rapidly pushed their way to the top of business at the Stock Exchange, supplanting the government stocks that had sustained most of the trading before the 1830s. The market was so lively that local stock exchanges were set up in the chief cities of England and Scotland, in time for the Railway Mania of the 1840s. Shares became available in less costly units, too. A single share in the Liverpool & Manchester cost £100, but later companies raised their capital in smaller shares, sometimes priced at under £10. For a new line, just 10 per cent of the full sum was usually required as a deposit. The less the outlay, the more potential investors could enter the market, often in the hope of a rapid and profitable onward sale (as the Mania demonstrated only too well).

  Waterhouse retired in 1913, but the firm of Price, Waterhouse & Co. continued to dominate railway accounting. It served as joint auditor to three of the Big Four companies, and
in the 1930s the company’s railway department was engaged by another body from the industry, the Railway Clearing House. This quietly amazing organisation deserves a fuller description, as the privately owned system could never have functioned without it.

  Because the first railway companies were conceived as self-contained businesses, no provision was made for through carriage of passengers and goods. As the pioneer lines began to join up to make the beginnings of a national network, this situation began to alter. But it was obvious that something more than a jumble of two-party agreements would be required if the system was to work smoothly. The Railway Clearing House (RCH) was the result. Operational from 1842, it was the brainchild of some leading men of the London & Birmingham Railway, who chose an ordinary house near Euston station as its home. The concept of a central hub for clearing and allotting payment was borrowed from banking and from the coaching trade, for which a similar body already existed charged with parcelling out the proceeds of passenger fares between the different horse owners. This was a simple task compared with the multiple missions of the RCH, even in its earliest years when membership was limited to the nine founding companies. Through booking had to be organised, for horses and private carriages as well as passengers; the proceeds were to be shared out on the basis of mileage travelled; through goods traffic was to be fostered; and any debts between companies were to be settled through the Clearing House itself.