NOT A PERIODICAL 
 THE UNIVERSITY 
 
 OF ILLINOIS 
 LIBRARY 
 
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 NOT A PERIODICAL 
 
 POLITICAl 
 SCIENCE 
 
UNIVERSITY OF ILLINOIS STUDIES 
 
 IN THE 
 SOCIAL SCIENCES 
 
 VOL. VII MARCH-JUNE, 1918 Nos. 1 and 2 
 
 BOARD OF EDITORS 
 
 ERNEST L. BOGART JOHN A. FAIRLIE 
 
 LAURENCE M. LARSON 
 
 PUBLISHED BY THE UNIVERSITY OF ILLINOIS 
 
 UNDER THE AUSPICES OF THE GRADUATE SCHOOL 
 
 URBANA, ILLINOIS 
 
COPYRIGHT, 1918 
 BY THE UNIVERSITY OF ILLINOIS 
 
Legislative Regulation of Railway 
 Finance in England 
 
 CHING CHUN WANG 
 
PREFACE 
 
 The purpose of this study is to find out what rules the English 
 Parliament has adopted from time to time for the regulation of 
 railway finance, and to ascertain, as far as possible, why these 
 rules were adopted, how they have been applied, and to what 
 results they have led. 
 
 In this study, the writer used the series of the so-called finance 
 acts as the back bone. 'After having become familiar with the 
 provisions in these finance acts and having classified these 
 numerous provisions into a number of divisions, he then traced, 
 as far as he could, the parliamentary debates upon these meas- 
 ures. He also endeavored to compare the original bills with the 
 amended ones as well as to examine other contemporary bills 
 which had anything to do with these finance bills, with the hope 
 of understanding the position of the legislators. The writer also 
 took care to examine the popular, the railway, as well as the 
 expert financial writers' opinions prevailing during those years 
 when these regulative measures were adopted or agitated. For 
 this purpose the London Times, the Railway Times, and the 
 Economist were most frequently consulted. 
 
 In the following pages, the writer has endeavored first of all 
 to trace the development of the general legislation on railway 
 finance so that a fairly comprehensive idea of the nature of 
 legislative regulation may be gained. Then follows a review 
 of the efforts of parliament to secure proper restriction upon the 
 issue of capital securities, attention being given, in the first 
 place, to share capital. Although loan capital forms only about 
 one-third of the total railway capital, the method of control has 
 loomed large in the English system of regulation. Accordingly 
 the questions of limitation upon the borrowing powers of the 
 railway companies, the registration of railway securities, as well 
 as the regulation of loan capital itself have been treated in some 
 detail. The attitude of Parliament toward railway stock water- 
 ing is also shown. To the important features of control of ac- 
 counts, government audit, and inspection two chapters are de- 
 voted. 
 
 Most of the information contained in this study is obtained 
 from such original sources as the British Statutes at Large, re- 
 ports of parliamentary and departmental committees, parliamen- 
 tary debates, direct communications from offices of the Board 
 of Trade, and similar material. 
 
CONTENTS 
 
 CHAPTER I 
 GENERAL LEGISLATION ON RAILWAY FINANCE 
 
 CHAPTER II 
 LEGISLATIVE SUPERVISION OF CAPITALIZATION A. SHARE CAPITAL . 
 
 CHAPTER III 
 SUPERVISION OF RAILWAY CAPITALIZATION B. LOAN CAPITAL . 
 
 CHAPTER IV 
 CONTROL OF THE BORROWING POWERS OF RAILWAY COMPANIES . 
 
 CHAPTER V 
 REGISTRATION OF RAILWAY SECURITIES . . ... 
 
 CHAPTER VI 
 REGULATION OF STOCK WATERING 
 
 CHAPTER VII 
 THE REGULATION OF RAILWAY ACCOUNTS 
 
 CHAPTER VIII 
 
 STATE AUDITING AND INSPECTION 
 
 BIBLIOGRAPHY 
 INDEX . 
 
 30 
 
 53 
 
 81 
 
 103 
 
 121 
 
 149 
 
 175 
 
 188 
 193 
 
CHAPTER I 
 GENERAL LEGISLATION ON RAILWAY FINANCE 
 
 As England was the pioneer of railway building so was she the 
 first to make experiments in the regulation of railway finance. 
 English statesmen had recognized the importance of regulating 
 railway finance before any other country had seriously consid- 
 ered the question. As early as the railway itself was introduced, 
 we find traces of efforts which were made by the English Parlia- 
 ment in this direction. 
 
 One thing which especially stands out to the credit of the 
 English legislature is the fact that it had learned a great deal 
 about the regulation of railways during the first fifty years of 
 railway enterprise and had then arrived at certain important 
 conclusions which, in some other countries, have not been prop- 
 erly understood until very recently. From the early thirties, 
 English legislators have recognized that the interest of the rail- 
 ways is bound up with that of the public and that the interests 
 of the two cannot be separated. 1 Herein lies a partial explanation 
 of the fact that Parliament practically has never enacted laws 
 which might properly be called hostile to the railway companies. 
 
 The English railways, like those of the United States, are pri- 
 vate enterprises, and under private operation. The part played 
 by both Governments is that of a supervisory nature. The Gov- 
 ernments of both countries have thought of purchasing and 
 owning their railways, 2 and both have refrained from adopting 
 that course. 
 
 The systems of regulation of the two countries are also similar. 
 
 1 See the remarks of Mr. Homes in the House of Commons, 1836. Han- 
 sard 's Parliamentary Debates, series 3 (hereafter called Hansard), v. 46, 
 p. 1336. 
 
 2 Detailed provisions were made in the Railway Regulation Act, 1844 
 (7 & 8 V. c. 85), for Government purchase of railways under certain con- 
 ditions. 
 
 9 
 
10 RAILWAY FINANCE IN ENGLAND [10 
 
 The early railway charters in the United States "reveal almost 
 at a glance," says Prof. B. H. Meyer, 3 "their common origin in 
 the English law." The principles underlying our federal laws, 
 as well, bear much resemblance to those accepted in England. 
 But in spite of such great similarities there is a striking differ- 
 ence between the two systems of regulation. This difference, 
 however, lies not so much in the regulations themselves as in the 
 manner and emphasis of regulation. First of all, the United 
 States has never attempted any strict regulation of railway 
 finance, while England has always regarded the regulation of 
 this branch of railway enterprise as essential. Then again in 
 England there is only one kind of regulation namely, that 
 adopted and enforced by the national legislature, while in Amer- 
 ica the numerous systems of state regulation have been of greater 
 importance or at least have given the railways more trouble than 
 the federal regulation, though recent developments indicate a 
 large increase of the importance of the latter. The railways in 
 England, therefore, do not have any such complicated contro- 
 versies as have resulted in the United States from the conflicting 
 regulations of the state and federal governments. 
 
 England also has enjoyed from the beginning many advan- 
 tages, which other countries envy. There has always been a 
 class of enterprising capitalists ready to embark in railway un- 
 dertakings and a class of men qualified by ability and business 
 habits for the duties of railway directors, officers, and engineers. 
 Therefore, instead of having trouble in persuading capital to 
 embark in railways when the enterprise was first introduced, as 
 was generally the case in other countries, England found it 
 necessary to caution capitalists from investing too readily. Her 
 problem in the beginning was not to induce investors to come 
 forward, but to caution them to be steady and to protect them 
 from being swindled by "bubble" schemes. Her difficulty has 
 not been to extend her railway system but to prevent superfluous 
 construction. 
 
 The English railway system had its origin in the enterprise of 
 individuals interested in the different localities. The efforts 
 were not fostered by the legislature as objects of national con- 
 cern, as was often the case on the continent, but were regarded 
 
 s Annals of American Academy of Pol. and Social Science, vol. 10, p. 390. 
 
11] GENERAL, LEGISLATION ON RAILWAY FINANCE 11 
 
 as projects undertaken for the profit of their promoters, which 
 Parliament might sanction for public advantage. In dealing 
 with these undertakings the legislature followed the policy which 
 had been pursued with success and benefit to the country since 
 the middle of the eighteenth century, of allowing private enter- 
 prise to develop and manage inland navigation. Under this sys- 
 tem each project was considered entirely on its own merits, and 
 sanctioned by a private act of Parliament which contained the 
 entire statute law applicable to the undertaking.* 
 
 In the regulation of railway finance, as in other branches of 
 government activity, each country has adopted a policy deemed 
 at the time to be most suitable to its own special requirements. 
 "The continental system is a paternal system in which the gov- 
 ernment overlooks and controls all the acts of the companies. 
 The American system is one of complete freedom. Neither sys- 
 tem is exactly suited to our (English) requirements, or our 
 characteristics. But the English system is like the American, in 
 so far as it is based on principles of freedom. ' ' This remark of 
 the Royal Commission on Railways of 1865-67 5 regarding the 
 rate system of Europe and America applies equally well in the 
 case of railway finance. Thus the general policy of the Board of 
 Trade, the Government office which has much to do with rail- 
 ways, "has rather been to favor the utmost liberty to public 
 companies to arrange their capital in any way they pleased. ' ' 6 
 
 But at the same time the English Parliament recognized that 
 for the public advantage it is desirable that a railway should 
 yield a reasonable return to its investors. 7 When a railway pays 
 little or no dividend on its capital, it has been feared that work- 
 ing expenses may be cut down injuriously, with the resulting dis- 
 advantages of insufficient or inefficient service. Then again, the 
 embarrassment of one company in failing to furnish reasonable 
 returns on its capital might discourage other investors from com- 
 ing forward to put their money in the beneficial railway enter- 
 prise, which fact would result not only in the checking of the 
 railway industry itself but in the hampering of the growth of all 
 
 * Beport of Eoyal Commission on Railways, 1867, p. vii. 
 5 Report of Royal Com. on Railways, 1867, p. liL 
 
 e Evidence before Select Committee on Railway Stock Conversion, 1890, 
 p. 37. 
 
 7 Report of Select Committee on Railway Borrowing Powers, 1864, p. iii. 
 
12 RAILWAY FINANCE IN ENGLAND [12 
 
 other industries and commerce in general. Furthermore, Eng- 
 land has for years recognized the value of encouraging the cir- 
 culation of capital, as shown by her effort to provide for the in- 
 vestment of all trust funds. These and other reasons led Parlia- 
 ment to attempt, from the beginning of railway enterprise, to 
 regulate railway finance not for the direct interest, of the gov- 
 ernment but for the security of the investors. 8 From a close 
 study of the efforts of Parliament in regulating railway finance, 
 one cannot fail to be impressed by the feeling that the English 
 legislature has constantly borne this in mind. 
 
 There were in England, during the early years of its railway 
 history, as there are now in the United States, many people who 
 did not believe in government regulation of railway finance for 
 the protection of investors. A leading lawyer in London said, 9 
 "I do not see why the Legislature should interfere to protect 
 them (railway investors) more than other people. If they choose 
 to take shares upon those conditions, it is their own affair." A 
 prominent financial paper 10 also said that "as a principle, we 
 believe there is nothing more objectionable than an attempt on 
 the part of a government to find prudence for the people. It re- 
 moves a great weight of personal and individual responsibility 
 and caution, and creates a reliance on public officers as the only, 
 however imperfect, substitute. ' ' 
 
 These opinions changed radically at times/ 1 but gradually 
 people began to appreciate the fact that certain regulations are 
 indispensable for the protection of the investors in such a com- 
 plicated business as railways, where it is well nigh impossible 
 for the layman investor to ascertain the value or safety of se- 
 curities issued, and where the confidence of the multitude of in- 
 
 s Report of Committee, April 24, 1837, p. xxvii, Parliamentary Papers, 
 1837, vol. 14, part 1. 
 
 9 Evidence before Select Committee on Eailway Companies' Borrowing 
 Powers, 1864, p. 20. 
 
 10 Economist, February 8, 1845. 
 
 11 The Economist said that at one period, ' ' men loudly complain of any 
 impediment, however right it may be, which the restriction of acts of Par- 
 liament throw in their (railways') way," while at another time, "they 
 evince the greatest impatience that Parliament will not at once disregard 
 every general principle and interfere by compulsory means to put a stop to 
 a course undertaken with their own free-will." Economist, April 11, 1846. 
 
13] GENERAL LEGISLATION ON RAILWAY FINANCE 13 
 
 vestors has an immediate and serious effect upon the commerce 
 of the whole nation. 
 
 This general policy has changed from time to time, although 
 not as violently as it has in some other countries or as it has in 
 the regulation of other branches of railway enterprise in Eng- 
 land itself. 12 The change of policy has been due, on the one 
 hand, to the change of public opinion and the circumstances of 
 the time; and, on the other hand, to the changes within Parlia- 
 ment itself. It may be said safely that English railway policy 
 has largely depended upon a varying and conglomerate body of 
 legislators, ' ' who may be assumed to have had no special famili- 
 arity with the subject on which they were legislating. " 13 As 
 Parliament has power to adopt any general or special measures to 
 regulate any branch of railway enterprise as it sees fit, one may 
 readily expect that occasional deviations from the adopted prin- 
 ciples would be made. 
 
 The nature of the English system of regulation is also charac- 
 teristic. Railway finance in England is regulated by two sets of 
 rules : 
 
 A. General laws applicable to all companies. 
 
 B. Special laws applicable to particular companies. 
 
 The general laws are based on broad principles and are em- 
 bodied in the general acts of Parliament. These general acts are 
 applicable as a whole or only by incorporation in the special acts 
 of the companies as the case may be. The special acts, which are 
 enacted to govern individual companies, resemble the charters 
 in the United States, but are obtainable only from Parliament by 
 fulfilling certain requirements. 
 
 In the first place, the special act creates an incorporated com- 
 pany with all the corporate privileges attaching to such incor- 
 poration. In the next place, it gives power for, and prescribes 
 rules governing the raising of capital. Then it grants the com- 
 pany the necessary powers to take land, lays down the rules gov- 
 erning meetings of the company, the construction of the road, 
 and finally it defines the right of the public in using the railway. 
 It also outlines the powers of the company, for example in charg- 
 ing tolls. The fact that out of a total number of forty-four sec- 
 
 12 J. S. Jeans, Railway Problems, 1887, p. 64. 
 
 13 w. W. Acworth, Elements of Bailway Economics, 1905, p. 132. 
 
14 RAILWAY FINANCE IN ENGLAND [14 
 
 tions of a recent railway bill " fourteen are devoted to financial 
 matters, fairly indicates the importance attached by Parliament 
 to the regulation of railway finance. 
 
 In these special acts are included not only the special regula- 
 tions made to meet the individual conditions of the company, but 
 also various provisions contained in the general companies acts. 
 A clause is uniformly inserted to subject the company to "the 
 provisions of any general act relating to railways now in force, 
 or which may hereafter pass. ' ' 15 
 
 It follows, as a consequence of Parliament having granted to 
 each company in its special act its corporate privileges, that 
 when the company desires to alter the terms of that incorporat- 
 ing act, to enlarge its original capital, or in any way to vary the 
 conditions under which the capital is to be raised, a new applica- 
 tion to Parliament becomes necessary. 16 
 
 The most important of the general acts governing railway 
 finance are the Companies Clauses Acts, 1845 and 1863, Railway 
 Companies Securities Act, 1866, Railway Companies Act, 1867, 
 Regulation of Railways Act, 1868, and Railway Regulation Act, 
 1871. All except the first two acts named above are applicable 
 to all railways without incorporation in the special acts. 
 
 In the enactment of special acts, Parliament is guided by a set 
 of standing orders as well as its model bills and clauses. 
 
 While the development of English legislation on railway 
 (finance has been a continuous one, still it may be divided into 
 three periods. The years from 1801 to 1844 form the first 
 period, 1845 to 1871, the second period, and 1872 to date, the 
 third period. 
 
 Although railway finance has received much consideration 
 from the beginning, during the first period it was regulated in a 
 more or less haphazard manner. The legislative measures then 
 taken were modelled after the special canal and turnpike enact- 
 ments. There was no general law governing railway finance. 
 
 The second period, covering the twenty-seven years from 1845 
 to 1871, is by far the most important in the history of English 
 legislation on railway finance. Concurrent with the railway 
 
 i* The Coventry Railway Bill, 1910, now withdrawn. 
 
 is Standing Order No. 1686 of the House of Commons, 1906. 
 
 is Report of the Royal Commission on Railways, 1867, p. xlii. 
 
15] GENERAL, LEGISLATION ON RAILWAY FINANCE 15 
 
 mania and disastrous railway panics which formed a special 
 feature of this period, the English system of financial legislation 
 underwent rapid evolution and was subjected to repeated tests. 
 The financial problems of railways formed a common topic of 
 conversation and were kept constantly before the eyes of Parlia- 
 ment. Numerous inquiries were put on foot, and attempts made 
 to bring the system of legislation to a higher state of efficiency. 
 As a result of this unparalleled activity of both the public and 
 Parliament, all the important general acts governing railway 
 finance were passed during this period. The rules which were 
 then adopted have remained unchanged, and few additions have 
 been made. The regulations which England uses to-day in gov- 
 erning railway finance, with the single exception of the Railway 
 Accounts Act of 1911, are exactly those adopted prior to 1871. 
 Be these acts efficient or not, the fact that they have seen service 
 for over forty years without being modified clearly indicates 
 either one or the other of two theories. First, it may mean that 
 the English system had been developed to such completeness prior 
 to 1871 that no modification has become necessary or, secondly, 
 it may mean that after the exertion during the .sixties, the Eng- 
 lish have been undergoing a state of reaction and have since be- 
 come too inert to modify these rules. While both hypotheses are 
 to a certain extent permissible, history shows the first to be the 
 more reasonable. 
 
 As has been indicated before, no legislation on railway finance 
 has taken place since 1871. From that year on has been a period 
 of application of principles already adopted during the first two 
 periods. Stock-watering received consideration in 1890, but no 
 general legislation or new principle was evolved. Moreover, the 
 present outlook indicates that with the exception of some legisla- 
 tion on railway accounting, few material changes are likely to 
 take place in the near future. 
 
 While the general purpose of all the legislation is to afford se- 
 curity to the investors, yet the place of emphasis of each period 
 is distinct and different from those of the other periods. Thus 
 the early legislation was largely for the purpose of insuring the 
 bona fide character of railway enterprise before granting Parlia- 
 mentary recognition and of demanding, though without a true 
 understanding of its significance at the time, publicity of rail- 
 
16 RAILWAY FINANCE IN ENGLAND [16 
 
 way affairs. Different from almost all other nations, as already 
 stated, the English did not have trouble in inducing investors to 
 embark in railway enterprises. On the contrary, she had to ex- 
 ercise considerable restraining influence. Thus the most prom- 
 inent topic of legislation during the early period was the matter 
 of preventing ' ' bubble ' ' schemes by securing an efficient system 
 of subscription contracts and of requiring substantial deposits of 
 money on each share subscribed, before permitting railway enter- 
 prises to receive Parliamentary sanction. 
 
 The question which received the greatest emphasis during the 
 second period was how to restore the confidence of the investing 
 public. The early regulations proved to be too indefinite, and 
 railway finance was found to demand more public interference. 
 Therefore, efforts were mostly directed toward finding methods 
 of regulating railway finance rather than to the discovery of new 
 principles. 
 
 Coming to the third period, we find the place of emphasis has 
 returned to that of the first period, especially in the matter of 
 publicity. The most important inquiries made during this period 
 have invariably resulted in the demand for greater publicity. In 
 spite of this similarity in emphasis, however, there is neverthe- 
 less a distinct difference, in that what has been done during the 
 third period is more definite and has been done with a much 
 clearer conception of what publicity means in the regulation of 
 railway finance than during the first period. After forty years' 
 experiment, England has remained where she was four decades 
 ago, as far as the standing rules are concerned ; but she seems to 
 have determined upon the relative emphasis to be applied to her 
 system of regulation in the future. 
 
 In tracing the historical development we find that prior to 
 1844 English legislation on railway finance was limited to the 
 provisions embodied in the numerous private acts. Each com- 
 pany had its own special acts which contained the entire statute 
 law applicable to the undertaking of that company. 17 
 
 Early legislation was greatly influenced by the current con- 
 ception of the railway as a turnpike. Time and again we find 
 acts passed which dealt jointly with stage roads and railways as 
 if the two were similar. The Duke of Wellington is said to have 
 
 IT Report of Eoyal Commission on Railways, 1867, p. vii. 
 
17] GENERAL LEGISLATION ON RAILWAY FINANCE 17 
 
 stated that in dealing with railways it was above all else neces- 
 sary to bear in mind the analogy of the King's highways. 18 This 
 remark, misleading as it appears now, was well representative of 
 the current belief. 
 
 Then again, the early acts followed very closely in their gen- 
 eral scope, the provisions which had been applied to canal com- 
 panies. The earliest canal acts, however, gave no power of bor- 
 rowing, 19 while the railways had been permitted to borrow from 
 the beginning, to a certain extent. Thus the act of May 21, 
 1801, 20 the earliest railway act, providing for the construction 
 and maintenance of a railway from Wandsworth to Pitlake, 
 stated, ' ' Proprietors may raise 30,000 by shares of one hundred 
 pounds each, to be numbered and deemed as personal estate. 
 Names of proprietors to be entered in a book, and tickets of their 
 shares distributed to them. Proprietors may raise 15,000 more 
 if necessary, by subscription or mortgage." 
 
 Before 1847 considerable laxity, however, prevailed in the 
 manner of framing the provisions governing the raising of cap- 
 ital. But the great burst of railway extension in 1836 awakened 
 some legislative activity, and the committees of Parliament 
 on railway bills began to feel the necessity of enacting 
 clauses conducive to the public welfare. A select committee was 
 appointed to inquire into the matter, but no legislation took 
 place. 21 However, the restrictions imposed by Parliament, in 
 1837 and subsequently on the obtaining of railway acts, tem- 
 porarily arrested speculation. 
 
 In 1839 a select committee was again appointed to inquire into 
 the state of railway communication, and as a result of its recom- 
 mendations a general "saving" clause was inserted in the Croy- 
 don railway bill. 22 In 1840 another select committee was ap- 
 pointed by the House of Commons to inquire into railway af- 
 
 is C. F. Adams, Railroads, p. 82. 
 
 19 The first act in which these powers appeared was passed in 1770. By 
 degrees the borrowing powers of public companies were restricted to one- 
 third of their share capital. See Report of Eoyal Commission on Bailways, 
 1867, p. vii. 
 
 20 41 George 3, c. 33. 
 
 21 Quarterly Review, v. LXXIV, p. 239. 
 
 22 The "saving" clause inserted in the Croydon bill reads: 
 
 ' ' And be it further enacted that nothing herein contained shall be 
 deemed or construed to exempt the railway by this or the said recited acts 
 
18 RAILWAY FINANCE IN ENGLAND [18 
 
 fairs. 23 Although no general legislation took place, commit- 
 tees seem to have done considerable good in throwing light 
 upon the nature of railway transportation. 24 
 
 Under this irregular system of legislation numerous charters 
 were granted and liberal encouragements were sometimes given 
 to the construction of railways. Then came that disastrous rail- 
 way mania of 1844, and England "awoke one day" as C. F. 
 Adams dramatically describes it, "from dreams of boundless 
 wealth to the reality of general ruin. ' ' 25 
 
 To see what could be done to improve the situation, a Parlia- 
 mentary committee was appointed early in 1844. It recom- 
 mended, and Parliament resolved that the following "saving" 
 clause, which had been inserted in railways bills in 1839, should 
 be uniformly inserted in all railway bills approved by Parlia- 
 ment. The clause was as follows: "And be it further enacted 
 that nothing herein contained shall be deemed or construed to 
 exempt the railway by this or the said recited Acts authorized to 
 be made from the provisions of any general Act relating to such 
 Bills which may pass during the present session of Parliament, 
 or of any general Act relating to railways which may pass dur- 
 ing the present or any future session of Parliament." 
 
 The committee gave to the question of railway legislation a 
 more comprehensive consideration than it had hitherto received. 
 As a result of the inquiries of this committee, provisions were 
 
 authorized to be made, from the provisions of any general act relating to 
 railways which may pass during the present or any future session of Par- 
 liament. " Hansard, v. 47, pp. 682-684. Compare with a similar clause 
 resolved by Parliament to be inserted in all railway bills, since 1844, which 
 appears in the next page. 
 
 23 Eeport of Boyal Commission on Railways, 1867, p. x. 
 
 24 This committee was the first body of officials to point out to Parlia- 
 ment that the right reserved to the public by the early railway acts of run- 
 ning their engines and carriages on the railways was practically a dead 
 letter, for the reason that (1) no provision had been made for ensuring to 
 independent trains, etc., access to stations and watering places along the 
 line, (2) the rates of charges limited by the acts were almost always too 
 high to permit independent parties to work their trains, (3) the necessity 
 of placing the running of all trains under the complete control of one man- 
 agement interposed much difficulty in the way of independent traders. 
 Ibid., p. x. 
 
 25 C. F. Adams, Railroads, p. 85. 
 
19] GENERAL LEGISLATION ON RAILWAY FINANCE 19 
 
 made, in the Railway Regulations Act, 1844, 26 for the suppres- 
 sion of loan notes which had been issued without legal authority 
 during the period of rapid railway extension. 
 
 By this time the provisions of the special acts governing each 
 company had become very complicated and numerous. The num- 
 ber of clauses contained in some of these acts had gradually in- 
 creased from 95, as in the act for the Wandsworth and Croyden 
 Railway, 1801, to 381, as in the act of the Lancaster and Carlisle 
 Railway passed in 1844. As Lord Somerset 27 remarked in the 
 House of Commons, there were an "immense" number of stat- 
 utes relating to these railway matters which occasioned a great 
 amount of uncertainty. In order to obtain greater uniformity 
 in the general provisions inserted in railway acts and to render 
 them more concise, the select committee of 1844 2S recommended 
 that the numerous clauses in railway acts which ' ' were common 
 to all and undisputed ' ' should be consolidated into a general act. 
 
 In the following year, Parliament following the recommenda- 
 tions of the select committee of 1844, for the first time passed 
 three clauses consolidation acts, containing the clauses which 
 were applicable to companies in general and which had been 
 usually inserted in the private acts, as well as some other general 
 provisions which Parliament deemed it desirable to enforce. This 
 was done with the hope of securing uniformity. The acts, how- 
 ever, did not prevent committees of either house of Parliament 
 from dispensing with some of these provisions in particular cases. 
 
 One of the three general acts had to do with the regulation of 
 railway finance. This act 29 contained provisions for regulating 
 the manner in which the companies' capital should be raised, the 
 further borrowing of money, the rights and responsibilities of 
 shareholders, the powers and duties of directors, the declaration 
 of dividends, the keeping and auditing of accounts, and, in a 
 general way, the manner in which the companies' financial af- 
 fairs should be conducted. 30 
 
 The expectations of the legislature in enacting the general act 
 
 26 7 & 8 V. e. 85 ss. 19-21. 
 
 27 Hansard, v. 77, p. 170. 
 
 28 Report of Royal Commission on Railways, 1867, p. xi. 
 
 29 The Companies Clauses Act, 1845, 8 V. c. 16. 
 
 30 See also Report of Royal Commission on Railways, 1867, p. xii. 
 
20 RAILWAY FINANCE IN ENGLAND [20 
 
 were fully and quickly realized. The consolidation of the nu- 
 merous clauses brought about a great degree of certainty and 
 uniformity, and made the law more accessible and intelligible to 
 the public. 
 
 It must be remembered that, at the time when the Companies 
 Clauses Act, 1845, was passed, the great railway mania was at its 
 height. The profitable returns afforded by the earlier railways 
 attracted a large amount of capital. Consequently competing 
 lines were proposed to most of the important centers of popula- 
 tion. Parliament, as the report of the select committee of 1844 
 showed, sanctioned many such lines for the purpose of encour- 
 aging competition, with the belief that the remedy for the evil 
 consequences of any monopoly which a railway was thought to 
 possess, was to be found in the construction of a competing 
 line. 31 ' ' There has certainly never before been any one object of 
 speculation, ' ' said the Economist in 1845, ' ' into which all classes 
 and ranks of men have entered so warmly as at this time into 
 railways. There seemed to be no business too absorbing, no pro- 
 fession too grave, and no privacy too secluded, to be able to keep 
 off this universal mania." 32 
 
 Reaction soon followed action with equal force. The feverish 
 railway extension led to a demand for capital for investment 
 larger than the resources of the country could supply. As the 
 railway fever was intense, so was the railway collapse complete. 
 At the end of 1847 an act 33 had to be passed to extend the time 
 for the construction of many railways, and in 1850 another act 34 
 to enable railway companies to abandon powers of proceeding 
 with portions of their undertakings, and to release them from 
 the conditions which had been attached to such powers. The 
 complete collapse may be shown by the fact that of the 8,592 
 miles of railway sanctioned in the three sessions of 1845, 1846, 
 and 1847, no less than 1,560 miles were abandoned under the 
 power of the Railway Abandonment Act. 35 
 
 The financial difficulties caused by the pressure for capital led 
 the House of Lords to appoint a committee in 1849 to consider 
 
 31 Report of Eoyal Commission on Eailways, 1867, p. xvii. 
 
 32 Economist, February 1, 1845. 
 
 ss See Report of Royal Commission on Railways, 1867, p. xvi. 
 3* Abandonment of Railways Act, 1850, 13 & 14 V. c. 83. 
 35 Report of Royal Commission on Railways, 1867, p. xviii. 
 
21] GENERAL LEGISLATION ON RAILWAY FINANCE 21 
 
 whether the railway acts did not require amendment, with a view 
 of providing for a more effectual audit of accounts, to guard 
 against the wrong application of the companies' funds. 38 This 
 committee recommended, for the first time in railway history, 
 the adoption of a uniform system of accounts and government 
 audit. 37 No immediate legislation, however, took place. 
 
 These and other events which took place during the later 
 forties and the fifties brought to light many new problems in 
 railway finance, as a result of which additional provisions differ- 
 ent from those contained in the Companies Clauses Act, 1845, 
 were frequently introduced into railway bills. Accordingly, the 
 Companies Clauses Act of 1863, 38 was enacted to extend the 
 former clauses act. This act of 1863 contained four new prin- 
 ciples, of which the first three had to do with railway finance. 
 The first of these three related to the cancellation and surrender 
 of shares, the second had to do with the creation of additional 
 capital, and the third governed the creation and issue of deben- 
 ture stocks. 
 
 During this period, the railways, in addition to their tendency 
 toward extension, had a general policy of "buying up" every 
 thing, in order to keep out all other lines from their own districts, 
 at the same time invading as far as possible those of other lines. 39 
 This of course proved as costly to themselves as it was to their 
 enemies. Heavy debts were contracted "for the purpose of se- 
 curing old traffic against intruders and for developing new traffic 
 for extensions and branches. ' ' 40 These struggles developed to 
 such an extravagant extent that in spite of the favorable gross 
 incomes, the dividends were low. Therefore, some shareholders 
 ' ' sincerely believed that if the Committee-rooms of the House of 
 Commons were closed for five years, it would be the most impor- 
 tant thing that had ever been done to protect railway property." 
 
 But Parliament apparently failed to realize clearly the serious 
 nature of the situation. It had adopted a number of restrictions, 
 but it failed to see to it that these restrictions were enforced. 
 
 36 
 
 37 Much attention was given to the question of uniform accounts. The 
 subject will be taken up more fully in Chapters VII and VIII. 
 
 38 26 & 27 V. c. 118. 
 
 39 London Times, February 9, 1863, p. 9. 
 <o London Times, February 23, 1863, p. 8. 
 
22 RAILWAY FINANCE IN ENGLAND [22 
 
 Consequently the speculative schemes as well as established com- 
 panies found it quite easy to get around the Parliamentary re- 
 strictions. Men of straw were secured to sign up subscriptions 
 for shares. Borrowed money was produced as paid-up portions 
 of shares for deposit. Furthermore, not only was the legal limit 
 of borrowing powers in many cases exceeded by the excessive 
 issue of debenture, but a sort of note called Lloyd 's bonds 41 was 
 issued for amounts of money many times in excess of the statu- 
 tory borrowing powers. As, according to the existing law, only 
 the securities issued within the parliamentary limits were legal 
 and hence valid, much confusion and difficulty followed the ex- 
 cessive issues, which in turn greatly damaged the credit of rail- 
 way companies. Further money, consequently, was difficult to 
 obtain. 
 
 Parliament, as most governments would do when in difficulty, 
 appointed two select committees, one in 1863 and the other in 
 the following year, to investigate the matter. These two select 
 committees made a number of good recommendations for the bet- 
 terment of railway finance, but no action was taken by Parlia- 
 ment to give effect to these recommendations until 1866, when 
 the Companies Securities Act, 1866, 42 was passed, requiring, 
 under penalty for failure, the railway companies to have regis- 
 tered officers and to deposit with the registrar of joint stock com- 
 panies statements of their borrowing powers and half-yearly loan 
 accounts. In the act were also set forth the particulars to be 
 specified in these statements and half-yearly accounts. The act 
 also prohibited railway companies from borrowing any money 
 before depositing the statement of their borrowing powers just 
 referred to. Moreover, the directors were required to declare 
 "each for himself" on every mortgage deed or bond, or certifi- 
 cate of debenture stock, that the specific security was issued 
 under the borrowing powers of the company as registered. 
 
 This measure, useful as it has proven to be, was far from being 
 effective in dispelling the chaos. The "arcadian simplicity of 
 the early times" where most railway bills before Parliament rep- 
 
 *i They are a sort of railway exchequer bonds, representing what in the 
 United States is called a floating debt, which is to be capitalized and paid 
 off sometime or other. They bear the name of the parliamentary draftsman 
 who originated them. 
 
 42 29 & 30 V. c. 108. 
 
23] GENERAL LEGISLATION ON RAILWAY FINANCE 23 
 
 resented the enterprise and capital of a number of bona fide in- 
 vestors had long passed away. Instead, the "speculative ele- 
 ment" prevailed. Subscription of railway shares actually be- 
 came, in some cases, a process of "selling in the market of the 
 powers conferred by the Legislature." 43 Contractors' schemes, 
 instead of railway corporations, became the center of railway 
 activity. These contractors' schemes soon became unable to sup- 
 port their undertaking, and they had to resort to the "finance" 
 companies 44 for help. As the latter were nothing but paper cre- 
 ations of credit, founded on works that were not or could not be 
 completed, and as these finance companies themselves offered no 
 security, the result could be readily foreseen. Not only did the 
 finance companies fail to bolster up the contractors' schemes, but 
 they were both dragged down to mutual ruin. 45 Thus came the 
 terrible collapse of 1867. There was so much confusion and dis- 
 trust of what was taking place in the railway companies, "that 
 all which the railway boards now say is searched between the 
 lines ; is suspected of ambiguity even when plain ; is taken in a 
 sense unfavorable to the railway when doubtful ; is believed when 
 it is against the board, and disbelieved when for the board." 48 
 
 The panic was a bitter, but a beneficial lesson, as a result of 
 which several fundamental principles were evolved. It was real- 
 ized 47 that the difficulties were to a great extent caused by the 
 mistaken view taken by Parliament originally in copying the 
 provisions of the old canal bills for the regulation of railway 
 finance, without taking account of the difference between the se- 
 curities issued by the canals and those by the railways, and with- 
 out weighing the consequences of so large an amount of per- 
 manent works being provided for by a floating instead of a fixed 
 debt. 48 With the idea that a railway, like a canal or a turnpike 
 
 is London Times, May 15, 1866. 
 
 4* These finance companies were formed for the avowed purpose of pro- 
 viding the capital which would enable the contractors to carry on their 
 works. See Hansard, vol. 183, pp. 857-858. 
 
 45 Ibid. 
 
 46 Economist, December 21, 1867. 
 
 47 Hansard, vol. 185, pp. 784-785. 
 
 48 Under the canal bills, the loans raised were precisely like mortgages of 
 any other landed estates and were usually for seven or fourteen years, and 
 the total amount was said to be small. Under the railway bills, altogether 
 over 120,000,000 had been taken from the floating capital of the country 
 
24 RAILWAY FINANCE IN ENGLAND [24 
 
 road, was to be open to all the world, so that anybody might 
 place his own engines and carriages on the line and run them, 
 on condition that he paid the company certain tolls for the privi- 
 lege, Parliament, in granting a lien on the tolls, gave what it 
 then considered to be as good a security as the mortgage on a 
 landed estate. 49 Therefore, the security for railway debentures 
 was made to cover only the permanent road-bed and the tolls, as 
 railway charges were then called, of the undertaking; and the 
 rolling stock was excluded. 
 
 The revelations of 1867 made clear the vast differences between 
 the railways and the canals, and made Parliament realize the de- 
 sirability of extending the lien of railway debentures to the 
 rolling stock of the companies. Consequently the Companies 
 Arrangement and the Debenture Holders Bill were introduced in 
 the session of 1867. After considerable deliberation by a special 
 committee the two bills were fused, as they were, into the Rail- 
 way Companies Bill. The purpose of the bill, as outlined by the 
 Duke of Richmond, was to give greater security to railway prop- 
 erty and to all classes of shareholders. 50 
 
 The procedure connected with the passage of this " finance'* 
 bill was entirely different from that connected with the bills of 
 former years. It received a very thorough investigation in the 
 committee as well as in both houses of Parliament. Indeed, the 
 bill came out from the committee room in a very different form 
 from that in which it was originally sent. The committee dis- 
 cussed every clause in the bill and had a division upon almost 
 every one of the clauses. There was so much objection on all 
 sides, that "if all their objections prevailed, there would not be a 
 single clause left in the bill. ' ' 51 
 
 The bill received royal assent in August, 1867, and became the 
 Railway Companies Act of that year. 52 The novel, and by far 
 the most important feature of the Act, was the provision made 
 for the protection of the rolling stock and plant from seizure, 
 
 under much shorter dated securities, which were not mortgages in the usual 
 sense of the term and could not then be held by trustees. According to IL 
 C. E. Childer, Hansard, vol. 185, pp. 784-785. 
 
 **l~bid., p. 786. 
 
 so Hansard, vol. 188, pp. 489-490. 
 
 si Hid., pp. 157-161. 
 
 52 30 & 31 V. c. 127. 
 
25] GENERAL LEGISLATION ON RAILWAY FINANCE 25 
 
 thus affording additional security to the debenture-holders and 
 insuring the convenience of the public. Besides providing for 
 the creation and issue of debenture stock and new capital, and 
 stipulating the rules governing the abandonment of railways, the 
 act made it possible for the companies to adopt ' ' schemes of ar- 
 rangement" in case they became unable to meet their engage- 
 ments. 53 
 
 Moreover for the first time all restrictions upon the rate of in- 
 terest on debentures were removed, and henceforth the com- 
 panies were given the liberty to arrange and pay whatever rate 
 of interest suited them best instead of being handicapped 
 by the rate sanctioned by Parliament, as had been the case 
 before. 
 
 Another new provision introduced was that no dividends 
 should be declared until all accounts of the company were audit- 
 ed and a declaration made by the auditors to the effect that the 
 proposed dividends were bona fide. 
 
 Just about this time, the Royal Commission on Railways of 
 1865-1867 made its report, in which special attention was called 
 to the importance of a uniform system of accounts for the effec- 
 tive regulation of railway finance. Although its work has often 
 been regarded as a failure, 54 its conclusions regarding the impor- 
 tance of uniform accounting have proven sound and of great 
 value. 
 
 Almost simultaneously with the report of the Royal Commis- 
 sion; the railways and the public also became aware of the great 
 importance of adopting some uniform system of accounts. Mem- 
 bers of Parliament began to realize the inadequacy of the old 
 system which permitted each railway to adopt its own system of 
 accounts and to keep it in its own way. This irregularity in ac- 
 counting was recognized not only as one of the causes of the 
 panic, which was then not yet over, but was considered as unde- 
 sirable in itself. It was quite generally recognized 55 that there 
 was no cure for the mischief of delusion, nor any hope for rail- 
 way property, except by the introduction of a principle of ac- 
 counting in which nothing would be admitted as profit but the 
 
 ss Hansard, vol. 189, p. 159; also see ss. 6-22 of Act. 
 s* A. T. Hadley, Railroad Transportation, 1903, p. 169. 
 ss London Times, November 8, 1867, p. 6. 
 
26 RAILWAY FINANCE IN ENGLAND [26 
 
 surplus of actual receipts over actual expenditures. Consequent- 
 ly much agitation took place. A number of bills 5<J for the regu- 
 lation of railway accounts were introduced into Parliament as a 
 result of which the Regulation of Railways Bill, 1868, was pre- 
 pared and introduced by the Board of Trade. In preparing this 
 bill, the Board of Trade not only gave careful consideration to 
 the recommendations of the Royal Commission on Railways and 
 took advantage of the experience of the previous years, but con- 
 sulted frequently a number of railway accountants and other ex- 
 perts. Parliament also gave the measure unprecedented atten- 
 tion. It no longer, for the time being at least, had any fear of 
 general and sentimental opposition to sane measures on this sub- 
 ject. The only question before it, therefore, was what should be 
 done to restore to railways their lost confidence and what meas- 
 ures should be adopted to prevent future malversation in railway 
 finance. 57 
 
 Under such favorable circumstances, the bill received unusual- 
 ly careful consideration instead of the former party quibbles, 
 and obtained royal assent in July, 1868. Henceforth all railway 
 companies were required to prepare and present, semi-annually, 
 a statement of accounts and balance sheets according to the 
 forms perscribed. The officers were subjected to severe penalty 
 for falsifying such accounts or statements. A system of gov- 
 ernment inspection and audit was also adopted. 
 
 The part of the act dealing with accounts and audit was at 
 once recognized as of a novel nature, and hence received much 
 discussion. 58 In spite of the fact that the act contained seven 
 parts, of which only one dealt with accounts and auditing, it has 
 been called, with good reason, an accounting act. Although the 
 general usefulness of a uniform system of accounts was felt, the 
 true import of such a system was not fully recognized. Much 
 less was it recognized that this measure was to be the culmination 
 of a century's work in legislation on railway finance. Neverthe- 
 less, this was the case. With the exception of the enactment of 
 the Railway Regulation Act, 1871, 59 dealing with railway statis- 
 
 ss The Eailway and Joint Stock Companies Account Bill and the Com- 
 panies Audit of Accounts Bill, etc. 
 57 Hansard, vol. 191, p. 1536. 
 ss Economist, March 21, 1868. 
 59 34 & 35 V. c. 78. 
 
27] GENERAL LEGISLATION ON RAILWAY FINANCE 27 
 
 tics, and the insertion, since 1890, of some special clauses in the 
 special acts governing the watering of stocks, no general legisla- 
 tive measure has been adopted since. Even the somewhat anti- 
 quated requirement of semi-annual accounts as well as the forms 
 of these accounts adopted prior to 1871 have been in use until 
 very recently. The system of accounts had, indeed, for some 
 time been recognized as inadequate and a departmental commit- 
 tee with a number of well known economists, statisticians, and 
 accountants as members, recommended in 1909 its modification. 
 A bill was actually introduced to give effect to the committee's 
 recommendation, but nothing had been done until 1911 when a 
 new accounts act was passed. 60 Hence with little qualification, 
 we may say that English legislation on railway finance was 
 closed by the passage of the Railway Regulation Act, 1871, and 
 with the exception of accounting what guides England to-day in 
 regulating the financial affairs of her railways is exactly what 
 guided her four decades ago. 
 
 To describe briefly the present scope of English legislative 
 control of railway finance, we may say that before incorporation, 
 the entrepreneurs are required to produce sufficient evidence that 
 all the proposed share capital has been subscribed for by bona 
 fide investors and that a deposit varying from 5 to 10 per cent 
 of the total estimated cost of the undertaking has been made. 
 The conditions under which the share capital may be raised and 
 the privileges and responsibilities of the subscribers, as well as 
 the rules governing the issue, cancellation, and surrender of such 
 shares are prescribed in detail. Preference shares with a fixed 
 rate of dividend may be issued according to the regulations laid 
 down by Parliament, and ordinary shares may be "split" into 
 preferred and deferred portions under certain conditions. Stock- 
 watering is permitted, but it must be done in the open, and a 
 record of such operations must be made in the company's ac- 
 counts. 
 
 The companies are given power to borrow on mortgage to the 
 extent of one-fourth of their total paid up capital. But such 
 borrowing powers are not to be exercised until all the shares of 
 the company are taken and one-half of the total on such shares 
 has been paid up. Only the securities issued within the statu- 
 
 - GO 1 & 2 Geo. V, Cap. 34. 
 
28 RAILWAY FINANCE IN ENGLAND [28 
 
 tory limits are regarded as legal securities, to enjoy the special 
 privileges given by law to mortgages. 
 
 In incorporation and in raising additional capital, the com- 
 panies are required to state in each and every case the purpose 
 for which money is raised, and they are prohibited from apply- 
 ing any money so raised to purposes other than those approved 
 by Parliament. 
 
 Annual accounts of all the incomes and expenditures are to be 
 kept according to the uniform system of accounts adopted in 
 1868, as revised in 1911, and annual statistical returns must be 
 made to the Board of Trade according to the rules prescribed in 
 the Railway Regulation Act of 1871 and the Railway Companies 
 (Accounts and Returns) Act of 1911. Government audit and 
 inspection of the company's affairs may be resorted to under 
 certain special circumstances. 
 
 Aside from these restrictions, the English railways are per- 
 mitted to do as they please in managing their financial matters, 
 subject to the common law of the country. But Parliament has 
 power to pass any general law governing railway finance as it 
 sees fit. Railway companies may change their original terms of 
 incorporation, or vary the conditions under which their capital 
 may be raised or spent, or effect any other modifications regard- 
 ing financial affairs; but in each and every case, they are re- 
 quired to apply to Parliament for special permission. 61 
 
 England, we have stated, undertook to regulate railway finance 
 long before some other countries realized the importance of this 
 branch of government activity. Thus, it may well be asked in 
 the beginning, (1) Why did England deem such actions neces- 
 sary? and (2) what led her to adopt her unique policy? The 
 first question may be answered by stating that England has long 
 recognized that public advantage requires that railways should 
 
 6i In practice, the permission can usually be obtained without any diffi- 
 culty, if there is no serious opposition. The following passage from an 
 editorial of the Economist, April 9, 1870, to a large extent expresses the 
 situation : 
 
 The "position (of Parliament) towards applicants for powers is very 
 simple. It is the mere dispenser of an authority which the applicants wish 
 to possess, and which it confers upon them in order that the country may 
 gain. Both parties are quite free in the matter. The companies to make a 
 profit apply for the power, and Parliament believing that its constituents 
 will gain, assents to the demand." 
 
29] GENERAL LEGISLATION ON RAILWAY FINANCE 29 
 
 yield reasonable returns to those who invest in such undertak- 
 ings and that a certain amount of government interference is 
 required to help investors to identify the securities issued by 
 railway companies, which they are asked to take up. To raise 
 a sufficient barrier against swindling operations and to protect 
 the public from "bubble" schemes, seem to be objects underly- 
 ing all the legislative actions of Parliament. 
 
 In answer to the second question as to why Parliament has 
 adopted its particular policy in regulating railway finance, it 
 may be said that although Parliament attempted to adopt more 
 stringent measures for realizing the purposes just referred to, it 
 was constantly reminded of the fact that England is a country 
 of free enterprise. The general principle was well established 
 that the state should interfere as little as possible with what is 
 being or is capable of being performed by private enterprise. 
 There has been even considerable cry that "the cost of a railway 
 is a matter with which the public and Parliament have no con- 
 cern. ' ' 62 The idea that an enlightened view of their own in- 
 terest would always compel railway officers to have due regard 
 to the general advantage of the public has always been kept 
 prominently before the attention of the government. More- 
 over, Parliament is an elective body, and has consequently been 
 influenced by popular conceptions in dealing with such scientific 
 questions as the regulation of railway finance. 
 
 Moreover, by the time Parliament had fully realized the im- 
 portance of more strict regulation, its laissez faire rules had 
 been established, and an enormous amount of capital already 
 invested in the railway business. Parliament therefore felt that 
 it would be unjust to withdraw in any way the early conces- 
 sions which led to the investments. The constant desire to make 
 railway investments safe securities on the one hand and to in- 
 terfere with railway management as little as possible on the oth- 
 er, seems to have caused Parliament to adopt its unique system 
 of regulation of railway finance which seems to differ from that 
 of all other countries. 
 
 62 London Times, June 4, and June 12, 1886. 
 
CHAPTER II 
 
 LEGISLATIVE SUPERVISION OF CAPITALIZATION 
 A SHARE CAPITAL 
 
 The greater part of English railway capital is raised by the 
 issue of three classes of instruments/ varying in security and 
 interest The net income is liable in the first instance to the 
 claims of the debenture holders, then to tho.se of the holders of 
 preference shares, and ultimately to those of the holders of or- 
 dinary shares. 2 
 
 In general a railway raises its capital in the first instance by 
 issuing ordinary shares. When this class falls to a discount, or 
 for some other reason, the company has recourse to inviting 
 subscriptions to preference or guaranteed shares. The holders 
 of the latter class of stocks are, to a certain extent, not only 
 proprietors but semi-creditors of the company, in that the net 
 income of the company is first of all secured to them in priority 
 over the ordinary stock holders. When the ordinary and pref- 
 erence stock are both taken up and, theoretically, paid for in 
 cash to the amount of the nominal value, then the company may 
 use its authority, granted by Parliament, to borrow money on de- 
 benture, mortgage, or otherwise, to the extent of one-third of 
 the amount raised by shares or one-fourth of the total capital. 3 
 
 Among the several important features into which the parlia- 
 
 1 Formerly railway securities were divided into five classes: ordinary, 
 guaranteed, preferential, loans, and debenture stock. About 1870, the sec- 
 ond and third classes as well as the fourth and fifth classes were merged. 
 In addition to these principal classes, there are also various subordinate 
 issues such as rent charge stocks which are practically guaranteed stocks, 
 and preferred and deferred stocks. The latter two, however, are but com- 
 ponents of the ordinary stock. There is another very rare class (according 
 to Wm. J. Stevens, British Railways, p. 4), called the contingent right stock 
 which shares in dividends with the ordinary stock after a certain rate on 
 the latter has been paid. 
 
 2 See London Times, August 27, 1871. 
 
 3 Cf. John Fraser, British Eailroads, 1903, pp. 26-27. 
 
 30 
 
31] LEGISLATIVE SUPERVISION OF CAPITALIZATION 31 
 
 mentary committee on railway bills would make inquiry before 
 recommending the passage of such bills were the financial affairs 
 of the applying company. 4 They would scrutinize, first of all, 
 the amount of the capital to be raised by the company, whether 
 by the creation of shares or by loans. Thus besides considering 
 the location and nature of the line, special engineering difficul- 
 ties, expected traffic, etc., the committee on railway bills in 18M, 
 as in the case of the Brighton and Chichester Railway, considered 
 carefully the following questions : 5 
 
 1. The amount of the proposed capital and the amount of 
 loans to be raised. 
 
 2. The amount of shares subscribed for and the deposits paid 
 thereon. 
 
 3. The names and places of residence of the directors with 
 the amount of shares taken by each. 
 
 4. The number of shareholders who might be considered as 
 having a local interest in the line, and the amount of capital 
 subscribed by them, together with their names and addresses. 
 
 5. The number of other shareholders and the capital taken 
 by them. 
 
 It was only after being satisfied with respect to these points 
 as set forth in the bill, that the committee would recommend 
 its passage. The manner in which these provisions governing 
 share capital of railway companies were embodied in the special 
 acts is illustrated by the following passages from the London and 
 Croydon Railway Act of 1837 : 6 
 
 "CXXXVI. And whereas the probable expense of making 
 the railway and other works hereby authorized will amount to 
 the sum of 1,800,000, and sums exceeding that amount have been 
 subscribed under the subscription contracts . . . ; be it en- 
 acted, That, notwithstanding any thing in the several subscrip- 
 tion deeds or contracts . . ., the capital of the company here- 
 by incorporated shall be 1,800,000 divided into 36,000 shares of 
 50 each; and that such shares shall, as soon as conveniently 
 may be after the passing of this act, be apportioned and di- 
 vided to and amongst the several provisional Committees or pro- 
 visional Directors . . ., in the proportion herein-before men- 
 tioned. . ." 
 
 The act further permitted the company to increase the num- 
 ber of shares by diminishing the amount in value of each share 
 
 4 Railway Times, October 5, 1839. 
 
 s Ibid., April 25, 1844. 
 
 6 Hereafter called the Croydon Railway Act. 
 
32 RAILWAY FINANCE IN ENGLAND [32 
 
 in order to facilitate the allotment of such shares among the 
 subscribers. 
 
 As these clauses became numerous and complicated Parliament 
 consolidated them and a number of other provisions into gen- 
 eral provisions to be applicable to all companies. Thus in the 
 Companies Clauses Act, 1845, provisions were made to the effect 
 that the capital of the companies should be divided into shares 
 of the prescribed number and amount and that such shares 
 should be numbered in arithmetical progression. 7 All the pro- 
 visions as being outlined in the private act just referred to were 
 also set forth with precision. Further provision was made to 
 enable railway companies to convert their borrowed money into 
 share capital under certain conditions. 8 
 
 In England, as in other countries, the railways were given 
 compulsory power to take land; but they were not allowed to 
 exercise such power until they produced a certificate under the 
 hands of two justices certifying that the whole of the capital or 
 estimated sum for defraying the expenses of the undertaking 
 had been subscribed under contract binding upon the subscrib- 
 ers. 9 Companies were also forbidden to reduce their capital by 
 the payment of dividends ; 10 but they might reduce their capital 
 in case the commissioners of railways authorized the abandon- 
 ment of a part of their undertaking and the commissioners fav- 
 ored such a reduction of capital. 11 
 
 As has been referred to, the Companies Clauses Act of 1845 
 
 7 Companies Clauses Act, 1845, 8 V. cap. 16. 
 
 8 " 56. It shall be lawful for the company, if they think fit, unless it be 
 otherwise provided by the special act, to raise the additional sum so author- 
 ized to be borrowed, or any part thereof, by creating new shares of the 
 company, instead of borrowing the same, or having borrowed the same, to 
 continue at interest only a part of such additional sum, and to raise part 
 thereof by creating new shares; but no such augmentation of capital . . . 
 shall take place without the previous authority of a general meeting of the 
 company. 
 
 "57. The capital so to be raised by the creation of new shares shall be 
 considered a part of the general capital, and shall be subject to the same 
 provisions in all respects, whether with reference to the payment of calls, 
 or the forfeiture of shares on nonpayment of calls, or otherwise, . . . " 
 
 9 Lands Clauses Act, 1845, 8 V. cap. 18, ss. 16-17. 
 
 10 Companies Clauses Act, 1845, s. 121. 
 
 11 Abandonment of Railways Act, 1850, 13 & 14 V. cap. 83, s. 28. 
 
33] LEGISLATIVE SUPERVISION OF CAPITALIZATION 33 
 
 required that the capital of the companies should be divided into 
 shares of the prescribed number and amount. The holders of 
 the shares were entitled to enjoy the proprietary privileges ac- 
 cording to the number of shares owned, 12 and were at liberty to 
 transfer their shares. A provision, however, was inserted in the 
 Companies Clauses Bill, 1845, to the effect that no shareholder 
 should make any transfer of shares in respect of his subscription 
 until he had paid all calls for the time being due on such shares 
 held by him. 
 
 This provision met with much opposition in Parliament. It was 
 objected to on the ground that it was not only too hard a meas- 
 ure, but it would prevent the solvent shareholder from disposing 
 of his shares until all the calls were paid up, thus giving an ad- 
 vantage to the insolvent holders, as it did not matter much to the 
 latter whether he effected a transfer or not. It was contended 
 that a call might be made for a particular day, and it would not 
 be proper to prohibit the transfer of shares in the interim. 13 
 
 To this objection, it was retorted that a call once made would 
 form a debt, and hence should be settled first. It was further 
 urged that the adoption of the clause would put an end to the 
 extremely harmful practice of railway speculation which was 
 very common at the time. These speculators, it was pointed out, 
 would often enter into engagements without the least probability 
 of their ever being able to meet them; and when they became 
 deeply involved for calls, they would shake off their responsibil- 
 ity by transferring their shares to men of straw. Thus after 
 considerable discussion, the clause was agreed to. 14 
 
 Further provisions, however, were made in the early special 
 acts, to the effect that transfers of shares and stocks should be 
 made by deed and should be registered in the registers of the 
 companies concerned, and that until such registration was made, 
 
 12 On account of the fact that many people subscribed to shares without 
 any idea of ever paying for them, a provision was made in the Railway Con- 
 struction Facilities Act of 1864 (27 & 28 V. cap. 121, s. 28) to render it 
 unlawful for any company to issue any share created under the authority of 
 a certificate of the Board of Trade nor should any such share vest in the 
 person accepting the same, unless and until a sum not less than one-fifth 
 part of the amount of such share had been paid up. 
 
 is Hansard, vol. 77, p. 929. 
 
 i* Ibid. 
 
34 RAILWAY FINANCE IN ENGLAND [34 
 
 the seller of the share should remain liable for all the calls and 
 the purchaser should have no part or share of the profits of the 
 undertaking, nor any voting power in respect of such trans- 
 ferred shares. 15 Forms of certificates of both shares and trans- 
 fers of shares were also prescribed. 
 
 So far so good ; but Parliament seemed to have failed at the 
 most important point. It did not stipulate the time within which 
 such registration should be executed. When the prospects of a 
 company were good, the proviso that failure to register would 
 deprive the purchaser of his proprietary privileges was sufficient 
 to insure proper expeditious registration, but when the pros- 
 pects of a company were bad, it was entirely different. Conse- 
 quently, purchasers of railway shares often would hold the trans- 
 fer in their possession so long as it suited their convenience; 
 the seller of those shares having no means of compelling the 
 purchasers to register the share, would remain always liable for 
 the payment of the calls. The law subjected these sellers to the 
 liability of paying calls, but afforded them no means of repos- 
 sessing themselves of their shares. 16 Consequently the original 
 holders having disposed of their shares in the market and after 
 the lapse of years when call upon call had accumulated to a 
 frightful amount, were sometimes subjected to legal proceedings, 
 ''because none of the many parties through whose hands these 
 shares had subsequently passed had chosen to render themselves 
 liable by conforming with the requirements of the company's 
 act" 17 The brokers also took advantage of this unfortunate 
 situation by arranging schemes whereby it was made possible 
 that from the moment the deed was stamped for the first time, 
 the transfer should pass from hand to hand possibly for many 
 months without the payment of any duty upon the several trans- 
 actions subsequent to the first. 18 
 
 The inconvenience resulting from such illegal transfer of 
 shares was seriously felt. 19 Therefore, it was urged, before the 
 
 is Companies Clauses Act, 1845, ss. 14-15, and s. CLV of the Croydon 
 Railway Act, 1837. 
 
 is Evidence before the select Committee of the House of Commons, 1839. 
 Railway Times, November 9, 1839. 
 
 17 Railway Times, November 9, 1839. 
 
 is Second Beport of select committee of the House of Commons, as ap- 
 peared in Railway Times, October 5, 1839. 
 
 i Railway Times, November 9, 1839. 
 
35] LEGISLATIVE SUPERVISION OF CAPITALIZATION 35 
 
 select committee of 1839 that some measure should be adopted 
 to limit the period within which transfers of shares and stocks 
 should be registered. 20 It was also suggested that unless regis- 
 tration was made within the specified time, the transfer should 
 lose its validity and the share should revert to the selling party. 21 
 No action, however, was taken by Parliament to effect these re- 
 forms. But in 1850, a provision was made in the Abandonment 
 of Railways Act of that year, 22 again providing that unless a 
 share had been duly registered and calls on it fully paid, it 
 would not entitle its holder to the proprietary privileges. No 
 provision, however, was made to stipulate a uniform limit of 
 time within which such registration should take place. Hence 
 the regulations governing the registration of transfer of shares 
 remained as defective as before, and nothing further has been 
 done since. 
 
 The payment of calls also received much consideration in 1845. 
 Companies were empowered by the Companies Clauses Act of 
 that year 23 to make calls for the payment of money upon the 
 shareholders by serving on each shareholder a notice at least 
 twenty-one days before making the call ; but no successive calls 
 should be made at less than the prescribed intervals. The ag- 
 gregate amount of calls made in any one year was also pre- 
 scribed. Every shareholder was held liable to pay the amount 
 of the calls made in respect of his shares ; and in case of failure 
 to pay such calls on or before the proper time, he should be 
 liable to be charged with interest for such unpaid calls at the 
 legal rate. The railway companies were further empowered to 
 sue and recover with interest from such defaulting shareholders 
 the amounts of the calls due, for which purpose the production 
 of the register of shareholders was prima facie evidence of such 
 defaulting parties being shareholders of the company and of the 
 number and amount of their registered shares. 
 
 Moreover, the directors after serving proper notice might at 
 any time after the expiration of two months from the day ap- 
 pointed for payment of such calls, declare the forfeiture of such 
 defaulted shares on which calls were due and unpaid. After 
 
 20 Ibid. 
 
 21 Ibid. 
 
 22 13 & 14 V. cap. 83, s. 6. 
 
 23 8 V. c. 16, 21-28. 
 
36 RAILWAY FINANCE IN ENGLAND [36 
 
 such declaration of forfeiture being confirmed by a general meet- 
 ing the company might sell such forfeited shares. 24 To safe- 
 guard the interest of the shareholders, however, it was provided 
 that no 25 company should sell or transfer more of the shares of 
 any such defaulters than was sufficient to pay the arrears, etc., 
 then due from them. In case the money produced by any such 
 sale was more than what was needed to pay for such arrears, 
 interests, etc., the defaulters might claim the surplus. 
 
 The matter of cancellation and surrender of shares was fur- 
 ther amplified by the Companies Clauses Act, 1863, 26 so as to give 
 the companies greater liberty in such matters and to make the 
 payment of calls of even greater consequence to the sharehold- 
 ers. 27 
 
 Provision was also made to the effect that the last registered 
 holders of such forfeited shares should not only be precluded 
 from all rights and interest in respect of such shares, but should 
 also be held liable to pay all arrears of calls, interest, and ex- 
 penses due in respect of the share at the time of the cancellation, 
 notwithstanding such forfeiture. 28 
 
 Moreover, companies were authorized to cancel forfeited shares 
 with the consent of holders and to accept, on such terms as they 
 saw fit, surrenders of any shares which were not fully paid up ; 
 but they were forbidden to "pay or refund to any shareholder 
 any sum of money for or in respect of the cancellation or sur- 
 render of any shares. ' ' 29 
 
 24 Ibid., ss. 29-33. 
 
 25 Ibid., ss. 34-35. 
 
 26 26 & 27 V. e, 118, s. 4. 
 
 27 Section four of this act provides: "Where any share ... is after 
 the passing of this act declared forfeited under and in pursuance of the pro- 
 visions ... in The Companies Clauses Consolidation Act, 1845, . . . 
 and the forfeiture is confirmed by a meeting in accordance with the same 
 provisions, . . . and notice of the forfeiture has been given, then, 
 . . . if the directors of the company are unable to sell the share for a 
 sum equal to the arrears of calls and interest and expenses due in respect 
 thereof, the company at any general meeting held not less than two months 
 after such notice is given may, in ease payment of arrears of the calls, in- 
 terest and expenses due in respect thereof is not made by the registered 
 holder of the share before the meeting is held, resolve that the share instead 
 of being sold shall be cancelled, and the share shall thereupon be cancelled 
 accordingly. ' ' 
 
 28 26 & 27 V. c. 118, 8. 6. 
 
 29 26 & 27, c. 118, s. 10. 
 
37] LEGISLATIVE SUPERVISION OF CAPITALIZATION 37 
 
 When a railway company desired to raise additional capital, 
 it should apply to the Board of Trade for permission, 30 and the 
 latter after being satisfied that the applying company had com- 
 plied with the requirements of the established rules governing 
 notices, etc., might settle a "draft of certificate" to authorize 
 the company to raise the prescribed amount of additional capi- 
 tal for the purpose set forth in the certificate. For the purpose 
 of raising such additional capital, the company was at liberty 
 to issue new shares or stock or to make loans, unless the certifi- 
 cate provided to the contrary. 31 New shares or stocks issued un- 
 der such circumstances, or for the conversion of its loans into 
 share capital, as well as for raising additional sums of money in 
 lieu of borrowing should be considered as a part of the general 
 capital and should be subjected to the same provisions in all 
 respects as the existing shares, except as to the time for making 
 calls and the amounts of such calls, which the company was au- 
 thorized to determine as it saw fit from time to time. 32 
 
 In order to safeguard the interests of the shareholders, it was 
 provided by the Companies Clauses Act of 1845 33 that if at the 
 time when the augmentation of capital took place the existing 
 shares were at or below par, the new shares might be of such 
 amount and issued in such a manner as the directors saw fit, but 
 that if at the time of the augmentation the existing shares were 
 at a premium, then, unless it was otherwise provided by the 
 special act of the company, the sum to be raised should be di- 
 vided into shares of such amount as would conveniently allow 
 the same to be apportioned among the shareholders in proportion, 
 to the existing shares, and such new shares should be offered to 
 the existing shareholders in the proper proportion by letter. 
 
 The latter provision, beneficial as it was to the shareholders, 
 seemed to have been more or less abused by .some of the share- 
 holders through their neglect in acknowledging their acceptance 
 of such offers. Consequently, a similar provision was made in 
 the Companies Clauses Act, 1863, 34 with the proviso that in case 
 the company's offer to any shareholder was not accepted within 
 
 30 Eailway Companies Act, 1864, 27 & 28 V. cap. 120, s. 3. 
 si Ibid., s. 4 and Schedule iii. 
 
 32 Companies Clauses Act, 1863, 26 & 27 V. cap. 118, s. 12, and Com- 
 panies Clauses Act, 1845, 8 V. cap. 16, ss. 56-57. 
 
 33 Companies Clauses Act, 1845, 8 V. cap. 16, sa. 58-60. 
 s* 26 & 27 V. cap. 118, ss. 17-21. 
 
38 RAILWAY FINANCE IN ENGLAND [38 
 
 the time limit and in the absence of any special arrangement to 
 extend such time limit, then the company might dispose such 
 new shares and stocks in whatever way it saw fit, "but so that 
 not less than the full nominal amount of any share or portion 
 of stock be payable or paid in respect thereof." The latter pro- 
 vision prohibiting the disposal of shares at a discount, however, 
 was repealed afterwards. 
 
 In several of the bills of the session of 1859 and 1862, power 
 was sought to accept surrenders of shares liable to be forfeited, 
 and to extinguish, without sale, the interest of the holders of 
 shares which had become forfeited, and thereupon to cancel or 
 merge the surrendered and forfeited shares, and in lieu of such 
 cancelled shares to issue new shares to an aggregate amount, lim- 
 ited in some cases to that remaining unpaid in respect of the 
 cancelled or merged shares, and in others extending to the ag- 
 gregate amount of the whole of the cancelled or merged shares. 35 
 The Board of Trade thought that such irregularities were unde- 
 sirable, and during those years repeatedly urged that the aggre- 
 gate amount of the new shares which might be issued in lieu of 
 the old shares should in all cases be restricted to the aggregate 
 amount remaining unpaid in respect of, the cancelled or merged 
 shares, so that the sums which had been already raised by means 
 of the old shares might not be raised a second time. It believed 
 that if further sums were required for the companies' undertak- 
 ing, it would be better that authority to raise them should be 
 sought as a power to raise additional capital, for by so doing the 
 nominal capital of the company would correspond with the 
 amount which the company would have been authorized to raise 
 by shares if the cancellation or merging did not take place. 36 
 
 Following these repeated recommendations of the Board of 
 Trade, Parliament inserted a clause in the Companies Clauses 
 Act, 1863, 3T to the effect that the companies might issue new 
 shares in lieu of cancelled or surrendered shares ; but the aggre- 
 gate nominal amount of such new shares should not exceed that 
 of the old shares after deducting the amount actually paid up 
 in respect of such old shares. 
 
 ss Report of Board of Trade on Railway Bills, 1861, pp. 22-23. 
 
 se Hid. 
 
 ST 26 & 27 V. c. 118, s. 11. 
 
39] LEGISLATIVE SUPERVISION OF CAPITALIZATION 39 
 
 By the same act, 38 railway companies, after having created 
 new shares or stock, were permitted to cancel such new shares or 
 stock should they decide not to issue the whole of such new 
 shares. 
 
 As stated above, between the ordinary shares and the deben- 
 tures or loans of a company are the preference shares. The lat- 
 ter bears a specified rate of dividend which shall be met out of 
 the company's net income before any ordinary shareholder may 
 receive any dividend. Prior to 1863, the interest or guaranteed 
 dividend on these preferential shares was cumulative. If it is 
 not paid in one year, then it must be paid together with the 
 dividend due in the succeeding year in full, before the ordinary 
 stocks could receive anything. But in the Companies Clauses 
 Act, 1863, 39 a provision was inserted to the effect that preference 
 shares should be entitled to dividends only out of the profits of 
 each year; and if any year ending on the 31st of December, 
 ''there are not profits available for the payment of the prefer- 
 ential dividend . . . for that year, no part of the deficiency 
 shall be made good out of the profits of any subsequent year, or 
 out of any other funds of the company." 
 
 With regard to the creation and issue of preferential stocks, 
 the same act 40 provided that where any company was author- 
 ized by any special act to raise any additional sum by the issue 
 of preference shares or stock with the sanction of a general meet- 
 ing it might create and issue (according as the authority given 
 by the special act extends to shares only, or to stock only, or to 
 both) such shares or stock as the company from time to time saw 
 fit. It was, however, further provided that such stock should 
 not affect any guarantee, or any preference or priority in the 
 payment of dividend or interest, granted by the company under, 
 or confirmed by, any previous act. 
 
 The act also required that the terms and conditions to which 
 any preference share or stock was subjected, should be clearly 
 stated in the certificate of the preference share or portions of the 
 preference stock. 41 
 
 ss ibid., s. 16. 
 
 39 26 & 27 V. c. 118, s. 14. 
 
 40 26 & 27 V. cap. 118, s. 13. 
 
 *i Companies Clauses Act, 1863, 26 & 27 V. c. 118, a. 15. 
 
40 RAILWAY FINANCE IN ENGLAND [40 
 
 After the adoption of those provisions regarding preference 
 shares, there was for a number of years a constant tendency for 
 the proportion of preferential capital to grow more rapidly than 
 that of the ordinary capital. Thus in 1858 the ordinary and 
 preference capital were outstanding in the proportion of 56 to 
 44, while in 1870 and 1871 the relative proportions were re- 
 versed, becoming 43 to 57 and 42 to 58 respectively. 42 Such 
 changes might have been brought about by two entirely different 
 causes. In the first place, when railway enterprise became es- 
 tablished, it might be reasonably expected that the preference 
 capital would tend to increase more rapidly than the ordinary. 
 When a railway pays large dividends on its ordinary shares, it 
 can raise money on easy terms by issuing preference or deben- 
 ture stocks at fixed rates of interest. This seems to have been 
 largely the case in England. On the other hand, when a com- 
 pany pays little or no dividend on its ordinary shares, it will be 
 compelled to resort to the issue of such preferential shares for 
 raising money, in order to avoid heavier sacrifices. 
 
 Another class of shares or rather another nomenclature given 
 to the ordinary shares, known as preferred and deferred shares, 
 has come into vogue since 1868. These, in reality, do not con- 
 stitute any separate class of shares, but simply represent two 
 divisions into which the ordinary shares are divided. All the 
 rules governing the ordinary shares are also applicable to these 
 preferred and deferred stocks, except that special rules have 
 been adopted to govern the process of, and the conditions under 
 which, the division may be executed. 
 
 The first known instance of "stock splitting," by which the 
 ordinary shares are divided into preferred and deferred, took 
 place in 1854 in the case of the Great Northern. 43 During that 
 year 12 having been paid on each 20 share of that Company, a 
 panic seized upon the public mind and grave doubts were enter- 
 tained as to whether the boldly competitive scheme of that com- 
 pany could be successful in the face of adverse circumstances. 
 At the same time the London and North- Western authorities 
 were not slow to take advantage of the situation in making 
 things uneasy for their competitors. In order to push the thing 
 
 Capt. Tyler's annual report to the Board of Trade, 1873, p. 4. 
 Railway Times, May 2, 1868. 
 
41] LEGISLATIVE SUPERVISION OF CAPITALIZATION 41 
 
 along, the directors of the Great Northern adopted the proposi- 
 tion, not to forfeit the shares and confiscate the whole of the 
 payments thereon, but to lay aside 10 for the defaulting sub- 
 scribers, and to give the remaining 2 as a bonus to future sub- 
 scribers with the whole of a dividend up to 3%, calling the 
 holdings of the old subscribers, B., or deferred, and those of the 
 new subscribers, A., or preferred stocks. This procedure speed- 
 ily restored confidence in the undertaking and carried it through 
 its vicissitudes. 
 
 This affair received considerable attention ; but it was not until 
 1868 that stock splitting became a burning question. In that 
 year, the South Coast and other companies applied for power 
 to divide their ordinary stocks into preferred and deferred or- 
 dinary", at the option of the shareholders. 44 Consequently strict 
 regulations were adopted in the Regulation of Railways Act of 
 that year 45 specifying with great elaboration the precise condi- 
 tions under which the division of stocks might be effected. 
 
 There was no debate on this clause ; but there was one in the 
 House of Lords on a similar clause of the South Coast Railway 
 Bill of that year just referred to, from which the clause in the 
 Regulation of Railways Act was copied. When the South Coast 
 Railway Bill was in the House of Lords, the clause giving power 
 for splitting stocks was struck out. But when the bill was con- 
 sidered in the House of Commons, the original clause was re- 
 inserted in the bill. Finally when the bill came back to the up- 
 per house of Parliament again, a motion was again made to omit 
 that clause. Lord Redesdale very strongly opposed the division 
 of stocks, on the ground that such a practice would favor stock 
 jobbing. 46 
 
 On the other hand, the Duke of Richmond, who was then pres- 
 ident of the Board of Trade, supported the clause on general 
 principles. He maintained that "the tendency of Parliament 
 had been not to interfere with the financial arrangements of these 
 companies; providing, of course, that Parliament saw that no 
 injustice was done to mortgages, or other parties. . ." He 
 
 ** Evidence before Select Committee on Railway Stock Conversion, 1890, 
 p. 37. 
 
 45 31 & 32 V. c. 119. 
 
 46 Hansard, 193 : 1545. 
 
42 RAILWAY FINANCE IN ENGLAND [42 
 
 further claimed that to prohibit the splitting of stocks was en- 
 tirely opposed to the recommendations of the Railway Commis- 
 sion, 47 which went very fully into the question, and gave it as 
 their opinion that it was the more judicious course for Parlia- 
 ment to relieve itself from interference in the financial affairs 
 of railway companies. Instead of proving injurious, he believed 
 the proposed subdivision of stocks would tend to give all parties 
 concerned an additional interest in seeing that the directors did 
 their duty. 48 
 
 After considerable discussion, the clause was adopted with 
 thirty contents and seven non-contents. 49 Since then the regula.- 
 tions governing the splitting of shares have been elaborated but 
 not modified, and railway companies have been given the liberty 
 to divide their shares under these or similar regulations. 50 
 
 Commenting upon this clause, the Railway Times 51 said that 
 it was certainly to be regretted that "the Legislature should 
 have lent itself to a system capable of further propagation of so 
 vile a mischief," and it concluded that "we have only to hope 
 that the nuisance may become so prevalent as to ensure its own 
 corrective." 
 
 But the hope of the Railway Times was not realized. On the 
 contrary, not only has the practice of "splitting" spread, but it 
 has also developed into the widespread "stock- watering" which 
 was not even thought of at the time when Parliament first gave 
 its permission to stock splitting. A comparison of the following 
 clauses of a railway bill passed in 1890 52 with the part of the 
 Regulation of Railways act, 1868, quoted above, may serve to 
 show the vast difference between the ; regulations governing 
 "splitting" as adopted in 1868 and the degenerated practice 
 which took place afterwards. The second clause of the Bill of 
 London and South- Western Railway passed in 1890 provides: 
 
 The company would create ordinary stock of two classes, (1) preferred 
 4% ordinary stock, and (2) deferred duplicate ordinary stock, both classes 
 
 47 He probably referred to the Eoyal Commission on Railways, 1867. 
 
 48 Hansard, 193 : 1545. 
 
 49 Hansard, 193: 1549. 
 
 so In the Model Bills and Glauses of the House of Lords, 1909, eight 
 clauses (pp. 24-25) were devoted to the regulations governing the division 
 of stocks. 
 
 si Railway Times, August 8, 1868, p. 819. 
 
 52 Railway Times, May 17, 1890. 
 
43] LEGISLATIVE SUPERVISION OF CAPITALIZATION 43 
 
 of which to be in substitution of a corresponding amount of paid-up ordi- 
 nary stock; that is to say, 100 of the preferred and 100 of the deferred 
 ordinary stock should be substituted for every 100 of the existing ordinary 
 stock. 
 
 But, it may be remembered, what was permitted in 1868 was 
 a mere "splitting," "preferred and deferred ordinary stock 
 shall be issued only in substitution of equal amounts of paid-up 
 ordinary stock, ' ' while the later practice was actually ' ' duplica- 
 tion," wherewith stock certificates bearing a face value of 200 
 were given for every 100 paid in. 
 
 The chief reason which led the companies to indulge in stock 
 splitting was that they thought the divided stocks would com- 
 mand higher prices than the solid property. But the Railway 
 Times both in 1868 and 1891, the years in which stock splitting 
 began and reached its highest point of development, respectively, 
 have proven by the market quotations of the two kinds of stocks 
 of several companies that the expectation of the companies was 
 by no means well founded in many cases. 53 On the other hand, 
 the same paper 5 * showed that much confusion resulted from the 
 splitting of stocks. Investors were in many instances led to 
 take up one section of these divided stocks under the delusion 
 that the deferred portion (as in the case of the Great Northern, 
 the originator of the scheme, just referred to) had been previous- 
 ly paid up. As this was far from being the true state of affairs 
 in many instances, much disappointment and suspicion arose. 
 Therefore, Parliament was blamed for being too ready to comply 
 with "every request made to it by speculators in the most des- 
 perate condition. ' ' 55 
 
 In England it has been held from the beginning of railway 
 legislation 56 that it is not the legitimate business of a railway 
 company to apply to one purpose the funds which have been 
 raised for another and that it was the duty of railway com- 
 panies to keep up the value of their capital assets no divi- 
 dends may be paid out of capital. 57 In the early railway acts 
 
 s 3 See Railway Times for November 14, and November 28, 1868, and 
 May 23, 1891, p. 606. 
 
 si Rail-way Times, May 2, 1868. 
 
 ss Ibid. 
 
 ss See Report of Committee on Railway Companies Powers, 1864, p. 58. 
 
 57 Section CLXX of the Croydon act of 1837 provided "That all the 
 money to be raised by the said company by virtue of this Act shall be laid 
 
44 RAILWAY FINANCE IN ENGLAND [44 
 
 of incorporation provisions were made as to the purpose for 
 which the company was incorporated and the proper mode of 
 applying the capital raised. Thus in the first Companies Clauses 
 Act 5S a specific provision was made to the effect that all the 
 money raised by the company should be applied, first, in paying 
 the costs and expenses incident thereto, and, second, in carrying 
 the purposes of the company into execution. It was further 
 provided by that act that, unless expressly provided to the con- 
 trary, companies might receive and apply to the purpose of the 
 company any calls to be made, notwithstanding mortgages. 59 
 
 Thus both the private and the public general acts required 
 that the company should first of all apply its capital to the 
 payment of expenses already incurred for forming the company, 
 and then to the execution of the purpose for which the company 
 was incorporated. 
 
 The financial difficulties and pressure for capital caused by 
 the extravagant extension of railways during the forties led to 
 considerable violation of the foregoing provisions. Therefore 
 the Lords' committee of 1849 was instructed to devise means to 
 guard against the application of funds to any other purpose than 
 those authorized by Parliament. This committee recommended 
 that railway companies should be required to explain in their 
 capital accounts not only how money was raised but the under- 
 takings to which it was applicable and the manner in which it 
 was actually spent. 60 
 
 During the latter part of the fifties and the first part of the 
 sixties, in many railway bills for constructing new works, pro- 
 visions were not made for raising additional capital; but the 
 companies were permitted to apply to the new works any money 
 
 out and applied, in the first place, in paying and discharging all costs and 
 expenses of applying for, obtaining, amd passing this Act, or preparatory 
 or relating thereto, incurred; . . . and the remainder of such money 
 shall be applied in and towards purchasing lands, and making and main- 
 taining the said railway and other works, and in otherwise carrying this 
 Act into execution ; and that the expenses incurred by the several provisional 
 committees or boards of directors for the said . . . lines . . . shall 
 be raised and paid by the subscribers to the said several lines ... in 
 proportion to the amount of their respective subscriptions. . ." 
 
 68 8 V. c. 16, s. 65. 
 
 698 V. e. 16, s. 43. 
 
 60 Report of Eoyal Commission on Railways, 1867, p. xviiL 
 
45] LEGISLATIVE SUPERVISION OP CAPITALIZATION 45 
 
 which they might have been authorized to raise by previous acts 
 and which might not be required for the purposes for which the 
 money was originally raised. In order to protect the sharehold- 
 ers from the danger that might arise from the application of the 
 funds of railway companies to purposes not sanctioned by Par- 
 liament and not in contemplation at the time when their powers 
 were obtained, both Parliament and the Board of Trade thought 
 that it was very important to take advantage of every suitable 
 opportunity to ascertain and limit the amount of money that 
 might be raised and to define clearly its application. 61 Moreover, 
 the Board of Trade emphasized this point for several years suc- 
 cessively beginning 1859. 62 
 
 When the Companies Clauses Act of 1863 was passed, a clause 
 was devoted to specifying the application of money raised by the 
 issue of debenture stocks, thus giving effect to the recommenda- 
 tion of the Board of Trade. 63 It enacted that money raised by 
 debenture stock should be applied exclusively either in paying 
 off money due by the company on mortgage or bond, or else for 
 the purposes to which the same money would be applicable if it 
 were raised on mortgage or bond. 
 
 In the Railway Construction Facilities Act of the following 
 year, 64 provision was again made to the effect that railway com- 
 panies ' ' shall apply every part of the money raised only for pur- 
 poses for which it is by the certificate (of the Board of Trade) 
 authorized to be applied." 
 
 In practice, however, there seemed to be considerable violation 
 of these rules, especially by the smaller lines. A striking exam- 
 ple may be found in the case of the Brecon and Merthyr Railway 
 Company. After having repeatedly violated the law in raising 
 its capital, 65 this company authorized the issue of 20,000 for the 
 
 ei Board of Trade annual report on Eailway Bills, 1860, p. 22. 
 
 62 Ibid., 1863, p. 19. 
 
 es 26 & 27 V. c. 118, sec. 32. 
 
 e* 27 & 28 V. c. 21, sub-sees. (4) and (5) of see. 29. 
 
 65 This railway about 66 miles long waa originally contracted to be con- 
 structed by a certain Savin at 10,000 per mile; but act after act had since 
 been obtained by its directors and the contractor for increasing the capital, 
 until, instead of the original authorized capital of 700,000, the shares and 
 debentures issued to the contractor for its construction amounted to 
 2,000,000. In this amount there were no less than ten kinds of preference 
 shares, each ranking in order of date, and fourteen issues of debentures 
 
46 RAILWAY FINANCE IN ENGLAND [46 
 
 construction of, and with a special hypothecation on, a branch 
 called the Ivor & Dowlais, which latter was authorized in 1865 
 but not yet commenced in 1867. It was also found that the act 
 of 1865 had already authorized the creation for the construction 
 of this line, of shares and debentures to the amount of 20,000 
 and had specially provided that the money should only be applied 
 of this line of shares and debentures to the amount of 20,000 and 
 had actually been issued under the name and were then existing; 
 but that the money was not applied to the line, which was left 
 entirely untouched. 
 
 Moreover, this kind of irregularities seemed to have continued 
 for some time. Thus in 1869 a complaint, which had many 
 parallels in railway affairs, was made against the Caledonian 
 Railway by the Forth and Clyde Navigation Company, with 
 whose undertaking and many others the Caledonian had amal- 
 gamated. The charge was that the absorbing company had ap- 
 plied the money raised under the special borrowing powers of 
 the particular undertaking to general purposes, to the amount 
 of more than 100,000, in breach of an engagement with the 
 absorbed company. In this connection, the Economist said 66 
 that in many cases even where there was not any apparent ob- 
 jection, the public had been "not a little injured" through the 
 diversion of the borrowing powers conferred. It further said 
 that "if the Legislature lays down rules ... in order to 
 secure the proper execution of undertakings which it authorized 
 and which it has a claim to see executed by virtue of the priv- 
 ileges conferred . . . care should be taken to have the rules 
 put in force, and a breach of them . . . ought to be ren- 
 dered impossible." 
 
 Another form in which capital has been applied to purposes 
 other than those authorized by Parliament is the payment of 
 dividend out of capital. This practice has been prohibited since 
 the early thirties. Thus in the Croydon Act of 1837 the pro- 
 
 also ranking in order of creation. Then the company again obtained from 
 the Board of Trade, under the general Railway Act, 1864, and without any 
 sanction for new lines, powers to create 570,000 of fresh preference stock 
 and 190,000 of fresh debentures stock for which they could not find any 
 market. See London Times, November 13, 1867, p. 4. 
 ee Economist, November 6, 1869. 
 
47] LEGISLATIVE SUPERVISION OP CAPITALIZATION 47 
 
 vision was made 67 to the effect that no dividend should be made 
 exceeding the net amount of clear profit at the time being in 
 the hands of the company, nor whereby the capital of the said 
 company should in any degree be reduced. 
 
 During the forties there seemed to be a need for a relaxation 
 of these restrictions. During that period many railway com- 
 panies received their capital by instalments and had to pay in- 
 terest pending construction. 68 When calls were made at a time 
 when a high rate of interest could be obtained the subscribers 
 were unwilling to meet such calls. ''To obviate this difficulty" 
 it was suggested that ' ' it was not unreasonable for railway com- 
 panies to resort to the unbusiness-like practice of allowing in- 
 terest 69 on calls before a railway is opened, and consequently 
 before it has any revenue. The interest was therefore charged 
 to capital, and served to swell the capital expenditures. " 70 It 
 must be stated that in some cases the payment of such "interest" 
 out of capital during construction appeared necessary, for in 
 such cases it was ' ' utterly ridiculous to hope for the payment of 
 deposits unless interest be allowed upon them during the con- 
 struction of the line. Men cannot afford to lock up their capital 
 in a total sacrifice of present results for the chance of any future 
 proceeds, however abundant. " 71 In still other cases, the prac- 
 tice was known as being advantageous to all concerned. 
 
 On the whole, however, it seemed that the payment of divi- 
 dends out of capital was not desirable. It was well known as 
 Lord Somerset pointed out 72 that many companies had gone on 
 paying dividends out of their capital stock, as if they were in a 
 most flourishing condition. These companies sometimes went on 
 paying dividends out of their capital until their capital no longer 
 existed. 
 
 Under such circumstances, Parliament saw fit to insert a clause 
 in the Companies/ Clauses Act, 1845, 73 stipulating that ' ' the com- 
 er i v. c. cxix, s. CXCIII. 
 es Hansard, 78: 48. 
 
 69 Interest here is used really in the sense of dividend. 
 
 70 Bail-way Times, April 27, 1844. 
 
 71 Ibid., July 25, 1846. 
 "Hansard, 78: 48-49. 
 " 8 V. c. 16, s. 121. 
 
48 RAILWAY FINANCE IN ENGLAND [48 
 
 pany shall not make any dividend whereby their capital stock 
 will be in any degree reduced." 
 
 The .general interpretation given to this clause, as shown by 
 the debate in Parliament, was that it was not to prohibit the pay- 
 ment of dividends from the interest of capital or pending con- 
 struction, but, to prevent the payment of dividends out of the 
 capital stock after the works were completed and when no profits 
 had been obtained. 74 
 
 In 1847 after the panic which followed the great railway ex- 
 tension of 1845, a standing order was passed by the House of 
 Lords which remained in force for many years, providing that 
 in every railway bill a clause should be inserted prohibiting the 
 payment of interest out of capital. 75 
 
 The Companies Act, 1862, 76 also provided in the first schedule 
 that.no dividend should be paid except out of profits earned. 
 But this latter regulation was not compulsory on the companies 
 registered under that act, for they were empowered by section 
 14 to make rules of association excluding the regulations in the 
 first schedule, and were thus practically enabled to make what 
 regulations seemed best to the shareholders. Consequently a 
 curious anomaly arose out of the conflict between the standing 
 order and the Companies Act, 1862. 77 
 
 In the Railway Construction Facilities Act, 1864, 78 provisions 
 were again made prohibiting the application of capital for the 
 purpose of paying interest or dividend on account of calls made. 
 In 1867 a clause was inserted in the Railway Companies Act of 
 that year 79 which prescribed in detail the conditions under 
 which a railway might declare any dividend. It said that no 
 dividend should be declared by a company until the auditors had 
 certified that the current half yearly accounts contained a full 
 and true statement of the financial condition of the company, 
 and that all proper expenses had been deducted from revenue. 
 
 But the act further provided that "if the directors differ from 
 the judgment of the auditors with respect to the payment of any 
 
 74 Hansard, 78: 48. 
 
 75 Railway Times, March 16, 1889. 
 
 76 25 & 26 V. c. 89. 
 
 77 Report of select committee, 1882, p. iii. 
 
 78 27 & 28 V. e. 121, sub-see. (3) of s. 29. 
 
 79 30 & 31, V. c. 129, s. 30. 
 
49] LEGISLATIVE SUPERVISION OF CAPITALIZATION 49 
 
 such expenses out of the revenue of the half year, such difference 
 shall, if the directors desire it, be stated in the report to the 
 shareholders, and the company in general meeting may decide 
 thereon, subject to all the provisions of the law then existing, 
 and such decision shall, for the purpose of the dividend, be final 
 and binding." Taking advantage of this last proviso, many 
 railway companies, like the Brighton, 80 charged large sums to 
 their capital account, in opposition to the opinion of the ac- 
 countants and auditors that the same should have been charged 
 to revenue. After violating the law in this manner, they would 
 then legalize their illegal act by calling a general meeting of the 
 company and abide by the decision of the meeting which accord- 
 ing to the law should be ' ' final and binding. ' ' 81 
 
 One of the chief reasons which led to the evasion of the law 
 was that, as a member of Parliament remarked in 1867, "There 
 is nowhere to be found a clear definition of working expenses, 
 that is to say there is nothing to define the charges which ought 
 to go to make up the working expenses of a company, before you 
 arrive at the profit upon which the debenture interest forms the 
 first charge. ' ' 82 The government itself was said to be unable to 
 distinguish working expenses from capital charges. When once 
 it was asked to define and determine what constituted the profits 
 of a railway, the Board of Trade appointed a committee to con- 
 sider the matter. This departmental committee reported, how- 
 ever, that ' ' it was too complex and difficult a matter for them to 
 undertake, and they recommended that the question be referred 
 to a small body of experts specially appointed for the purpose. 
 The Board of Trade was consequently asked to appoint such a 
 committee, but it declined to do it. 83 
 
 Under such circumstances, it became an easy matter for rail- 
 ways to disregard all principles of accounting, if they saw fit. 
 The gross income representing the returns from which the work- 
 ing expenses must be deducted before any money should be 
 used for dividends, was a definite quantity and could not be 
 meddled with ; but the working expenses were not, and might be 
 "switched." So some of the railway directors, in order to make 
 
 so London Times, November 18, 1867, p. 8. 
 si See Fraser, British Eailways, 1903, p. 117. 
 82 Hansard, 186: 1030. 
 ss Fraser, British Eailways, 1903, pp. 52-53. 
 
50 RAILWAY FINANCE IN ENGLAND [50 
 
 their business appear "rosy," often charged part of such work- 
 ing expenses to capital and declared dividends out of capital. 84 
 
 Moreover, the matter of charging certain items of current ex- 
 penses, such as the purchase of engines, etc., to capital was 
 viewed with more or less approval hy the shareholders. In some 
 cases it was not considered at all improper or injurious, still less 
 dishonest, to defray a portion of the current expenditure out of 
 money borrowed, and treat as net income or profit what then ap- 
 peared as the remainder. These shareholders even would often 
 exact dividends whether earned or not, and would connive at 
 the means so long as the immediate end was secured. A decent 
 dividend not only enriched their pockets, but kept up the market 
 value of their shares. Five per cent in hand, with their holdings 
 at par, even temporarily, appeared far more comfortable than 
 three per cent with the stock at a discount, in spite of promising 
 hopes. Therefore, accounts were "cooked" on the one hand and 
 "swallowed" on the other. 85 
 
 In 1882 an open effort was made to remove the restrictions 
 prohibiting the payment of dividend out of capital. 86 A com- 
 mittee was appointed by Parliament to consider the matter. 
 This committee, after six sessions and a month's work, report- 
 ed ** tnat the prohibition of the payment of interest out of cap- 
 ital was in accordance with "sound financial principles and acts 
 as a protection to the public." In special cases, however, the 
 committee recommended that it might be permissible, subject to 
 strict rules, 88 to pay interest upon capital during construction. 
 
 s* London Times, October 29, 1867, p. 6. 
 as London Times, November 18, 1867, p. 8. 
 se Eailway Times, March 16, 1889, p. 374. 
 
 87 See Report of Select Committee, 1882, Parliamentary Paper, 1882, 
 vol. 13, p. iii. 
 
 ss The rules recommended were briefly : 
 
 (1) Clauses denning the amount of interest, and the terms for which it 
 is payable, to be inserted in every bill, and to be specially reported on by 
 the Board of Trade before being submitted to the committee (on Railway 
 Bills). 
 
 (2) Such interest to be an addition to the authorized capital of the 
 undertaking. 
 
 (3) Power of issuing debentures to be reckoned on the capital exclusive 
 of such addition for interest. 
 
 (4) Payment of such interest to continue only during construction of 
 
51] LEGISLATIVE SUPERVISION OP CAPITALIZATION 51 
 
 Although the effort of the railway companies was unsuccessful, 
 it brought about much agitation, as a result of which the House 
 of Lords in 1886 modified its standing order so as to give power 
 to railway companies, under certain strict provisions, to pay in- 
 terest out of capital. 89 
 
 The relaxation of the earlier regulations, however, was not ac- 
 companied with such good results as was expected. 90 On the 
 contrary, much evil was done. The effect of paying interest out 
 of capital, as observed a writer, 91 has been to give a certain 
 particular stock an altogether fictitious value, and genuine in- 
 vestors have been victimized. The same writer also alleged, not 
 without reason, that the dividing up of principal money as 
 profits and the lack of restraint as to their enormous expansion 
 of capital expenditure, regardless of its productivity of revenue, 
 can, and did, only eventuate in a diminution, or even entire ces- 
 sation, of dividends on ordinary stocks. 92 
 
 The result of charging working expenses to capital has proved 
 to be equally objectionable. It necessitated the overburdening 
 of the business with large capital charges, which sooner or later 
 would give much embarrassment to the property. 93 In so far as 
 the public was not clearly aware of these manipulations, the 
 practice proved exceedingly illusory. It was merely a matter of 
 white-washing the true state of affairs by throwing expenses on 
 the revenue of the future. Indeed, the besetting evil of railway 
 finance, as observed the London Times, 9 * "has arisen from the 
 
 the works, or for such less period as the committee may think fit to author- 
 ize, according to the circumstances of the case. 
 
 (5) The rate of interest to be fixed by the committee, but in no case to 
 exceed 5 per cent. 
 
 (6) The prospectus and share certificates to contain on the face of them 
 an intimation that interest is payable out of capital during construction 
 only. 
 
 The committee also recommended that these provisiona should be enacted 
 in a general act, instead of mere modifications of the standing orders. See 
 Report of Select Committee, May 19, 1882, Parliamentary Paper, 1882, 
 vol. 13. 
 
 ** Railway Times, March 16, 1889, p. 373. 
 
 so Ibid. 
 
 91 Fraser, British Railways, 1903, pp. 108-109. 
 
 92 Ibid., p. 144. 
 
 93 London Times, November 18, 1867, p. 8. 
 
 94 Ibid., October 29, 1867, p. 6. 
 
52 RAILWAY FINANCE IN ENGLAND [52 
 
 confusion of two things capital and revenue.'' Some of the 
 most serious disputes, which affected in a remarkable degree the 
 property of some important companies, turned entirely upon the 
 mystification over the charging of these two items. Directors 
 were charged with carrying to capital, expenses which belonged 
 to revenue; and proprietors demanded that capital accounts 
 should be closed. The general effect was that fictitious dividends 
 made it almost impossible to estimate the value of any railway 
 property. 
 
 From the foregoing pages, it is clear that most of the regula- 
 tions governing the share capital of railway companies were 
 adopted prior to 1845. It is only in a very few instances where 
 any changes have been made after the passage of the Companies 
 Clauses Consolidation Act of 1845. But these changes, although 
 few in number, have proven of great importance as well as of a 
 unique nature. Indeed, it is largely in the adoption of her regu- 
 lations since 1845 concerning such matters as the creation of pre- 
 ferred and deferred stocks and the application of capital that 
 England especially differed from other countries. 
 
 A special feature revealed is the fact that practically all the 
 measures concerning the share capital of railway companies, as 
 we have seen, were adopted as a matter of course. With the ex- 
 ception of those concerning stock splitting and the application of 
 capital practically all the rules governing railway share capital 
 were adopted without any debate in Parliament. Nor did they 
 receive much discussion from the public. This, however, is not 
 the case concerning the regulation of the other branches of rail- 
 way finance as we shall see in the following chapters. 
 
CHAPTER III 
 
 SUPERVISION OF RAILWAY CAPITALIZATION 
 B LOAN CAPITAL 
 
 In the earlier years of the English railways, loan capital con- 
 sisted of mortgages or bonds, which were commonly called de- 
 bentures, and which resembled the bonds issued in the United 
 States. In later years a class of securities called debenture- 
 stock came into vogue. The debenture-stocks were similar to the 
 debentures in that each of them represented a debt with a fixed 
 rate of interest against the company. They were, however, dis- 
 tinctly different in two respects. First, the debentures were 
 usually issued for limited periods, while the debenture-stocks 
 were usually perpetual; and second, the former were repre- 
 sented by deeds issued by the company to cover large lump sums 
 of money, whereas the latter were issued in the form of circulat- 
 ing certificates, in coupon form, to represent smaller amounts. 
 Debenture stocks, however, were little known until the fifties. 
 Accordingly, Parliamentary regulations applied at first to the 
 temporary debentures or mortgages, but were gradually modi- 
 fied to take care of the permanent debenture-stock. 
 
 The cardinal policy of Parliament, as a member of Parliament 
 said, 1 to which opinion he subscribed, has been to make the de- 
 benture capital of railways a secure investment. With this goal 
 in view, Parliament has endeavored to regulate the loan capital 
 of railways from the beginning of the enterprise. In each of the 
 special acts, which created the company or enabled it to prose- 
 cute its work, the amount of the loan capital as well as the man- 
 ner in which the company might raise it were invariably set 
 forth in detail. Aside from some occasional and slight irregu- 
 larities, the proportion of the loan capital was usually limited 
 to one-third of the share capital of each company. 2 This was done 
 
 i Hansard, vol. 183, p. 785. 
 2Cf. infra, Chap. IV. 
 
 53 
 
54 RAILWAY FINANCE IN ENGLAND [54 
 
 to give security to the debentures or mortgages. Before a com- 
 pany could raise any additional capital by loans or in any way 
 alter the provisions of its incorporation act it was required to 
 appear before Parliament for a special act granting such power. 
 Thus from the beginning railway companies were subjected to 
 explicit regulations set forth in their special acts in raising 
 money by loans. The following passage from the London and 
 Croydon Railway Act of 1837 3 may serve to illustrate how and 
 under what conditions railway companies were permitted to 
 raise money by loans: 
 
 And be it further enacted, that it shall be lawful for the said company, 
 by an order of any general or special geiieral meeting of the said company, 
 after one-half of the said capital shall have been paid up, from time to 
 time to borrow and take up at interest any sum in addition to their said 
 capital of one million eight hundred thousand pounds, not exceeding in the 
 whole the sum of six hundred thousand pounds, on the credit of the said 
 undertaking, as to them shall seem proper; and the said company and di- 
 rectors . . . after an order shall have been made for that purpose at 
 any general or special general meeting . . . hereby empowered to mort- 
 gage, assign, and charge the property of the said undertaking, and the 
 rates, tolls, and other sums arising or to arise by virtue of this Act, or any 
 part thereof, ... as a security for any such money to be borrowed as 
 aforesaid, with interest; . . . and a copy of the order of any general 
 or special general meeting . . . authorizing the borrowing of any such 
 sum of money, certified by one director or by the secretary or clerk of the 
 said company to be a true copy, shall be sufficient evidence of the making 
 of the order; . . . and all which mortgages, assignments, and charges 
 shall be made under the common seal of the said company by deed duly 
 stamped, in which the consideration for the same shall be truly stated. . . 
 
 The forms to be used for such mortgages as well as for the 
 transfer of the same were prescribed. Provisions for the regis- 
 tration of the execution and the transfer of such securities were 
 also set forth in detail. 4 
 
 For the security of the creditors, section CLXI of the same 
 act provided that in case of non-payment of interest as specified 
 in the act, by an order of two justices of the peace, "some per- 
 son may be appointed to receive the whole or such part of the 
 said rates, tolls, or sums as are liable to pay such interest so due 
 and unpaid. . ." 
 
 The time for repayment of the principal was required to be 
 
 s 1 V. c. CXIX, sec. GLX. 
 * Cf. infra, Chap. V. 
 
55] SUPERVISION OP RAILWAY CAPITALIZATION 55 
 
 clearly specified in the mortgage deed, 5 and if no time was speci- 
 fied, the holders of such mortgages might demand payment after 
 twelve months from the date when the loan was made, "upon 
 giving six calendar months' notice in writing to the secretary or 
 clerk of the 'company. . ." 6 If the company failed to meet 
 such demand of repayment of the principal due and if such 
 principal in the aggregate amounted to the sum of 20,000, two 
 justices might order the appointment of receivers 7 as in the case 
 of non-payment of interest. 
 
 From these provisions, it is clear that besides the limitations 
 upon the borrowing powers of railway companies, two distinct 
 principles were laid down, (1) the real security of the mortgages 
 was limited to the ' ' undertaking, ' ' 8 the tolls and rates of the 
 company, and (2) these mortgages were for limited periods, and 
 were liquidated or renewed upon the expiration of such periods. 
 Both of these principles, as will be shown more fully, gave rise 
 to much difficulty afterwards, the one on account of its own de- 
 fect which was not foreseen at the time and the other because of 
 the wrong conception of it by the public. 
 
 These special provisions regarding loan capital soon became too 
 numerous and hence difficult for the railways to follow. Under 
 such circumstances, it was but natural that many irregularities 
 took place in making loans, notwithstanding the intention of 
 Parliament to prevent them. To simplify matters, Parliament 
 devoted no less than twenty sections of its first Companies 
 Clauses Act 9 to regulations governing loan capital of railways. 
 In this general act, the miscellaneous provisions scattered in the 
 numerous special acts governing the limit of borrowings, the 
 registration of mortgages and transfers, the appointment of re- 
 ceivers, etc., were amplified and set forth in a compact form. 
 The forms of mortgages and transfers contained in the special 
 acts were also improved upon by making the provisions more 
 specific and more adaptable to the new conditions. The powers 
 of re-borrowing and of conversion of loans into share capital 
 were also amplified. But the most notable change was that re- 
 
 5 Sec. CLXIII. 
 
 e Sec. CLXIV. 
 
 7 Sec. CLXV. 
 
 s By undertaking was meant the business of the Company. 
 
 Companies Clauses Act, 1845, 8 V. c. 16. 
 
56 RAILWAY FINANCE IN ENGLAND [56 
 
 garding the evidence of authority for borrowing. Formerly, as 
 seen in the Croydon Act, nothing was required to show that the 
 company had complied with the requirements set forth in its pri- 
 vate acts as to the requisite subscription and payment of one-half 
 of its capital, etc., before borrowing. The only evidence neces- 
 sary was a copy of an order of a general meeting certified by a 
 director, or the secretary, or even the clerk of the company. By 
 the general act of 1845, however, a new provision 10 was made to 
 the effect that in addition to such a certified copy of an order of a 
 general meeting, a certificate of a justice of the peace showing 
 that the definite portion of the company's capital, stipulated in its 
 special act, had been subscribed and paid up, should be presented 
 before a company made any loans. Thus the financial affairs 
 were placed, to a certain extent, under the supervision of a pub- 
 lic officer. 
 
 In examining these clauses of the act one cannot help being 
 impressed with the great care which Parliament took in order to 
 make the loan capital of railways a safe investment. Indeed, if 
 these provisions had been conscientiously followed they might 
 have proved effectual to carry out the intentions of Parliament 
 and to prevent much difficulty which occurred later. 
 
 It must be remembered that the aforesaid general act was 
 passed during a period of railway speculation. This and its 
 subsequent collapse, which took place two years later, furnished 
 a good test of the usefulness of the provisions concerning finance 
 just referred to. Up to 1848 about 175,000,000 had been in- 
 vested in railways, of which about 40,000,000, or one-fourth, 
 was raised by loans. On account of the collapse of 1847, ex- 
 orbitant rates of interest had to be offered ; and notwithstanding 
 such inducements, some of the best lines could not be completed 
 for want of funds. 11 During the collapse, railway credit was 
 greatly damaged. Whatever loans were made, were only for 
 short periods. In order to clear off the wreckage of 1847, Par- 
 liament in 1850 passed the Abandonment of Railways Act 12 ' ' to 
 facilitate the abandonment of railways and the dissolution of 
 railway companies. . ." This act provided that the com- 
 
 10 Companies Clauses Act, 1845 (8 V. e. 16), sec. 40. 
 
 11 C. L. Webb, Letter to H. Labouchere, Board of Trade, on Railways, 
 1849, p. 26. 
 
 12 13 & 14 V. c. 83. 
 
57] SUPERVISION OP RAILWAY CAPITALIZATION 57 
 
 panics' share as well as loan capital should be reduced propor- 
 tionately with the amount of the work abandoned. 13 Aside from 
 this incidental provision contained in the Abandonment Act of 
 1850, nothing was done to alter the rules laid down in the Com- 
 panies Clauses Act of 1845 during the period. Even the de- 
 rangements caused by the crisis of 1847 failed to induce Parlia- 
 ment to adopt any new or to modify its old measures. But be- 
 ginning about 1850 complaints against the existing system of 
 loans began to be made by numbers of investors. As the deben- 
 tures issued under the existing system were by deed for large 
 lump sums, people with money to invest were debarred from 
 placing it in such debentures because they could seldom find 
 such as would suit them in amount and length of time to run. 
 Some companies also expressed dissatisfaction with the incon- 
 venience and expense attending the existing system of arranging 
 their debenture debts. 1 * It was felt that the securities for money 
 lent to railway companies should be issued for more convenient 
 amounts and that they should also be made easier of transfer- 
 ence. Therefore, it was urged that divisible debenture stocks be 
 issued and the existing system of stamps and registration re- 
 modeled. But it was at once recognized that it would be diffi- 
 cult to get rid of the stamps, since the government would not 
 forego its revenue from this source. To meet this difficulty, a 
 proposal was made that the government should not be stripped 
 of its tax, but only it should receive it in a different way. In 
 lieu of the existing system of stamps, each company should pay a 
 fixed annual sum to the government, calculated on an average 
 of, say the preceding three or four years, or in some other way 
 satisfactory to both parties. Then the debenture stock certifi- 
 cates might be issued without stamps and passed from hand to 
 hand without registration. In support of this system, besides 
 other arguments, the success accompanying a corresponding 
 change in the East India Company's bonds, made under similar 
 conditions, was cited. 15 
 
 To do away with registration would apparently save some 
 
 is Sec. 28, 13 & 14 V. c. 83. 
 
 i* Railway Times, Dec. 31, 1853, p. 1354. 
 
 !5 The bonds of the East India Company were once stamped, but in 1835 
 the company obtained powers under the Act 5 & 6 Win. c. 64 to pay an 
 annual sum in lieu of stamp duty. Cf. Railway Times, Sept. 25, 1852. 
 
58 RAILWAY FINANCE IN ENGLAND [58 
 
 trouble ; but it was apprehended that such a course might create 
 confusion and also impair the security of the debenture-holders. 
 To avoid such danger, it was proposed: (1) Any company wish- 
 ing to avail itself of the power of the act should be required to 
 show that, on the average of the preceding three years, its net 
 annual profit had been equal to 10% on its debt; (2) the amount 
 of the debt should in no case be increased after the application 
 to Parliament for adoption of the act; (3) that such company 
 should be bound, under penalty, to publish quarterly in the 
 London Gazette, a statement showing the amount of its debt, 
 the sum required for payment of the quarter's interest on the 
 same and the actual amount of net profit earned during the same 
 quarter. It was thought that, with these particulars before 
 them, the public could at once detect any irregularities in a com- 
 pany's loan capital, and that in the absence of any irregularities, 
 a profit equal to 10% of its loan capital would constitute a suf- 
 ficient security to the company's debenture holders. 
 
 The division of debentures Into convenient units representing 
 100 to 1,000 was enthusiastically expected to have an impor- 
 tant and beneficial effect. Instead of a person who wished to sell 
 say 5,000 railway debentures having to wait until he could find 
 another person having that exact sum to invest, he would be 
 able to divide the amount among a number of purchasers. By 
 this process, transactions would be greatly facilitated and the 
 market extended. Moreover, when the debt was spread over a 
 great number of persons, it would not be so easy for a combi- 
 nation of large money-lenders to demand repayment of loans at 
 inconvenient times so as to embarrass the company for their own 
 benefit. Thus a great difficulty with which the companies had 
 to contend would disappear. 16 
 
 Following these agitations further efforts were made during 
 the years from 1851 to 1853 to effect an alteration of the exist- 
 ing debentures by the issue of stocks carrying a fixed rate of 
 interest and affording other owners the same privileges as the 
 debentures, in lieu of the existing bonds. 17 Parliament, how- 
 ever, failed to see the necessity of passing any act to accom- 
 plish the changes; but self-interest induced a number of com- 
 panies to convert their debentures into such perpetual debenture 
 
 is Eailway Times, Sept. 25, 1852, pp. 100-109. 
 IT Eailway Times, Dec. 31, 1853, p. 1354. 
 
59] SUPERVISION OP RAILWAY CAPITALIZATION 59 
 
 stocks. The innovation was looked at askance. The idea was 
 still rife that loans were only a temporary charge which ought 
 to be gotten rid of as soon as possible. Anything which had to 
 do with perpetuating such loans at once aroused suspicion. In 
 commenting upon such practices, the Railway Times 18 said that 
 such operations were "suggestive of grave reflection." It la- 
 mented that railway companies should change their debts into a 
 permanent part of their capitalization, and regarded such a 
 change as an unmistakable evil. It urged that those companies 
 which had borrowed to a large extent "would do well to make 
 up their minds to pay off debentures . . . before they par- 
 take of any dividends, no matter how moderate or legitimately 
 earned." "Every proprietor who is capable of serious thought, 
 and who desires to leave an unincumbered estate to his children 
 should make it his duty to strive for an extinction of the loan 
 debt of every company with which he is connected. . ." It 
 was the general idea that when a company was out of debt it 
 was out of danger. But it soon became clear that the debts of 
 railways, once contracted, were going to remain. The compa- 
 nies clearly realized the usefulness of these debenture stocks. 
 This class of securities would enable persons who had no specu- 
 lative desires, who had no enterprising tastes, who had no prac- 
 tical knowledge, to aid in the successful completion of splendid 
 undertakings; they would enable such persons to obtain the sin- 
 gle object which they desired a fixed secure income. 19 But 
 what was of far greater importance was the fact that debenture 
 stocks would save the companies from being swamped by de- 
 bentures falling due at unfortunate times. This great advan- 
 tage, however, was not clearly recognized until some years af- 
 terwards. It was the need of money which gradually led* a 
 number of railway companies to use debenture stocks. 
 
 Beginning with the fifties, it became quite general for rail- 
 way companies to apply to Parliament for powters to create this 
 class of stock for the purpose of paying off mortgages and bond- 
 ed debts, or as a means of raising money in lieu of borrowing 
 on mortgages or bonds. 20 Therefore, it became important that 
 the legal powers under which the old debentures should be ex- 
 is Ibid., May 8, 1852, p. 473. 
 i Economist, May 2, 1863, p. 477. 
 20 Board of Trade, General Eeport on Shares, Loam, etc., 1860, p. 17. 
 
60 RAILWAY FINANCE IN ENGLAND [60 
 
 tinguished and the debenture stocks created, should be clearly 
 defined. No general legislation took place. What Parliament 
 did was to insert clauses in the bills of the companies seeking 
 powers to make such conversions of new issues. In these special 
 acts, Parliament prescribed in detail the manner in which such 
 conversions of debentures or the creation of new debenture 
 stocks might be effected. The following passage from the Act 
 of 1851 of the London and Northwestern Railway 21 which was 
 one of the most important companies using this class of securi- 
 ties, may serve to show in what way Parliament legislated on the 
 issue of such stocks: 
 
 That it shall be lawful for the company from time to time, with the con- 
 sent of three-fifths of the votes of the shareholders present in person or by 
 proxy at any general meeting of the company convened with due notice of 
 that object, to resolve that any portion of the borrowed capital of the com- 
 pany, or any debenture or other security for which or for the interest 
 whereof the company are lawfully liable, . . . not exceeding an amount 
 to be defined in and by such resolution, may be converted into stock of the 
 company of like amount, either by agreement with the holders of such mort- 
 gages or bonds respectively before the same respectively became due, and 
 issuing stock of a corresponding amount, instead of reborrowing the same 
 so paid off; and also, with the like consent, from time to time, to resolve 
 that the whole or any part, to be defined in and by such resolution, of the 
 moneys which the company shall have authority to raise by borrowing under 
 the powers of any of their Acts, . . . shall or may be raised by the cre- 
 ation and issue of stock of a corresponding amount, instead of borrowing 
 the same; and also, with the like consent, to attach to the stock so author- 
 ized to be created and issued for any of the purposes aforesaid a fixed and 
 perpetual irredeemable yearly dividend or interest at any rate not exceed- 
 ing the rate of 3 10s. for every 100 thereof; . . . and the stock so 
 created and issued shall be a charge upon the tolls and undertaking, and 
 lands, tenements, and hereditaments of the company, but shall be distribut- 
 able, transmissible, and transferable, . . . and the said interest or 
 dividend shall forever have priority of payment over all other dividends on 
 any other stock or shares of the company, whether ordinary or preference, 
 or guaranteed, and the stock when so created shall be termed ' ' London and 
 North Western Debenture stock ; ' ' provided that nothing herein contained 
 shall in anywise prejudice or affect the rights of the holders of mortgages 
 or bonds of the company. . . 
 
 Four distinct principles were set forth in this clause: (1) 
 Debenture stocks might be issued in redeeming debentures fall- 
 
 21 15 V. e. cv. Quoted by John Whitehead in his book on Guaranteed 
 Securities, 1859, pp. x-xi. 
 
61] SUPERVISION OF RAILWAY CAPITALIZATION 61 
 
 ing due as well as for raising additional loan capital within the 
 company's powers; (2) the rate of interest was fixed with the 
 consent of Parliament; (3) the security of such stock should 
 consist in a charge upon "the tolls and undertaking, and lands, 
 tenements, and hereditaments" of the company; and (4) such 
 stocks were to be "distributable, transmissible, and transferable 
 as personal estate." It must be remembered that some of these 
 principles were not new, but were copied from those governing 
 the issue of the older forms of securities. On close perusal, it 
 may be seen that the provisions contained in the clause were 
 such as to make the debenture stocks a safe and clearly-defined 
 investment. Indeed, Parliament had by this time recognized 
 to a certain extent the necessity of this class of securities for the 
 improvement of the financial condition of the railways, and 
 commenced to take steps to give the holders of debenture stocks 
 every possible protection and security. Thus in the act just 
 referred to provisions were made to the effect that if written 
 demand for the payment of dividend due on any debenture 
 stocks was not met satisfactorily within thirty days, the pro- 
 prietors of such stocks holding an amount of nominal value of 
 20,000 or upwards might, without prejudice to their right to 
 sue, require the appointment of a receiver. 22 
 
 By these provisions, the debenture stockholders were given 
 the power to recover the arrears of their interest either by bring- 
 ing suit in any competent court or by requiring the appointment 
 of receivers. It may be noticed, however, that only the interest 
 was secured, and the principal was not mentioned. There was 
 some dissatisfaction over this fact, but it was generally con- 
 ceded 23 that so long as the interest was made sure, the principal 
 would take care of itself, for what the average investor wanted 
 was not so much the possession of his principal but a regular and 
 reliable income that grew out of the principal. This was es- 
 pecially true when his security was easily marketable. 
 
 The chief reason why Parliament took such precautions to 
 give great security to the holders of debenture stocks was that 
 there was an abundance of money ready for investment and 
 the only thing necessary to induce investors to come forward 
 
 22 15 V. e. cv. XII. 
 
 23 Economist, Feb. 23, 1867. 
 
62 RAILWAY FINANCE IN ENGLAND [62 
 
 was indisputable security. 24 With, this point in view, Lord 
 Redesdale in 1856, endeavored to insert a clause in the railway 
 bills of that session, making the railway directors personally 
 liable for any illegal issue of debenture stocks; but this prop- 
 osition, which if adopted might have prevented much trouble, 
 was " killed" in the committee room. 25 
 
 But it must also be noticed that what Parliament did was for 
 the protection of the holders of legal securities. If one's se- 
 curity was legal, he was safe, but no protection was extended to 
 the holders of illegal securities. Parliament prescribed the rules 
 governing the issue of railway securities, and laid down the 
 principle that securities issued in violation of these rules were 
 illegal and hence not within the protection of law. Per se this 
 doctrine appeared proper and good. But how were the investors 
 to know which securities were legal and which were not? Par- 
 liament gave adequate protection to the holder of legal securities, 
 but it failed to enable the investors to distinguish the legal from 
 the illegal. Hence in spite of the repeated and apparently earn- 
 est efforts of Parliament much dissatisfaction existed. Com- 
 plaint was heard everywhere as to the difficulty of distinguish- 
 ing the legal from the illegal security. 26 
 
 To determine the legality of a security required an under- 
 standing of a number of acts of Parliament which the ordinary 
 investors could hardly construe correctly without a lawyer 's aid. 
 Yet if these acts were not justly construed and precisely obeyed 
 the debenture would give no effectual charge upon the line, and 
 hence the holder of it would have no legal claim to priority over 
 even a contracted debtor of the company. Furthermore, the 
 nature of the law was such that a debenture which was once 
 bad would remain bad. A debenture which was invalid at its 
 issue because it was in excess of the borrowing powers, would 
 not be improved because other debentures were paid off. The 
 contract was illegal when it was executed, and it could not gath- 
 er legality by subsequent payments to third parties. 27 
 
 2* Railway Times, Aug. 4, 1855, p. 781. 
 
 25 Hid., April 26, 1856, p. 514. 
 
 26 It was often heard in bank parlors, ' ' How do we know this debenture 
 is worth anything? The validity depends on its accordance with the bor- 
 rowing powers of the company, and what those powers are, or how they 
 have been exercised, we do not know." Compare Economist, July 11, 1863. 
 
 27 Economist, May 2, 1863. 
 
63] SUPERVISION OP RAILWAY CAPITALIZATION 63 
 
 In spite of this unsatisfactory state of affairs, the use of de- 
 benture stocks continued to become more extensive. To insure 
 uniformity in practice and to facilitate the use of such stocks, 
 the Board of Trade repeatedly recommended, 28 during the latter 
 part of the fifties, that provisions should be made in a general 
 act embodying the principles governing the issue of such stocks. 
 Consequently Parliament in 1863 codified into general law the 
 various provisions scattered in the special acts as well as some 
 of the recommendations of the Board of Trade. A large part 
 of the Companies Clauses Act of that year 29 was devoted to the 
 regulation of debenture stocks. Provisions were made as to the 
 creation and issue of debenture stocks, the priority of such 
 securities, the limit of the rate of interest and the enforcement 
 of payment of such interest either by action or by the appoint- 
 ment of receivers. The companies were also required to keep 
 a register of debenture stocks issued and to deliver certifi- 
 cates to holders of debenture stocks, etc. In short practically 
 all the provisions contained in this act governing the creation 
 and issue of debenture stock were modelled after those govern- 
 ing the creation and issue of the earlier forms of securities, and 
 which had been heretofore inserted in special acts. 
 
 The improvement, however, was not enough to meet the sit- 
 uation. The act provided, in great detail, for the regulation of 
 the debenture stock itself, but it did not afford any effective 
 means for the enforcement of the regulations. It gave further 
 protection to the holders of legal debentures; but it again failed 
 to evolve any means by which one might be enabled to tell which 
 debenture was a legal one and which was not. In brief, it 
 stopped short at the point where action was demanded. Hence, 
 in spite of the act, little improvement was made to clarify the 
 doubt which prevailed. In the meantime gross encroachments 
 upon the acts of Parliament were made. 
 
 Being at a loss as to how to mend the situation, Parliament 
 appointed a select committee in 1863 to inquire as to what 
 should be done to prevent such encroachments ; 30 and the work 
 of this committee was continued by another select committee 
 appointed in the following year. Both of these committees 
 
 28 Board of Trade, General Report on Railway Bills, 1861, p. 23. 
 
 29 26 & 27 V. c. 118, Part III. 
 so Cf. infra, Chap. IV. 
 
64 RAILWAY FINANCE IN ENGLAND [64 
 
 were of the opinion that holders of statutory debentures duly 
 registered, should have a right to recover and secure the pay- 
 ment of all principal and interest due to them in priority to the 
 holders of other obligations not issued under the authority of 
 Parliament. 31 They also recommended that the right of the 
 public to the use of the railways should be protected and that 
 the rolling stock and plant of a railway should never be seized 
 by creditors. Moreover, the committee recognized the evil re- 
 sulting from the lack of means to establish the legality of de- 
 bentures. Therefore it was also urged 32 as a modified protec- 
 tion to the holders of such debentures that there should be a 
 semi-annual declaration in the gazette of the state of the bor- 
 rowing powers of the company and an endorsement upon each 
 certificate. This was not expected to render it impossible for 
 the companies to issue debentures beyond their borrowing pow- 
 ers; but it was hoped that the knowledge of the fact that their 
 misconduct would be palpably and continually kept before their 
 own eyes, would be a powerful force in restraining the directors 
 from exceeding such borrowing powers to any considerable ex- 
 tent. Many plans 33 for verifying the legality of debentures 
 were proposed, of which one advocated that there should be an 
 examination of the debenture accounts by a public department, 
 and that a stamp should be affixed to the debenture whose le- 
 gality had been ascertained. It was also urged that the chair- 
 man and secretary of the railway company should be required 
 to certify under their hands the amount of debentures at any 
 time issued, and should be made liable to penalty if the amount 
 was false, or if the debentures issued were in excess of their bor- 
 rowing powers. The great weakness with a scheme like that was 
 that it did not provide for the most common case in which 
 debentures were issued by mistake. As the directors were liable 
 in almost all cases under such a scheme except that of mistake, 
 it was readily recognized that such a scheme would not prove 
 very effective. 
 
 It was also proposed that all debentures illegally issued should 
 be made binding on the company and have a claim prior to the 
 dividends of the shareholders. This was based on the usual as- 
 
 31 Select Committee of 1864, Report, pp. III-IV. 
 
 32 Evidence before select committee of 1864, p. 27. 
 as Economist, July 11, 1863. 
 
65] SUPERVISION OP RAILWAY CAPITALIZATION 65 
 
 sumption that the shareholders appointed the directors who 
 managed the business and should, therefore, be liable for their 
 misconduct. But it was recognized that ' ' considering how little 
 !real influence most shareholders, in fact, have in the appoint- 
 ment of the directors, it appeared rather hard to reduce their 
 dividends if the directors are dishonest. . . " 34 
 
 Parliament, however, was not ready to adopt any of these 
 propositions. So the situation drifted from bad to worse. The 
 goodness of debentures and the repayment of the money bor- 
 rowed, as in the case of the Great Eastern, 35 became the subject 
 of a complicated controversy even between the directors and the 
 deputy chairman of the company. The one would say that bad 
 securities had been issued, while the other would deny the 
 charge; and the world had to judge between them. In some 
 cases debentures were issued when no real capital whatever had 
 been subscribed. As in the case of the Eastern Section Rail- 
 way, 36 certain ''receipts" were exchanged between a financial 
 agent and the company by which transaction "apparent cap- 
 ital" was created. Thus the parliamentary requirements and 
 restrictions were utterly disregarded. But this case was not 
 the worst. Some men who were known to have "the greatest 
 repute for integrity and the highest standing," went so far as 
 to "pawn" debentures not only in an illegal manner, but even 
 for fraudulent purposes. As revealed in the case of the London, 
 Chatham and Dover Railway, 37 supposedly genuine debentures 
 issued by the company were found later to have "nothing in 
 them." In defence of the company, one of its directors de- 
 clared that those "debentures were not debentures at all." He 
 admitted that he had obtained money on them, but he said 
 "They were not worth anything." They were "quasi things" 
 and the good securities were elsewhere. It was no wonder, 
 therefore, that the whole basis of railway credit was utterly 
 shaken. 
 
 To make things still worse, the treacherous instrument called 
 Lloyd 's bonds 38 also appeared in the financial market about 
 
 a* Economist, July 11, 1863. 
 
 35 Economist, Aug. 12, 1865, p. 970. 
 
 36 Economist, Oct. 27, 1866. 
 
 37 Economist, Oct. 27, 1866. 
 
 38 For a description of these bonds cf. supra, p. 19. 
 
66 RAILWAY FINANCE IN ENGLAND [66 
 
 this period. What followed was but natural. Distrust and dis- 
 satisfaction over railway securities was felt everywhere. It 
 was urged that the government should see to it that the law was 
 complied with. A loud cry 39 was also raised demanding that 
 government should stamp all the debentures issued as it stamped 
 money and "ascertained the qualities of schoolmasters/' 40 so 
 that only the allowed number would be permitted to circulate. 
 
 Nothing, however, was done by Parliament to meet the de- 
 mands. In the meanwhile the railway panic of 1865-1867, which 
 was the result as well as the cause of the growing distrust in 
 railway debentures, was setting in, during which a number of 
 companies suffered great embarrassments. The credit of some 
 railway companies like that of the South Eastern was greatly 
 injured on account of the pressure brought about by the re- 
 newal of their debentures. Other companies, like the London, 
 Chatham and Dover, met with "utter and disgraceful failure" 41 
 due to similar causes. What was even of greater consequence 
 was the effect of such happenings upon the credit of the whole 
 railway system. The accidental circumstances of mere neigh- 
 borhood to the "exploded" companies was construed into some 
 participation in their faults. In the midst of this chaos, a royal 
 commission was appointed to examine the whole matter, with a 
 view toward government purchase as a solution of the problem. 
 Parliament intended to postpone all action until the commission 
 had finished its work; but the prevailing difficulties made early 
 action necessary. Therefore, in 1866 the Railway Companies 
 Securities Act 42 was passed for the purpose of remedying the 
 situation. 
 
 By 1867 the panic subsided ; but the old ominous controversy 
 over the nature and value of railway securities was still rife. 
 In fact it held all other financial matters in abeyance. Of the 
 aggregate railway capital of about 450,000,000 more than 27% 
 represented debenture debts, 43 the number of investors in such 
 securities numbered no less than 100,000. 44 
 
 sa Economist, Nov. 17, 1866. 
 
 40 Ibid., Oct. 27, 1866. 
 
 41 Ibid., 1866, pp. 1484-1485. 
 
 42 29 & 30, V. e. 108. Cf. infra, Chap. V. 
 
 43 London Times, Feb. 6, 1867, p. 9. 
 4* Hansard, 185: 297. 
 
67] SUPERVISION OF RAILWAY CAPITALIZATION 67 
 
 Meanwhile the current belief was that a man lending money 
 upon a debenture, lent it upon a mortgage not only of the in- 
 come, but also of the property of a railway company. But this 
 belief was shattered by the decision of the Lord Justice in the 
 London, Chatham and Dover Company's land case, 46 in which 
 the principle governing the question was laid down at some 
 length. It was held that the holders of railway debentures were 
 not only without any immediate hold on the general property 
 of the undertaking as distinguished from its income, but were 
 not entitled to any claim to the rents or proceeds from the sale 
 of the company's surplus land. In other words, the debenture- 
 holders had only a hold on the tolls and earnings of the line and 
 not on the property of the company. The whole question seem- 
 ed to have turned on the interpretation given to the word "un- 
 dertaking" in the security which the debenture-holders received, 
 for their money. The popular idea was that by that term the 
 debenture-holders were mortgagees of the whole property and 
 effects of the company. But the court held that the object and 
 intentions of the legislature were to create a railway "which 
 was to be made and maintained, by which tolls and profits were 
 to be earned, and which was to be worked and managed by a 
 certain company. . ." "The whole of this when in operation 
 is the word contemplated by the Legislature, and it is to this 
 that the name undertaking is given." 
 
 This decision and the financial depression of 1865-1867 brought 
 to light the following broad and practical points regarding rail- 
 way debentures. 46 
 
 First. The Court of Chancery would not undertake to man- 
 age a railway for the debenture holders. It was true that in 
 
 45 During those years many companies acquired, either accidentally or 
 involuntarily, more land than they ultimately needed, and such lands sooner 
 or later were resold, so that the proceeds might revert to the capital of the 
 concern. The London, Chatham and Dover more than other companies, had 
 a considerable amount of such lands which was valued at about 1,000,000. 
 The debenture-holders, naturally enough, desired to establish their claims 
 upon this as well as other properties of the company, and applied to the 
 Court of Chancery for a receiver to take and hold for their benefit the pro- 
 ceeds from the disposal of such lands when sold and the rents in the mean- 
 time. It was on this claim that the decision referred to in the text was 
 rendered. Cf. London Times, February 6, 1867, p. 9. 
 
 Economist, Feb. 2, 1867. 
 
68 RAILWAY FINANCE IN ENGLAND [68 
 
 some cases the Court of Chancery did, for limited periods, un- 
 dertake the management of large concerns; but this was done 
 with the view of winding up that concern. But it could not 
 wind up a railway. A railway was, as had been recognized 
 then, an unending business and the court could not wind it up. 
 
 Second. The debenture-holders could hardly manage the rail- 
 way in case their interest and principal were in arrear, even if 
 they wanted to do so. They were not a corporate body. They 
 could not appoint directors to manage for them. The majority 
 of all but one had no more legal capacity than the one. 
 
 Third. The debenture-holders had not even a preferential 
 claim or mortgage on any outlying surplus land. 
 
 Fourth. The debenture-holders could not sell the railway. 
 The right of building the railway was given by Parliament to a 
 certain specific company. Neither that company, nor any law 
 court could sell it save by the assent of Parliament. "Once a 
 railway company, always a railway company. ' ' It was a sort of 
 a consecrated entity, which only Parliament could create, and 
 which only the same body could change. 
 
 Fifth. The mortgagees could not split their securities in spite 
 of the Act of 1863, the old form of debentures representing lump- 
 sums of money being still the most common form of securities 
 issued by railway companies. Thus the investors must take the 
 security as a whole and as a unit, and as they found it. 
 
 But the real state of affairs was not as objectional as these 
 difficulties would suggest. All but the last of these drawbacks 
 applied only to the poorer roads, which were in difficulty, and 
 did not have any reference to the debentures of strong, solvent 
 companies. 
 
 But the most objectionable drawback of the railway debentures 
 was the falling due of such securities at fixed and often unfor- 
 tunate seasons. This was fairly recognized in the early fifties, 
 but was made clear during the depression. Experience had 
 taught the hitherto credulous that short-period debentures were 
 dangerous and uncontrollable, "a lottery within themselves." 
 Some companies "highest in credit, most secure in revenue . . . 
 unassailable in repute found themselves ... as helpless as the 
 vilest excrescence which had been able to foist itself into the 
 family of railway interests. . ." Thus the Railway Times 
 
69] SUPERVISION OF RAILWAY CAPITALIZATION 69 
 
 urged that short-period debentures be abolished and in place 
 debenture-stocks issued at such a rate of interest as would estab- 
 lish for them an immediate and permanent popularity. The 
 Economist also advocated that in the interest of the companies 
 as well as the investors, it was essential that a large portion of 
 the existing 110 millions sterling of debenture bonds which 
 would mature at fixed periods, very often without any or at 
 least with insufficient notice, should be changed into debenture 
 stocks, representable in consols at the option of the holder, by 
 certificate to bearer in coupon form. Some members of Parlia- 
 ment 4T also recognized the evil of the existing system of deben- 
 tures. Many solvent companies were often placed in consid- 
 erable embarrassment by the claims of the holders of such short- 
 period debentures. Indeed, to permit a large amount of capital 
 raised with short-period debentures to be sunk in a fixed under- 
 taking was regarded as a great error on the part of Parliament. 48 
 The legislature was forced to recognize this evil, when borrowers 
 were compelled to come constantly or "almost hourly" before it 
 for renewals of their loans. 49 
 
 Under such conviction, many people firmly believed that per- 
 manent debenture-stocks should be created in place of the exist- 
 ing ' ' accommodation bills, ' ' as the railway debentures were called. 
 It was urged 50 that this reform would not only save the com- 
 panies the periodical recurrence of the danger inherent with the 
 falling due of short-period debentures, but would also mean an 
 immediate source of saving in money and trouble to the railways. 
 It would relieve the railways from the trouble of stamping, and 
 would save the commissions and fees to lawyers and brokers as 
 well as the wages of the staff of clerks employed for managing 
 the debenture business. Therefore, new debenture-stocks should 
 be issued to shareholders in place of dividends, and this pro- 
 cedure, it was thought, would prove acceptable to the share- 
 holders. 
 
 Another defect of the law which was brought to light by the 
 financial depression, and which led to an enlightened and most 
 
 Hansard, 185: 785. 
 
 48/&id., 186: 1030. 
 
 Ibid. 
 
 so London Times, March 23, 1867, p. 12. 
 
70 RAILWAY FINANCE IN ENGLAND [70 
 
 beneficial enactment, was the fact that the debenture holders 
 had no preferential claim on the rolling stock which formed the 
 implement of the trade. In the absence of any adequate pro- 
 tection for the rolling stock, even if the debenture-holders did 
 unanimously concur in the management of a railway to com- 
 pensate their losses in interest or principal, they would still be 
 in danger of having the carriages seized by the contractor, the 
 engine maker, or any other casual creditor of the company. 
 The debenture mortgage was on the "tolls or fares" of the rail- 
 way, and there was no specific pledge of the carriages. 51 There- 
 fore legislation was needed to keep the railway intact in order 
 to safeguard the security upon which the debenture-holders had 
 a claim, namely: the earnings of the company. 
 
 As might have been expected, the panic of 1865 and the re- 
 sultant discoveries regarding the validity and securities of rail- 
 way debentures created a widespread alarm among the owners 
 of these securities, which fact in turn involved many railway 
 companies in serious embarrassment. Interest to the amount 
 of one-half to one per cent higher than should have been paid 
 according to the natural state of the money market had to be 
 offered in order to induce investments. 52 It became essential for 
 Parliament to take action in order to remove such alarm. More- 
 over, the fact that the class of people who invested in such 
 securities were those who needed the greatest protection made 
 immediate action necessary. 53 Early in 1867 the Railway De- 
 benture Holders Bill was introduced to prevent any one class 
 of creditors from injuring the public and other losses of cred- 
 itors by seizing the rolling stock so as to stop the working of 
 the line. 54 This measure, before being presented to Parlia- 
 ment, was submitted to and approved by "the highest authori- 
 ties" of the leading railways and was also approved by the At- 
 torney General. 55 What the bill asserted was that the whole un- 
 dertaking, engines, carriages and all, formed the security of the 
 debenture holder, and that other creditors should be forbidden 
 from seizing engines or any part of the plant, or in any way 
 
 6i Economist, February 2, 1867. 
 52 Hansard, 185: 787. 
 sa Hansard, 185: 781. 
 
 54 The bill was introduced on Feb. 12, 1867. Hansard, 185 : 297-299. 
 
 55 Hansard, 185 : 781. 
 
71] SUPERVISION OF RAILWAY CAPITALIZATION 71 
 
 breaking up the "living whole" on which the conveyance and 
 convenience of the public as well as the money of the mort- 
 gagees depended. 
 
 This measure was regarded as both timely and helpful in es- 
 tablishing the desirability of debentures. "No one could 
 doubt, ' ' remarked the Economist ' ' that this enactment is bene- 
 ficial. It amounts to preserving the interest of the mortgages 
 from all danger, if the line yields money enough to pay it, be- 
 cause the whole earning machine is kept together and intact to 
 make what gains it can." 
 
 It was also felt in Parliament that, in the existing feverish 
 state of the public mind, any attempt to oppose such a measure 
 as the Railway Debenture Holders Bill might conduce to the 
 spread of panic and to create the impression that Parliament 
 was not anxious to strengthen the position of the debenture- 
 holders. 57 Nevertheless, the bill was shelved for a while after 
 the second reading. 
 
 Being deeply impressed by the need of protection to the de- 
 benture-holders, some members evidently grew impatient with 
 the lack of action of Parliament. Consequently early in April, 
 1867, 58 a resolution was introduced into the House of Commons 
 to the effect that ' ' in case where adequate security can be given, 
 the state should assume the responsibility of the debenture debt 
 of railway companies unable to meet their engagements, upon 
 conditions providing for the eventual acquisition of such rail- 
 ways by the state upon terms of mutual advantage." In fact 
 the matter of government guarantee had been thought of for 
 some time. In the previous year it was announced that the 
 cabinet intended to adopt a plan for giving a government guar- 
 antee to railway debentures and for obtaining a sum of money 
 applicable to the payment of the national debt by that means. 
 The scheme was proposed in various forms, but in its essence it 
 was this: that the government should borrow the money need- 
 ful for railways at the cheapest rate it could in the market, and 
 lend it to the railways at what was called a "just" rate, namely, 
 a rate which railways had been paying. This process, it was 
 
 se Economist, February 23, 1867. 
 
 57 Hansard, 185 : 788. 
 
 5 8 The resolution was introduced by E. W. Crawford on April 2, 1867. 
 See Hansard, 186: 1025-1063. 
 
72 RAILWAY FINANCE IN ENGLAND [72 
 
 hoped, would on the one hand enable the railways to obtain 
 money upon fairer terms than they otherwise could, and on the 
 other hand, enable the government to gain the difference be- 
 tween the rate which it would have to pay and that which it 
 would charge. 59 
 
 So far, so good. But serious objections were at once detected. 
 In the first place it was recognized that the chief reason why the 
 government was an easy borrower a borrower at low terms 
 was because it was a small borrower. Even then, there were 
 many dealers who declared that the public were withdrawing 
 from investment in "consols." If a large new loan were asked 
 for, it would likely tax the credit of the government to such an 
 extent as to necessitate a great depreciation. But it was argued, 
 not without reason, that the proposed loan to pay off railway de- 
 bentures would not constitute a loan for new, additional money. 
 The capital represented in these debentures had been sunk years 
 ago. All that was needed was a transfer from the books of the 
 railways to that of the government. To this it was replied that 
 such a transfer was precisely what would impair the credit of 
 the government. Its securities were then at a scarcity value. 
 The money to be attracted by a low rate of interest was limited 
 and could not be much augmented. Consols were once sold for 
 less than half of their face value, 60 and it was not beyond possi- 
 bility that a disastrous event like a war might occur to necessi- 
 tate large loans. In such case, a government guarantee would 
 prove, it was feared, exceedingly embarrassing, if not disastrous. 
 
 Moreover, even if the borrowing could have been done prop- 
 erly, it was still almost impossible for the government to fix the 
 "just" rate at which to lend to the different railways. The nat- 
 ural test of a proper rate of interest was the test of the market. 
 The railways which the public trusted would get their money on 
 good terms; those which the public distrusted would get it on 
 bad terms. But it was asked, how could a government charge 
 one railway 5% and another railway 4%. There would at once 
 be a cry of favoritism. Such a process would not only give rise 
 to much complaint, but would also offer a strong temptation to 
 the different lines to corrupt the officials who had charge of de- 
 
 59 Economist, November 17, 1866. 
 
 o In 1797 consols were sold at 47. Cf. Economist, November 17, 1866. 
 
73] SUPERVISION OF RAILWAY CAPITALIZATION 73 
 
 termining the rates of interest. Therefore it was urged that the 
 true function of a government in relation to railway credit was 
 to see that the law was complied with. The government should 
 use not its faculty of borrowing, but its function of verification. 
 Thus neither the resolution of Mr. Crawford nor the sentiment 
 of the cabinet in favor of government guarantee, resulted in any 
 action by Parliament. 
 
 But many members of Parliament clearly saw that something 
 must be done to prevent the spread of discredit over railway de- 
 bentures. Therefore, soon after the withdrawal of Mr. Craw- 
 ford's resolution just referred to, the Railway Companies Ar- 
 rangement Bill was introduced by the Secretary of State for 
 India. This bill, after being read a second time, was, in con- 
 junction with the Debenture Holders Bill, referred to a select 
 committee, and the two bills were "fused" into the Railway 
 Companies Bill. 61 This measure was regarded as of great im- 
 portance. Lord Redesdale was even of the opinion that if it had 
 been introduced twenty years earlier it might have prevented 
 many of the difficulties in which the railway companies had be- 
 come involved. 62 
 
 When the bill was discussed in the House of Lords, a proviso 
 was urged to the effect that whenever a company created any de- 
 benture stock having a higher rate of interest than 5%, it should 
 fall to that rate at the end of seven years. 63 But the Duke of 
 Richmond pointed out that the question of limiting the rate of 
 interest had been thoroughly discussed by the committee which 
 examined the bill. This committee felt that the companies which 
 required such arrangements were in most cases probably in all 
 cases the best judges of what they needed, and that they ought 
 to be left to borrow money in the manner which they thought 
 best. If they could borrow at 5% they were not likely to pay 
 6% for it. Therefore, it was thought unjustifiable for Parlia- 
 ment to restrict the companies in fixing the rates of interest. 64 
 
 But the most important and the most warmly opposed part of 
 the bill was that which prohibited creditors from seizing the 
 rolling stock of railways. This modification of the established 
 
 ei Hansard, 187: 1723-1724. 
 
 62/&uZ., 188: 491. 
 
 63 /bid., 189: 157. 
 
 6* Hansard, 189: 157-158. 
 
74 RAILWAY FINANCE IN ENGLAND [74 
 
 law by adding to the legal mortgages of the land estate, as it was 
 called, all the personal property that might happen to be upon 
 it was looked upon as too great a change. 85 
 
 It was, however, clearly recognized that it would be very in- 
 convenient to the public, who also had a right in railways, to 
 have the rolling stock of the company seized by individual cred- 
 itors, to say nothing of the undesirability of destroying the rea- 
 sonable security of the debenture-holders, who were the first 
 creditors. "When a law gave occasion for the stoppage of the na- 
 tion's commerce, it should be modified even if it were of old 
 standing. 66 
 
 An objection was raised against such a proposition on the 
 ground that it would deprive the trade creditor of his security. 
 It would give the debenture-holders an unwarrantable advantage 
 over all other creditors of a railway company, with the single 
 exception of the tax gatherers. It was feared that a case might 
 occur where a contractor engaged in constructing a line and de- 
 siring payment when the line was finished, would be unable to 
 put in an execution for payment in case the company had issued 
 debentures. The contractor for casual repairs, too, might be 
 brought into such a predicament under similar circumstances. 
 For these reasons, a member of the House of Commons seriously 
 opposed the measure,, and thought that it would be more appro- 
 priate to call such a measure railway companies creditors' de- 
 finance bill instead of railway debenture-holders' bill. 67 
 
 Those in favor of the measure, however, denied that such 
 could be the case. However, even if it did so affect the security 
 of such trade creditors, that fact alone was not sufficient to make 
 the measure undesirable. Inasmuch as the bulk of the railway 
 revenue was received in cash, railway companies should pay cash 
 for their stores, labor, etc., and should not get into debt on their 
 account. Moreover, there was in fact a large amount of property 
 left untouched by the bill which could be seized by such trade 
 creditors, if such a course became really necessary. In addition, 
 the trade creditors had recourse to appointing receivers. 68 
 
 es Hansard, 185 : 783-784. 
 wlbid., 185: 784. 
 67 Ibid., 185: 783. 
 185: 782. 
 
75] SUPERVISION OP RAILWAY CAPITALIZATION 75 
 
 The opponents to the measure further contended that the 
 clause would encourage solvent companies to delay the payment 
 of their debts. Moreover, it was inexpedient to oblige the cred- 
 itors of solvent companies to resort to the "cumbrous and per- 
 haps tedious" plan of getting a receiver appointed. If a railway 
 were insolvent, it would itself apply for the appointment of such 
 receivers. In other words, in the case of solvent companies, it 
 would be impracticable and, in the case of the insolvent, it 
 would be unnecessary for the trade creditor to have recourse to 
 the appointment of receivers. Hence he would get no protec- 
 tion whatever from the clause providing for the appointment of 
 such receivers. 69 
 
 To this it was answered that a creditor would have ample rem- 
 edy inasmuch as a solvent company would, under the provisions 
 of the bill, make immediate payments, while a receiver should be 
 appointed in the case of insolvent companies. No company that 
 was solvent would think for an instant of allowing a receiver to 
 be appointed. 70 It was also urged that if the trade creditors had 
 the power of selling the rolling stock, there would be a serious 
 effect upon the shareholders. Such powers might be pressed at 
 inconvenient moments with the intention of bringing down the 
 shares to a point far below their value, and then the very men 
 who had assisted in bringing about that unfortunate state of af- 
 fairs might step in and make a handsome fortune out of the mis- 
 fortune of others. 71 It was further pointed out that it was only 
 the small creditors who would ever be tempted to seize the roll- 
 ing stock. It would never be worth the while of large creditors 
 to do so. No railway which had the slightest regard for its own 
 reputation would permit its rolling stock to be seized for the 
 purpose of securing small debts. 72 Furthermore, the measure 
 was not directed against existing creditors. As to future cred- 
 itors, they would be given their credit with the full knowledge 
 that they could not levy execution in case of default in payments. 
 Thus they would be duly aware of what their securities were. 
 To give such creditors the power to apply to the Court of Chan- 
 
 69 Hansard, 187 : 1725. 
 ro Ibid., 187: 1726. 
 "/few*., 187: 162. 
 72 Hansard, 189 : 162. 
 
76 RAILWAY FINANCE IN ENGLAND [76 
 
 eery for the appointment of a receiver to seize the tolls of the 
 railway was regarded, therefore, as ample protection. 73 
 
 The opponents also endeavored to introduce an amendment to 
 the measure that should retain the power of seizing the rolling 
 stock in the hands of the creditors, unless the Court of Chancery 
 should appoint a receiver. But this amendment was defeated. 7 * 
 
 Another new and seriously contested section of the bill was 
 the so-called "arrangement" clause, providing for the creation 
 of "pre-preference" stocks. 75 This provision was opposed on the 
 ground that it would interfere seriously with the rights of the 
 holders of the some 150,000,000 in debentures. 76 Persons who 
 advanced money on debentures did so in the belief that they had 
 a first claim upon the company's receipts; but if Parliament 
 should confer the power of creating preference stocks, the public 
 would be unwilling to advance any more money upon this class 
 of securities in the future. It might be proper to permit the 
 creation of such pre-preference stocks by special act when the 
 particular circumstances warranted such a procedure; but it 
 would be impolitic to confer such powers by a general act. 77 
 
 There was also much opposition among the holders of railway 
 debentures as shown by the fact that a formal protest was lodged 
 against such a provision being inserted in private bills of the 
 session by a large number of bankers and lawyers, as well as by 
 many prominent railway men, in behalf of the holders of railway 
 debentures. 78 These petitioners claimed that the effect of such 
 
 187: 1725. 
 
 74 Hid., 187 : 1722. 
 
 75 Pre-pref erence stocks were securities issued in excess of a company 'a 
 borrowing powers in case that company became unable to meet its engage- 
 ments with its creditors. The first instance of the issue of such stocks was 
 that of the Caledonian Railway. In 1851 that company obtained powers 
 from the House of Commons to issue debentures in excess of its powers, for 
 the purpose of paying its debts. At the time the company was in a state 
 of great embarrassment, and the course adopted proved beneficial. It was 
 pointed out in Parliament that in that case the creation of the additional 
 debentures (pre-preference stock was not the name used) was equal to put- 
 ting a charge over the preference shareholders. Hansard, 187: 1246. For 
 further discussion of this provision in Parliament, cf. Hansard, vols. 186- 
 189, under Railway Companies Bill, 1867. 
 
 76 Hansard, 189: 159-160. 
 
 77 Ibid., 188: 590-492, and 189: 163. 
 i& Railway Times, July 22, 1897. 
 
77] SUPERVISION OF RAILWAY CAPITALIZATION 77 
 
 a provision would be to depreciate or bring into disrepute the 
 security hitherto attached to acts of Parliament. It was claimed 
 that "a large proportion of these securities were held by trus- 
 tees for infants, married women and widows, or by persons of 
 fixed income, who invested their means in such securities upon 
 the faith of the acts of Parliament, and that such persons would 
 have never made any such investments had they supposed that 
 Parliament would permit their rights to be affected by a later 
 issue of securities of prior lien." 
 
 After being committed and recommitted and modified in many 
 respects, the bill was passed and became the Railway Companies 
 Act of 1867. The first important section of this act provided 
 that the creditors of a railway company might obtain the ap- 
 pointment of a receiver, and if necessary, of a manager, on ap- 
 plying to the Court of Chancery to manage the railway, but that 
 the ' ' rolling stock and plant used or provided by a company for 
 the purpose of the traffic on the railway or of the stations or 
 workshops, shall not, after the railway or any part thereof is 
 open for public traffic, be liable to be taken in execution at law 
 or in equity at any time after the passing of this Act, and before 
 the first day of September, 1868. . ." 
 
 It may be noticed that the provision for the protection of roll- 
 ing stock was adopted for only one year. This was due to the 
 fact that such a measure was still regarded as an innovation. 
 On account of the aforesaid opposition and uncertainty as to the 
 practicability of such a measure, Parliament decided to try it 
 for twelve months so as to carry the matter over the next ses- 
 sion; and then if it were found absolutely necessary that there 
 should be a sale of rolling stock by the creditors, it could be so 
 arranged by an Act of Parliament. 79 
 
 This precaution proved beneficial. It afforded time to try out 
 the principle and it also gave a great stimulus to all concerned 
 to make close observation, with a view to altering the rule either 
 one way or the other. 
 
 The result of the application of the provisions governing the 
 protection of rolling stock proved so advantageous that Parlia^ 
 ment in the following year, by a special general act, 80 extended 
 
 79 Hansard, sec. 3, 189 : 162. 
 
 so The Eailway Companies Act, 1868, 31 & 32 V. c. 79. This act was 
 enacted for the sole purpose of extending the time-limit to 1870. 
 
78 RAILWAY FINANCE IN ENGLAND [78 
 
 the time limit of the provision to three years, that is, until Sep- 
 tember 1, 1870, and at the end of the three years, Parliament 
 found it expedient to pass another special act 81 for the purpose 
 of making the provision perpetual. 
 
 A large part of the act was devoted to defining relations be- 
 tween the company and its creditors. In this connection, ample 
 provisions were made for settling and defining the rights of 
 shareholders of the company as among themselves for raising 
 money by pre-preference stocks. Considerable protection was 
 afforded the holders of the different classes of securities which 
 might be affected by such schemes, through the requirement be- 
 fore a plan could be put into operation of the consent of the 
 holders of three-fourths of each class of such affected securities. 
 Moreover, the scheme must first of all be filed in the Court of 
 Chancery; and after hearing the directors, creditors, or other 
 parties whom the court might deem entitled to be heard and on 
 being satisfied with the nature of the scheme, the court might 
 confirm it. Notice concerning both the filing, as well as the con- 
 firmation, of the plan must be published in the gazette. 82 
 
 Besides the provision prohibiting the seizure of the rolling 
 stock, and that for the creation of pre-preference stocks, the 
 Railway Companies Act of 1867 contained a number of other im- 
 portant clauses governing the loan capital of railways. In the 
 first place it provided that, except the claim of the rent charges 
 and lease, ' ' all money borrowed or to be borrowed by a company 
 on mortgage or bond or debenture stock under the provisions of 
 any Act authorizing the borrowing thereof shall have priority 
 against the company and the property from time to time of the 
 company over all other claims on account of any debts incurred 
 or engagements entered into by them after the passing of this 
 Act." 83 Thus by this clause, the holders of debenture stocks 
 were clothed with an indisputable claim of priority against the 
 company over the holders of Lloyd's bonds and other irregular 
 securities. This measure was without doubt urgently needed for 
 improving the desirability of railway debentures. 
 
 Section 26 of this act provided that "money borrowed by a 
 
 si Railway Companies Act, 1875, 38 & 39 V. e. 31. 
 
 82 The Railway Companies Act, 1867, 30 & 31 V. c. 127, ss. 6-22. 
 
 ss 30 & 31 V. c. 127, p. 23. 
 
79] SUPERVISION OF RAILWAY CAPITALIZATION 79 
 
 company for the purpose of paying off, and duly applied in pay- 
 ing off, bonds or mortgages of the company given or made under 
 the statutory powers of the company, shall ... be deemed 
 money borrowed within and not in excess of such statutory 
 powers. ' ' 
 
 As we have seen, the railways had much trouble in meeting 
 their mortgages falling due. It has also been shown that there 
 was much difficulty over the fact that securities issued tem- 
 porarily in excess of the borrowing powers even in anticipation 
 of paying off debentures falling due were sometimes regarded as 
 illegal. By the above provision Parliament endeavored to re- 
 move this difficulty; and subsequent events have amply shown 
 that the effort of Parliament was not in vain. That such a pro- 
 vision had been urgently needed, few men who are familiar with 
 the financial affairs of English railways can deny. 
 
 To make the debenture stocks more acceptable and easier to 
 issue this act also removed all the restrictions prescribed in the 
 Companies Clauses Act of 1863 as to the rate of interest. 84 
 Therefore, the companies and their investors were empowered to 
 make whatever arrangements they saw fit in regard to the rate 
 of interest. 
 
 Thus closed the legislation on the loan capital of railways in 
 England. Based upon the acts just referred to, the Lord Chan- 
 cellor in 1869 decided that railway companies should be held 
 liable for all loans irregularly contracted and even in excess of 
 its borrowing powers, 85 thus removing much of the temptation of 
 railways to borrow illegally. Aside from the imposition, 86 since 
 1868, of a stamp duty of 2 per cent on the nominal value of the 
 debenture stocks transferred, nothing new has been added to the 
 principles laid down up to 1870. In spite of the temporary dis- 
 content with these measures of Parliament, the regulations seem 
 to have proven on the whole satisfactory. With the additional 
 security and facility given to railway debenture stocks it soon 
 became common for railways to ask Parliament for powers to 
 issue stocks to be appropriated solely to the liquidation and can- 
 cellation of debentures and other periodical loans falling due. 87 
 
 s* Sec. 25, 30 & 31 V. c. 127. 
 ss Economist, August 7, 1869. 
 
 86 Sec. 12, 31 & 32 V. c. 124. 
 
 87 Eailway Times, May 2, 1868. 
 
80 RAILWAY FINANCE IN ENGLAND [80 
 
 The desirability of such stocks was well shown by the fact that 
 by 1876 practically all the loans were converted into this class of 
 securities. 88 
 
 Our survey of this aspect of English railway finance leads to 
 certain conclusions, briefly expressed as follows: 
 
 1. Other things being equal, long period debts or better still, 
 perpetual and devisible debenture stocks redeemable at the op- 
 tion of the company are more desirable for railways than lump 
 sum loans or mortgages falling due after short periods. 
 
 2. The action taken by the English Parliament in 1867 pro- 
 hibiting the seizure of rolling stock, revealed the advanced ideas 
 of that body and proved to be an effective measure for the estab- 
 lishment of stability in railway finance. 
 
 3. The function of a government in regulating the capitaliza- 
 tion of railways by loans lies not so much in the adoption of 
 many complicated restrictions as in the enforcement of a few 
 essential rules, with a view of enabling the investor himself to 
 tell the true financial condition of the concern in which he in- 
 vests. 
 
 ss Board of Trade, General Eeport on Railway Shares, Loan Capital, 
 etc., 1876. 
 
CHAPTER IV 
 
 CONTROL OF THE BORROWING POWERS OF RAILWAY 
 
 COMPANIES 
 
 In early years borrowing powers were granted to railway com- 
 panies for the purpose of relieving the pressure of calls upon 
 shareholders for new capital. There was no idea then that bor- 
 rowings should become a permanent charge upon capital. Par- 
 liament and the companies alike were of the opinion that the 
 vast profits to be derived from railways would speedily enable 
 the latter to pay off their debts and in addition to declare divi- 
 dends of a much higher rate than is now- expected. The general 
 belief was that railways were to be constructed with capital 
 raised from subscriptions, plus a small proportion of loans for 
 temporary purposes. It is hardly necessary to say that these 
 illusions as to railway profits were soon dispelled. The idea of 
 being able to pay off borrowed money, however, was retained for 
 many years, and was not abandoned until the constant and in- 
 creasing requirements for renewals, replacements, and improve- 
 ments had grown beyond all expected proportions. 1 
 
 With such a conception of railway borrowing in mind, Parlia- 
 ment endeavored, from the beginning, to limit the borrowing 
 powers of railway companies as well as to lay down strict rules 
 governing their exercise. Thus, in one of the standing orders, 2 
 which guided early railway legislation, it was provided that no 
 railway company should be authorized to raise, by loan or mort- 
 gage, a sum of money larger than one-third of its share capital, 
 and that until fifty per cent of the share capital should have been 
 
 1 Eailway Times, August 22, 1863. 
 
 2 Standing Order No. 84. Cf. Eemarks on Standing Orders by a Par- 
 liamentary Agent, London, 1837, p. 55, and Eailway Times, April 27, 1844. 
 Cf. also evidence before the select committee on railways, House of Com- 
 mons, 1844, p. 29. 
 
 81 
 
82 RAILWAY FINANCE IN ENGLAND [82 
 
 paid up, it should not be in the power of the company to raise 
 any money by loan or mortgage. 3 
 
 Thus from the beginning, two principles were laid down. 
 First, no railway company should borrow more than one-third of 
 its share capital ; and secondly, no company should borrow at all 
 until one-half of its share capital had been paid up. 
 
 The purpose of Parliament in so strictly limiting the powers 
 of railway companies to one-third of their share capital was due 
 first to the general belief, as already mentioned, that railways 
 should be built only with their subscribed share capital, and sec- 
 ond to the fact that strict limitation of loans was deemed neces- 
 sary to give the creditors of the companies adequate security. 
 The stipulation that 50 per cent of the share capital be paid up 
 before the exercising of borrowing powers, was adopted with the 
 hope that such a requirement would tend to place the shares in 
 the hands of substantial investors as well as to strengthen the 
 security of the debentures. 
 
 It was also held that no sellers of land or of material to a rail- 
 way company could be prejudiced by the railway company issu- 
 ing securities not authorized by the act of incorporation. The 
 company was not entitled to call any credit or to pledge any part 
 of their property for any other purpose, nor should the directors 
 make any contract or sanction any engagements to pay money 
 until they had clearly ascertained that from one or other of the 
 two sources authorized by Parliament they had the power of 
 fulfilling them. 4 
 
 So far so good. But in practice these rules were not always 
 observed. Much consideration was usually given to peculiar 
 circumstances. The .standing order just referred to was often 
 "either dispensed with or modified so as to meet the circum- 
 stances of the case. " 5 In fact another standing order provided 
 for a select committee on standing orders, whose duty it was to 
 
 3 As has been referred to in Chapter I the early railway acts were 
 modelled after the Canal Acts, and the latter in the earliest years gave no 
 power for borrowing. The first acts in which borrowing powers appeared 
 were passed in 1770. By degrees this power of the Companies was re- 
 stricted to one-third of their share capital. Report of Royal Commission 
 of Railways, 1867. If iii. 
 
 * Letter to the London Times, August 23, 1866. 
 
 5 Eemarks on Standing Order, pp. 78-79. 
 
83] BORROWING POWERS OP RAILWAY COMPANIES 83 
 
 "determine whether the standing orders ought or ought not to 
 be dispensed with." 6 Moreover, it soon became clear that not 
 only were the borrowings of railways to remain a permanent 
 charge instead of a temporary obligation as was expected, but 
 that the limit of the borrowing powers was altogether too narrow. 
 The state of the money market and other circumstances fre- 
 quently made it advisable for a railway company to raise a larger 
 proportion of its capital by loans than the law permitted. In- 
 deed it was only by over-borrowings that some companies con- 
 tinued to pay a fairly good dividend. 7 
 
 Under such circumstances one may readily imagine what hap- 
 pened. When a railway company wished to increase its loans, 
 especially when it could declare bigger dividends by such a 
 process, it would find some way of so doing whether the law 
 permitted it or not. Moreover, the law itself was 4 too imperfect 
 to be effective, for it only .stipulated against the borrowing on 
 mortgages and bonds, whereas there were other ways by which 
 money could be borrowed. As was currently remarked at the 
 time, one could always drive a coach and six through any law if 
 he tried hard enough. 8 This was exactly what happened. Money 
 was borrowed in many ways in excess of the legal limit, in spite 
 of the law. The best known expedient for evading the restric- 
 tions of Parliament was by the issue of loan notes!, for which the 
 directors issuing them were personally responsible. By the issue 
 of such loan notes the companies had "continually exceeded 
 their borrowing powers. ' ' 9 Thus the law prohibiting railways 
 from borrowing more than one-third of their share capital on 
 mortgages or bonds was evaded although not violated in letter. 
 
 The early restrictive measures upon railway borrowings 
 coupled with What was done to evade them had generally a 
 vicious effect upon the property of the original shareholders, 
 especially when the company was not prosperous. In such cases, ' 
 the borrowing powers were usually exhausted and hence no 
 money could be obtained through that channel. Loan notes 
 might be issued, but they were obligatory upon the directors 
 
 6 Kemarks on Standing Orders, pp. 13-14. 
 
 7 Eailway Times, April 27, 1844. 
 
 8 Evidence before Select Committee on Eailway Borrowing Powers, 1864, 
 p. 22. 
 
 9 Eeport of Royal Commission on Railways, 1867, p. xxiii. 
 
84 RAILWAY FINANCE IN ENGLAND [84 
 
 personally instead of upon the company. The directors would 
 naturally become more desirous of relieving themselves of their 
 personal obligations according as the conditions of the company 's 
 finance became more desperate. Therefore, they would proceed 
 to Parliament and obtain authority to issue shares either at a 
 ruinous discount, or with an exorbitant rate of interest guaran- 
 teed upon them. The result would be an immediate depreciation 
 of the value of the old stocks. The property of the original 
 shareholders, who encountered the risk of forming the com- 
 pany, was often ruined, and the credit of the concern would also 
 sink with the value of the old stocks. Thus it was claimed that 
 the standing order limiting the borrowing powers of railway 
 companies had a tendency either to prevent railways from rais- 
 ing their capital in the most judicious manner or to compel them 
 to issue securities of an irregular character. 10 
 
 Efforts were made, during the forties, to urge Parliament to 
 abolish, or at least to broaden the limit. 11 Nothing, however, 
 was done to remedy the situation. The law was neither modified 
 nor enforced. Like many other stringent laws, it was consistent- 
 ly disregarded. In some cases, sums of money larger than the 
 amount of the total authorized share capital were borrowed 
 through loan notes or other similarly illegal instruments. 12 
 
 The worst effect was that the public did not understand clearly 
 that such loan notes were illegal, and were astonished when it 
 was declared by the select committee of the House of Commons, 
 1844, 13 that these loan notes were ' ' absolutely invalid, ' ' and that 
 the lenders had no means whatever of enforcing the repayment 
 of their money. The issue of such notes was not merely illegal 
 but actually a breach of the original contract under which the 
 act of incorporation was obtained. Thus this select committee 
 on railways felt it highly important to adopt some means to pre- 
 vent the recurrence of practices so "highly objectionable. . ." 14 
 
 10 Railway Times, April 27, 1844. 
 
 11 Ibid. 
 
 12 Beport of select committee of the House of Commons on Bailways, 
 May 24, 1844. Eailway Times, June 22, 1844. 
 
 is Fifth Report of Select Committee of the House of Commons, 1844. 
 Cf. also Eailway Times, June 22, 1844. 
 i* Ibid. 
 
85] BORROWING POWERS OF RAILWAY COMPANIES 85 
 
 At the same time it was noticed that although the existing 
 transactions were illegal and contrary to the public policy, they 
 were, nevertheless, of "a perfectly bona fide character" as be- 
 tween the borrowers and the lenders. The contracts were en- 
 tered into without a distinct knowledge of the illegality. More- 
 over, the money so raised was applied for the execution of the 
 work authorized by Parliament. Therefore, ignorance of the 
 illegality of these securities should be considered. 
 
 With these problems in view, the select committee on railways 
 after many sittings at which much evidence was taken, recom- 
 mended the suppression of the issue of such illegal securities in 
 the future. At the same time, it expressed the opinion that in 
 order to avoid undue hardship upon investors and the danger 
 of disturbing the existing bona fide engagements, certain pro- 
 visions ought to be made by Parliament for the purpose of con- 
 verting these loan notes into valid securities. 
 
 Following the recommendations of this committee, Parliament 
 passed an act 15 in 1844 to the effect that ' ' from and after the 
 passing of the Act any railway company issuing any loan notes 
 or other negotiable 16 or assignable instruments purporting to 
 bind the company as a legal security for money advanced . . . 
 other than under the powers of some Act or Acts of Parliament, 
 . . . shall for every such offense ' ' be liable to a fine equal to 
 the sum for which such loan notes purported to be a security. 
 The companies, however, were permitted to renew their loan 
 notes issued prior to the passing of the act for any period not 
 exceeding five years from the passing of the act. 
 
 It was also provided that companies should pay off all their 
 notes issued or contracted to be issued before July 12, 1844, as 
 the same might fall due, and that a register of all such loan 
 notes, etc., should be kept by the secretary of the company, which 
 should be open, without charge, at all reasonable times to the 
 inspection of persons interested. 
 
 In the Companies Clauses Act of 1845, considerable attention 
 was given to the question of railway borrowing powers. The 
 general rules governing the borrowing powers of railway corn- 
 is The Eegulation of Bailways Act, 1844, 7 & 8 V. c. 85. 
 
 is Italics are mine. 
 
86 RAILWAY FINANCE IN ENGLAND [86 
 
 panics, laid down in this first Clauses Consolidation Act, may 
 be briefly summed up as follows: 
 
 (1) Borrowing powers must first be obtained from Parlia- 
 ment. 
 
 (2) All borrowings must be executed according to the pro- 
 visions and regulations contained in the acts granting such 
 powers. 
 
 (3) All borrowings must be sanctioned by an order of a 
 general meeting of the company. 
 
 (4) In no case must such borrowings exceed in the whole the 
 sum prescribed in the special acts of Parliament, which sum was 
 generally limited to one-third of the share capital of the com- 
 pany. 
 
 (5) Fifty per cent of the aggregate sum of the share capital 
 must be paid up. 
 
 For the enforcement of these rules, it was provided that the 
 certificate of a justice of peace and a copy of the order of a gen- 
 eral meeting should constitute sufficient evidence of powers to 
 borrow. Rules governing the manner of transfers of such se- 
 curities as well as the registration of the same were prescribed in 
 detail. 
 
 To strengthen these rules, it was further provided that " at all 
 reasonable times the books and accounts of the company shall be 
 open to the inspection of the mortgagees and bondholders. . . 
 with liberty to take extracts therefrom, without fee or reward." 
 
 Thus within two years, the issue of loan notes, which was one 
 of the most effective instruments for evading the law, was placed 
 under severe penalty, and the general rules governing the bor- 
 rowing powers of railways as well as the methods for their en- 
 forcement were codified into a general act. But in both cases 
 loopholes were left, through which these rules were practically 
 nullified. In the case of the prohibition against loan notes the 
 phraseology of the law led some railways to construe, not with- 
 out reason, that the enactment applied only to negotiable securi- 
 ties, as specified in the enactment, and not to the mere borrow- 
 ing of money on instruments not negotiable. At any rate, some 
 railways made this their excuse to evade the restrictions against 
 over-borrowing. A new form of notes was soon devised by an 
 expert lawyer which proved to be of greater consequence than 
 
87] BORROWING POWERS OF RAILWAY COMPANIES 87 
 
 the earlier form of loan notes. In the case of the general law 
 restricting over-borrowing, the regulations, per se, were strict 
 enough. But the enforcement of these regulations was left en- 
 tirely in the hands t>f the country justices. Under the act, these 
 justices, with their knowledge, or rather lack of knowledge, re- 
 garding the complicated system of railway finance and account- 
 ing, were depended upon to ascertain whether or not a railway 
 had fulfilled the requirements of the law governing its borrow- 
 ings; and their findings were final. 
 
 Moreover, in spite of the general law, considerable irregularity 
 appeared to have existed in practice. Thus in their third re- 
 port, 17 the select committee on railways appointed by the House 
 of Commons in 1848, three years after the first general act was 
 passed, pointed out that some bills of that session appeared "to 
 contain irregular or undefined powers of raising money. . ." 
 This committee also pointed, out that the most objectionable pro- 
 visions were the general powers for raising money to pay off 
 debts of the companies, when the bills contained no distinct re- 
 cital of the facts or specifications of the amount. 
 
 In spite of such irregularities, it may be said that the first 
 period of the legislation on railway borrowing powers was closed 
 by the act of 1845. With the exception of the provision con- 
 tained in the Abandonment of Railways Act, 1850, 18 providing 
 for the reduction of borrowing powers in proportion to the 
 amount of work abandoned, nothing very important was done 
 during the following fifteen years to alter the established rules. 
 
 In 1856 agitation for the more strict regulation of railway bor- 
 rowing powers was revived. A prominent member of the House 
 of Lords 19 endeavored to insert clauses in the railway bills seek- 
 ing legislation during the session of that year to the effect that 
 no money should be borrowed by a company except on the au- 
 thority of a minute signed by a majority, at least, of the direc- 
 tors for the time being of the company, and such minutes should 
 be published in the London Gazette before any money be raised 
 under the same; and if any money should be borrowed beyond 
 
 IT General Report of the Board of Trade on Bills of the Session, 1863, 
 p. 19. 
 
 is 13 & 14 V. e. 83. 
 
 is Lord Eedesdale. See Bailway Times, April 26, 1856. 
 
88 RAILWAY FINANCE IN ENGLAND [88 
 
 the powers given by this proposed act, the directors signing the 
 minute authorizing such borrowing should be personally liable 
 jointly and severally for the amount so raised beyond the powers. 
 
 The purport of the provision was to prevent the companies 
 from exceeding their borrowing powers, by making the directors 
 personally liable for such offenses. This aroused much opposi- 
 tion. It was feared that it would alarm the public mind and 
 shake the confidence of directors in their colleagues. In speak- 
 ing of this provision, the Railway Times 20 editorially remarked 
 that it was "so fraught with evil, so redolent of injustice, and 
 so hostile to the whole moneyed world that deals or invests in 
 debenture securities, that it cannot be tolerated. ' ' 
 
 The required advertisement in the London Gazette was re- 
 garded as worse than useless. Attention was called to the fact 
 that it was not always prudent for a purchaser, and frequently 
 less so for a borrower, to announce that he must obtain a certain 
 sum of money. These announcements in the London Gazette, 
 though they might be overlooked by the mass of the community, 
 would be keenly scrutinized by the "sensible" commission 
 agents, who had no money of their own but who played a great 
 part in keeping others' money in circulation. As soon as the ad- 
 vertisement appeared in the Gazette, it was feared that "the 
 highest existing rates of interest" would be "uniformly" ex- 
 acted from the borrowing company. 
 
 Moreover, if the directors were made personally liable, as pro- 
 vided by the clause, it would prevent good men from taking up 
 seats in railway directorates. Even without any such liabilities, 
 railway companies had already found it hard to find really 
 "good and upright men to undertake the onerous but thankless 
 duty of directors." 
 
 No open opposition was made in Parliament. But the Parlia- 
 mentary committee in charge of the matter unanimously rejected 
 the clause even without hearing the arguments of those who were 
 prepared to oppose it. 21 
 
 But the question of borrowing powers of railways was still a 
 live one. In the Lands Clauses Consolidation Act of 1860 pro- 
 
 20 Railway Times, April 26, 1856, from which the other quotations in 
 this connection are taken. 
 
 21 Railway Times, May 3, 1856. 
 
89] BORROWING POWERS OF RAILWAY COMPANIES 89 
 
 vision was made to the effect that, in case the proprietors of a 
 railway agreed for the purchase of any land in consideration of 
 the payment of a rent charge, annual feu duty or a ground 
 annual, the borrowing power of the railway should be reduced 
 by an amount equal to twenty years' purchase of any rent 
 charge, feu duty or ground annual, for the time being payable. 
 In the following year the question of the borrowing powers of 
 railways came up again. In petitioning for authority to increase 
 their share capital for the purpose of subscribing to the under- 
 taking of another company, some railway companies endeavored 
 to extend their borrowing powers in proportion to such additions 
 of share capital. On the surface, this extension of borrowing 
 powers seemed permissible, in that the borrowings would be still 
 within the limit of one-third of the share capital. But upon ex- 
 amination the Board of Trade concluded that any extension of 
 borrowing powers based upon the share capital created for the 
 purpose of subscribing to the undertaking of another company 
 was inconsistent in principle with the rule laid down by Parlia- 
 ment which provided that "in the case of a railway bill no com- 
 pany shall be authorized to raise by loan or mortgage a larger 
 sum than one-third of their capital." * 2 In order to test the con- 
 sistency of such extension of borrowing powers, it was necessary 
 to go back to the original object of the rule just referred to. 
 This was that the mortgage creditors of a railway company 
 might have the security of a definite undertaking, on which a 
 subscribed capital was to be paid up to an amount not less than 
 three times as great as the sum to be borrowed. If a company 
 were empowered to borrow on the basis of an increase of its 
 share capital to be used for subscribing to the undertaking of 
 another company, the lender of money so borrowed would not 
 derive any additional security whatever from such creation of 
 new capital, for this additional share capital would not be laid 
 out in the subscribing company's undertaking, on which alone 
 the lender would have a charge, but elsewhere. Thus, the spirit 
 of the rule of Parliament would be destroyed. Moreover, if this 
 request of the railways were granted, the additional share capital 
 
 22 The 126th standing order of the House of Commons and the 189th 
 standing order of the House of Lords. See General Eeport of the Board 
 of Trade on Railway Bills, 1867, p. 25. 
 
90 RAILWAY FINANCE IN ENGLAND [90 
 
 would be made the basis by both the subscribing and the receiv- 
 ing companies for an extension of their powers. Accordingly 
 the Board of Trade recommended that such requests be not 
 granted. 23 
 
 About 1855, as has been shown in a previous chapter, deben- 
 ture stocks came into vogue as a security in place of debenture 
 bonds, and Parliament took steps to reduce the borrowing powers 
 of the companies in proportion to the amounts represented by 
 the debenture stocks issued. In every railway bill seeking power 
 to issue such stocks, provisions were made to the effect that after 
 the issue of such debenture stocks or the conversion of any mort- 
 gages or bonds into such stocks, "it shall not be lawful for the 
 company to issue mortgages or bonds, or any other securities, or 
 again to borrow the sum so converted/' and the borrowing 
 powers of the company should be decreased by the amount so 
 borrowed, converted or raised by the issue of debenture stocks. 24 
 
 The growing popularity of such debenture stock led the Board 
 of Trade to make repeated recommendations, beginning about 
 1858, for the adoption of some general regulations governing the 
 issue of debenture stocks. Among other things, it recommended 
 (1) that the powers to create such stocks should be defined; (2) 
 that money should not be raised by debenture stocks in lieu of 
 borrowing until such money might be raised by the exercise of 
 the borrowing powers of the company; and (3) that to the ex- 
 tent of the nominal amount of the debenture stocks disposed of, 
 the borrowing powers should be extinguished. 25 Following these 
 recommendations of the Board of Trade, Parliament inserted a 
 clause in the Companies Clauses Act of 1863 26 to the effect that 
 the ' ' power of borrowing and re-borrowing by the company shall, 
 to the extent of the money raised by the issue of debenture stock, 
 be extinguished. " As is seen, this was not a new principle, but 
 an old one embodied in a new act. 
 
 Thus we see that prior to 1863 the question of the borrowing 
 powers of railways was not of any great popular interest, al- 
 though it had always been considered of considerable importance 
 in railway legislation. The custom of limiting the borrowing 
 
 24 15 & 14 V. c. 83. 
 
 25 General Beport of the Board of Trade on Railway Bills, 1861, p. 24. 
 
 26 26 & 27 V. c. 118, Sec. 34. 
 
91] BORROWING POWERS OP RAILWAY COMPANIES 91 
 
 powers to one-third of the share capital of railway companies 
 had been established. The public had seldom thought of chang- 
 ing the established rules. They also imagined that the restric- 
 tions laid down by Parliament were observed. With some slight 
 exceptions, the act of 1845 was considered as sufficient to safe- 
 guard the interest of the security-holders. In fact there was an 
 idea that the recording of securities by the secretaries of the 
 companies was a sufficient protection without an examination 
 into the details of the company. When the investor got his de- 
 benture, he never thought of searching the company's books. 
 It would be useless; ''it was never done; people trusted to its 
 being correct. ' ' 2T 
 
 But under this smooth surface, something unexpected was 
 taking place. The borrowing powers of many railway companies 
 were grossly abused or exceeded. In the first place a cry was 
 raised against the restrictions on borrowing powers to the effect 
 that they were too strict and that the limit was too small. Com- 
 panies were frequently in urgent need of larger sums of bor- 
 rowed money either to carry on works or to repay debentures 
 falling due. This difficulty was encountered in the common prac- 
 tice of companies issuing bonds to agents in several of the mon- 
 eyed circles in the country. By so doing the company would 
 often suddenly discover itself to have borrowed, through its 
 various brokers, a larger sum than was permitted to it. Then 
 whatever securities were issued over and above the limit were 
 illegal. Such illegal issues, however, were not practically very 
 objectionable, and Parliament often recognized such over-issues 
 in spite of their illegality. 28 
 
 But intentional breaches of the borrowing powers were also 
 made. Some of the companies which were the least entitled to 
 exercise such power were the most eager to exercise it. To get 
 around the restrictions, they resorted to fictitious subscriptions 
 and other improper methods. They filled their subscription 
 lists with the names of "men of straw," and they nominally ful- 
 filled the requirement of having one-half of their share capital 
 paid up not with payments, however, made by bona fide sub- 
 scribers, as contemplated by Parliament, but through the agency 
 
 27 Evidence before select committee on borrowing powers of railway com- 
 panies, 1864, pp. 6-10. 
 
 28 Railway Times, September 12, 1863. 
 
92 RAILWAY FINANCE IN ENGLAND [92 
 
 of contractors' contributions or advances made by financial 
 agents. As soon as the requirements of law were in some such 
 way complied with, they would immediately have recourse to 
 their borrowing powers. In many cases, the line was construct- 
 ed almost entirely with borrowed money, without any funds be- 
 ing left for the equipment or working of the road. Then the 
 promoters would go to Parliament to ask for powers to cancel 
 their ordinary shares which had been created but not disposed 
 of and to issue, instead, preference and other shares with claims 
 prior to those of the ordinary shareholders. 29 
 
 Fraudulent breaches of the law were also quite common. As 
 in the case of the West Hartlepool Harbor and Railway, it was 
 discovered after a protracted inquiry by a select committee that 
 vast frauds had been committed. The company under its three 
 separate acts of Parliament was authorized to raise 2,100,000 
 with power to borrow to the extent of one-third of the sum paid 
 up for shares. Thus, even if the whole share capital had been 
 paid up, which was not the case, the amount the company would 
 have been empowered to borrow was 525,000. But the com- 
 pany actually borrowed 2,700,000, without any authority from 
 Parliament. 30 
 
 The discovery of this fraud discredited railway debentures 
 more widely than did even the panic of 1847. The mind of the 
 public was appalled when it was shown that all this fraud was 
 done in spite of the "duly authorized, properly circulated" half- 
 yearly accounts and in spite of the service of the ' ' Committee of 
 Assistance" who helped to keep the company's affairs straight. 
 The debenture-holders felt that they possessed no security either 
 in the acts of Parliament or in the returns of the Board of 
 Trade, and much less in the half-yearly accounts of the com- 
 panies. In spite of all the restrictions and protection which 
 Parliament appeared to have given, he might be robbed of his 
 money at any time. 31 
 
 It was, however, not the mere breaking of the law, but the 
 effect of such breaches upon the investors, that proved especially 
 obnoxious. When a company over-issued securities contrary to 
 
 29 Railway Times, May 2, 1868. 
 
 so Hansard, 171: 1302-1303. 
 
 a Economist, June 22, 1863, pp. 674-675. 
 
93] BORROWING POWERS OF RAILWAY COMPANIES 93 
 
 law, much hardship must necessarily fall upon somebody. The 
 securities issued over and above the borrowing powers were il- 
 legal, and hence the holders of such securities had no status be- 
 fore the law. If the principal and interest were paid to the 
 holders of such illegal securities, the money must come from 
 somewhere. If they were not paid, they would be losers. The 
 holders of the legal securities would justly oppose the reduction 
 of their interest to pay the holders of illegal debentures. They 
 advanced their money upon legal security and they would object 
 to anyone else receiving one farthing until their claims were 
 satisfied. These holders of legal securities, who had no share in 
 the management of the company, certainly should not be made 
 to suffer by the misconduct of persons over whom they had no 
 control. Nor should they in equity suffer simply because other 
 people had lost money upon purchasing illegal securities. 
 
 Then it was urged that the holders of the excessive debentures 
 who advanced their money without any legal security should 
 stand the loss. At first sight this appeared permissible. But 
 the true state of affairs showed that this was too harsh a measure. 
 It was true that these holders of excessive debentures had no 
 legal claim to depend upon; but it was also true that this was 
 not entirely their fault. Their money was advanced in a bona 
 fide manner. The company had received their money into its 
 hands and had either spent it on its authorized works, or still 
 retained it in its treasury. Moreover, it was likely that neither 
 the shareholders nor the holders of legal securities could have 
 derived their income were it not for the money advanced by the 
 holders of such illegal securities. 
 
 Finally it appeared that the shareholders, who in law had the 
 power to appoint directors and the managers of the business and 
 whose employees issued such illegal debentures, should be made 
 responsible. But there were also many practical objections to 
 this course of procedure. In the first place, it was pointed out 
 that these shareholders bought their stocks on the express as- 
 surance embodied in the acts of Parliament that there should be 
 only a certain amount of fixed charges against the company with 
 a prior claim over their dividends. Although theoretically they 
 had the power of appointing the managers and directors, many 
 of them, in reality, were no more responsible for the conduct of 
 
94 RAILWAY FINANCE IN ENGLAND [94 
 
 their so-called employees than the other classes of investors. 
 They had more enterprising spirit in investing their money in 
 the stocks of the railway, but they certainly should not be pun- 
 ished for that enterprising spirit which was much needed. 
 
 All these and many other difficulties as shown elsewhere in our 
 study were direct results of the evasion and overriding of the 
 borrowing powers which Parliament had taken special and con- 
 stant care to prescribe. 
 
 As mentioned previously, the issue of loan notes or other ne- 
 gotiable or assignable instruments purporting to bind the com- 
 pany as security for money advanced, was, since 1845, prohib- 
 ited. Owing to the narrowness of the limit of borrowing powers 
 and some less laudable reasons, some companies soon discovered 
 an ingenious way to get around this restriction. They devised 
 the well known device of Lloyd 's bonds to bridge over the barrier 
 against loan notes. These instruments were issued neither as 
 negotiable securities nor for "cash-advances," but as acknowl- 
 edgments of obligations for work done, materials supplied, or 
 for debts contracted in excess of their borrowing powers. 
 
 The original purpose for which these bonds were devised was, 
 however, not altogether bad, and the circumstances under which 
 they were supposed to be used also appeared to justify their ex- 
 istence. As often happened, a railway company suddenly dis- 
 covered that its expenditures were underestimated or its re- 
 sources overestimated. In either case the directors were in dif- 
 ficulty. They were compelled under severe penalty to complete 
 their work within a definite time. 32 Their funds were exhaust- 
 ed. The contractor would refuse to continue the work without 
 pay, and the directors had no money to pay him. Moreover, if 
 the work was left to stand still, not only the capital already 
 spent would remain unproductive and the work itself deteriorate, 
 but the contractor would sue. Naturally a question would arise 
 
 s 2 In each Railway Act there is always a clause stipulating the time 
 when the line must be completed and the penalty for failure. Clause 34 
 of the Model Bills of the House of Lords, 1909, says that ' ' if the railway 
 is not completed within five years from the passing of this Act, then on 
 the expiration of that period the powers by this act for making and com- 
 pleting the railway or otherwise in relation thereto shall cease except as 
 to so much thereof as is then completed," and clause 35 provides that de- 
 posit money shall not be repaid except so far as railway is opened. 
 
95] BORROWING POWERS OF RAILWAY COMPANIES 95 
 
 as to what should be done. As the law did not prohibit railway 
 companies from securing their debts contracted for the execu- 
 tion of the bona fide purpose of their undertaking, the directors 
 would, therefore, make some sort of an arrangement with the 
 contractor by which they would furnish him from time to time 
 with acknowledgments of indebtedness, under seal of the com- 
 pany, for the amount due to him on account of work done. On 
 these evidences of credit the contractor could secure money. In 
 this way Lloyd's bonds were issued to give time to the debtor 
 company instead of pressing it to issue shares and debentures 
 at great sacrifice. 
 
 This was the way in which Lloyd's bonds were originated and 
 in many instances used to the advantage of railways and the 
 public; and they appeared quite desirable. No tenable argu- 
 ment seemed to have been advanced to show that a railway com- 
 pany should not issue to its contractors acknowledgments of 
 indebtedness for the amounts actually due them on account of 
 work actually executed. Indeed, it was claimed that "if re- 
 stricted to their proper purpose, Lloyd's bonds would have been 
 a useful and certainly not inconvenient invention. ' ' 33 But these 
 bonds were soon issued for different purposes. Speculative un- 
 dertakings were gotten up with hardly any hope of securing 
 money through subscription ; and these bonds were issued at ' ' an 
 enormous sacrifice" in order to get the undertaking completed. 
 Ultimately debentures had to be issued. The result of such a 
 procedure was a great extra cost to the shareholders and the 
 owners of the property in general. 34 Swindling schemes were 
 also floated through the instrumentality of these bonds to coerce 
 some existing companies to purchase or lease at outrageous 
 prices. 35 
 
 Moreover the employment of the device tended to deceive the 
 investing public. With the current conception that the borrow- 
 ing powers of railways were strictly limited, investors were se- 
 duced into a belief that the work was so far completed with 
 money raised in accordance with the requirements of the acts of 
 
 33 Railway Times, December 15, 1866. 
 
 3 * Evidence before Select Committee on Bailway Borrowing Powers, 1864, 
 p. 35. 
 
 35 Ibid., p. 19. 
 
96 RAILWAY FINANCE IN ENGLAND [96 
 
 Parliament; while in reality their later investments instead of 
 being applied to further prosecution of the work, had to be 
 diverted to the payment of debts of which the.se new subscribers 
 (the only subscribers, for that matter) were ignorant. 36 
 
 On the other hand it was contended that the complaint against 
 Lloyd 's bonds that they represented a violation of the borrowing 
 powers of the company, was unfounded. These bonds could be 
 a violation of the borrowing powers only when they were issued 
 in excess of the borrowing powers of the company; but it was 
 only occasionally that they were issued in excess of such borrow- 
 ing powers. 37 But this argument neglected the fact that railway 
 companies could violate the law without exceeding the limit of 
 their borrowing powers. The companies were authorized to raise 
 so much money on shares and so much on loans. The latter 
 privilege was not to be resorted to until the whole of the former 
 had been subscribed and one-half of its total amount paid up. 
 Some companies, however, whose undertakings were of such an 
 unpromising character that they could neither secure subscrip- 
 tions nor make calls, and whose borrowing powers consequently 
 did not materialize legally, would evade the law by resorting to 
 Lloyd's bonds. 38 Although the amount raised was not in excess 
 of the borrowing powers, the issue of such bonds was illegal 
 nevertheless. 
 
 Moreover, as is usually the case with such convenient and yet 
 illusive schemes, these Lloyd bonds soon lost their original iden- 
 tity. In fact by 1864, the original purpose and the proper 
 function of these bonds were practically forgotten. Instead of 
 issuing them to contractors 1 for work done in order to relieve 
 temporary pressure, companies used them in coupon form for 
 raising money 39 and also put them into circulation as negotiable 
 securities. 40 Some directors incurred heavy obligations by the 
 issue of these bonds even without consulting the shareholders and 
 without the knowledge of the holders of statutory debentures. 41 
 
 se Railway Times, December 15, 1866. 
 
 37 Daily News, January 18, 1864, quoted by Railway Times, January 23, 
 1864. 
 
 38 Railway Times, January 23, 1864. 
 
 39 Evidence before Select Committee of 1864, p. 31. 
 
 40 Hansard, 182 : 183. 
 
 41 Report of Royal Commission on Railways, 1867, p. xxiii. 
 
97] BORROWING POWERS OP RAILWAY COMPANIES 97 
 
 Indeed, within a few years after their first use Lloyd bonds 
 became quite extensively circulated, and represented several 
 million pounds in nominal value. In some cases they were even 
 regarded as statutory securities. 42 Thus their extensive appli- 
 cation, and the purposes to which they were applied, led the 
 Railway Times to say that "no other name than fraud can be 
 given to transactions of this description, and the eminent legal 
 ability which has been exercised in drawing up the instrument 
 so as to keep it out of the range of criminality must accept its 
 share of discredit. . . " 43 These instruments ' ' might or might 
 not be within the strict limit of legality," stated a member of 
 Parliament, 44 "but they certainly had a tendency to be made a 
 most fruitful means of deception and concealment of the real 
 position of the company's affairs." 
 
 The effect of this expedient was the total evasion of the statu- 
 tory limitations of borrowing powers. While the legal borrow- 
 ings were limited to only one-third of the share capital, the il- 
 legal borrowings by Lloyd bonds were subjected to no limitation 
 whatever. Thus the precaution of the legislature for the protec- 
 tion of the holders of statutory securities was nullified. This 
 coupled with the numerous and varied excuses offered by the 
 companies for exceeding their borrowing powers in other ways 
 resulted in much confusion of the whole situation. 45 The in- 
 vestor had no means of ascertaining whether or not the borrow- 
 ing powers of a company had been exceeded, and consequently 
 whether or not the securities offered by that company were 
 worthless. They had to trust the railway returns made by the 
 companies to the Board of Trade, but they had no means where- 
 by to verify the accuracy of these returns. 46 If these returns 
 were made with strictness, they might in themselves form a good 
 prevention against over-issue of securities, or at least give 
 some valuable information. But these returns, besides not be- 
 ing always accurate, were not made until the end of each year 
 and were not published by the Board of Trade until August or 
 September of the year following. In the meantime the public 
 
 42 Evidence before Select Committee of 1864, p. 127. 
 
 43 Bailway Times, June 25, 1864. 
 
 44 Marquess of Clanricarde in the House of Lords, Hansard, 190: 1972. 
 
 4 5 Hansard, 181: 338. 
 
 4 6 Bailway Times, September 12, 1863. 
 
98 RAILWAY FINANCE IN ENGLAND [98 
 
 had to depend upon such "miserable and imperfect" extracts 
 therefrom as were given in the daily papers. 47 Moreover, the 
 acts of Parliament were sometimes in such a state of confusion 
 that some of the railway companies themselves did not know 
 what their borrowing powers were. 48 Thus the position of the 
 debenture-holders became exceedingly unsatisfactory. By the 
 kind of false shield which had been thrown over the debentures 
 through the limitation of borrowing powers, the public was led 
 to believe that the debenture-holders had a protection which they 
 really never had. 49 
 
 Being faced by such a serious situation, some people advocated 
 that borrowing powers should be abolished altogether. They 
 argued that "this Gordian knot, respecting which so much 
 trouble is taken to render it difficult to unloose, could be cut in 
 an instant. Abolish borrowing powers for the future, except in 
 so far as advances may be made on calls. Let no company . . . 
 raise capital by any other means than subscription for shares. 
 Let existing bonds be converted into debenture stock, and the 
 whole difficulty will be found to have 'vanished like a guilty 
 thing away.' " 50 
 
 Certain members of Parliament seemed to be alive to the 
 serious nature of the situation. A resolution was introduced in 
 Parliament to the effect that the issue of securities should be 
 taken away from the directors appointed by the shareholders and 
 placed in the hands of persons representing the creditors. The 
 extreme character of this resolution reveals to a certain extent 
 the anxiety with which people searched for remedies. But it was 
 regarded as being of too novel a character and was withdrawn. 51 
 
 Parliament, however, felt obliged to take some steps. As most 
 legislative bodies would have done under such circumstances, 
 the House of Lords appointed a select committee in 1863 "to in- 
 quire into the whole situation and report as to what legislative 
 measures are desirable for the purpose of restraining the direc- 
 
 47 Railway Times, September 26, 1863. Evidence before Select Com- 
 mittee on Borrowing Powers of Railways, 1863. 
 
 48 Evidence before Lords' committee of 1863. Cf. Railway Times, Sep- 
 tember 26, 1863. 
 
 49 Evidence before Lords' Committee of 1864, p. 33. 
 so Railway Times, September 12, 1863. 
 
 si Railway Times, August 22, 1863. 
 
99] BORROWING POWERS OF RAILWAY COMPANIES 99 
 
 tors of railway companies from exceeding the limits of the bor- 
 rowing powers fixed by the Act of Parliament. ' ' 52 The com- 
 mittee made two reports, in which some methods for the enforce- 
 ment of the rules governing borrowing powers were recommend- 
 ed. 53 In the same year when the Companies Clauses Bill was 
 considered in committee, a member in the House of Commons 64 
 moved the addition of a clause requiring companies possessing 
 borrowing powers to make an annual return to Parliament of 
 the capital which they had raised, with the object of preventing 
 the recurrence of cases like that of the West Hartlepool Com- 
 pany 55 or any similar violation of the provision forbidding com- 
 panies from raising money on debentures or mortgage until one- 
 half of their share capital was paid up. The clause, however, 
 was rejected for technical reasons. 
 
 But the alarm which resulted from the general lack of in- 
 formation regarding the condition of the borrowing powers of 
 railway companies continued. Therefore in 1864 the House of 
 Lords felt it expedient to appoint another select committee to 
 continue the inquiry commenced in the previous session. The 
 purpose of appointing this committee as well as that of appoint- 
 ing the previous one was to devise some means whereby directors 
 might be restrained from exceeding the limits of their fixed bor- 
 rowing powers. Parliament appeared to believe that there was 
 no question as to the merits of the established rules limiting the 
 borrowing powers of railway companies. The only thing needed 
 was to find some efficient way of enforcing these rules. There- 
 fore, Parliament reasserted its intention of restricting such bor- 
 rowing powers through the Railway Construction Facilities Act 
 of 1864 58 in which provisions were made whereby every com- 
 pany which wished to borrow money was subjected to the follow- 
 ing restrictions: 
 
 (1) "They shall not exercise the said powers of borrowing any money 
 until the whole of the share capital authorized by the certificate is sub- 
 scribed for or taken, and until one-half thereof is actually paid up, and 
 
 52 Hansard, 181 : 385-386. 
 
 63 For the recommendations of this committee, cf. infra, Chap. V. 
 5* M. D. Hassard. Cf. Hansard, 172 : .935-936. 
 
 55 See Appendix to Report of Select Committee on Eailway Borrowing 
 Powers, 1864, and Hansard, 171: 1302-1303. Cf. also supra, p. 92. 
 se 27 & 28 V. c. 121. 
 
100 RAILWAY FINANCE IN ENGLAND [100 
 
 until they prove to the justice who is to certify under section 40 of the 
 Companies Clauses Consolidation Act, 1845, . . . before he so certifies, 
 that shares for the whole of the capital are issued and accepted, and that 
 not less than one-fifth part of the amount of each separate share has been 
 paid up on account thereof before or at the time of the issue or acceptance 
 thereof, and that all such shares were taken in good faith, and are held 
 by the subscribers or their assigns who are legally liable for the same. ' ' 
 
 (2) "They shall not borrow a larger sum in the whole than one- third 
 of the amount of the share capital authorized by the certificate." 
 
 The latter part of the first clause was especially important, in 
 that it required not only all shares should be taken in good faith 
 but not less than one-fifth of the amount of each separate share 
 had to be paid up before a company could resort to its borrow- 
 ing powers. This provision put a strong check against the prac- 
 tice of inducing "men of straw" to sign up subscriptions and 
 using borrowed money to meet the requirement of paying up 
 one-third of the share capital. It has proven so useful that pro- 
 visions similar to it have been invariably inserted in railway 
 acts since. 57 
 
 This closed the legislative measures concerning the borrowing 
 powers of railway companies. As has been shown, Parliament 
 held from the beginning to the idea of limiting the borrowings 
 of railways to one-third of their share capital, and has consistent- 
 ly adhered to this principle throughout. Whenever the question 
 of borrowing powers came to its notice, all it endeavored to do 
 was to adopt measures to meet the changed circumstances with 
 the purpose of maintaining the borrowing limit. Parliament ap- 
 peared to believe that the merits and necessity of limiting rail- 
 way borrowings to one-third of the share capital had passed be- 
 yond the stage of argument. All that was needed was to see 
 that the limit was not exceeded. The idea of inquiring into the 
 adequacy of this limit itself did not seem to have been enter- 
 tained. Nor did Parliament appear especially desirous to find 
 out what were the causes which led railway directors to exceed 
 their borrowing powers. Even the fact that the established cus- 
 tom of borrowing on other good securities invariably warranted 
 a larger proportion of loans than one-third of the share capital 
 failed to induce Parliament to inquire into the advisability of 
 modifying such restrictions. 
 
 57 Cf. Clause 7 of the Model Bill of the House of Lords, 1909. 
 
101] 
 
 BORROWING POWERS OF RAILWAY COMPANIES 
 
 101 
 
 The legal limit of the borrowing powers was thus quite defi- 
 nite. In practice, however, considerable latitude seems to have 
 been given to the companies as shown by the following table : 
 
 PROPORTION OF BORROWINGS TO TOTAL PAID-UP CAPITAL 
 
 Name of Company 
 
 1860 
 
 1870 
 
 1880 
 
 1885 
 
 1890 
 
 1895 
 
 1900 
 
 1907 
 
 
 % 
 
 % 
 
 % 
 
 % 
 
 % 
 
 % 
 
 % 
 
 % 
 
 Great Eastern 
 
 
 33 
 
 32 
 
 31 
 
 32 
 
 31 
 
 32 
 
 33 
 
 Great Northern 
 
 15 
 
 23 
 
 24 
 
 25 
 
 22 
 
 26 
 
 25 
 
 ?5 
 
 Great Western 
 
 28 
 
 35 
 
 25 
 
 24 
 
 24 
 
 24 
 
 25 
 
 ft4 
 
 London, Chatham and Dover 
 London and North-Western 
 
 20 
 
 ?,7 
 
 29 
 
 28 
 
 29 
 ?,(\ 
 
 29 
 26 
 
 30 
 
 27 
 
 30 
 3ft 
 
 31 
 
 3ft 
 
 3fl 
 
 Mersey 
 
 
 
 
 
 22 
 
 40 
 
 40 
 
 41 
 
 44 
 
 Metropolitan 
 
 
 24 
 
 29 
 
 27 
 
 29 
 
 27 
 
 26 
 
 ?A 
 
 Midland 
 
 19 
 
 22 
 
 fl3 
 
 fll 
 
 29 
 
 28 
 
 ftl 
 
 ?,?, 
 
 North Eastern 
 
 28 
 
 25 
 
 24 
 
 24 
 
 24 
 
 26 
 
 31 
 
 30 
 
 
 
 
 
 
 
 
 
 
 These railways were picked at random, with some reference to 
 their location. The percentages were calculated from the figures 
 given in the Board of Trade returns. It is clearly seen, that 
 some of these railways considerably exceeded the limits of their 
 borrowing powers. While the legal limit was 33 per cent of the 
 shares and 25 per cent of the total paid up capital, some of the 
 companies for a number of years borrowed to the extent of 30 
 per cent or more of the latter capital. The Mersey for a number 
 of years even borrowed to the extent of more than 40 per cent 
 of the total capital. There were other railways which did like- 
 wise. The writer does not pretend to say that such ''excessive" 
 borrowings were bad in themselves, nor does he maintain that 
 Parliament should not have given some latitude to the enforce- 
 ment of its rules; but his study of the contemporary opinion 
 leads him to feel that much difficulty arises from the loose en- 
 forcement of strict rules. 
 
 If the whole railway system of the kingdom is taken into con- 
 sideration, similar irregularities seem to have existed. Thus, 
 in 1860 the loans equaled 23 per cent, in 1870 they equaled 27 
 
102 RAILWAY FINANCE IN ENGLAND [102 
 
 per cent, in 1880, 25 per cent, in 1890, 26 per cent, in 1900, 28 
 per cent, and in 1907, 27 per cent of the total paid up capital. 
 
 So far as the writer has been able to discover, the strenuous 
 adhesion of Parliament to the idea of limiting the borrowing 
 powers of railway companies to one-third of their share capital 
 arose simply out of the desire of giving security, by that means, 
 to the holders of legal debentures. Yet if railways had been 
 permitted to borrow to the extent of one-half or even two-thirds 
 of the bona fide share capital it seems hardly likely that thereby 
 the debenture holders would have been deprived of a reasonable 
 security. It hardly admits any doubt that it is desirable for a 
 government to limit the facilities for constructing railways with 
 other people's money; yet too stringent regulations are liable 
 to be as harmful as the lack of regulation. 58 English experience 
 seems to justify the statement that broad but vigorously en- 
 forced restrictions may prove more beneficial than narrow but 
 loosely enforced limitations. 
 
 Another fact which calls for attention is that one of the chief 
 difficulties which English railways and the investing public had 
 in regard to the question of borrowing powers, was the lack of 
 true information concerning the real condition of such powers 
 and the actual state of affairs of the companies. Half the time, 
 neither the public nor the companies knew what actual powers 
 existed. These facts lead to the opinion that if more efforts 
 were made to clarify railway affairs in general and railway 
 borrowing powers in particular, much difficulty might have been 
 avoided and better results obtained. 
 
 Cf. Hadley, Eailroad Transportation, 1903, p. 54. 
 
CHAPTER V 
 REGISTRATION OP RAILWAY SECURITIES 
 
 From the two preceding chapters it is clear that from the 
 beginning of railway enterprise, Parliament intended to give 
 ample protection to the holders of legal securities, and that for 
 the purpose of affording such protection it endeavored to re- 
 strict the borrowing powers of railway companies. It is the 
 purpose of this chapter to elucidate the principal methods by 
 which Parliament tried to restrict such borrowing powers. 
 
 In the early acts, by which railway companies were incor- 
 porated or enabled to raise money on mortgages or bonds, pro- 
 visions were made to the effect that an entry or memorial of all 
 mortgages or assignments should be made in the registers of the 
 companies within fourteen days from the time when the as- 
 signment or mortgage was made, and that such registers should 
 be open to the inspection of the proprietors or other interested 
 persons at all reasonable times without charge. 1 Provisions 
 were also made requiring the registration of the transfers of 
 such securities in the companies' registers within twenty -one days 
 of the execution of that transfer. It was only after such regis- 
 tration that the assignee might be entitled to the full benefits 
 and payments of the securities transferred. 2 Clauses to the 
 above effect were inserted in the private railway acts during 
 
 1 Section cxix of the London & Croydon Eailway Act, 1837, provided 
 that "An entry or memorial of such mortgage or assignment, containing 
 the numbers and dates thereof, and the names of the parties, with their 
 proper additions, to whom the same shall have been made, and of the sums 
 borrowed, together with the rate of interest to be paid thereof, be entered 
 in some book to be kept by the secretary or clerks of the said company; 
 which said book may be perused at all reasonable times by any of the pro- 
 prietors or mortgagees of the said undertaking or other persons interested 
 therein, without fee or reward." 
 
 2 For the registration of each transfer, the company should be paid the 
 sum of two shillings and sixpence. Ibid. 
 
 103 
 
104 RAILWAY FINANCE IN ENGLAND [104 
 
 many years, and were found quite beneficial, and so in the Com- 
 panies Clauses Consolidation Act of 1845, we find general pro- 
 visions made for the registration of railway securities. In sub- 
 stance, these general clauses were similar to those of the earlier 
 private acts, with the exception (1) that the time limit within 
 which the transfers should be registered was extended from 
 twenty-one to thirty days, and (2) that until such entry (of the 
 transfer) was made the company shall not be in any manner 
 responsible for the transfer of such mortgage, thus making the 
 registration less rigid but of greater consequence to the secur- 
 ity-holders. The latter did not appear eager to avail them- 
 selves of the provision of the early acts requiring the registra- 
 tion of the purchase and transfer of railway securities. It was 
 felt that unless registration was made a condition of the validity 
 of such securities, the provision would remain a dead letter. 
 Hence, the new provision of 1845 was passed making it neces- 
 sary to register all transfers in order to render the company in 
 any wise responsible to the transferee. 
 
 Thus from the time Parliament began to prescribe the limit 
 of railway borrowing powers, it adopted this system of regis- 
 tration as a means of securing the observance of the same. It 
 thought that since all securities were registered in the companies' 
 registers and since such registers were open to public inspection, 
 there would be little chance for the companies to exceed the limit 
 of their borrowing powers without being at once detected. But 
 although the manner of registration was threshed out with much 
 precision, the execution of such registration was left entirely in 
 the hands of the companies. Prior to 1863, outside of occasional 
 agitations, practically no effort had been made to modify these 
 provisions. The general opinion was that the registration done 
 by the companies themselves was sufficient to prevent irregular- 
 ities. The public relied, and justly in ordinary cases, on the 
 integrity of the companies. 3 Unfortunately, however, in some 
 cases this reliance was ill-founded. Many companies made so 
 little use of registration that they were not aware of the exact 
 limits of their borrowing powers, as prescribed by Parliament ; * 
 
 s Economist, May 2, 1863. 
 
 * Letter in London Times, August 23, 1866. 
 
105] REGISTRATION OF RAILWAY SECURITIES 105 
 
 and many others purposely exceeded their limits in borrowing. 5 
 Indeed, the practice of overborrowing, as remarked the Earl of 
 Donong, 6 actually reached the stage not only of illegality but of 
 fraud. The public were told that Parliament had put a limit to 
 the borrowing powers of railway companies, but they soon found 
 out that under the semblance of this limit money was borrowed 
 every day beyond the authority which Parliament had given. 7 
 Consequently, doubt, suspicion and dissatisfaction prevailed, 
 which in turn depreciated the value of railway securities so much 
 that they were sometimes called insecurities? 
 
 This unsatisfactory state of affairs gave rise to agitation. A 
 number of chambers of commerce and other commercial bodies 
 petitioned Parliament in 1863 to modify the existing law, so that 
 railway debentures might be required to be registered and put 
 on the same footing as landed securities. Instead of the regis- 
 ters kept by the companies as required by the Companies Clauses 
 Act of 1845, which really formed no security to the public, it 
 was urged that there should be public registers kept in places of 
 easy access. 9 A scheme for such registration 10 was presented to 
 the select committee of 1863 to the effect that every railway com- 
 pany should be compelled to furnish the lender with a certificate 
 stating that the latter was the registered proprietor of the un- 
 dermentioned debenture bonds or other securities, duly sealed 
 with the corporate seal of the company. 
 
 According to this scheme, these certificates were to be register- 
 ed in the Bank of England by a public registrar and the regis- 
 tration was to be followed up with a series of acknowledgments 
 which would place it beyond doubt. Holders of registered se- 
 curities would alone be recognized as bondholders according to 
 acts of Parliament and alone would be entitled to exercise the 
 
 s The West Hartlepool, the Cork & Yanhol, the Carmarthan and Cardi- 
 gan, and the London, Chatham and Dover were in this class. Cf. Economist, 
 June 20, 1863, Hansard, 182 : 1580-1583, and Economist, December 22, 1866. 
 
 e Hansard, 177: 1297. 
 
 7 Ibid., 183: 869. 
 
 8 Economist, August 12, 1865. 
 
 9 Evidence before select committee of 1864 on Kailway Borrowing Pow- 
 ers, 1864, p. 12. 
 
 ^Eailway Times, October 3, 1863. 
 
106 RAILWAY FINANCE IN ENGLAND [106 
 
 rights of interference which the law accorded to mortgagees. On 
 the other hand, if the holder of such securities failed to register 
 he would not be deprived of his money or of his common law 
 right, but simply of those extraordinary privileges which be- 
 longed to the rightful and recognized mortgagees. 
 
 To form a complete check, it was also urged that the Board of 
 Trade should be furnished with returns showing the extent of 
 the borrowing powers of each company. Then the proposed 
 public registrar, being in an independent office, should furnish 
 the Board of Trade with a return compiled from the registration 
 of the securities of each company, showing the amount which each 
 company had borrowed. By comparing these two independent 
 returns, the Board of Trade could easily ascertain whether or not 
 a company had exceeded its borrowing powers. 
 
 Another plan was proposed by the Deputy Keeper of the Sig- 
 net of Scotland 11 to the effect that (1) public registers should 
 be kept in London, Edinburgh and Dublin; (2) that all existing 
 companies having debenture debts or stocks should be required 
 to give to the respective registrars a return duly certified as on a 
 certain date, specifying the acts of Parliament under which they 
 were authorized to borrow money, the amount so authorized, the 
 amount which the shareholders had authorized to be borrowed by 
 resolution of general meetings, and the dates of such meetings, 
 together with the amount of debenture bonds and stocks which 
 had been issued and was then due and outstanding against each 
 company; and (3) that all existing and future companies should 
 be required to make returns from time to time of all acts there- 
 after passed authorizing the borrowing of money or effecting any 
 changes of their borrowing powers. 
 
 He also proposed that each return should be registered in a 
 separate book or a part of a book for each company. It should 
 be incumbent on all companies, after the designated date, to 
 transmit to the respective registrars for registration, before they 
 were issued, all debentures and certificates of debenture stocks. 
 The registrar should register these, entering the number, date, 
 amount, etc., in a special form prepared for the purpose. A 
 registration fee was also recommended. Then after such regis- 
 
 n See evidence before Lords' Committee of 1864, pp. 4-15. 
 
107] REGISTRATION OF RAILWAY SECURITIES 107 
 
 tration the registrar should certify on each instrument the fact 
 and date of such registration. 
 
 To form a complete check, he also proposed that it should be 
 incumbent on the companies to send in for registration all de- 
 bentures or other vouchers of debenture loans or stock which were 
 discharged. These should be registered under a separate head- 
 ing in the book or part of the book applicable to each company. 
 
 This system, it must be observed, was intended for the regis- 
 tration of all debentures or debenture-stock certificates to be is- 
 sued thereafter. It was suggested that existing debentures should 
 also be registered. The Deputy Keeper of the Signet, however, 
 was of the opinion that it would be rather cumbersome to re- 
 quire the registration of all existing securities. Moreover, such 
 a process would not afford any additional security than that 
 afforded by simply requiring all companies to give the total 
 amounts of securities which they had issued. 
 
 Others were of the opinion that it was necessary to have a 
 public register of all transfers and renewals in addition to the 
 'registration done by the companies as provided by the Compa- 
 nies Clauses Act of 1845. Although such transfers or renewals 
 did not affect the borrowing powers, their consummation should, 
 nevertheless, be made more definite through a system of public 
 registration. Accordingly, another elaborate form Was recom- 
 mended for the purpose. 
 
 A representative of the Board of Trade also suggested a form 
 for registration purposes very similar to this. 
 
 Under such a system of registration, it was thought that am- 
 ple protection would be afforded the public. By these tables 
 the public could see the amount authorized by Parliament, the 
 amount sanctioned by the shareholders to be borrowed, and the 
 number of securities discharged. A comparison of the figures 
 given in the proposed tables would indicate at once how much 
 legal debt was out-standing against the company and the con- 
 dition of the company's borrowing power. It was also recog- 
 nized that there would not be much trouble to start such a sys- 
 tem of registration, since a similar system of registration had 
 already been used in the case of landed securities. 12 
 
 12 There were already registration offices under the Companies Act, 1862. 
 Cf. Evidence before Lords' Committee of 1864, p. 4. 
 
108 RAILWAY FINANCE IN ENGLAND [108 
 
 It was further urged that if the registrars were appointed 
 with definite instructions to register nothing beyond what the 
 companies were authorized to issue, the people would be able 
 to tell at once whether any security was legal or not. It could 
 be safely expected that no man would think of lending money 
 upon debentures which were not registered. 13 
 
 The agitation for a simple and effective system of registration 
 appears to have been most keen; the matter was of wide in- 
 terest. The general opinion of stock brokers, money-lenders, 
 and the like was unanimously in favor of .some sort of govern- 
 mental registration. The railways as a whole, according to the 
 representatives of some of the leading lines hi the kingdom, en- 
 tertained no objection against the compulsory registration of 
 their securities. 14 Some of them would even welcome such a 
 procedure. The solicitor of the Bank of England, which estab- 
 lishment was then a large investor in the securities of railway 
 companies, was also strongly in favor of such a system of regis- 
 tration. 15 Indeed, the concensus of opinion as expressed before 
 the Lords' Committee of 1864 was that the investors had too 
 much trust in the honor of railway officials in connection with 
 their borrowing powers and that a public registration of railway 
 debentures, if constructed upon some simple principle, was 
 needed to restore and maintain confidence. Such a system of 
 registration would ultimately prove to be an advantage not only 
 to the investing public but to the railway companies as well. 
 
 Furthermore, since neither investors nor borrowers were able 
 to ascertain the legality of some of the existing securities, it 
 was asked : 16 Why was it not feasible for the government to 
 investigate and establish the legality of such securities for them? 
 It was suggested that the Board of Trade might effectually do 
 for every person what he could not do for himself, and which, 
 even if it were possible for each individual, would have to be 
 done over and over again by every successive holder of each 
 railway debenture. Thus it was urged that the railway corn- 
 is Evidence before Lords' Committee, 1864, p. 12. 
 
 i* More than eight of the influential chambers of commerce openly ex- 
 pressed their desire for such a course of public registration. Ibid., pp. 
 14-15. 
 
 IB Hansard, 181 : 338-9. 
 
 IB Economist, May 2, 1863. 
 
109] REGISTRATION OP RAILWAY SECURITIES 109 
 
 panies should be required to certify to the Board of Trade 
 every new issue of debenture. Only after due examination and 
 being satisfied that the company had not exceeded its borrowing 
 powers, the Board of Trade should give the company stamped 
 debentures for that specific amount. According to the opinion 
 of the managing director of the Lands Improvement Company, 17 
 securities, unless so stamped, should not receive any legal recog- 
 nition. By this process every debenture holder whose deben- 
 ture had the mark of the Board of Trade impressed upon it 
 would be sure that he held a good security. The credit of the 
 companies would also be benefited by the removal of the ex- 
 isting suspicion. 
 
 The consideration of the matter was taken up by Parliament. 
 As mentioned in a previous chapter, 18 when the special report 
 and evidence upon the West Hartlepool Harbor and Railway 
 bill were presented to the House of Lords, great alarm was felt 
 over railway borrowings by that and other companies. Action 
 by Parliament was obviously necessary if the alarm were not 
 to spread. Accordingly in 1863 the House of Lords appointed 
 a committee on railway borrowing powers to inquire and report 
 as to what legislative measures were desirable to prevent the 
 railway companies from exceeding their borrowing powers. 
 This committee, therefore, recommended 19 that semi-annual 
 declaration of the state of the borrowing powers signed by the 
 chairman, the secretary, and a director of the company should 
 be published in the London Gazette by every railway company 
 exercising, or claiming to exercise, borrowing powers under any 
 act of Parliament. In this declaration, the amount paid up and 
 the amount which the company was legally authorized to borrow 
 by the creation of debt, should be clearly set forth. These officers 
 of the company should also declare that the total amount now 
 raised by the company upon bonds or other securities did not 
 exceed the above mentioned amount, upon which the company 
 could legally borrow. 
 
 The committee also recommended that thereafter no mortgage 
 
 IT Evidence before Lords' committee of 1864, pp. 22-33. 
 
 is Cf. supra, p. 118. 
 
 is This part of the committee 'a report and evidence are published in 
 Eailway Times for August 22, 1863. See also Report of Lords' committee, 
 1864, p. 27. 
 
110 RAILWAY FINANCE IN ENGLAND [110 
 
 bond or any security for money should be issued by any rail- 
 way company without having endorsed upon that security a 
 certificate in the following form, to be signed by the chairman 
 and secretary of the company: 
 
 "A. B. Railway Company. Date. 
 
 Bond for No , being part of the total amount 
 
 which this company can now legally borrow." 
 
 A plan for the registration of all securities by an independent 
 public office was suggested to the committee, but while the com- 
 mittee conceded that such a regulation "might operate for the 
 security of the public," it felt that it did not have sufficient 
 time to give full consideration to the subject. 
 
 Parliament did not take any immediate action to give effect 
 to those recommendations. But when the Companies Clauses 
 Bill of 1863 was considered in committee in the House of Com- 
 mons, M. D. Hassard moved the insertion of a clause requiring 
 companies possessing borrowing powers to make an annual re- 
 turn to Parliament of the capital which they had raised. This 
 motion was rejected on the ground that it was not proper to in- 
 sert a provision of such importance into a bill which was only 
 intended to consolidate the clauses commonly inserted in com- 
 panies bills. 20 In the same year, however, in connection with 
 the regulation of the issue of debenture stocks, Parliament 
 adopted a provision for the registration of such stocks. This 
 provision 21 did not contain any new principle. It simply made 
 the rule regarding the registration, by the companies of mort- 
 gages, deeds, etc., applicable to the registration of debenture 
 stocks. In the same act, Parliament also adopted a clause 22 
 requiring all companies to keep a separate account of debenture 
 stocks, showing how much money had been received for or on 
 account of debenture stocks. Also how much money was borrowed 
 
 20 Hansard, 172 : 936. 
 
 21 Sec. 28 of the Companies Clauses Act, 1863, provided that the com- 
 pany should from time to time enter the debenture stock created in a 
 register to be kept for that purpose. In the register it was to enter the 
 names and addresses of the persons and corporations who are holders of 
 such stock, with the respective amounts of each; and the register was to be 
 accessible for inspection and perusal at all reasonable times to every mort- 
 gagee, etc., without charge. 
 
 22 Sec. 33. 
 
Ill] REGISTRATION OF RAILWAY SECURITIES 111 
 
 or owing on mortgage or bond, or which they had power to 
 borrow, had been paid off by debenture stock instead of being 
 borrowed on mortgage or bond. 
 
 At the same time some members of Parliament also considered 
 the advisability of bringing in a bill for the purpose of carrying 
 out the recommendations of the committee on railway borrowing 
 powers of 1863. 23 But it was feared that those recommenda- 
 tions would be of little value unless provisions were made for 
 general registration of debenture transactions. Moreover, it 
 was still felt that further information was needed on the sub- 
 ject of registration before any efficient system could be adopted 
 to cope with the situation. Therefore, another select committee 
 was appointed in 1864, to continue the inquiry commenced by 
 the select committee of the previous year. 24 In its report, this 
 committee first of all recommended that requirement of a com- 
 pulsory public registration of railway debentures and deben- 
 ture stocks as an efficient means whereby to restrain the direc- 
 tors from exceeding the limit of their statutory borrowing pow- 
 ers. 25 The committee was also of the opinion that holders of 
 statutory debentures duly registered should have a right to re- 
 cover and secure the payment of all principal and interest due 
 to them in priority to the holders of Lloyd's bonds, or of any 
 other obligations or acknowledgments of indebtedness not is- 
 sued under the authority of Parliament. 26 
 
 Following the recommendation of this committee, the Regis- 
 tration of Railway Debentures, etc., Bill was introduced into the 
 House of Lords in 1865. 27 This bill was in a great measure 
 founded on the report of foregoing committee. 28 It passed the 
 upper house without much discussion, but it wjent to the lower 
 house late in the session. 29 The promoters of the bill thought 
 it would meet with severe opposition from the powerful railway 
 interests in that house. 30 Therefore, they did not push the 
 
 23 Hansard, 173 : 1317. 
 
 24 Ibid., 175: 697. 
 
 25 Report of Lords' Committee, 1864, p. 111. 
 
 26 Ibid. 
 
 27 Hansard, 180 : 848. 
 
 28 Hansard, 184: 1704. 
 
 29 Ibid., 180 : 848. 
 
 so In 1864 there were no less than 153 railway directors (not to speak 
 
112 RAILWAY FINANCE IN ENGLAND [112 
 
 measure vigorously. After being read a second time, it was 
 "put off" for a fortnight, and nothing was done with it that 
 year. 31 
 
 At this time it must be remembered that there was much con- 
 fusion over the legality of railway securities. Many companies 
 were forced to declare their inability to observe accurately the 
 limits of borrowing powers prescribed by the numerous acts of 
 Parliament. The public also became aware that under the sem- 
 blance of compliance with the limit prescribed by Parliament, 
 money was borrowed every day beyond the authority given. 
 Parliament itself was forced to recognize the unfortunate state 
 of affairs. 32 It appeared timely to legislate on the matter, but 
 it was thought impolitic to start too stringent rules so as to 
 "make it safe for people to jump in the dark." As a compro- 
 mise between the extreme views, the Marquess of Clanricarde re- 
 vived the agitation of the previous year by proposing that every 
 company should be compelled to make periodical returns and 
 that Parliament should adopt some system of public registra- 
 tion so as to enable the people to judge for themselves. 33 In 
 the meantime a bill 3 * for the registration of railway debentures, 
 which was substantially the same as that of the previous ses- 
 sion, was introduced into the House of Commons. 35 This bill 
 contained thirteen clauses and dealt in detail with the yearly 
 returns to the registrar of joint stock companies, the appoint- 
 ment of assistant registrars by the Board of Trade, and the 
 question of fees, and other questions. It also contained three 
 schedules, of which the first was concerned with the reports on 
 borrowing powers, the second with the registration of the issue 
 of bonds and debentures and of certificates of debenture stock, 
 
 of engineers, bankers, or contractors) in the House of Commons, nearly one- 
 fourth of the chief branch of the legislature being thoroughly identified 
 with the railway interest in the country. Some of the railway directors, 
 however, were not returned to Parliament for the purpose of representing 
 the railway interest, others were solicited to become members of railway 
 boards in consequence of their being members of Parliament. Railway 
 Times, January 16, 1864. 
 
 si Hansard, 180 : 848. 
 
 32 Ibid., 183 : 869. 
 
 ss Hansard, 183 : 869. 
 
 34 Bill No. 109, 1866. 
 
 ss Hansard, 182:1577; 181, pp. 336-338. 
 
113] REGISTRATION OP RAILWAY SECURITIES 113 
 
 and the last with the registration of discharges of debentures 
 and debenture stock. 
 
 In spite of the general need of some system of registration, 
 however, the railway interests raised considerable objection to 
 the provisions proposed by this bill. 36 In the first place, they 
 claimed that such a system of compulsory registration would 
 give to the registered securities an apparent validity which they 
 did not have intrinsically, and that it was impossible for the pro- 
 posed registrar in charge of the annual returns, etc., to ascertain 
 whether bonds submitted to him were or were not issued within 
 the borrowing powers of that company. But the railway inter- 
 ests, as remarked the Earl of Belmore, failed to notice that all 
 the bill proposed to do was exactly what had been done for the 
 preceding 150 years with regard to the registration of deeds in 
 Ireland. All land deeds had to be registered in the Rolls Office 
 in Dublin. This was exactly the proposition as regards the 
 registration of railway securities, and it did not seem probable 
 that the registration in the case of railway securities would give 
 the debentures any more validity than it would convert a false 
 deed in Ireland into a good one. The only object of the require- 
 ment was to show the numbers and amounts of the securities 
 issued by each company so that the investors might be able to as- 
 certain for themselves which securities stood in relative priority. 
 
 Another objection against this compulsory registration of rail- 
 way securities was that this requirement would take away from 
 the directors the feeling of responsibility, which they were then 
 supposed to have. If the directors were divested of their duty 
 of looking into the limits of their borrowing powers and were re- 
 quired by law to rely upon the findings of some government 
 office in regard to the exercise of their borrowing powers, they 
 might be induced to shirk the responsibility of keeping their 
 loans within the limit. But this argument could not hold in the 
 face of the fact that many railway directors themselves often did 
 not know either the extent of their responsibility or the exact 
 limit of their borrowing powers. 
 
 A general objection was also made on the ground that such 
 registration would interfere with the proper conduct of the com- 
 panies' business. Extra forces of men would have to be em- 
 
 se Ibid., 181 : 336-338. 
 
114 RAILWAY FINANCE IN ENGLAND [114 
 
 ployed in order to prepare the required returns, and the regular 
 business would be interfered with. But the supporters of the 
 bill retorted that no one would deny that the required compul- 
 sory registration would mean some extra work for the railways, 
 but that it must also be conceded that the increased value of their 
 securities due to such registration would more than compensate 
 them for any minor inconveniences which they would have to 
 incur. 
 
 While this bill was progressing, the Government was also plan- 
 ning to bring in a bill to give effect to some of the recommenda- 
 tions of both of the select committees on railway borrowing 
 powers. 37 Thus, in May 1866, a measure called the Railway 
 Companies Securities Bill was introduced by the president of 
 the Board of Trade into the House of Commons. 38 This bill dif- 
 fered from the Registration of Railway Debentures, etc., Bill in 
 that while the former was based largely on the report of the 
 Lords' Committee on railway borrowing powers of 1863, the lat- 
 ter embodied the recommendations of the committee of 1864. 
 
 Soon after the introduction of this measure, the Registration 
 of Railway Debentures, etc., Bill was withdrawn 39 without any 
 discussion. The government measure, after being examined and 
 considered in committees and amended considerably, was adopted 
 and has since been known as the Railway Companies Securities 
 Act of 1866. 40 Its primary purpose was to amend the law re- 
 lating to securities issued or to be issued by railway companies. 
 The principal provisions may be summed up as follows: (1) 
 Every railway company, on or before January 15, 1867, should 
 register and keep registered at the office of the Joint Stock Com- 
 panies the names of their secretary, accountant, treasurer, or 
 chief cashier for the time being authorized to sign instruments 
 under the act. (2) Within fourteen days after the end of each 
 half year every railway company should make an account of 
 their loan capital authorized to be raised and actually raised up 
 to the end of that half year, specifying the particulars described 
 in the schedules of the act. (3) The Board of Trade was au- 
 thorized to prescribe, by notice in the London Gazette, the forms 
 
 37 Hansard, 181 : 338-339. 
 ss IUd., 183 : 1197. 
 
 39 It was withdrawn on July 23, 1866. Ibid., 184: 1279. 
 
 40 29 & 30 V. c. 108. 
 
115] REGISTRATION OF RAILWAY SECURITIES 115 
 
 in which, the half-yearly accounts were to be kept. Such ac- 
 counts were to be open to the inspection of shareholders, etc., at 
 all reasonable times, without charge. (4) Within twenty-one 
 days of the end of each half year every railway company should 
 deposit with the Registrar of Joint-Stock Companies a copy, 
 certified and signed by the company 's registered officers as a true 
 copy, of their loan capital half-yearly account, and it should be 
 unlawful for any railway company to borrow any money unless 
 and until it had first deposited the aforesaid accounts. Failure 
 to deposit such accounts or to register its proper officer should 
 render the company liable to a fine not exceeding 20 for the 
 initial offense and a penalty not exceeding 5 per day during 
 the time which the offense continued. (5) Any person might 
 inspect the documents kept by any registrar on the payment of 
 one shilling for each inspection, and might have certified extracts 
 furnished him on the payment of additional fees. It was fur- 
 ther provided that thereafter two of the directors and the regis- 
 tered officers of each company should endorse on every deben- 
 ture, ' ' each for himself, ' ' as stated in the act, that, so far as he 
 knew the debenture was issued duly and was within the pre- 
 scribed limits to the borrowing powers. In case any mortgage 
 deed or bond was delivered without such a declaration, the com- 
 pany should be liable to a penalty not exceeding 20 for every 
 offense, and if any officer or director knowingly permitted the 
 delivery of such mortgage, deed, etc., he should be personally 
 liable to the same penalty as that of the company. Moreover, if 
 any director or registered officer of a company signed any dec- 
 laration, account, or statement required by the act, knowing the 
 same to be false in any particular, he should be deemed guilty 
 of an offense against the act and should be liable to a fine or 
 imprisonment. 
 
 It may be noticed that all the provisions contained in the act 
 had been, more or less, generally conceded as being necessary. 
 Parliament did not adopt any of the more stringent measures, 
 such as the compulsory stamping of each security by the govern- 
 ment, etc., for fear that in trying to require too much at a time 
 the whole program might be either defeated or made difficult of 
 application. Most of the provisions, therefore, were passed with- 
 out much opposition in either house of Parliament. 
 
 But of even greater importance were the provisions governing 
 
116 RAILWAY FINANCE IN ENGLAND [116 
 
 the make-up of these returns as required by the act. No matter 
 what efficient rules were adopted to enforce the making of re- 
 turns, the system would be of little value if the returns them- 
 selves were inadequate. It may be remarked that two distinct 
 things were required, namely: (1) half-yearly account of the 
 loan capital of the company, and (2) a statement of the borrow- 
 ing powers. The half-yearly accounts were required to show 
 the acts of Parliament under the power of which the company 
 had borrowed money, the amounts of loans authorized and the 
 amounts raised by loans, besides other important accounting de- 
 tails ; 41 while the statement of the borrowing powers should con- 
 tain information concerning (1) the acts of Parliament con- 
 ferring the borrowing powers and the conditions under which 
 the powers may be exercised, (2) the amount of mortgage or 
 bonded debt or debenture stock authorized, and (3) the date at 
 which such conditions have been fulfilled. 
 
 This act proved disappointing to some, in that it failed to 
 embody many of the more stringent measures demanded. Thus 
 the Economist said : 42 
 
 "English legislation abounds in abortive expedients. It 
 shrinks from difficulties. There is very commonly an admitted 
 evil, and very obviously only one real remedy. But very often 
 that real remedy is painful, and if public attention is but half 
 aroused to the subject, we are apt to put up with some half- 
 measure which gives little or no trouble, which looks as if it 
 might mend matters a little, and which has no disadvantage save 
 that it is not a searching cure of the evil to be remedied, and 
 that in a little while it will be forgotten on account of the slight- 
 ness of its effect, while the malady itself will rage as much as 
 ever." 
 
 "One of these half-way laws is the Act of last session as to 
 railway securities." 
 
 This important financial paper contended that the precautions 
 provided by this act failed exactly at the weak point. What was 
 wanted was an independent audit, a warranty by a competent 
 and impartial authority that such and such debentures were 
 
 *i Cf. first schedule of the Railway Companies Securities Act, 1866. Cf. 
 also infra, Chap. 7. 
 
 42 Economist, October 27, 1866. 
 
117] REGISTRATION OP RAILWAY SECURITIES 117 
 
 good. "The confusion, not to say worse, of the affairs of some 
 railways has been so great that those connected with all of them 
 are inevitably subject to a doubt Half of the directors in dis- 
 organized railways do not know what is being done, and others 
 wish to do what is illegal. Against such dangers, the act gives 
 no security; it requires certain statements to be made which all 
 the good companies, and 99 out of 100 . . . will make hon- 
 estly, but which an exceptional company, or rather some few 
 people about such a company, may make dishonestly. As long 
 as you rely on the bona fides of the issuer of the debenture you 
 are not, and cannot be, safe from his mala fides." ** 
 
 The act seemed to have failed to check the confusion over de- 
 bentures at least during the three or four years after its passage. 
 Nor did it prevent some of the companies from exceeding their 
 borrowing powers, as shown by the fact that a good number of 
 railways continued their former practice and that neither the 
 shareholders nor the public were at all aware of the liabilities 
 to which the companies were subject. 4 * Moreover, during 1867, 
 the year after the act was passed, many railway properties be- 
 came greatly depreciated and a feeling sprang up throughout the 
 country that further reform was needed. 45 Thus Lord Redesdale 
 felt it "extremely necessary" to adopt some provisions to the 
 effect that railway securities, unless properly registered, should 
 be regarded as invalid. 46 
 
 In this connection it may be remarked that the apparent fail- 
 ure of the Railway Companies Securities Act during several 
 years after its passage was perhaps due more largely to the spec- 
 ial momentum of the established habit of the railway companies 
 to over-borrow rather than the weakness of the act itself. When 
 the state of railway borrowing had reached such a chaotic condi- 
 tion and the companies had become so used to exceeding the 
 limit of their borrowing powers, as they were during the early 
 sixties, it would take some time to make any signal improvement, 
 no matter what measures were adopted. Therefore, the contem- 
 porary dissatisfaction and the apparent lack of good results from 
 
 ibid. 
 
 44 Hansard, 190 : 1962. 
 
 45 /bid., 190 : 1955. 
 
 id., 190: 1962. 
 
118 RAILWAY FINANCE IN ENGLAND [118 
 
 the act during the years immediately following its enactment do 
 not necessarily prove that the act was ineffective. On the con- 
 trary, time seemed to have proven the act of great value in spite 
 of its defects, in helping to restore order out of the financial 
 chaos which existed during the fifties and sixties. An English 
 writer, 47 after criticising the English system of regulation, gave 
 much credit to this act as having done "a great deal towards 
 placing railway finance on a sounder footing. . ." 
 
 After the enactment of the Railway Companies Securities Act, 
 Parliament commenced to give its special attention to the adop- 
 tion of some effective system of accounting as a possible method 
 of regulating railway loan capital as well as other branches of 
 railway finance. Accordingly special legislation for the purpose 
 of regulating the borrowings of railways may be said to have 
 closed with the passage of this act. 
 
 Now it may be asked, why did the railway companies exceed 
 the limit of their borrowing powers? What was the reason that 
 directors even risked their personal liability to issue illegal se- 
 curities ? It is true that some directors violated the law for inde- 
 fensible reasons; but it is equally true that in some instances 
 they were practically compelled to borrow beyond the legal lim- 
 its. By reason of the restriction of loans to one-third of the 
 share capital the companies were naturally always at the limit 
 of their borrowing powers. Thus the directors were placed 
 under an obligation at a certain time to meet a large amount of 
 debts falling due, whatever might then be the state of the money 
 market. Therefore, they often felt it necessary to raise money 
 beforehand w r hen the state of the money market was easy. More- 
 over, it often became necessary for a company to create new 
 debts in anticipation of the falling due of the old debts so that 
 its creditors or financial agents might not be able to take advan- 
 tage of the occasion to embarrass the company. With its loans 
 up to the limit, in issuing fresh debentures, the company in 
 either case would exceed the statutory limit of its borrowing 
 
 48 
 
 powers. 
 
 In answer to the question as to why railway directors, especial- 
 ly of small lines, were willing to evade the law and assume the 
 
 47 J. S. Jeans, Eaihvay Problems, p. 23. 
 
 48 Cf. Economist, May 2, 1863, and Hansard, 181 : 338. 
 
119] REGISTRATION OP RAILWAY SECURITIES 119 
 
 risk of personal liability, the Economist said, 49 "But human na- 
 ture is vain and weak, and the directors are puffed up by the 
 little local importance, and flattered by secretaries who live by 
 the line, and engineers and attorneys who make a large profit 
 out of it, and so they yield and ruin themselves. ' ' 
 
 Some people felt that the limit of the borrowing powers, which 
 was only one-third of the share capital, was "utterly inade- 
 quate, ' ' 50 that the limit was too small compared with the gen- 
 eral practice of borrowing on other mortgages, 51 and that too 
 strict rules would invite their evasion. Indeed, it was contended 
 that this inadequacy of borrowing powers was responsible for 
 the gross violation of the limit. 
 
 Others felt 52 that it was not within the power of the legisla- 
 ture to put any effective restrictions upon the borrowing powers 
 of railway companies, even if it were proper to do so. If a com- 
 pany wanted to borrow, it would find some way of doing it in 
 spite of the law. Therefore, it was urged that the limit upon 
 borrowing powers should be removed 53 and railways should be 
 allowed to borrow what they liked, provided that they made 
 known all their proceedings. If the public had the necessary 
 information, they might be safely given absolute freedom in ad- 
 vancing their money. 54 If the limit was not entirely done away 
 with, it should at least be extended. 
 
 Further it was urged that the borrowing powers of railway 
 companies should be made more definite and the law governing 
 the same should be more strictly enforced. If the railway direc- 
 tors realized that there were absolute limits to their borrowing 
 which it was not possible to evade, they would make better ar- 
 rangements beforehand, and would not be so speculative. In- 
 deed much of the difficulty was attributed to the facility with 
 
 49 Economist, December 14, 1867. 
 
 so Evidence before Lords' Committee, 1864, p. 34. 
 
 si The ordinary margin of borrowing with reference to good mortgage 
 securities was two-thirds of the share capital. See evidence before Lords' 
 Committee, 1864, pp. 34-35. 
 
 52 Evidence before Lords' Committee on Bailway Borrowing Powers, 
 1864, p. 24. 
 
 ss Evidence before Royal Commission on Railways, 1867, pp. 803-836. 
 
 5 * Evidence before Lords ' Committee on Railway Borrowing Powers, 
 1864, pp. 33-35. 
 
120 RAILWAY FINANCE IN ENGLAND [120 
 
 which, railway directors in general were able to get their wrongs 
 set right by the assistance of Parliament in patching up their 
 former acts. Although they did not always succeed in getting 
 what they asked for, the hope of being able to do it operated 
 strongly upon them. 55 Parliament in its desire to protect deben- 
 ture holders by limiting the borrowing powers had led the public 
 to believe in the thoroughness of the protection ; while in reality 
 their protection was by no means satisfactory so long as the law 
 was indefinite and loosely enforced. 56 Therefore, it was urged 
 that the limit of the borrowing powers of railway companies 
 should be made more definite and strictly enforced, or that there 
 should be none at all. 
 
 Another defect in the law prior to 1866 was that there was not 
 any effectual means to ascertain whether or not the law had been 
 complied with. The law said that railways should not issue any 
 debentures unless and until a certain proportion of their capital 
 had been paid up, but it left the enforcement of this provision 
 to a justice of the peace. It limited the amount that the railway 
 could borrow but in practice could not enforce the limitation. 
 The whole trouble seemed to be briefly this : The legislature had 
 given a privilege of borrowing and had defined the extent of the 
 privilege as well as the conditions under which the privilege 
 might be exercised; but under the circumstances which existed 
 during the sixties no one had any adequate means of ascertain- 
 ing whether or not the limit had been exceeded or the requisite 
 conditions had been fulfilled. 57 Therefore, it was recognized 
 that the difficulty was a legal one and not an economic one, in 
 that the earning powers of the railways, on the whole, were such 
 as to make a mortgage on railway undertakings "one of the very 
 best securities. ' ' 58 Toward removing this difficulty, the agita- 
 tion as well as the laws adopted during the sixties for the regis- 
 tration of railway securities seem to have done much. 
 
 55 Evidence lefore Lords' Committee on Eailway Borrowing Powers, 1864, 
 p. 27. 
 
 58 Evidence before Lords' Committee, 1864, p. 33. 
 
 57 Economist, May 2, 1863. Cf. also Hansard, 171 : 1303. 
 
 as Economist, October 20, 1866. 
 
CHAPTER VI 
 REGULATION OF RAILWAY STOCK WATERING 
 
 Stock watering by railways may be- defined as the nominal in- 
 crease of railway capital without any commensurate investment 
 of real capital in the concern. It amounts to the fictitious in- 
 creasing of the capital liabilities by mere book entries and the 
 issuing of unpaid certificates. Stock watering has several forms, 
 chief among which may be mentioned (1) stocks issued partially 
 to represent money, which, instead of being used for improving 
 the property is paid out as dividend; (2) stocks issued to repre- 
 sent an actual increase in the earning capacity and market value 
 of the property; and (3) stocks issued to give certain parties 
 control of the line without actually risking anything like the 
 amount nominally represented by their stocks. 1 Stock watering 
 may be done in many ways, the most important, as it is practiced 
 in England, are those of mere duplication or triplication of ex- 
 isting stocks or the creation of new but unpaid stocks. 
 
 Stock watering under the first form came up before Parlia- 
 ment in 1868, in connection with the Regulation of Railways 
 Bill of that year. The Duke of Richmond proposed the insertion 
 of a clause in that Bill to enable railway companies to issue 
 preference shares which had been authorized and remained un- 
 issued at the time, in lieu of dividends, in cases where by a vote 
 of no less than three-fourths of the holders of ordinary shares 
 any portion of the amount declared by the auditors to be ap- 
 plicable to the payment of dividends on the ordinary shares is 
 applied to the redemption of debentures or to the execution of 
 authorized works. This proposition was objected to on the 
 ground that it would enable a company to apply its earnings to 
 the construction of new works or the redemption of debenture 
 without paying anything to the preference shareholders. 2 
 
 1 Hadley, Railroad Transportation, 1903, pp. 54-55. 
 
 2 Railway Times, May 23, 1868, p. 548. 
 
 121 
 
122 RAILWAY FINANCE IN ENGLAND [122 
 
 This objection, per se, did not appear valid, for the dividend 
 on the ordinary stock was distributable only after the claims of 
 the preference shareholders had been satisfied. Since the divi- 
 dend on the ordinary shares of a company was duly earned, as it 
 was required to be in this case, there was no reason why that 
 company, with the consent of the holders of its ordinary shares, 
 should not be permitted to issue its existing preference shares in 
 lieu of such dividends. Indeed, as the Railway Times 3 main- 
 tained, it appeared strange that the shareholders could not, on 
 their own accord obtain the privilege of paying themselves "in 
 paper instead of in cash." The difficulty appeared to be that 
 Parliament feared the proposal would prove "extremely unjust 
 and that it would probably lead to gross mismanagement, though 
 it would not be open to so much objection if the payment were 
 made in ordinary instead of in preference stock. ' ' Some prom- 
 inent members in the House of Lords 4 contended that ' ' if Par- 
 liament could have foreseen the evil which had resulted from the 
 issue of preference stock," it would have never given its sanc- 
 tion to these preference shares. The difference of opinion with 
 regard to this proposition of issuing preference shares in lieu 
 of dividends appeared to be so strong that the bill was with- 
 drawn. 6 
 
 Thus direct stock watering in England has been practiced 
 only under the various shades of the second form. The first 
 form, as has just been shown, failed to receive the sanction of 
 law; and the last form, which is by far the most objectionable, 
 has proved impracticable under the English system of regulation 
 and the conservative business sentiment of the people. 
 
 But stock watering has been practiced indirectly, although on 
 a small scale, ever since the thirties. One of these early methods 
 of indirect stock watering was to pay interest on calls before a 
 line was opened, and then charge such unearned interest to cap- 
 ital. This practice became quite common during the forties. 6 
 From its appearance it was quite harmless, but in reality it was 
 nothing but a pure case of stock watering, in that such charges 
 of unearned interest would swell the capital account to the extent 
 
 zEailway Times, May 23, 1868. 
 
 * Lord Redesdale et al.. Hansard, 192 : 420-422. 
 
 s Hansard, 192 : 422. 
 
 e Railway Times, April 27, 1844. 
 
123] REGULATION OF RAILWAY STOCK-WATERING 123 
 
 of the interest so charged, without any corresponding addition 
 to capital. Although the magnitude of these nominal additions 
 was small, the effect became rather objectionable. So in 1847, 
 after the panic which followed the great railway extension, the 
 House of Lords adopted a standing order 7 prohibiting the pay- 
 ment of interest out of capital. This was done, however, not 
 primarily for the purpose of preventing stock watering, but to 
 discourage speculation. 8 Nevertheless, this standing order had 
 considerable effect upon stock watering, and remained in force 
 for many years. 
 
 This restriction was again emphasized in 1864 in connection 
 with the loans made by the railway companies. In the Railways 
 Construction Facilities Act of that year a provision was made to 
 the effect that railway companies should not, out of money 
 raised under the certificate of the Board of Trade by calls or 
 borrowing, pay interest or dividend to a shareholder on the 
 amount of calls made on his shares. 9 
 
 For twenty years these restrictions remained in force. Prac- 
 tically nothing was done during that period to change them. 
 But in 1882 on behalf of the small undertakings, which were in 
 demand at that time, an effort was made to obtain from Parlia- 
 ment a modification of these restrictions. The reason advanced 
 was that the payment of interest out of capital would offer a 
 great inducement to local investors and small capitalists, who 
 could not afford to put their money into these undertakings with- 
 out obtaining at once some returns upon it. While the effort 
 was unsuccessful, it brought about considerable agitation, as a 
 result of which the House of Lords in 1886 modified its standing 
 order so as to make the payment of interest out of capital per- 
 missible under certain conditions. 10 This relaxation of the law, 
 however, was not accompanied with such good results as was 
 expected. It soon proved that it was the bright prospects of the 
 undertaking and not the power of the company to pay interest 
 out of capital that could induce investors to come forward. So 
 this relaxation of the indirect check against stock watering 
 
 7 Standing Order No. 167. 
 
 s Report of Select Committee, May 19, 1882, p. iii. 
 
 9 27 & 28 V. c. 121, sub-see. 3 of section 29. 
 
 10 According to Earl Beauchamp in House of Lords, Eailway Times, 
 March 16, 1889. 
 
124 RAILWAY FINANCE IN ENGLAND [124 
 
 proved to be ill-advised. Since then, however, special provisions 
 have been made to restrict the payment of interest out of cap- 
 ital. Thus the Coventry Railway Act of 1910 provided that no 
 interest should be paid on any share until at least two-thirds of 
 the authorized share capital had been accepted by bona fide 
 shareholders, nor should interest accrue in favor of any share- 
 holder when calls on any of his shares were in arrears. The ag- 
 gregate amount to be paid for interest was also limited to a 
 definite sum, and the company was required to give notice of its 
 power to pay such interest in every one of its prospectuses, ad- 
 vertisements, or other documents inviting subscriptions, so that 
 investors might know what might take place. Moreover, the 
 borrowing powers of the company should be reduced to the ex- 
 tent of one-third of the amount paid for interest, and the half- 
 yearly accounts were required to show the amount of capital on 
 which, and the rate at which, interest had been paid. 11 
 
 Another indirect method of stock watering was to declare un- 
 earned dividends. This practice was quite as extensive as the pay- 
 ment of interest out of capital. A member of Parliament 12 was 
 reported to have said that many railways paid dividends out of 
 their capital stock as if they were in a most flourishing condition ; 
 and that they sometimes carried the practice so far that their 
 capital no longer existed. This practice once became quite alarm- 
 ing ; and the House of Commons felt itself compelled to insert a 
 clause in the Companies Clauses Act of 1845 13 to the effect that 
 companies should not declare any dividend whereby their capital 
 stock would be in any degree reduced. By the Companies Act 
 of 1862, it was also provided in Table A that no dividends should 
 be paid except out of profits earned. But this regulation was 
 not compulsory on the companies registered under that act, for 
 they were empowered by sec. 14 to make rules of association ex- 
 cluding the regulation in Table A. Much conflict consequently 
 resulted between the application of this act and the enforcement 
 of Standing Order No. 167. 1 * 
 
 But some railways soon found another method of adding water 
 to their capital by the issuing of stocks at a discount. They is- 
 
 11 Sec. 41 of the Coventry Railway Bill, 1910. 
 
 12 Lord G. Somerset. Hansard, 78 : 48-49. 
 is 8 V. c. 16, sec. 121. 
 
 i* Report of Select Committee, 1882, p. iii. 
 
125] REGULATION OP RAILWAY STOCK-WATERING 125 
 
 sued stock certificates for sums larger than were paid into the 
 treasury of the company. This practice also became obnoxious, 
 as a result of which a clause was inserted in the Companies' 
 Clauses Act of 1863, 15 prohibiting the issue of any shares for less 
 than the full amount. 
 
 This law lasted three years. Owing to the agitation of the 
 railway interests as well as the changeableness of the attitude of 
 Parliament in railway matters during the period, the law was 
 amended by the Railway Companies Act of 1867, 16 and the pro- 
 vision prohibiting the issue of shares at a discount was elim- 
 inated. 
 
 There was no debate upon the amendment in the public bill. 
 But the question regarding railways was debated in connection 
 with the proposal made in the Brighton Railway Bill. 17 This 
 company (the Brighton Railway Company) being very much in 
 want of funds proposed to raise money by the issue of prefer- 
 ence stocks; but being unable to raise the amount required by 
 such means, they sought to issue ordinary stocks at a discount. 
 The proposal was regarded by the lords as "perfectly new" and 
 of great importance. Lord Redesdale, who recommended the 
 passage of the bill, confessed that it was an objectionable course, 
 but he thought that "it was less objectionable than the creation 
 of preference stocks, and he therefore felt disposed, under the 
 circumstances, to allow the company to issue stocks at a dis- 
 count." None of the lords who spoke on the question were cer- 
 tain as to the advisability of such a measure; but with the feel- 
 ing that "when a railway company was in difficulty it was the 
 interest of all parties that money to carry it through should be 
 raised in some way," they did not oppose the measure openly. 
 Following the example of the Brighton, four other companies 
 also obtained similar powers, and 4,043,000 in "water" was 
 added in that year to the railway capital by the issue of stocks 
 at a discount, 18 
 
 By the amendment of 1867 and the interpretations given to 
 that amendment in the cases just cited, it was generally consid- 
 
 is 26 & 27 V. c. 118, sec. 21. 
 is 30 & 31 V. c. 127, sec. 27. 
 "Hansard, 188:1423-1424 (July, 1867). 
 
 is The Chatham & Dover, the Great Eastern, the Sheffield, and the Met- 
 ropolitan. Fraser, British Eailways, p. 54. 
 
126 RAILWAY FINANCE IN ENGLAND [126 
 
 ered that the issue of shares at a discount was permitted. This 
 freedom was made more unmistakable in 1869 by the Companies 
 Clauses Act of that year, 19 in which it was provided that the re- 
 peal of the proviso against the issuing of stocks at a discount 
 was made applicable generally to all companies coming under 
 that act. Thus all restrictions were removed. The railways at 
 once made use of this relaxation of the law; and the issuing of 
 stocks at a discount soon became quite general. 20 
 
 Although these discounts were ipso facto nominal additions, 
 they were comparatively negligible in amount and were done 
 only indirectly. Open stock watering was still under the ban of 
 law. There appeared, however, to be much latitude in enforcing 
 the law governing such nominal additions. Since 1867 many 
 railway companies have obtained powers to "convert" their 
 stocks, by which process considerable nominal additions were 
 made. But in most of these cases the "infusion," as it was 
 then called, was still small compared with the capital of the 
 companies, and was made more or less incidental to other ar- 
 rangements. Out and out stock watering by duplication did not 
 take place until 1888, 21 when a new departure took place under 
 the scheme known as stock splitting. In that year the North 
 British Railway was authorized to make an "absolute duplica- 
 tion" of its existing stock of 5,181,000. By this so-called 
 process of duplication, every holder of the company's ordinary 
 stock on which, say, 100 had been paid, was given a certificate 
 for 200 in the converted stock. In the same year the Great 
 Northern made a nominal addition of 1,803,000, and in the fol- 
 lowing year the Taff Vale obtained powers to increase its ordi- 
 nary capital of 1,300,000 two and a half times by the same 
 process. The latter case led Parliament to make its first inquiry 
 into stock watering. We shall, therefore, examine it briefly. 
 
 When the bill of the Taff Vale for triplicating the amount of 
 
 is 32 & 33 V. c. 48, sec. 5. 
 
 20 Evidence before the Select Committee of 1890 on the Conversion of 
 Railway Stocks, p. 39. 
 
 21 Prior to 1890 complete information regarding the amount of nominal 
 addition was not obtained by the Board of Trade, but the Board of Trade's 
 returns of 1890 show a total of 57,800,000. Deducting from this the sum 
 of about 21,000,000 added in 1888, 1889 and 1890, the amount of nominal 
 capital existing prior to 1888 would be about 37,000,000. 
 
127] REGULATION OF RAILWAY STOCK-WATERING 127 
 
 its ordinary shares was lodged in Parliament, it aroused consid- 
 erable anxiety. Therefore, in spite of the fact that it was not 
 the duty of the Board of Trade to examine questions dealing 
 with capital in railway bills, the matter was brought informally 
 to the notice of that board for consideration. The view which 
 that board took on the question was that the proposed nom- 
 inal increase was so extensive that it ought to be dealt with 
 in a public manner, and should not be allowed to pass as a mat- 
 ter of course, notwithstanding their general opinion that the 
 "greatest freedom should be permitted to companies to arrange 
 their capital as they pleased." Eventually the bill was passed 
 and ample powers of duplication were granted to the company, 
 subject to the provision that surplus profits above 15 per cent 
 on the ordinary capital, or 6 per cent on the new enlarged cap- 
 ital, should be given to the public in the form of reduced rates or 
 improved accommodations. It was also provided that the nature 
 of the nominal increase as well as the old capital should be 
 shown in the accounts of the company, so that every one should 
 be able to understand what had happened. 22 
 
 Leaving the advisability or inadvisability of granting powers 
 for stock watering, for future consideration, we may here men- 
 tion the erroneous idea which Parliament had in regard to rail- 
 way finance as evidenced by the proviso under which the ex- 
 tensive powers of duplication were granted to the Taff Vale. 
 Although the high level of the maximum rate of dividend fixed 
 to "balance" the favors granted might have been warrantable 
 at the time by the special circumstances of that company, the 
 method of limiting the maximum was altogether misleading and 
 ineffective. According to that method any surplus above 15 per 
 cent etc. was to be given to the public in the form of reduced 
 rates. It was fairly well recognized then, as it has been gener- 
 ally recognized since, that a railway company under restriction 
 as to the maximum rate of dividend would be constantly tempted 
 to increase its expenditures, whenever its profit promised to ex- 
 ceed that limit. 23 There are always many ways in which a rail- 
 way company can spend money before it will give it to the 
 
 22 Evidence before the Select Committee of 1890. 
 
 23 " To forbid a corporation to increase its profits is to encourage waste 
 and discourage enterprise." Hadley, Eailroad Transportation, 1903, p. 102. 
 
128 RAILWAY FINANCE IN ENGLAND [128 
 
 public. This was especially true during that period when the 
 system of accounts was ineffective to check up the expense 
 charges of the company. 
 
 Then again, the proviso was based on a false premise. The 
 maximum was fixed at 15 per cent only because the company 
 had been declaring an average dividend at that rate during the 
 previous seven years. From this it would follow that a company 
 which might have gone on the principle of charging high or dis- 
 criminating rates and had thus been enabled to pay high divi- 
 dends would have its maximum fixed at a high point, whereas a 
 company that had been content with moderate rates would be 
 punished for its moderation by having its maximum fixed at a 
 low level. 24 It is needless to say that such a practice would 
 mean gross injustice. 
 
 To the public such a principle would also be unfair. One dis- 
 trict would be given a right to receive all profits above say 5 
 per cent of dividend of the railways serving it, while another 
 district would not be entitled to enjoy such a right until the divi- 
 dends of its railways had reached say 10 or 15 per cent. But the 
 question of rates is not within the scope of our study* Suffice it 
 to say that strange as it appeared to others, 25 Parliament at the 
 time thought it had gained a great concession from the railway 
 by the provision mentioned and referred to it in subsequent 
 years as a principle to be followed instead of regarding it as a 
 bad practice to be avoided. 
 
 The case of the Taff Vale, significant as it appeared to be, 
 was nevertheless only the prelude to what took place immediate- 
 ly afterwards. It was in 1890 that stock watering reached an 
 extravagant scope, and it was in that year when the most im- 
 portant parliamentary inquiry regarding stock watering was 
 made. In 1890 four companies 26 lodged bills for powers to add 
 
 2* "The market value (of railway stocks) depends upon the rate which 
 has been charged. . ." Interstate Commerce Commission Report, Feb. 
 22, 1911, p. 259. 
 
 25 Economist, March 22, 1890, pp. 364-365. 
 
 26 The Isle of Wight, the London & South-Western, the Caledonian, and 
 the Great Northern. The London & South-Western may be taken as a 
 simple and typical example of stock duplication. In the second clause of 
 this company's bill it was provided that the company would create ordinary 
 stock of two classes (1) preferred 4 per cent ordinary stock and (2) de- 
 
129] REGULATION OF RAILWAY STOCK-WATERING 129 
 
 some 36,000,000 nominally to their capital, and those bills were 
 not opposed. 27 The vast interest involved in these proposals at 
 once attracted much attention. The Board of Trade in spite of 
 its policy to favor non-intervention in such matters, thought the 
 question of such an extensive increase of nominal capital to be 
 of "novel impression" and a "new departure so important that 
 it ought not to be passed sub silentio . . .," so it urged 
 that the question should be fully debated and the whole matter 
 thrashed out. The chairman of the Ways and Means Commit- 
 tee, under whose hands such unopposed bills were usually dis- 
 posed of without much discussion, also considered that the vast 
 interests involved in them required special investigation. He 
 disregarded, therefore, the usual rule of procedure, and handled 
 those bills as if they were opposed. Accordingly they were re- 
 ferred to a select committee of nine members, five being nom- 
 inated by the House of Commons and four by the Committee of 
 Selection. 28 This select committee was empowered to send for 
 persons, papers, and records, etc., concerning both sides of the 
 question, and to consider what provisions should be made for the 
 benefit of the public, if the applications were allowed. 29 
 
 Two distinct questions at once presented themselves for solu- 
 tion, namely: 
 
 (1) Whether or not the proposed duplication of stocks ought 
 to receive sanction. 
 
 (2) How far it was necessary or expedient for Parliament to 
 interfere with the methods by which the duplication was done, 
 and if Parliament should so interfere, whether the terms and 
 
 ferred duplicated ordinary stock, both classes of which to be in substitu- 
 tion of a corresponding amount of the paid up ordinary deferred. That is 
 to say, 100 of the preferred and 100 of the existing ordinary stock should 
 be substituted for every 100 of the existing ordinary stock. It was also 
 provided that the maximum dividend on the preferred stock should be at the 
 rate of 4 per cent non-cumulative, and that the remainder of the net profits 
 would go to the deferred ordinary stock. The voting powers were to re- 
 main as before, as if the splitting or duplicating had not taken place. Cf. 
 Eailway Times, May 17, 1890, and testimony of the representative of the 
 L. & S. W. before the Select Committee of that year. 
 
 27 Eailway Times, March 22, 1890, and June 21, 1890, p. 784. 
 
 28 Select Committee of the House of Commons on Stock Conversion, 1890, 
 hereafter called Select Committee of 1890. 
 
 w Report of Select Committee, 1890, p. ii. 
 
130 RAILWAY FINANCE IN ENGLAND [130 
 
 conditions under which duplication might be done should be 
 prescribed in a general enabling bill. 
 
 With these questions before it, the committee, besides taking 
 testimony from the representatives of the railways and other 
 interested parties, called for much independent evidence, among 
 which was that of the representatives of the Board of Trade, 
 the Stock Exchange Committee, and of prominent members of 
 the London and Scottish banking fraternity. A remarkable 
 phalanx of opinion was obtained. 
 
 One very striking feature of the evidence on the question of 
 stock watering was that not one of the witnesses thought the 
 practice good in itself. Even those who appeared in behalf of 
 the railways did not attempt to justify it on its own merits. On 
 the other hand, all the witnesses agreed that in principle stock 
 watering should be avoided. But the railway representatives 
 claimed that if the practice were an evil, it was a necessary one, 
 since if they did not do it themselves, the conversion companies 30 
 were going to do it for them. 
 
 The second question upon which much discussion took place 
 was how to ameliorate this necessary evil. What was elicited 
 upon this question was enlightening. The Board of Trade 31 
 was of the opinion that if the freedom of stock watering were to 
 be generally conceded, it was most important that they should 
 retain a record of the actually paid-up capital as distinguished 
 from the nominal addition. The position of the board was to 
 leave railway shareholders to duplicate, triplicate, or to give any 
 name or units to their capital, for the purpose of buying and sell- 
 ing, that suited them best, "but/' they said, "let us take care of 
 the public interest so far as the record is concerned." The 
 
 so The first stock conversion company was floated in February, 1889. 
 The object of the company, which was new at the time, was to effect the 
 duplication or triplication of the stocks of railway companies independent 
 of the railways themselves. The conversion company, or trust, used its own 
 capital for the purchase of railway stocks, and also gave its own shares and 
 debentures in exchange for any railway stocks that might be deposited with 
 it. Thus, it obtained a considerable amount of railway stock, which in turn 
 was made the basis of a very much larger issue of the trust's own shares 
 and bonds. For details of the working of the conversion company see 
 Economist, 1889, p. 596. 
 
 si For details of the position of the Board of Trade see Evidence before 
 the Lords' Committee on the Conversion of Stock, 1890, pp. 37-44. 
 
131] REGULATION OF RAILWAY STOCK-WATERING 131 
 
 Board of Trade was also of the opinion that there should be uni- 
 formity in recording these nominal additions. If no special act 
 like that of 1868 were enacted, a uniform clause requiring such 
 records should be inserted "as far as possible" in all private 
 bills asking for powers to make nominal additions. It also pro- 
 posed under the powers of obtaining statistical information con- 
 ferred by the Railway and Canal Traffic Act of 1888 32 to obtain 
 and record the same information in the annual returns under the 
 Regulation of Railways Act of 1871. 33 Attention must be called 
 to the fact that the purpose of the Board of Trade in insisting 
 upon the keeping of a clear record of the original paid-up and 
 the nominal capital was "mainly in the interest of the govern- 
 ment and the public with reference to the powers with which the 
 companies have been entrusted, and not for the purpose of bene- 
 fiting or shielding the investing classes in any way. ' f 34 
 
 Whatever the purposes were, all the evidence agreed on the 
 necessity of keeping a clear record of all nominal additions. A 
 practical banker 35 in testifying, believed that to keep a separate 
 record of such nominal additions was very important not only to 
 the railway companies themselves but to the general investors as 
 well. The chairman of the stock exchange 36 considered it very 
 important that the government should insist upon having the 
 original capital placed on the face of the accounts, so that there 
 should be no doubt as to what was the real paid-up capital. By 
 this means, ' ' every person who buys or sells these shares will al- 
 ways have before him every six months what his position is." 
 In short, the consensus of opinion both in Parliament as well as 
 outside of it was that a clear, separate record of the conversion 
 and the converted stocks was necessary for the general interest 
 of the railways and the public. It is interesting to notice that 
 no objection whatever against this requirement was raised by the 
 railways. 
 
 The select committee, after examining those witnesses repre- 
 senting different interests, made a special report three months 
 
 32 52 & 53 V. c. 66, sec. 32. 
 ss 34 & 35 V. c. 78. 
 
 s* Evidence before the Lords' Committee on the Conversion of Stock, 
 1890, p. 43. 
 
 35 Ibid., pp. 53-56. 
 se Ibid., p. 47. 
 
132 RAILWAY FINANCE IN ENGLAND [132 
 
 after its appointment. As above stated, the committee had to 
 decide two distinct questions: (1) whether the proposed nominal 
 additions ought to receive the sanction of Parliament, and (2) 
 how far it was expedient for Parliament to interfere with the 
 process by which the nominal additions were to be effected. In 
 answer to the first question, the committee said that there was 
 "nothing unreasonable or objectionable from a public point of 
 view in the conversion of ordinary stocks into a preferred and a 
 deferred class," and, therefore, it recommended "that the neces- 
 sary power for that purpose should not be refused when a rail- 
 way company desires it." "With regard to the second question, 
 which was of general interest, the committee instead of trying to 
 solve it as it was expected, dodged it by throwing the responsi- 
 bility upon the Royal Commission of 1867 which stated "that 
 Parliament should relieve itself from all interference with the 
 financial affairs of railway companies, leaving such matters to be 
 dealt with under the Joint Stock Companies Act . . ." and 
 the committee urged "that Parliament should continue to act 
 upon the principle of non-intervention . . . believing that 
 while the public are naturally concerned in the solidity and sta- 
 bility of corporations to which Parliament has given large ex- 
 clusive powers, these objects are, in most cases, best secured by 
 trusting to the self -interest of the shareholders. " 37 In order to 
 avoid the confusion inherent in these nominal additions, the 
 committee believed "it right to insist (1) that the dividend 
 should in all cases continue to be declared on the original stock, 
 and (2) that the original stock or paid-up capital shall be re- 
 corded and shown in the accounts as though no alteration had 
 been made, . . ." and (3) that the new stock should bear a 
 different and uniform nomenclature. 
 
 This report proved, as might have been expected, disap- 
 pointing to many parties, 38 but not to the railway companies. 
 Throughout its length it showed that the committee took for 
 granted the very matters into which it had been expected to in- 
 quire. Most of its conclusions were drawn from the fact that 
 some commission said so and so; and much of the evidence 
 
 37 Report, pp. IV- V. 
 
 38 Both the Economist and the Railway Times published editorials strong- 
 ly criticising the report. 
 
133] REGULATION OF RAILWAY STOCK-WATERING 133 
 
 seemed to have been disregarded. In the first place, the con- 
 elusion of the committee that "there was nothing unreasonable 
 or objectionable from a public point of view in the conversion of 
 ordinary stocks . . ." did not seem to be well founded. In 
 the face of the numerous objectionable features of stock water- 
 ing brought out by the evidence, no one could have expected such 
 a conclusion. 
 
 Then the statement made by the committee that the estab- 
 lished principle was that Parliament should not concern itself 
 any more with the financial affairs of railways than with those 
 of other stock companies was open to serious question. Parlia- 
 ment had never assented to this principle. On the contrary it 
 had never permitted railway companies to deal with their cap- 
 ital accounts with the same degree of freedom as the ordinary 
 joint stock companies. Numerous facts 39 could be cited to show 
 that Parliament had drawn a clear and broad line of demarca- 
 tion between the principles governing the finances of railway 
 companies which enjoyed a state conferred monopoly and that 
 of ordinary industrial undertakings. "To assume, therefore, 
 that Parliament had acted on the principle of non-intervention 
 in the financial affairs of railway companies seemed to be direct- 
 ly opposed to facts. ' ' 40 Whether the principle involved in 
 stock watering was right or wrong, it was certainly not to be 
 summarily disposed by quoting a twenty-year old opinion which 
 Parliament did not endorse at the time and which in its subse- 
 quent actions it had often deliberately set aside. 
 
 It must not be inferred from these disappointing features that 
 the inquiry of the committee was entirely fruitless. At least two 
 of the recommendations of the committee have since proved to be 
 sound. The first was that regarding the keeping of a clear rec- 
 ord of all nominal additions and the other was that of requiring 
 a uniform and distinct nomenclature to be put on the face of the 
 "watered" stocks. It is to be regretted, however, that sound as 
 these recommendations were, they were shorn of much of their 
 
 39 Parliament has put railway finance upon a different footing from that 
 of other companies by specially authorizing trustees to invest in certain 
 classes of railway stocks. It has reserved to itself the power to deal with 
 the affairs of an insolvent railway; and it has intervened to limit railway 
 dividends, etc. 
 
 <o Economist, June 21, 1890. 
 
134 RAILWAY FINANCE IN ENGLAND [134 
 
 force and value by the lack of emphasis placed upon their en- 
 forcement. 
 
 This report was received by Parliament on June 13, 1890. 
 No general or special legislation resulted from the inquiry. But 
 clauses embodying the recommendations of the committee to re- 
 quire the recording of all nominal additions were introduced 
 into the bills then under consideration. 41 Moreover, a precedent 
 was established, according to which similar clauses have con- 
 tinued to be inserted in all subsequent bills for powers to make 
 nominal additions to railway stock. Parliament also occasion- 
 ally required that dividends be paid on the original ordinary 
 shares, exclusive of the nominal additions, as in the case of the 
 Midland, where it was provided that the "company shall, not- 
 withstanding the conversion, . . continue to ascertain and 
 declare their dividends on the amount of ordinary stock which 
 would have been entitled to dividend if no such conversion had 
 taken place. . . " * 2 
 
 Parliament, however, failed to make use of the committee's 
 recommendation of adopting some distinct nomenclature for the 
 converted stocks. Neither was any uniform method of procedure 
 adopted to compel all railway companies to report their nominal 
 additions to stock. An indirect but more effective check against 
 stock watering, however, was adopted in the following year, by 
 the enactment of the Stamp Act in which it was provided that in 
 case of any nominal increases of the share capital, an ad valorem 
 duty of 2 shillings per 100 should be charged, with a cumula- 
 tive penalty for neglect to render due statement of such in- 
 creases. This measure has been rigorously enforced. Thus the 
 railway companies have been compelled under penalty to pay 
 duty on, as well as to render due statements of, all nominal in- 
 creases to a government office. It may be added that a further 
 check against unnecessary stock watering was effected by a sub- 
 sequent enactment in which the stamp duty was increased from 
 2 to 5 per cent. 
 
 In this way, the question of stock watering was disposed of, 
 and the policy for its regulation settled once for all. No new 
 
 41 Eailway Times, June 14, 1890. 
 
 42 Sec. 67 of the Midland Act of 1897, quoted in Fraser, British Rail- 
 ways, p. 68. 
 
135] REGULATION OF RAILWAY STOCK-WATERING 135 
 
 departure from the policy has since been made by Parliament. 
 The status thus established may be summed up as follows : 
 
 (1) Railway companies shall have freedom to determine their 
 policies and practice in making nominal additions to their 
 capital. 
 
 (2) Before such nominal additions are made, the company 
 must come to Parliament for power. 
 
 (3) Bills for such powers are dealt with in the same way as 
 any other kind of private bill. 
 
 (4) Clauses requiring the keeping of a clear record of all 
 nominal additions as distinguished from the paid-up capital are 
 uniformly inserted in such bills before their passage. 
 
 (5) An ad valorem, duty of 5 per cent is to be paid on the 
 nominal increases and a due statement of all nominal additions 
 is to be furnished to the Stamp Duty Commissioners' office. 
 
 By this system of regulation, complete liberty has been given 
 to the companies on the one hand, and publicity has been insured 
 to the public on the other. Although England had to suffer from 
 her leniency toward stock watering, she has never known those 
 vicious schemes of stock watering practiced in the United States. 
 Thus, disappointing as the 1890 investigation and imperfect as 
 the action of Parliament appeared to be, much good was brought 
 about, which was, perhaps, due both to the efficacy of the Eng- 
 lish system of regulation as well as the readiness of the English 
 railways to mitigate as far as possible the evils inherent in stock 
 watering. 
 
 Following the suggestion of the Select Committee of 1890, the 
 Board of Trade in preparing its railway returns for 1890 also 
 endeavored to find some way to give practical effect to the rec- 
 ommendations in regard to the records to be kept. On account 
 of the lack of definite power, the Board of Trade, however, had 
 to request the companies to show in their semi-annual returns 
 the amount by which the various descriptions of their stocks and 
 shares had been nominally increased or decreased. 43 But the 
 "request" of the Board of Trade, though not as effective as a 
 command might have been, proved quite useful, and considerable 
 information regarding nominal additions was obtained from the 
 companies which had added "water" to their capital. These 
 
 43 General Beport to Board of Trade on shares, etc., 1890, p. 4. 
 
136 
 
 RAILWAY FINANCE IN ENGLAND 
 
 [136 
 
 figures of nominal capital have since been published by the 
 Board of Trade from year to year, 44 to the advantage of the 
 public as well as to the railways themselves. By turning to 
 these returns one may at once see for himself what part of the 
 company's capital represents nominal increases, which informa- 
 tion is an advantage in itself as well as a means to clarify con- 
 fusion and, in a measure, to prevent speculation in stocks. 
 
 But, as remarked before, the policy of freedom in stock water- 
 ing in England was established; and the aforesaid indirect 
 checks against this practice were not felt seriously in some cases. 
 The significance of this policy may be seen from the following 
 table which exhibits the development of stock watering in Eng- 
 land from the time when its first record appeared in the Board 
 of Trade returns. 
 
 NOMINAL CAPITAL, 1890-1907.45 
 
 Year 
 
 Shares and 
 Stocks 
 Million 
 pounds 
 
 Deben- 
 tures 
 Million 
 pounds 
 
 Total 
 
 Proportion 
 to paid up 
 capital 
 Per cent 
 
 Nominal 
 Increase 
 during year 
 Million 
 pounds 
 
 Real 
 Increase 
 during year 
 Million 
 pounds 
 
 1890 
 
 49.3 
 
 8.5 
 
 57.8 
 
 6.4 
 
 6.0 
 
 14.9 
 
 1891 
 
 
 
 64.1 
 
 7.0 
 
 7.0 
 
 14.8 
 
 1892 
 
 53.7 
 
 15.0 
 
 68.1 
 
 7.2 
 
 4.0 
 
 20.9 
 
 1893 
 
 53.7 
 
 24.4 
 
 78.1 
 
 8.0 
 
 10.0 
 
 17.0 
 
 1894 
 
 54.2 
 
 26.8 
 
 81.0 
 
 8.2 
 
 3.0 
 
 11.1 
 
 1895 
 
 56.7 
 
 31.8 
 
 88.5 
 
 8.8 
 
 7.5 
 
 8.2 
 
 1896 
 
 68.9 
 
 37.4 
 
 106.3 
 
 10.1 
 
 17.8 
 
 10.6 
 
 1897 
 
 114.5 
 
 38.0 
 
 152.5 
 
 14.0 
 
 46.2 
 
 14.1 
 
 1898 
 
 139.8 
 
 43.7 
 
 183.5 
 
 16.1 
 
 31.0 
 
 13.7 
 
 1899 
 
 141.0 
 
 43.8 
 
 184.8 
 
 16.0 
 
 1.3 
 
 16.5 
 
 1900 
 
 142.7 
 
 44.2 
 
 186.9 
 
 16.0 
 
 2.1 
 
 21.6 
 
 1901 
 
 143.7 
 
 43.7 
 
 187.4 
 
 15.8 
 
 .5 
 
 19.0 
 
 1902 
 
 145.7 
 
 43.7 
 
 189.4 
 
 15.7 
 
 2.0 
 
 19.4 
 
 1903 
 
 147.5 
 
 43.7 
 
 191.2 
 
 15.6 
 
 1.8 
 
 16.8 
 
 1904 
 
 149.2 
 
 44.3 
 
 193.5 
 
 15.4 
 
 2.3 
 
 20.5 
 
 1905 
 
 150.0 
 
 44.3 
 
 194.3 
 
 15.4 
 
 .8 
 
 13.5 
 
 1906 
 
 151.0 
 
 44.3 
 
 195.3 
 
 15.2 
 
 1.0 
 
 13.3 
 
 1907 
 
 151.5 
 
 44.4 
 
 195.9 
 
 15.0 
 
 .6 
 
 6.6 
 
 44 In the Board of Trade Annual Eeturns showing the authorized and 
 paid up share and loan capital of the railway companies, the amounts by 
 
 45 The figures in the table are obtained from the annual Railway returns 
 
137] REGULATION OF RAILWAY STOCK- WATERING 137 
 
 From this table, it may be seen that at the time when the par- 
 liamentary inquiry was made, 57,800,000 46 or about six per 
 cent of the total paid-up railway capital in the United Kingdom 
 represented nominal additions. This equaled about 3,000 per 
 mile of line opened. The effect of the attitude of Parliament 
 and the Select Committee of 1890 may be seen from what hap- 
 pened during the subsequent eight years, when an average of 
 16,000,000 in " water" was added annually. In 1895 the nom- 
 inal addition made was as large as the real increase in capital; 
 in 1896 it was about twice as much and in 1897 it reached the 
 enormous proportion of 46,200,000 which was more than three 
 times as much as the increase of real capital made during that 
 year. This shows how extensively stock watering was practiced 
 during that period. On account of the encouragement given by 
 the findings of the Select Committee of 1890 the railways ap- 
 peared to have thought that there was a "gold mine" in stock 
 watering, and plunged into its depth. Thus by a stroke of the 
 pen, so to speak, the amount of the stocks of a number of com- 
 panies was doubled or trebled, without adding anything materi- 
 ally to their properties. The significance of such extensive and 
 violent manipulations can hardly be overestimated. When over 
 16 per cent of the paid-up capital represents "water," and 
 
 which the capital of each railway company has been nominally increased by 
 the conversion, consolidation, and division of their stocks, are shown with 
 figures in italics under the figures of the total capital of each company. 
 There is also a separate table showing, in abstract, the nominal increases of 
 each individual company as well as the whole system. The returns, how- 
 ever, contain no information as to the difference between the nominal 
 amount and the amount actually received of the stocks which have been 
 issued at a premium or at a discount. 
 
 of the Board of Trade and the percentages are calculated with a slide-rule. 
 They represent the United Kingdom, but the amount for England and 
 Wales is about 75-80 per cent in almost every case. 
 
 The nominal increases due to discount on issue, payment of dividends 
 out of capital stock, are not included in the figures of column of ' ' Nominal 
 increase during year. ' ' 
 
 46 Of this amount, 6,000,000 was due to the conversions made by the 
 Midland which has been by far the most important company in stock water- 
 ing. This company has about 41,000,000 of its nominal capital represent- 
 ing water. 
 
138 RAILWAY FINANCE IN ENGLAND [138 
 
 when nominal additions made in a year become three times as 
 big as the increase of real capital, we have something that is at 
 once important. It becomes hard to agree with the Select Com- 
 mittee of 1890 that such stock manipulations as these made no 
 difference whatever to the public. 
 
 Another peculiar feature of the English practice of stock 
 watering is that "water" is added not only to the shares and 
 stocks but to the debenture debts as well, 47 and that the nominal 
 additions to these debts, as shown in the preceding table, repre- 
 sent a considerable proportion of the total amount of "water." 
 
 But stock watering reached its zenith in 1897, and its decline 
 has been more striking than its growth. In 1898 the annual in- 
 crease declined to 31,000,000, and in the following year, it 
 dwindled to the insignificant figure of a little over a million 
 pounds. Ever since that time the annual increase has never 
 been more than 2,300,000, and the practice has continued to de- 
 cline until it reached the negligible proportion of only about 
 half a million in 1907. 
 
 The course of these annual increases may be seen more clearly 
 by the help of the following diagram. In the first place, it may 
 be noticed that the annual increases of nominal capital from 
 1890 to 1895 were about equal. The curve suddenly commenced 
 to rise in 1896, it reached the highest point in 1897, it com- 
 menced to fall in 1898, and it reached a very low point in 1899. 
 
 This course is especially interesting when studied with the 
 curve showing the increases of real capital during the same 
 period. Before 1895 the "real increase" curve always stays 
 above the "nominal increase" curve. During the following 
 four years the latter rises above the former by an enormous 
 margin; and since 1899 the "nominal" curve remains consider- 
 ably below the "real" curve. Then the curve showing the real 
 increases does not have any such violent and abrupt changes as 
 that showing the nominal increases. 
 
 These facts also reveal that there is some truth in the principle 
 which had a great influence upon the English legislators that 
 
 47 The watering of the debenture debts has been done usually by giving a 
 new certificate for a debt of say 200 at 2 per cent for a former and actual 
 debt of 100 at or above 4 per cent per annum for either the purpose of 
 making the security more attractive or that of reducing the rate of interest. 
 
139] 
 
 REGULATION OF RAILWAY STOCK-WATERING 
 
 139 
 
 
 yv 
 
 f / 1* 13 f* tf n IT n tt it** 01 ft ei tn *f it, or 
 
 ///) represent />o/r?ff>a/ fncrtascs 
 
 represfn/s acfifa/ add/ f was f tqtrfa 
 
 railway shareholders would generally find out for themselves 
 what is good or bad, though sometimes after much loss, and to a 
 certain extent explain why Parliament has been so lenient in the 
 regulation of stock watering. But even this self-conviction of 
 the railways could not right what was wrong. While the indi- 
 vidual roads had to suffer enormous financial losses in the pay- 
 ment of stamp duties and litigation penalties, the whole system 
 also could not escape from the disastrous confusion created in 
 the minds of the public. In spite of the far-sightedness and 
 moderation of most of the English railways in stock watering, 
 today about 200,000,000, or about $44,000 per mile of line 48 
 still encumbers the English railway capital, to say nothing of 
 the unrecorded nominal additions, all of which serves to add 
 more confusion and uncertainty to the complicated questions of 
 railway finance. 
 
 This leads us to ask why stock watering came into vogue and 
 
 48 The mileage of the United Kingdom given in the 'Board of Trade re- 
 turns for 1908 was 12,845, including double track, and 10,263 miles not in- 
 cluding second and third tracks. 
 
140 RAILWAY FINANCE IN ENGLAND [140 
 
 what were the underlying notions regarding it. First of all, it 
 must be remembered that stock watering has practically never 
 been defended on its own merits. Nothing was elicited from 
 the inquiry of 1890, which was by far the most important of its 
 kind, to justify the practice. Bankers and large merchants re- 
 gretted the necessity of stock watering, and many railway of- 
 ficials were opposed to the practice. In short, all seemed to 
 agree that stock watering was an evil, because it was nothing but 
 a pure case of misrepresenting actual facts. It was advocated 
 not as anything good in itself, but as a measure of self-defense 
 against the operations of the stock conversion and investment 
 companies. As the.se conversion companies had achieved some 
 apparent success in securing and . duplicating large blocks of 
 railway stocks, the railway directors made their plea for powers 
 to follow the example of the conversion companies. Their reason 
 was that there might be danger to the properties if large blocks 
 of their stocks were merged in successive trusts. If such dupli- 
 cations were a necessary evil, it was better that they should be 
 effected by the railways themselves rather than by certain irre- 
 sponsible conversion companies, which were making it a business 
 to effect such duplications for speculative purposes. Besides 
 other objectionable features, the special danger apprehended 
 from the operation of the conversion companies was that as hold- 
 ers of large blocks of stock they would possess a voting power 
 which might be used to thwart the policy of the directors con- 
 ceived in the best interest of the company. 
 
 There appeared to be considerable justification for this appre- 
 hension. But it must be noticed that the argument of the rail- 
 way companies postulated that the operations of the conversion 
 company had already proved such a financial success that share- 
 holders had a strong inducement to avail themselves of them. 
 This, however, was not exactly the case. Take the London & 
 South-Western as an example, we find the price of the com- 
 pany's ordinary stock in May, 1889, when the scheme of the con- 
 version company was first put into operation, was 180. At this 
 price, 3,000 would have bought 1,666 of stock. The latter 
 amount of stock sold at the price of 179, which prevailed at the 
 
141] 
 
 REGULATION OP RAILWAY STOCK- WATERING 
 
 141 
 
 time 49 when the company lodged its bill for duplication, would 
 have realized 2,970. On the other hand, if an investment of a 
 similar amount were made in the stocks of the conversion com- 
 pany which operated on the London & South- Western stocks, 
 the result would have been as follows : 50 
 
 Amount 
 
 
 Invested 
 
 Stock 
 
 
 
 
 1,000 
 
 1st pref 'd 
 
 1,000 
 
 2nd " 
 
 1,000 
 
 Deferred 
 
 Issue Price Amount 
 May, 1889 Purchased 
 
 
 
 100 1,000 
 
 104 962 
 
 39 2,562 
 
 Price in Market Value 
 May, 1890 May, 1890 
 
 
 
 99.5 995 
 
 101.0 972 
 
 36.0 923 
 
 3,000 
 
 2,890 
 
 From these figures it may be seen that the duplication process 
 as carried out by the conversion company did not work out to 
 the advantage of those who invested in its securities in prefer- 
 ence to investing directly in the railway stocks. "While the in- 
 vestor who put 3,000 into the ordinary stock of the London & 
 South-Western in May, 1889, got a security which was worth 
 2,970 a year later when the company wanted to duplicate its 
 stocks, the person who invested the same amount of money in the 
 stocks of the conversion company which represented the London 
 & South- Western stocks, had securities which were worth only 
 2,890. In other words, the investor who availed himself of the 
 agency of the conversion company had lost 80 more on the cap- 
 ital value of his 3,000 investment than he would have lost had 
 he bought the railway stock itself. In addition he had to suffer 
 loss by paying to the conversion company as commission one- 
 eighth of whatever annual dividend he received. If the Cale- 
 donian stocks were analyzed, similar results would be obtained. 
 Therefore, the assumption that the duplication or triplication of 
 railway stocks by the conversion companies had become so at- 
 tractive to investors as to necessitate the adoption of the same 
 process by the railways seems to be erroneous. 
 
 It was, how r ever, generally recognized that the conversion com- 
 panies by manipulation might exercise some baleful influence 
 
 49 May, 1890. 
 
 so Economist, May 17, 1890, p. 618. 
 
142 RAILWAY FINANCE IN ENGLAND [142 
 
 and interfere with the voting power of the railway companies. 
 Stock watering, however, did not appear to be the real remedy, 
 for the railway companies, as was then recognized, 51 could never 
 have hoped to keep pace with the conversion companies in the 
 matter of stock manipulations. Furthermore, even if the railways 
 could have manipulated their stocks as rapidly as the conversion 
 companies, it was no reason why they should be induced to join 
 the gambling ranks of the conversion companies. Both the Rail- 
 way Times and the Economist 52 strongly criticised the partici- 
 pation in it by the railway companies. 
 
 The foregoing was the principal reason given by the railway 
 representatives before the Select Committee of 1890 in advocat- 
 ing stock watering. But, the reasons emphasized within the 
 walls of the committee rooms are often different from those 
 emphasized without. The case in 1890 seemed to be no excep- 
 tion. For in the report of the Isle of Wight Railway 53 we find 
 the only reason given by the directors of that company to their 
 shareholders in advocating the duplication of stocks was that the 
 process would " (1) increase the capital value of the debenture 
 stocks. . . (2) It will benefit the ordinary stock-holders, be- 
 cause experience has abundantly shown that preferred and de- 
 ferred stocks . . . are together more valuable than one or- 
 dinary stock. (3) It will benefit the preference stockholders" 
 by making their securities more negotiable, and so forth. These 
 might not have been the only reasons in every case but they 
 seemed to be the most important ones why the railway compan- 
 ies wanted to ''water" their stocks. Thus it was not the fear 
 of the conversion companies, as emphasized by the railway rep- 
 resentatives before the Select Committee that led to the watering 
 of stocks, but the hope of pecuniary gains. 
 
 There was no doubt that the railway directors had some rea- 
 son for believing that stock watering would make the securities 
 more valuable. It must also be admitted that some companies 
 had made some apparent gains from the operation. But, as we 
 have shown, such gains were by no means always the rule. On 
 
 51 Railway Times, April 26, 1890, p. 541. 
 
 52 Economist, May 7, 1890, p. 619. 
 
 ss Eailway Times, March 1, 1890, p. 304. 
 
143] REGULATION OF RAILWAY STOCK-WATERING 143 
 
 the contrary actual losses have been suffered from such manip- 
 ulations in some cases. Moreover, even if by stock watering the 
 prices of railway securities were inflated, as was expected, such 
 temporary gains of the existing investors would only mean a 
 corresponding loss to the investors who came afterwards. In- 
 deed, as the Railway Times maintained, 54 those who looked to 
 the future must have entertained grave misgivings as to the 
 wisdom and even the honesty of the financial legerdemain in- 
 volved in stock-watering. It is hardly conceivable that the 
 change of the names of securities could create any lasting and 
 real advantage to the general investor without a corresponding 
 loss to some others. 
 
 The reason given by the Board of Trade 55 for permitting 
 stock watering is especially worth noticing. That department 
 shared "the common feeling rather against a watering of cap- 
 ital, ' ' but, as said one of its officers, if the railway shareholders 
 desired it, I would "incline to think . . . it is rather cov- 
 ered by the general idea that they should be allowed to do what 
 they please. . ." 
 
 One may see plainly that the opinion of the Board of Trade 
 was a negative one. It was one of suspense. They advocated 
 that Parliament should permit stock watering not at all because 
 they thought stock watering was good, but because they thought 
 non-intervention was their policy, and hence, they must follow it. 
 
 The immediate effect of stock watering in England has been 
 unmistakably bad. In the first place, this process has unneces- 
 sarily added treacherous elements of speculation in railway fi- 
 nance, in turn the cause of much disastrous fluctuations in rail- 
 way stocks, especially the "adulterated" classes. Genuine in- 
 vestors have been victimized. Many people have sustained dis- 
 astrous and irretrievable loss from the practice. 56 
 
 Moreover, the process of stock watering, as was prophesied at 
 the time, 57 has conclusively proved to be not only unproductive 
 of any real advantage, but delusive, as shown by the fact that 
 
 5* Eailway Times, April 24, 1890, p. 541. 
 
 55 Evidence before Select Committee of 1890, pp. 42-43. 
 
 ss Fraser, British Eailways, p. 109. 
 
 57 Eailway Times, April 26, 1890, p. 41. 
 
144 RAILWAY FINANCE IN ENGLAND [144 
 
 "The subsequent balance-sheets can hardly show the true posi- 
 tion of the undertaking with so much water added. " 58 In spite 
 of the efforts of the Board of Trade to set forth clearly the 
 nominal additions of each company, stock watering is largely 
 responsible for the subsequent misconception of many people 
 regarding the true nature and extent of railway capital in Eng- 
 land. It is hard to tell exactly how much harm these nominal 
 additions have done, but it is certain that they have contributed 
 their part to delude future generations into the belief that the 
 English railway system has cost a great deal more than it really 
 has. And this delusion has undoubtedly done more harm than 
 good. Fictitious capital has long been recognized as a real evil 
 in railway finance, 59 and stock watering has, perhaps, created 
 more fictitious capital than any other known process. 
 
 The effect of stock watering upon the general investing public 
 is of even greater consequence. The creation of so many nomen- 
 clatures for the "watered" stocks at once caused much incon- 
 venience to the holders of existing stocks. As was expected, the 
 misrepresentation of actual facts by this process brought about 
 much confusion. The numerous descriptions of stocks which had 
 been already complicated enough were made altogether beyond 
 the comprehension of any ordinary investor. 60 The public was 
 puzzled as to the value of such securities. The stockholder could 
 not know exactly what was the real position or status of his in- 
 vestment ; the new investor was unable to tell the value of what 
 he was buying. As the readiness of an average man to invest 
 varies directly with his knowledge of the steadiness and true 
 value of the securities, these new elements of uncertainty have 
 unquestionably frightened away many investors who would have 
 come forward otherwise. 
 
 Abstractly considered, stock watering is also objectionable. 
 It cannot but work to the disadvantage of the general public. A 
 company with an inflated capital account is usually under pres- 
 
 ss McDermott, Railways, p. 164. 
 
 59 London Times, May 15, 1866. 
 
 60 The best known varieties of ordinary stock are those known as ordi- 
 nary, as preferred and deferred ordinary, as preferred and deferred con- 
 verted ordinary, besides consolidated "A" and "B" ordinary stock and 
 "consols." See J. Fraser, British Railways, p. 65. 
 
145] REGULATION OP RAILWAY STOCK-WATERING 145 
 
 sure to "wring" big profits out of its customers so as to pay 
 dividends on its fictitious as well as real capital. 
 
 Again, stock watering, as President Hadley said, has been re- 
 sorted to in order to furnish an excuse for paying higher divi- 
 dends than the law or public sentiment would otherwise permit, 61 
 Indeed an English writer claimed that one reason for the adop- 
 tion of stock watering in England was that the nominal reduc- 
 tion of dividends would render the companies concerned less 
 liable to attack on the ground of excessive profits. 62 
 
 Moreover, it is generally recognized that the "watered" stocks 
 of a railway company usually have some baleful effects upon the 
 wages which it pays and the rates which it charges. The com- 
 pany with a large capital and consequently a low rate of divi- 
 dend certainly has a more plausible reason for opposing the pay- 
 ment of higher wages to its employees as well as for objecting to 
 any reduction of its charges than it would have otherwise. Al- 
 though the actual relation between capital and railway rates is 
 unsettled there is hardly any question that, other things being 
 equal, a company with a low rate of dividend is less liable to 
 have its charges reduced by the government than it would be if 
 its rate of dividends were high. 
 
 Furthermore, stock watering seems to have been one of the 
 worst causes in giving rise to speculation, and sometimes, to 
 fraudulent manipulations, both of which results have been re- 
 sponsible in making railway securities a much less reliable form 
 of investment than they might have been. 63 The best managed 
 companies have either been cautious or have never attempted to 
 indulge in stock watering. It is the promoter and the speculator 
 who find opportunities in this practice. It is to the advantage 
 of the general investing public and the responsible railway direc- 
 tor to avoid this practice. Indeed, the phrase of stock watering 
 is still altogether indefinable, and the evil effects of stock water- 
 ing have been recognized in the United States as well as in 
 England. 64 
 
 61 Hadley, Railroad Transportation, 1903, p. 55. 
 
 62 E. B. McDermott, Eailways, p. 164. 
 
 63 E. R. Johnson, Am. Railway Transportation, 1907, p. 94. 
 
 64 Of the nine witnesses who testified before the U. S. Industrial Com- 
 
146 RAILWAY FINANCE IN ENGLAND [146 
 
 The principle, or rather the lack of principle, involved in 
 stock watering "is to be deprecated." 65 It is "opposed to con- 
 servative railroad financiering;" 66 it gives rise to objectionable 
 speculation and gambling, 67 it leads to pursuing a short sighted 
 policy ; 68 it should be ' ' emphatically condemned ; " 69 it "is a 
 practice against which Parliament should have resolutely set its 
 face." 70 
 
 Thus, from all the evidences, statistics, and authorities consult- 
 ed and after examining the principal reasons given by various 
 parties, we are led to conclude that stock watering in railway 
 finance is objectionable. 
 
 Now what shall be the remedies ? No general rule can be laid 
 down for all countries, nor, perhaps, could any be laid down for 
 the same country for all times. Any empirical formula or dog- 
 matic doctrine is liable to be useless, or even harmful. But tak- 
 ing England as an example, it seems that more strict rules were 
 warranted and could have been adopted for the regulation of 
 railway stock watering. Even at the time when the practice was 
 most vigorously advocated, there did not appear to be much ob- 
 jection against more stringent measures than those adopted by 
 Parliament. The only excuse we find for the attitude of the 
 select committee of 1890 and the legislature in giving much free- 
 dom to stock watering was that the established principle seemed 
 to be non-intervention. It is hardly necessary to emphasize that 
 to fall back always on old principles in order to solve new prob- 
 lems is a dangerous policy. Even the English people are op- 
 posed to all kinds of government interference, it seems that Par- 
 liament could have done more to safeguard the public interest. 
 If nothing else, it certainly could have required the appearance 
 
 mission of 1900 in regard to stock watering, every one was of the opinion 
 that the practice was harmful. Chief among these witnesses were Profes- 
 sors Seligman, Johnson and Newcomb. U. S. Industrial Commission Eeport, 
 1900 V, IV, pp. 25 et seq. 
 
 65 E. E. McDermott, Eailways, p. 164. 
 
 66 E. E. Johnson, Am. Railway Transportation, 1907, p. 90. 
 
 67 Railway Times, April 26, 1890, p. 541. 
 es Hadley, p. 22. 
 
 69 The Economist, Feb. 9, 1889, p. 172. 
 TO Ibid., July 13, 1889, p. 891. 
 
147] REGULATION OF RAILWAY STOCK-WATERING 147 
 
 of uniform nomenclature on the face of the converted stocks as 
 recommended by the select committee. It could have enacted 
 some law to enable the Board of Trade to compel instead of to re- 
 quest the companies to furnish returns showing the nominal ad- 
 ditions as distinguished from the actual capital; and it could 
 have enacted a general law so as to insure uniformity in the 
 whole matter, instead of leaving it to be dealt with piecemeal. 
 
 On the other hand, we must not criticise the English Parlia- 
 ment according to our understanding of what stock watering 
 means in the United States. In the first place, the "worst forms 
 of stock watering, unhappily so common in America ... is 
 practically unknown in England. " n If at all, stock watering 
 must be done openly. It must be sanctioned by Parliament. 
 Such publicity removes much of the temptation to effect stock 
 watering for dishonest purposes. Moreover, the indirect checks 
 imposed by the Stamp Acts have made stock watering quite diffi- 
 cult. Let stock watering be done openly and be investigated first 
 by some dignified government office, it will disappear on its own 
 merits. Therefore, stock watering in England, extensive as it is, 
 has never been nearly as objectionable as in some other countries. 
 Moreover, the English railways seem to have seldom if ever, 
 "watered" their stocks for dishonest purposes. They also ap- 
 pear to have been eager to help the government to prevent the 
 difficulties inherent in stock watering. Hence a request of the 
 Board of Trade has been sufficient to secure full information re- 
 garding their nominal additions made each year. Thus by turn- 
 ing to the annual railway returns of the Board of Trade, one 
 may see at a glance what proportion of the capitalization of each 
 company represents water. This difference partially explains 
 why Parliament has taken such lenient measures in regulating it. 
 
 Thus, it appears that publicity is one of the most effective and 
 practicable checks against objectionable stock watering in rail- 
 way finance. To insure this, railway companies should be com- 
 pelled to show in their accounts and balance-sheets all their 
 nominal additions. They also should be required to furnish 
 periodic and due statements exhibiting clearly such nominal ad- 
 ditions as distinguished from the actual capital, with remarks as 
 
 71 Hadley, Railroad Transportation, 1903, p. 156. 
 
148 RAILWAY FINANCE IN ENGLAND [148 
 
 to the time when, and circumstances under which, the additions 
 were made. A uniform nomenclature should be marked on the 
 certificates of all adulterated stocks so as to avoid confusion. It 
 further appears that stock watering in railway finance should 
 be discouraged and placed under government supervision in all 
 cases, and prohibited whenever circumstances permit. 
 
CHAPTER VII 
 THE REGULATION OF RAILWAY ACCOUNTS 
 
 The English legislature took pains to regulate railway ac- 
 counting as early as it endeavored to regulate other branches of 
 railway finance; but it did not prescribe any precise system of 
 accounting before 1868. The keeping of accounts had been 
 obligatory upon the railway companies in common with other 
 joint stock companies. For this purpose separate provisions 
 were made in the special acts of incorporation. Thus a clause 
 in the Croydon Act of 1837 * provided : 
 
 ' ' That the said directors shall cause a book or books to be kept 
 by a book-keeper who shall be expressly appointed by the said 
 directors for that purpose, and who shall enter or cause to be 
 entered in the said book or books true and regular accounts of all 
 sums of money received and expended for or on account of the 
 undertaking . . . ; and such book or books shall at all rea- 
 sonable times be open to the inspection of the respective loan 
 creditors . . . without fee or reward, and the said loan 
 creditors or any of them may take copies of or extracts from the 
 said book or books without paying anything for the same ; and in 
 case the said book-keeper shall refuse to permit such loan cred- 
 itors or any of them to inspect such book or books, or to take 
 such copies or extracts as aforesaid, such book-keeper shall for- 
 feit and pay over for every such offence any sum of money not 
 exceeding 20." 
 
 In 1841 a member of Parliament inquired of the president of 
 the Board of Trade as to whether it had not become necessary 
 to take evidence to show that all railway companies should peri- 
 odically furnish to the Board of Trade a debtor and creditor ac- 
 count, drawn out on a simple but uniform plan, of their half- 
 yearly receipts and expenditures, etc. To this inquiry, however, 
 
 1 1 V. c. cxir, s. CLXXXVIII. 
 
 149 
 
150 RAILWAY FINANCE IN ENGLAND [150 
 
 the president of the Board of Trade answered that he did not 
 think that it had become desirable to make any such regula- 
 tions. 2 This last statement shows how little value was attached 
 to uniform accounting during the forties. 
 
 In 1842 in connection with the collection of stamp duty on 
 passenger fares, a clause was inserted in an act of that year 3 to 
 the effect that all companies should keep accounts of their pas- 
 senger receipts in such form as should be prescribed by the com- 
 missioners of stamps and taxes, and should, within five days 
 after the first Monday in each calendar month, deliver to the 
 said commissioners or other duly appointed officers a true copy 
 or copies of the accounts so kept. Another section 4 of this act 
 provided that all books containing passenger receipts should be 
 open to the inspection of officers of stamp duties, under penalty 
 of 50 for each offense against the law. 
 
 For the purpose of government purchase of railways, a clause 
 was introduced in the Railway Regulation Act, 1844, 5 to the 
 effect that, during the period of three years previous to the time 
 when option of revision of rates or state purchase of a railway 
 should become available, true accounts should be kept of all 
 sums of money received and paid, that a half-yearly account in 
 abstract should be prepared, showing the total receipt and ex- 
 penditure, and that these accounts should be open to public 
 inspection. 
 
 This general provision as well as those contained in the act of 
 1842 just referred to, were, however,, not made primarily for the 
 purpose of regulating accounts. It was not until 1845 that gen- 
 eral provisions were made to regulate railway accounts. In the 
 Companies Clauses Act of that year, 6 no less than eight clauses 
 were devoted to the regulation of this branch of railway finance. 
 By this act, railway directors were required to cause "full and 
 true accounts to be kept of all sums of money received or ex- 
 pended on account of the company . . . and of the matters 
 and things for which such sums of money shall have been re- 
 
 2 Hansard, 73: 1070-1071. 
 s 5 & 6 V. e. 79, s. Iv. 
 4 Section V. 
 s 7 & 8 V. c. 85, s. 5. 
 s 8 V. e. 16. 
 
151] THE REGULATION OP RAILWAY ACCOUNTS 151 
 
 ceived or disbursed. . . " The act further provided 7 that the 
 books of a company should be balanced at the prescribed periods, 8 
 and an exact balance sheet should be made up, exhibiting a true 
 statement of the capital stock, credits, and property of every de- 
 scription belonging to the company, as well as the debts due by 
 the company at the date of making the balance sheet. A distinct 
 view of the profit or loss which might have arisen in the course 
 of the preceding half year should also be presented. Such bal- 
 ance sheet was also required to be examined by at least three of 
 the directors, and was to be signed by the chairman or deputy 
 chairman of the company. Moreover, both the shareholders and 
 mortgagees were authorized to have access to these accounts at 
 the prescribed or other reasonable times, with the liberty of tak- 
 ing extracts therefrom without charge. 9 In the Railways Clauses 
 Act of the same year, 10 a further provision was made to require, 
 under penalty, 11 railway companies to prepare and transfer to 
 the clerks of the peace and the over-seers of the poor of the coun- 
 ties and parishes traversed by the railway, abstracts of their an- 
 nual accounts. 
 
 The financial depression caused by the railway mania of 1847 
 led to some investigation of the accounts of railway companies. 
 A committee of the House of Lords was appointed in 1849 to 
 consider "whether the railway Acts do not require amendment, 
 with a view of providing for a more effectual audit of accounts 
 to guard against the application of the funds of such companies 
 to purposes for which they were not subscribed, under the au- 
 thority of the Legislature." 12 This committee pointed out that 
 a serious omission in the existing law was the want of any pre- 
 scribed and uniform system of accounts, and recommended the 
 enforcement of some statutory forms to be binding, within cer- 
 
 7 Section 116. 
 
 s If no period is prescribed, then the balance should be made fourteen 
 days at least before each ordinary meeting. 
 8 V cap. 16, ss. 55 and 117-119. 
 
 10 8 V. cap. 20, s. 107. 
 
 11 In case any railway company should fail to prepare or transmit such 
 accounts as required by law, it should forfeit for each failure the sum of 
 twenty pounds. 
 
 12 Eeport of Eoyal Commission on Eailways, 1867, p. xviii. 
 
152 RAILWAY FINANCE IN ENGLAND [152 
 
 tain limits, upon all railway companies. 13 It further proposed 
 that the statutory forms should embrace the following partic- 
 ulars : " 
 
 1st. A full .statement of all the parliamentary powers granted 
 for raising money, showing the undertakings to which they were 
 applicable ; the manner in which the money had been raised ; the 
 nature of securities issued under each act, with the condi- 
 tions and rate of interest applicable to each, and the amount of 
 money obtained and in arrears; and the balance of parliamen- 
 tary powers unexhausted. 
 
 2nd. A capital account explaining how the money shown as 
 having been raised under the parliamentary account had been 
 dibursed, and 
 
 3rd. An account of the ordinary income and expenditure of 
 the railway company. 
 
 It also recommended that separate accounts should be kept for 
 separate branches of the enterprise of every company. 
 
 Moreover, it was further urged that the right of inspection by 
 shareholders of the companies' accounts should be unrestrained; 
 that all accounts without exception touching or relating to the 
 receipts or payments of each company should be required to be 
 produced, and that in case of refusal the statutory penalty 
 should be extended from the book-keeper to the governing body. 
 
 About the same time, the Railway Commissioners 15 also voiced 
 the opinion, apparently with the general approval of the rail- 
 ways, that the companies should specify in their accounts every 
 loan contract, the period for which it was contracted, with the 
 rate of interest and the liquidation of such loans or portion 
 thereof as might be made from time to time. 16 
 
 These recommendations, practical as they were, failed to ma- 
 ture into legislation. They were too much out of line with the 
 laissez faire ideas of the time. 
 
 During 1859 to 1862, the Board of Trade persistently recom- 
 mended that separate accounts should be kept of the amounts of 
 
 is Report of 1909 Departmental Committee on Accounts, etc., p. 4. 
 
 i* Report of Royal Commission on Railways, 1867, p. xciii. 
 
 is These early railway commissioners had the duty of examining railway 
 bills and differed materially from those appointed since 1873. 
 
 is C. L. Webb, Letter to the President of tJie Board of Trade, 1848, pp. 
 59-60. 
 
153] THE REGULATION OF RAILWAY ACCOUNTS 153 
 
 debenture stocks created and disposed of, and of the application 
 of the money raised by such issues. 17 It was, however, not until 
 1866 that Parliament began to give effect to some of these recom- 
 mendations. In the Companies Securities Act, 1866, provisions 
 were made to require all railway companies, within fourteen 
 days after the end of each half year, to make an account of their 
 loan capital authorized to be raised and actually raised up to the 
 end of that half year. In the account, the railway companies 
 were required to specify the following particulars, in addition 
 to what was required by former acts. 
 
 (1). The amount or prospective amount of loans authorized 
 or confirmed by Parliament; 
 
 (2). Whether or not the obtaining of the certificate of a 
 justice for any purpose, or the obtaining of the assent of a meet- 
 ing of the company, was made a condition precedent to the ex- 
 ercise of the borrowing powers ; 
 
 (3). The date at which such condition was fulfilled; 
 
 (4). The aggregate amount of the company's existing debts 
 contracted on mortgage, bond, or debenture stock, up to the end 
 of the half year ; and 
 
 (5). The aggregate amount remaining to be borrowed. 
 
 Then the second and every subsequent half-yearly accounts 
 were required to show the items described in paragraphs (1) and 
 (4) for two consecutive years, and the increase or decrease 
 of any of those items in the second of those half years as com- 
 pared with the first. The Board of Trade was authorized to 
 prescribe, by public notice in the London Gazette, the forms of 
 the half-yearly accounts of the loan capital of railways from 
 time to time. 18 
 
 The act further provides that within twenty-one days after 
 the end of each half year, every railway company should deposit 
 with the registrar of joint stock companies, a copy, certified and 
 signed by the company 's registered officer as a true copy, of their 
 loan capital half-yearly account. Moreover, these accounts were 
 to be open to the inspection of shareholders, stockholders, etc., at 
 all reasonable times without charge. 
 
 Furthermore, the act made it unlawful for any railway com- 
 
 17 General report of the Board of Trade on Railway bills, 1861, p. 23. 
 is 29 & 30 V. cap. 108, s. 6. 
 
154 RAILWAY FINANCE IN ENGLAND [154 
 
 pany to borrow any money on mortgage or bond, or to issue any 
 debenture stock, ' ' unless and until they have first deposited with 
 the registrar of joint stock companies ... a statement cer- 
 tified and signed by the company's officer" in the prescribed 
 manner. 19 
 
 By this series of enactments, Parliament "endeavored to se- 
 cure a faithful record and account of all the financial transac- 
 tions of the companies to be kept under the authority of the di- 
 rectors; a power for any shareholder within limited bounds to 
 examine the company's accounts; the periodical exhibition of a 
 balance sheet showing all the capital, stock, credits, and prop- 
 erty of and debts due by the company, and giving a distinct 
 view of the profit and loss ; and the payment of a dividend out 
 of profits, coupled with a prohibition against reduction of cap- 
 ital by means of dividends. . . " 20 
 
 It may be observed, however, that all except the last one of 
 the statutes referred to were enacted for the purpose of requir- 
 ing the companies to keep accounts according to their own way, 
 without any governmental interference. Even the act of 1866 
 just referred to went no further than to authorize the Board of 
 Trade to prescribe and alter some forms of loan accounts. In- 
 deed, it was not until the report of the Royal Commission on 
 Railways of 1867 had been made that steps were taken by means 
 of the Regulation of Railways Act, 1868, to give effect to the far- 
 sighted recommendations of the select committee of 1849 regard- 
 ing the adoption of a uniform system of accounts. We shall, 
 therefore, examine (1) how the results of the old system of reg- 
 ulation of railway accounts led to the adoption of the new sys- 
 tem of 1868, (2) the nature of the principles set forth in the 
 new system, (3) the defects of the new system, and (4) what 
 Parliament has done since. 
 
 The early system of regulation required railway companies 
 themselves to keep true and clear accounts of all their incomes 
 and disbursements for the purpose of preventing irregularities 
 in the application of the companies' capital. This was based 
 on the assumption that the ordinary maxims of prudence and 
 good faith, combined with the usual practice of persons engaged 
 in commercial affairs would be sufficient to secure the observance 
 
 19 29 & 30 V. e. 108, s. 10. 
 
 20 Eeport of Eoyal Commission on Eailways, 1867, p. xxiii. 
 
155] THE REGULATION OF RAILWAY ACCOUNTS 155 
 
 of these regulations. 21 "Unhappily/' as it was remarked in the 
 House of Commons in 1867, 22 "the fact was far otherwise." It 
 was true that railway companies always kept accounts and uni- 
 formly prepared a sort of balance sheet every half year; "but 
 it was frequently such as no merchants or bankers would be sat- 
 isfied with." It was claimed that a great number of companies 
 considered a balance sheet a means of mystifying and mislead- 
 ing their proprietors and the public, and that balance sheets 
 were often used to conceal the real state of a company. It has 
 even been said that the balance sheet of a railway company has 
 no more effect than a sheet of waste paper. 23 
 
 Moreover, there was no uniformity whatever in the matter of 
 railway accounts during those years. 24 One company had one 
 form of accounts ; a second one, another ; and a third one a form 
 still different. It was not only impossible to compare the ac- 
 counts of the different companies, but also impossible even to 
 compare the accounts of the same company for different years. 
 
 Regarding the prohibition against the wrong application of 
 the companies' capital, Sir William Hunt in introducing the 
 railway and joint stocks companies' account bill, 1868, said, 25 
 that no one could read the act of 1854 for the consolidation of 
 railway and joint stock companies, or the Companies' Act of 
 1862, without being struck by the grave and imperative language 
 in which the acts directed that no dividend should be paid un- 
 less their accounts showed that the dividend has really been 
 earned, and could be paid out of the net profits of the company. 
 But in this case also the law has proved ineffectual. Directors 
 were often tempted to disregard all the moral and legal obliga- 
 tions in order to make things look "pleasant" to their propri- 
 etors. Dividends were frequently declared out of capital, until 
 it became impossible to tell whether or not it was really earned. 26 
 
 The effect of this practice was that railway shareholders were 
 so "bewildered and mystified by cooked accounts, manipulated 
 figures, partial statements, and delusive representations of rail- 
 way property" that they actually regarded the payment of divi- 
 
 21 Hansard, 187: 1588. 
 
 22 Ibid. 
 
 23 Fraser, British Railways, 1903, p. 140. 
 2* See Railway Times, May 23, 1868. 
 
 25 Hansard, 187: 1588. 
 
 26 London Times, August 27, 1866. 
 
156 RAILWAY FINANCE IN ENGLAND [156 
 
 dend out of capital as a legitimate practice and looked at the 
 chaos of railway accounting as hopeless. Apparently they im- 
 agined that they could "eat their cake and have it too." 27 As 
 a natural consequence of this state of affairs, suspicion arose, 
 which proved harmful not only to the public but to the railways 
 as well. As said the London Times in 1866, 28 "nothing has dam- 
 aged railway property so much as the suspicion, notoriously rea- 
 sonable, that the truth was not put before the public in the re- 
 ports of railway directors. ' ' 
 
 The magnitude of the evil due to the lack of confidence could 
 not be fully comprehended at the time. The problem facing the 
 railway companies was not merely to satisfy the shareholders of 
 that time. It was necessary that they should give assurance to 
 the investing public in order to get additional money to keep the 
 railways "alive." Explanations at meetings, statements of fig- 
 ures capable of favorable inference, sometimes sufficed to satisfy 
 those who had already put their money in; but they could not 
 attract new investment. 
 
 Following the suspicion of the investing public, the share- 
 holders also became discontented. They saw their property de- 
 preciating; they found that their shares could be disposed of 
 only at great sacrifices. No longer were they to be satisfied with 
 "information" alone. 29 
 
 The difficulty, however, was not exactly an economic one. 
 There was plenty of money for investment. It was generally 
 recognized at the time by clearer observers that if there was a 
 single company where shares were considered by its directors to 
 have fallen too low in the market, they could set the matter right 
 easily. There were plenty of shrewd people at the time waiting 
 with money to find investments. "Give them a statement such 
 as they require, and such as any city accountant . . . would 
 prepare, in a form that the simplest tradesman might under- 
 stand it, and forthwith they will bid within a fraction of the true 
 value of the shares." 30 Thus the problem before Parliament 
 was to stop suspicion and to restore confidence. 31 
 
 27 London Times, November 8, 1867, p. 6. 
 
 28 Ibid., August 27, 1866. 
 
 29 Economist, December 28, 1867. 
 
 so Fraser, British Railways, 1903, p. 140. 
 si Economist, December 23, 1867. 
 
157] THE REGULATION OP RAILWAY ACCOUNTS 157 
 
 It was recognized that besides retreating from the costly 
 litigations, in which the railways were fond of indulging, there 
 was only one thing required to set the railways ' ' straight before 
 the public." 32 They must make a clear statement of their 
 affairs. However unpromising it might be, the whole truth must 
 be told so that no disguise or reserve could be suspected. It was 
 urged that 33 there was no cure for the mischief of delusion nor 
 any hope for railway property except by the introduction of a 
 principle of accounting in which nothing should be admitted as 
 profit but surplus of actual receipts over actual expenditures. 
 The Royal Commission on Railways in its report of 1867 also 
 recognized 3 * that greater facilities should be afforded for the de- 
 tection and repression of acts by which the public were misled 
 or deceived. It further said, "The concealment or imperfect 
 representation of important facts, which no one is charged with 
 the duty of faithfully disclosing to the shareholders or the pub- 
 lic, will be found to underlie most of the delinquencies . . . 
 and there can be little doubt that many objectionable transac- 
 tions would not be embarked in if they were to be immediately 
 followed by publicity. . . " A member of Parliament 35 urged 
 before the commission that Parliament should take care to see 
 that the periodical railway accounts should "comprise not only 
 every item of expenditure but every liability, and every contract 
 that they have entered into . . . and leave the public to 
 judge for themselves. Many other members of Parliament were 
 also of the opinion that shareholders should only ask the legis- 
 lature to require that accounts be kept in an intelligent way so 
 that they may have a chance to "sift them to the bottom." 36 
 
 But it was the report of the commission that gave uniform ac- 
 counting its proper place of importance. 37 It emphasized that 
 the provisions of the law regarding the financial affairs of rail- 
 way companies would always remain defective, until a uniform 
 system of accounts was secured. Until that was done, each com- 
 
 32 London Times, February 9, 1863, p. 9. 
 ss Ibid., November 8, 1867, p. 6. 
 
 3* Report of Eoyal Commission on Railways, 1867, p. xliv. 
 ss G. P. Bidder, M. P., before Eoyal Commission on Eailways, 1867. 
 Evidence before Royal Commission, p. 803. 
 se Hansard, 191 : 1541-1542. 
 37 Report of Royal Commission, 1867, p. XXIII. 
 
158 RAILWAY FINANCE IN ENGLAND [158 
 
 pany was at liberty to adopt its own form of accounts and to 
 vary that form from time to time. The result would always be 
 that no adequate comparison of the financial affairs of different 
 railways, or even of the same railway, could be made. This lack 
 of uniformity in accounting not only deprived the public of the 
 power to ascertain the relative conditions of different companies, 
 but also deprived one company of the means of profiting by the 
 experience of another. 
 
 Thus it soon became generally recognized that until clear, com- 
 plete and truthful accounts, on a common system, could be ob- 
 tained, there would be continued suspicion. The urgent need of 
 such a uniform system of accounts was recognized, alike, by the 
 railways and Parliament. This was well shown by the fact that 
 while both Houses of Parliament were giving the matter atten- 
 tion, the railway men themselves were holding meetings, in 1868, 
 to discuss the same subject. 38 
 
 To give effect to some of these recommendations, Sir "William 
 Hunt introduced the Railway Audit of Accounts Bill early in 
 the session of 1867. 39 In the following year, another bill, called 
 the Joint Stock Companies Accounts Bill, was introduced, the 
 aim of which, similar to that of the bill of the previous year, was 
 to secure to shareholders and the public, periodically, a true bal- 
 ance sheet of the financial affairs of railway companies and a 
 true statement of the assets and liabilities. 40 
 
 Neither of these bills, however, was enacted into law. In the 
 meantime, the government prepared the Regulation of Railways 
 Bill, which embodied many of the principles contained in the 
 two bills just referred to. This bill was first introduced into the 
 House of Lords. 41 A considerable proportion of the bill was 
 based on the recommendations of the Royal Commission. 42 More- 
 over, the Board of Trade had also received frequent deputations 
 and much correspondence on the subject from railway experts. 43 
 In fact some of the very fundamental matters, such as the forms 
 
 ss Railway Times, May 23, 1868. 
 
 39 For purpose of this bill, see Eailway Times, June 15, 1867. 
 
 40 Hansard, 187: 1588. 
 4i/&td., 192: 1294. 
 
 42 Hansard, 192: 115-116. 
 
 43 IUd., 192 : 1294. 
 
159] THE REGULATION OF RAILWAY ACCOUNTS 159 
 
 of accounts, etc., were adopted only after extended consultation 
 with some of the most prominent railway accountants. 44 
 
 When the Regulation of Railways Bill was introduced, the 
 legislators recognized the great change which had taken place in 
 the English railway system since the forties. Thus attention was 
 called to the fact that all legislation connected with railways 
 must be cautious, practical, and well considered, and that in 
 dealing with the subject it was as necessary to look at the inter- 
 est of the public, on whose behalf the railways were constructed, 
 as it was necessary to take care of the interest of the sharehold- 
 ers who expended their money in those great undertakings. 45 
 Parliament was also reminded that it was by no means desirable 
 to adopt a policy by which it would lay down stringent rules 
 with respect to all the details of accounts and the management 
 of the companies. 46 It was believed that sufficient time had 
 elapsed since the panic of 1866-1867 to afford Parliament the 
 means of legislating upon the subject without acting in the hasty 
 and ill considered manner which might have been inevitable if 
 they had dealt with it during the previous session. 47 The com- 
 plete collapse also led the public and the railways to appreciate 
 more fully whatever action might be taken. It was under the 
 influence of such prevailing opinion that the first important act 
 to regulate railway accounts was prepared. 
 
 The first part of the bill related to accounts and audit; the 
 second to the liabilities of railway companies in certain cases as 
 general carriers ; the third provided for the safety of passengers ; 
 the fourth dealt with the matter of compensation for accidents; 
 the fifth had to do with light railways ; the sixth referred to arbi- 
 trations by the Board of Trade ; and the last part was given to 
 miscellaneous matters. "None of these," said the Economist, 48 
 1 ' are unimportant ; and all are designed to bring railway law into 
 accordance with recent experience. ' ' But the ' ' novel part of the 
 bill is the first section, making new rules for the auditing and 
 inspection of railway accounts." On account of its importance 
 
 44 Hansard, 190 : 1957. 
 
 45 Ibid., 190: 1955. 
 
 46 Ibid., 190 : 1956. 
 
 47 Ibid., 190: 1956. 
 
 48 Economist, March 21, 1868. 
 
160 RAILWAY FINANCE IN ENGLAND [160 
 
 and novel nature, that part of the bill, therefore, received much 
 discussion both in and out of Parliament. 
 
 During the course of the passage of the bill, Parliament laid 
 great emphasis upon the importance of the forms of accounts 
 which were attached to the bill. It had in mind that the ac- 
 counts should neither on the one hand be limited to the ordinary 
 payments and receipts, nor on the other hand be so extensive as 
 to make it hard for the eye to follow or the mind to compre- 
 hend. 49 They should be sufficiently elastic to meet the varying 
 circumstances of the different railways, and at the same time 
 precise enough to enable shareholders of ordinary intelligence to 
 compare one year's accounts with those of any other year and 
 the accounts of one company with those of another. The guid- 
 ing purpose was that every person looking at these forms should 
 be able to see at a glance the exact financial position of each 
 company. 50 
 
 The importance of uniformity in railway accounts was greatly 
 emphasized. The advocates of such a uniform system had in 
 mind two important objects: First, to prevent the "dressing" 
 of accounts, and secondly to insure that every item of expendi- 
 ture should pass through the books of the company. Incidental- 
 ly, it was also hoped that when all companies adopted the same 
 form of accounts, the public and the investors would be enabled 
 to form some estimate of the values of the shares and securities 
 of railways. 51 
 
 But it was recognized that according to the provisions of the 
 bill, the usefulness of the prescribed uniform system of accounts 
 would largely depend upon the voluntary efforts of the com- 
 panies themselves. If the companies made use of these pre- 
 scribed forms, as they should for their own interest, the uniform 
 system would be of great value. The auditors and inspectors 
 would have a convenient guide in the "labyrinth of accounts." 52 
 The common form would become familiar, and people would 
 know what to verify. One more important and general use of 
 such a common system was that so long as there was no down- 
 right falsification, it would be possible to compare one railway 
 
 49 Hansard, 190 : 1972. 
 
 so Hansard, 190: 1957. 
 
 si Ibid., 191: 1538. 
 
 52 Economist, August 29, 1868, p. 993. 
 
161] THE REGULATION OF RAILWAY ACCOUNTS , 161 
 
 with another, and that, where circumstances were nearly similar, 
 the comparison would be invaluable. 53 As a prominent railway 
 accountant said, in the Manchester Railway Conference in 1868, 
 "The importance of the adoption by all railway companies of a 
 clear, complete and uniform system of accounts, properly audit- 
 ed and vouched, can scarcely be over-estimated. . . " 5 * It was 
 generally recognized that it was exceedingly desirable to have 
 one form of accounts. 55 In fact all those members of Parliament, 
 who spoke in connection with the bill during its passage, advo- 
 cated the adoption of a uniform system. 
 
 Some contended, however, that it was impossible to have a uni- 
 form scheme of accounts for all companies, because the circum- 
 stances of the different companies were so dissimilar. A uniform 
 scheme would not furnish any accurate comparison, it was 
 urged, unless people knew what were the gradients of each line 
 and the prices of fuel and labor in each instance as well as other 
 details which varied in different places. 56 This objection, how- 
 ever, failed to gain much weight and experience has since proven 
 that a uniform system is desirable in spite of its drawbacks. 
 
 The greatest defect of the bill, however, was said to be the lack 
 of any regulations governing the "filling up" of the uniform 
 forms. It was urged that the usefulness of these forms might be 
 much lessened, if not nullified, by irregularities in the entering 
 of the different expenses into the accounts. Thus the Economist 
 said, 57 "We question very much . . . whether the dictation 
 of a certain form in the accounts will do much good. . . 
 There will be room for endless disputes as to whether certain 
 expenses are for renewals or new works, or as to whether capital 
 or revenue should be changed. . . " It also believed 58 that 
 the distrust of the people had been related to the substance of 
 the accounts, and that changing the form would not mend mat- 
 ters much. 
 
 The London Times also pointed out that "a uniform system 
 of accounts would prevent one line from showing better than an- 
 
 ss Economist, August 29, 1868, p. 995. 
 
 s* Railway Times, May 23, 1868. 
 
 ss Hansard, 190 : 1961-62. 
 
 ss Ibid., 187: 1590-91. 
 
 57 Economist, March 21, 1868. 
 
 ss Ibid., August 29, 1868, p. 992. 
 
162 RAILWAY FINANCE IN ENGLAND [162 
 
 other, but it would not prevent them all from showing un- 
 truly. ' ' 69 This paper believed that the people clamored mostly 
 over the evil itself, instead of the source of the evil. ' ' The root 
 of the evil, ' ' it said, ' ' lies not so much in the system of accounts, 
 of which every body complains, as in the principle of account- 
 ing. . ." 60 
 
 These anticipations, especially that of the Economist, have be- 
 come true since, as shown by the report of the departmental 
 committee on railway accounting and statistical returns of 1909 
 to be referred to hereafter. 
 
 It was also urged that there should have been inserted in the 
 act provisions for a "wear and tear" account. It was believed 
 that the proper way of providing for renewals was to lay aside 
 certain sums annually in proportion to the value of the material 
 and the depreciation it would suffer. This was regarded as be- 
 ing especially important, since the pressure of heavy renewals 
 had been one of the chief factors in tempting railway boards to 
 charge capital with what did not belong to it. In spite of the 
 requirement of the engineers' certificates concerning rolling 
 stock and permanent ways as provided by the bill, some railway 
 men thought that it would be impossible to ascertain the real 
 surplus profit to be divided as dividends without a depreciation 
 account. 61 
 
 Furthermore, there were also other persons who were entirely 
 opposed to any such regulation of accounting. They based their 
 opposition chiefly on the ground that England ' ' had grown great 
 by having private parties to manage their own affairs in their 
 own way by individual care of individual interest which could 
 not be superseded by the action of any government department 
 whatever." 62 The Railway Times, 03 which was strongly opposed 
 to the measure, said, ' ' The entire railway history of the kingdom 
 is redolent of the idea as well as of the practice of shareholders 
 being at all times and under all circumstances fully cognizant of 
 any matter or detail in which their property may be involved." 
 After citing the satisfactory results of several of the companies 
 
 59 London Times, November 8, 1867, p. 6. 
 eo Ibid., November 6, 1867, p. 6. 
 
 61 See Economist, August 29, 1868, p. 993. 
 
 62 See Hansard, 167 : 1569. 
 
 63 Railway Times, June 8, 1867. 
 
163] THE REGULATION OP RAILWAY ACCOUNTS 163 
 
 who had been left to manage their accounts in their own way, 
 the paper concluded that "all these private parties have been 
 conducting their own affairs in their own way ; and is not to be 
 endured that they should be interfered with. . ." 
 
 Furthermore, in the debate in Parliament, it was also agreed 
 that it was quite impossible to control railway directors by acts 
 of Parliament. If they were determined to "cook" the accounts, 
 they would do so, in spite of all the acts in the statute book. 64 
 
 Another important provision of the bill was that regarding the 
 penalty for falsifying accounts. This question did not receive 
 so wide discussion as that concerning the accounts themselves but 
 it excited more animated debate in Parliament than any other 
 part of the bill. The original bill provided that "if any state- 
 ment of accounts, balance sheet, estimate or report, which is re- 
 quired by this act is false in any particular, the auditor or officer 
 of the company who signed the same shall, unless he satisfies the 
 court that tries the case that he was ignorant of such falseness, 
 be liable, on conviction thereof on indictment, to fine or impris- 
 onment, or on summary conviction thereof to a penalty not ex- 
 ceeding fifty pounds. ' ' 65 
 
 The most striking feature of this provision was that the onus 
 of proof was placed on the defendant. This at once aroused in- 
 tense opposition. The beneficial effect of punishing the wilful 
 falsification of railway accounts was generally admitted ; but the 
 manner of inflicting such punishments as provided by the clause 
 proved extremely distasteful to many. The provision was 
 strongly opposed because it was entirely contrary to ordinary 
 principles of law. According to usage, a man was assumed to be 
 innocent until he was proven guilty, while according to the pro- 
 vision in the bill, the railway officers were to be held guilty until 
 they could establish their innocence. According to this prin- 
 ciple, it was feared that if there was any falsehood in any of the 
 accounts, statements, balance sheets, etc., so voluminously re- 
 quired by the bill, and which the chairman and secretary were 
 required to sign, they would be held guilty and might be sent to 
 jail unless they could prove their ignorance of the falsity. Nor 
 were railway officers to be allowed the ordinary privilege of trial 
 
 e* See "Hansard, 191, p. 1540. 
 
 es Railway Times, March 21, 1868. 
 
164 RAILWAY FINANCE IN ENGLAND [164 
 
 by jury like other Englishmen, but they must prove their ig- 
 norance to the satisfaction of the court trying the case. It was 
 urged that this system would be liable to be attended with great 
 oppression, to say nothing of the violation of all established cus- 
 toms. The judges, in spite of their ability and the respect of the 
 people for them, were not immune from errors. In occasional 
 instances, they might also have a grudge against railway officials. 
 Therefore it would be necessary, it was contended, to appoint 
 railway officers who know nothing of the accounts so that they 
 might be able to prove their ignorance and could sign the re- 
 quired documents without danger of being imprisoned or fined. 66 
 If these disgraceful penalties were to be attached to the ordinary 
 performance of the duties of a railway officer, it would become 
 impossible to find any respectable people to perform such duties. 
 
 The Economist also questioned the practicability of the pro- 
 vision, not only because the provision was contrary to the ordi- 
 nary practice of law but because it was illusory. It called atten- 
 tion to the fact that particular falsities were as likely to creep 
 into accounts by neglect as by wilful perversion. Therefore it 
 believed that the clause, as it stood, instead of doing any good to 
 insure true accounts would offer a premium on being neglectful 
 and ignorant. 67 
 
 Ultimately, the heated discussion resulted in the amendment 
 of the penalty clause so as to read : 68 
 
 "If any statement, balance sheet, estimate, or report which is required 
 by thia act be false in any particular to the knowledge of the auditor or 
 officer of the company who signs the same for the company, such officer or 
 auditor sh'all be liable upon conviction thereof on indictment, to fine or im- 
 prisonment. ' ' 
 
 Thus the onus of proof was removed from the defendant ; and 
 railway officers were to be punished for signing statements and 
 accounts which they knew to be false. 
 
 The bill when first introduced was quite a voluminous docu- 
 ment but it was found, on close examination, that many of the 
 provisions, though admirable in theory, were impracticable. Ac- 
 cordingly, it was greatly reduced in size before it reached the 
 second reading in the House of Lords, so as to make it a smaller 
 
 66 Hansard, 192 : 6-7 and 190 : 1962. 
 
 67 Economist, March 21, 1868. 
 
 68 Hansard, 192: 7-8. 
 
165] THE REGULATION OP RAILWAY ACCOUNTS 165 
 
 and more practicable measure. After various modifications and 
 improvements, the bill received the royal assent on July 31, 
 1868, and became the Regulation of Railways Act of that year. 69 
 Fifteen schedules or forms were prescribed, a great part of 
 which relate to accounts, while the others deal with statistics of 
 traffic, mileage, etc. They include, in the first place, a set of 
 capital accounts. No. 1 is a statement of capital authorized and 
 created by the company, requiring the enumeration in detail of 
 the acts or certificates of the Board of Trade, authorizing the 
 creation of capital, and a statement in each case of the amount 
 actually created and the balance left. No. 2 is a statement of 
 stock and share capital created showing the proportion received, 
 and requires the exhibition in parallel columns of the amount of 
 capital created under each act or certificate, the amount received, 
 calls in arrear, amount uncalled and amount unissued. No. 3 
 shows the capital raised by loans and debenture stock, and the 
 amount of each at the beginning and end of the half year com- 
 pared. These are, however, subsidiary to Nos. 4 and 5, the ob- 
 ject of which is to show at a glance how the capital account 
 stands and what has been done upon it during the half year, 
 especially how the money has been spent. The statements are 
 quite detailed, and "shareholders and all concerned should be 
 able to tell," it was expected, "at a glance whether there is any 
 item here properly belonging to revenue. ' ' 70 No. 6 is a return 
 of the working stock, which was regarded as of great importance 
 in connection with the engineers' certificate which must be af- 
 fixed to the accounts. 71 The object of Nos. 7 and 8 is to show 
 in detail the proposed further expenditures on capital account 
 in the following half year and subsequent years. A comparison 
 of the proposed expenditures compared with the available assets 
 of the company was expected to be of great value. The need of 
 such an account had been insisted upon for some years and its 
 usefulness was well recognized. It was, however, pointed out 
 at the time as a defect that the directors were in no way bound 
 
 69 31 and 32 V. e. 119. 
 
 TO Economist, August 29, 1868. 
 
 "i The "engineer and the locomotive superintendent were required to cer- 
 tify, respectively, that the company's permanent way, stations, etc., and 
 the company's plant, engines, etc., were maintained in good working condi- 
 tion and repair during the half year. 
 
166 RAILWAY FINANCE IN ENGLAND [166 
 
 by their estimates even as to the half year concerned ; but it was 
 hoped that this would be safeguarded by the fact that the ensu- 
 ing account would show whether or not the estimates were cor- 
 rect, although the remedy would be only ex post facto. 
 
 Nos. 9, 10 and 11 are revenue accounts. The first deals with 
 the gross revenue, the second the net revenue, and the last, the 
 appropriation of the balance, if any, available for dividends. 
 Supplementary to No. 9 is No. 12, which consists of abstracts A. 
 B. C. etc., referred to in No. 9. Those abstracts were expected 
 to prove especially useful in enabling the shareholder to study 
 his own company's affairs and compare its expenditures with 
 that of others. Form No. 13 is the general balance sheet, which 
 exhibits the whole system. Statistical forms to show mileage 
 statements and those to be used by the company's engineers and 
 locomotive superintendents were also prescribed. 
 
 These prescribed accounts may be conveniently classified into 
 two groups: those relating to capital and those relating to rev- 
 enue. According to this system, the receipts and expenditures 
 on capital account are shown separately from the general balance 
 sheet, which differs materially from the American system where 
 the balance sheet exhibits in condensed form all the assets and 
 liabilities of the company, and the income statement shows the 
 gross earnings and expenses as well as the net revenue and its 
 application. This distinctive feature of British railway accounts 
 is sometimes known as the "double account system," according 
 to which the details of capital expenditures and capital receipts 
 are separated from the other assets and liabilities. Only the bal- 
 ance, either positive or negative, enters into the general balance 
 sheet. This system is based on the theory that inasmuch as the 
 capital is created by Parliament for a specific purpose, that pur- 
 pose is best fulfilled by crediting to one special account all 
 amounts received from the issue of capital securities and debit- 
 ing the account with all the assets acquired with the funds so 
 received. 72 
 
 According to the provisions of the act every incorporated com- 
 pany, seven days at least before each ordinary half-yearly meet- 
 
 72 Cf. an able article by A. M. Sakolski on the ' ' Control of Railroad 
 Accounts in leading European countries," in the Quarterly Journal of 
 Economics, May, 1910. 
 
167] THE REGULATION OF RAILWAY ACCOUNTS 167 
 
 ing, should prepare and print, according to the statutory forms, 
 a statement of accounts and balance sheet for the preceding half 
 year and an estimate of the proposed capital expenditure for the 
 ensuing half year, which should be the same as those submitted to 
 its auditors. In case of default, the company should be liable to a 
 fine of five pounds per day. The Board of Trade, with the con- 
 sent of a company, was authorized to alter the statutory forms 
 to suit special circumstances. 
 
 The act further required that every statement of accounts, 
 balance sheets, etc., required by the act, should be signed by the 
 chairman or deputy chairman of the company's directors and 
 should be preserved at the company's principal office. A printed 
 copy was required to be forwarded to the Board of Trade. 
 Shareholders and holders of debentures, etc., were also entitled 
 to receive copies of such accounts on application. However, all 
 persons interested in the company's affairs were permitted to 
 peruse the original copy without charge. When a company 
 should act in contravention of these provisions, it would be liable 
 to a penalty not exceeding fifty pounds for each offense. 
 
 Upon the enactment of the act, the Railway Times expressed 
 much dissatisfaction over the whole measure, 73 and several mem- 
 bers of Parliament also regarded the act as being too weak to be 
 of much value. 74 More than anything else, the means for secur- 
 ing the object of the act was severely criticised. Dissatisfaction 
 was especially expressed at the purely permissive character of 
 the requirements. The only compulsory clause was that requir- 
 ing the publication of the accounts in a certain form. Even 
 this compulsory provision was regarded as weak. A maximum 
 penalty of 35 per week was regarded as being ineffective to give 
 any great stimulus to exertion, at least in the case of important 
 companies where a body of directors at any time had much to 
 gain by a stealthy evasion of the act. Much mischief might be 
 done long before it could become worth while to prevent the 
 accumulating penalties. 75 
 
 On the other hand, the Economist at once recognized the pre- 
 scribed accounts as being very "skillfully framed." After ex- 
 
 73 Railway Times, August 1, 1868. 
 T* Hansard, 190, p. 1968. 
 75 Economist, March 21, 1868. 
 
168 RAILWAY FINANCE IN ENGLAND [168 
 
 amining and criticising every feature, it concluded that "the 
 accounts are very perfect and likely to be useful, in spite of all 
 defects." 76 
 
 It was further recognized that the silent influence of the pro- 
 visions would have a great amount of influence in preventing 
 companies from violating these regulations. The fact that a de- 
 parture from the prescribed forms would at once expose a de- 
 faulting company to the penalty of discredit, which would be 
 much severer than a fine, would insure at least a nominal com- 
 pliance with the provisions. 77 
 
 The Regulations of Railways Act, 1868, closed the legislation 
 on railway accounting. The regulations governing, and the 
 forms of accounts adopted in that year were generally recognized 
 as being very good in themselves. They emphasize the advanced 
 ideas which English legislators entertained long before others 
 realized the importance of this branch of railway regulation. 
 But they went no further. Instead of following up its good 
 start and taking advantage of its subsequent experience to im- 
 prove these regulations and principles as courageously as it had 
 adopted them, England settled down for many years to the idea 
 that nothing further was needed. Thus many defects in these 
 regulations have been suffered to exist during the last forty 
 years. 
 
 Among these defects, first of all, may be mentioned the fact 
 that there seemed to be much variation in the date of closing the 
 financial year of some of the companies. This defect, though 
 apparently of little consequence, had the undesirable effect, as 
 pointed out by the departmental committee on railway accounts 
 and statistics of 1909, 78 of rendering comparisons less valuable 
 than they would have been if the same date were common to all 
 companies. 
 
 Then the established regulations required that railway com- 
 panies should prepare their accounts in accordance with the 
 forms prescribed in the act of 1868 half-yearly is not in accord- 
 
 76 Ibid., Aug. 29, 1868. 
 
 77 Economist, March 21, 1868. 
 
 78 Report of the Committee of tlie Board of Trade on EaUtvay Accounts 
 and Statistical Returns, 1909 (hereafter called report of departmental com- 
 mittee on accounts and statistics, 1909), p. 4. 
 
169] THE REGULATION OF RAILWAY ACCOUNTS 169 
 
 anee with the usual practice of other companies and does not 
 seem necessary according to expert opinion. 79 
 
 But another defect, which is of much greater consequence, lies 
 in the lack of uniformity in practice. "It is obviously of the 
 first importance," said the departmental committee on railway 
 accounts and statistics, 1909, 80 "from the point of view of com- 
 parison between the different companies, that there should be 
 uniformity of practice among all the companies with regard to 
 the keeping of accounts and statistics ; that is to say, that every 
 heading both in accounts and in the statistics, should bear pre- 
 cisely the same meaning in the case of all railways should, in 
 fact, be standardized." In this connection it may be recalled 
 that one of the leading purposes for enacting the act of 1868 was 
 to afford the means of a comprehensive comparison between the 
 different companies, and that it was emphasized at the time that 
 uniformity in practice was even more important than uniformity 
 in the system of accounts. 
 
 In practice, however, the emphasis seems to have been placed 
 in the wrong place. The forms of accounts themselves are uni- 
 form, but the manner in which these accounts are filled up dif- 
 fers among the different companies. Thus after reviewing the 
 diverse nature of the capital accounts of some sixteen leading 
 railways, the Economist 81 in 1882 stated that "it would appear 
 to be wholly impossible to construct a statement, setting forth 
 the actual money expenditure upon those systems in many 
 cases it would be difficult even for the companies themselves to 
 construct such a statement. ' ' This financial paper further stated 
 that the capital accounts of railway companies "were wholly 
 unreliable for purposes of contrast with revenue, almost every 
 company constructing its capital account upon a different prin- 
 ciple. ' ' An English writer 82 also stated that ' ' the first item of 
 every railway balance sheet, which has yet been published to the 
 world under state authority during the past seventy years, is the 
 deliberate expression of an unmitigated falsehood. . . In ar- 
 
 79 Bepart of departmental committee on railway accounts and statistics, 
 1909, p. 4. 
 so Ibid., p. -5. 
 
 si Economist, March 4, 1882, .pp 248-249. 
 82 Fraser, British Railways, 1903, pp. 138-139. 
 
170 RAILWAY FINANCE IN ENGLAND [170 
 
 riving at each of these balances, every conceivable irregularity 
 . . . has been introduced, and has thereby received, not only 
 the sanction but the approval of the state. ' ' This writer further 
 said that ' ' the account is not a balance sheet at all, nor is it even 
 a very defective shadow or skeleton of one. It is . . . only 
 the declaration of an untruth, in every instance, coupled with a 
 list of a few of the most insignificant balances, which appear in 
 a company's set of subsidiary book of accounts." 
 
 We are not prepared to agree with these strong terms. But 
 the lack of uniformity in practice has recently attracted consid- 
 erable attention. The departmental committee on railway ac- 
 counts and statistics, 1909, gave much time to this difficulty, and 
 the evidence taken by that committee goes to show that much 
 needs to be done in making the uniform accounts really as useful 
 as they should be. Indeed, this committee was convinced that 
 unless some permanent machinery is established to define the 
 scope of the various headings and to decide authoritatively from 
 time to time the questions of detail which must arise in this con- 
 nection, much of the value of the uniform system of accounts 
 would be lost ; and they accordingly recommended the formation 
 of a standing committee, to be appointed by the Board of Trade, 
 which should include representatives of the railway companies, 
 to decide on points arising in connection with the preparation of 
 the accounts and statistical returns. 83 
 
 This departmental committee also recommended that "in the 
 interest both of the railway companies themselves and of the gen- 
 eral public" a system of yearly accounts and statistical returns 
 should be substituted for the present system of half-yearly ac- 
 counts. It further recommended that a uniform date should be 
 adopted to close the financial year of all the companies, instead 
 of permitting each company to adopt its individual date. 
 
 Furthermore, this committee took great pains in preparing a 
 set of forms for financial accounts and returns, 84 with the aim 
 of meeting the changed circumstances. Special effort was made 
 
 ss For this and other recommendations of this departmental committee, 
 see its report, pp. 1-6. 
 
 s* Those interested in railway accounting will find their time well spent 
 in examining the forms which are to be found in appendix I of the com- 
 mittee's report. 
 
171] THE REGULATION OF RAILWAY ACCOUNTS 171 
 
 to exclude from the financial statements all matters of a purely 
 statistical nature, thus making a strict division between the 
 financial and statistical parts of the returns which did not exist 
 in the statutory forms then in force. 
 
 A bill was introduced into the House of Commons in 1910, to 
 give effect to most of the recommendations made in the report of 
 this departmental committee, but was withdrawn in consequence 
 of the dissolution of Parliament. 
 
 From the foregoing, we have seen that England endeavored to 
 regulate the accounts of railways, to some extent, from the be- 
 ginning, but prior to 1868, the companies were practically free 
 to keep their accounts in their own way. The panic of 1867 and 
 other events led Parliament to adopt a definite and uniform sys- 
 tem of accounts twenty years before the United States attempted 
 to regulate railway accounting in any definite way. England, 
 however, made no further progress after her early start. Be- 
 tween 1868 and 1909 nothing was done to improve the old sys- 
 tem, whose defects are many and obvious. During this time the 
 United States made some remarkable advancements in railway 
 accounting and its regulation. The measures adopted by the 
 Interstate Commerce Commission toward the unification of rail- 
 way accounting and statistical returns, which met with consider- 
 able opposition at first, are gradually becoming more popular 
 and have unquestionably done much good. In fact the report 
 and recommendations of the departmental committee of 1909 
 have been greatly influenced by the system of accounts adopted 
 by the Interstate Commerce Commission. It is hoped that Par- 
 liament may soon see fit to give more serious consideration to 
 these recommendations. 
 
 Since writing the foregoing, the Railway Companies (Ac- 
 counts and Returns) Act of 1911 has been enacted. This act is 
 based largely upon the recommendations of the departmental 
 committee of 1909. 
 
 At a glance, one can see that the act and its forms of accounts 
 are a decided improvement over that of 1888. The half-yearly 
 accounts are changed into annual accounts, which experience has 
 unquestionably proven to be the right thing. The forms are 
 much more detailed and precise than the former ones. This is 
 
172 RAILWAY FINANCE IN ENGLAND [172 
 
 especially true with regard to the revenue accounts. The intro- 
 duction of the appropriation account is a decided improvement. 
 The separation of the various expenses of operation and main- 
 tenance according to their nature are incomparably more dis- 
 tinct and detailed than those of 1886. 
 
 Another notable improvement is the equalization of the re- 
 ceipts and expenses of the different auxiliary operations. These 
 auxiliary operations are of an entirely different nature from 
 that of the general railway business. Chief among this may be 
 mentioned form No. 11 which shows the receipts and expenses in 
 respect of omnibuses and other passenger vehicles not running 
 on the railway, No. 12, receipts and expenses in respect of steam- 
 boats, No. 15, receipts and expenses in respect of hotels, and of 
 refreshment rooms and cars where catering is carried on by the 
 companies. Each of these forms a distinct auxiliary service of 
 its own kind and each service has its own head and staff. To 
 separating the receipts and expenses of each service from those 
 of the rest, not only the general manager of the whole undertak- 
 ing may be better enabled to watch the whole situation and meas- 
 ure the efficiency of his men, but the individual heads of the dif- 
 ferent services will also be impressed more effectively with their 
 responsibility. By separating the accounts of the different ser- 
 vices and allocating the items of revenues and expenses to the 
 respective officers responsible for the items, the company will do 
 much to encourage economy and efficiency. "With the same idea 
 in view, wages are separated from costs of materials and office 
 expenses. With the multiplication of the activities of a modern 
 railway, such a system of segregation is imperative to successful 
 management. 
 
 We must observe, however, that improved as it was, the act 
 still has many defects which, in our opinion, could be advan- 
 tageously avoided. First of all it may be mentioned that the 
 leave given to end the financial year other than on the same date 
 is not going to prove advantageous. To close the accounts on 
 the same date is of fundamental importance to realize fully the 
 advantages of a uniform system of accounts^ which was one of 
 the chief reasons for passing the bill. In any act, loopholes or 
 exceptions to the general rule can hardly be expected to do more 
 good than evil. 
 
173] THE REGULATION OF RAILWAY ACCOUNTS 173 
 
 Another defect, which we feel is a serious one, is the lack of 
 any definite and detailed classification of the different items of 
 accounts. It may be recalled that one of the chief aims of the 
 departmental committee of 1909 was to secure uniformity. But 
 we may be permitted to say that uniformity in accounting can 
 not be easily achieved. The uniformity in the headings of ac- 
 counts cannot be expected to insure the uniformity in what may 
 be put under each heading by the different railways. While the 
 accountants may be reasonably expected to put the most obvious 
 items under the proper heads of accounts, they may quite as 
 reasonably be expected to interpret the less obvious items of 
 which there are numerous in the enterprises of a railway in 
 different ways. To sustain this statement, it may be recalled 
 that the Regulation of Railway Act, 1868, prescribed a form of 
 accounts for all railways, yet at the time of the revision in 1913, 
 following the act of 1911, there were innumerable differences be- 
 tween the accounts of one company and those of another. Al- 
 though the present forms of accounts are far more detailed and 
 specific than those of former years, there is nevertheless ample 
 room for differences in the allocations. It is understood that the 
 Standing Committee of Accountants, under the Railway Clear- 
 ing House regulations, has prepared an annotated form of ac- 
 counts, but it is not generally accessible to the shareholder or 
 the general public. This, in the opinion of the writer, is a de- 
 fect. The said annotated classifications or something similar to 
 it should be prepared and promulgated by government authority 
 which should be strictly followed by the railways and accessible 
 to all interested parties, instead of keeping it under the veil of 
 secrecy. Publicity and openness is the foundation of public con- 
 fidence. Therefore it is publicity that government regulation 
 should emphasize. In the long run, the railways and all other 
 parties concerned. will have everything to gain and little to lose 
 by adopting such a policy of publicity. There seems to be con- 
 siderable apprehension against such an open policy, but we feel 
 the anticipated dangers are visionary rather than real. Given a 
 fair trial, publicity w r ill surely find its own favorable position in 
 railway finance and regulation. 
 
 The above is only an inadequate observation. To give full 
 consideration to the act would require at least a separate chap- 
 
174 RAILWAY FINANCE IN ENGLAND [174 
 
 ter. As the act was passed after this monograph was written, 
 the writer prefers to limit himself to this short analysis. It is 
 recommended that every student interested in accounting will 
 find it of great advantage to make a thorough examination and 
 detailed comparison of the different forms of accounts as set 
 forth in the accounts of 1886 and 1911. 
 
CHAPTER VIII 
 STATE AUDITING AND INSPECTION 
 
 Parliament has required from the beginning an authentic audit 
 of railway accounts by the railway companies themselves. It has 
 also adopted elaborate, although ineffective, regulations govern- 
 ing such auditing by the companies. Thus in the Companies 
 Clauses Act, 1845, numerous provisions were made governing the 
 appointment and duties of auditors, etc. 1 The substance of these 
 rules may be briefly summed up as follows : 
 
 Unless otherwise provided by the company's special act, the 
 shareholders at the first meeting after the incorporation of the 
 company should elect, either in person or by proxy, the pre- 
 scribed number of auditors, 2 in like manner as in the case of the 
 election of the directors. One of the auditors, to be determined 
 in the first instance by ballot between themselves or in any other 
 way suitable to themselves and afterwards by seniority, should 
 retire at the end of the first ordinary meeting in each year ; 3 and 
 this annual vacancy should be filled by election at the same meet- 
 ing. If no other qualifications were required by the special act, 
 every auditor should have at least one share in the undertaking, 
 and should not hold any other office in the company nor should 
 he "be in any other manner interested in its concerns, except as 
 a shareholder." 
 
 In regard to the duties and powers, the act stipulated that the 
 auditors should receiye and examine all the half-yearly or other 
 periodical accounts and balance sheets of the company, which 
 should be delivered to them by the directors at least fourteen 
 days before the ensuing ordinary meeting at which these ac- 
 counts, etc., were to be produced to the shareholders. They were 
 also required either to make a special report or simply to con- 
 
 1 8 V. c. 16, SB. 101-108. 
 
 2 If no number is prescribed, then two would be the number. 
 
 3 Each auditor should be immediately eligible to reelection. 
 
 175 
 
176 RAILWAY FINANCE IN ENGLAND [176 
 
 firm the accounts, etc., submitted. Furthermore, these reports 
 or confirmations together with the reports of the directors should 
 be read at the meeting. In performing their duties, the auditors 
 were empowered to employ at the company's expense such ac- 
 countants and other persons as they might deem proper. 
 
 After the financial disaster of 1847, general proposals con- 
 cerning the auditing of railway accounts were made, but no re- 
 sult was obtained from these attempts. In 1848 a bill was sent 
 down from the upper house of Parliament, in which it was pro- 
 posed that on the requisition of a certain number of sharehold- 
 ers who were ready to deposit 200 to meet the expense, the gov- 
 ernment should appoint impartial persons as auditors. The 
 principal object of the bill was to protect the minority. It was 
 urged that as the directors were elected by majority, if the aud- 
 itors were also elected by the same majority, the check would 
 be imperfect. 4 This measure was opposed however, on the ground 
 that there was no demand for it by railway shareholders, that it 
 is very questionable whether Parliament had any right to inter- 
 fere with private business, and that one might just as well have 
 an audit of the accounts of the Bank of England. 5 After con- 
 siderable discussion in the House of Commons, it was finally 
 rejected. 
 
 But the financial difficulties of the railways were too apparent 
 to escape the attention of Parliament. A select committee was 
 appointed by the House of Lords in 1849 to consider ' ' Whether 
 the railway Acts do not require amendment, with a view of pro- 
 viding for a more effectual system audit accounts, to guard 
 against the application of funds as such companies to purposes 
 for which they were not subscribed, under the authority of the 
 legislature. ' ' 6 This committee recommended that the right of 
 inspection by shareholders of the accounts should be unrestrain- 
 ed: that all account, without exception, touching or relating to 
 the receipts or payment of the company should be required to be 
 produced; and that in case of refusal the statutory penalty 
 should be extended from the bookkeeper to the governing body. 
 The committee further recommended that the restriction upon 
 
 * Hansard, 98 : 1143-1147. 
 
 s Hansard, 187 : 1589-1590. 
 
 e Report of Eoyal Commission on Eailways, 1867, p. xviii. 
 
177] STATE AUDITING AND INSPECTION 177 
 
 selecting auditors from among the shareholders should be re- 
 pealed, and that the auditors should be empowered to call for all 
 books and documents of the company necessary to elucidate not 
 only the balance sheet, but the entire whole financial condition 
 of the company. Moreover, the committee also urged that the 
 government should name one auditor to act in conjunction with 
 two auditors to be named by the company ; and that if the gov- 
 ernment auditor differed in opinion from the company's audi- 
 tors, his opinion should be recorded and published with the 
 accounts for the information of the shareholders. 
 
 Bills embodying some of these provisions were introduced in- 
 to Parliament in subsequent sessions, but none of them became 
 law until 1868. 
 
 In 1851 the railway companies themselves brought in an audit 
 bill, proposing to appoint a board of auditors elected by share- 
 holders. The president of the Board of Trade objected to the 
 proposal, on the ground that it would make the people judges in 
 their own case and that such a tribunal lack independence and 
 continuity. The last proposal made to the House of Commons 
 up to 1867 was that the railway companies should elect a body 
 of 300 persons, out of which five auditors should be chosen to 
 hold their places during good behavior. It was proposed that 
 the debenture holders should also take part in the election. No 
 legislation, however, sprang from these bills. 7 
 
 Thus up to 1857 the main objects aimed to be secured by Par- 
 liamentary action may be summed up as follows : 8 
 
 (1) A clear and faithful record and account of all the finan- 
 cial transaction of the company. 
 
 (2) Authority for shareholders to inspect within certain fixed 
 periods the company's accounts and to take copies or extracts. 
 
 (3) The appointment of auditors from among the sharehold- 
 ers to audit the balance sheets and accounts. 
 
 (4) The preparations of a scheme for the declaration of a 
 dividend to be paid out of the profits of the company. 
 
 For the purpose of securing these objects, Parliament adopted 
 the following rules. 
 Each company at its annual meeting should appoint two audi- 
 
 7 Hansard, 187: 1589-1590. 
 
 s Report of Royal Commission on Railways, 1867, p. xliv. 
 
178 RAILWAY FINANCE IN ENGLAND [178 
 
 tors, one of whom should retire annually but should be re-eligi- 
 ble. 
 
 The directors should deliver to the auditor half-yearly or other 
 periodical accounts and balance sheets fourteen days before the 
 meeting at which they were to be produced. 
 
 The auditors should receive and examine the same, and might 
 employ at the expense of the company such accountants and oth- 
 er persons as they might think fit to assist them. They should 
 either make a special report on the accounts or simply confirm 
 them. 
 
 The directors should keep the accounts of the company. The 
 books should be balanced at the principal periods, and there- 
 upon the exact balance sheet be made up, which should exhibit 
 a true statement of the capital stock, credits, and property of 
 every description belonging to the company, the debts due by 
 the company, as well as a distinct view of the profit or loss 
 which had arisen in the course of the half year. 9 
 
 The application of these provisions, however, was by no means 
 free from difficulty. In practice, it was found that only a very 
 short summary was usually laid before the auditors, who made 
 an examination of it within a very limited time. 10 The daily 
 transactions of railway companies were so numerous and in- 
 tricate that the company was compelled to employ a staff of 
 clerks and accountants proportionate to the magnitude of its 
 business in order to examine and check every transaction as 
 it took place. Since the manner in which every transaction 
 was debited or credited depended upon the orders issued at the 
 time when the transaction was made, the accounts could be 
 cheeked efficiently only by a contemporaneous audit by an estab- 
 lishment employed in the same office, or by a complete transfer 
 or transcript of the accounts, vouchers, correspondence, minute 
 books, etc., to be examined elsewhere. 11 It was quite competent 
 for the shareholders of any company to direct their auditors to 
 investigate the accounts of the company to any extent they 
 thought necessary after the accounts were rendered each half- 
 
 * Report of Royal Commission on Railways, 1867, p. xliv. 
 
 10 Economist, May 16, 1857. 
 
 11 Hid. 
 
179] STATE AUDITING AND INSPECTION 179 
 
 year, but it did not seem to be within their power to direct any 
 continuous, daily audit. 
 
 The Royal Commission on Railways, 1865-67, however, dis- 
 covered that in many cases, especially as in that of the London 
 and North- Western, 12 much could be done by the companies 
 themselves for the purpose of ensuring a supervision and effec- 
 tive audit in the interest of the shareholders. At the same time, 
 the commission pointed out that the powers conferred by the 
 Companies' Clauses Acts were manifestly insufficient for this 
 purpose, in case the directors were otherwise disposed. 13 
 
 It has been shown in a previous chapter that under the sys- 
 tem of independent auditing much abuse arose, especially in the 
 declaration of dividends otherwise than out of net profits. It 
 was a "striking fact," said the London Times, 1 * "that . . . 
 the auditors have never discovered or, at any rate, disclosed any 
 one of the numerous cases of ... false returns to the 
 Board of Trade, payments of unearned dividends, charging of 
 revenue expenses to capital, or any other of the various forms 
 of 'cooking' accounts by which shareholders have been lured to 
 ruin. . ." 
 
 Therefore it was again urged that no legislation to repress the 
 existing abuses would be of any avail without a system of gov- 
 ernment audit of the companies' accounts. 15 On the other hand 
 the Royal Commission apprehended that it would not be desir- 
 able to impose upon the Crown the duty of auditing the accounts 
 of joint stock companies and to certify to the shareholders the 
 correctness of their own balance sheets, for in practice this would 
 require a very large staff of officers as well as involve very 
 serious responsibility, merely to relieve the shareholders of a 
 duty which they could well perform for themselves by the elec- 
 tion of competent auditors with adequate powers and sufficient 
 remuneration. But this commission agreed with the select com- 
 mittee of 1849 that the restriction upon selecting auditors from 
 among the shareholders should be repealed, and was also of the 
 opinion that the auditors should be empowered to carry on a 
 
 12 Royal Commission on Railways, 1865-74, Appendixes E-F. 
 
 is Ibid., 1867, p. xlv. 
 
 i* London Times, November 3, 1867, p. 4. 
 
 is Report of Royal Commission on Railways, 1867, p. xliv. 
 
180 RAILWAY FINANCE IN ENGLAND [180 
 
 continuous audit and to call for all books and documents neces- 
 sary to elucidate not only the balance sheet, but the whole finan- 
 cial position of the company. 16 
 
 In commenting on the report of the Royal Commission regard- 
 ing government audit of railway accounts, the Economist stat- 
 ed, 17 "These remarks seem to us full of wisdom. The attempt 
 to separate the accountant from the transactor will fail, unless 
 pursued into the minutest details. The man who does the busi- 
 ness will give what accounts of it he pleases. ' ' 
 
 The general chaotic condition of railway finance which has 
 been repeatedly referred to and the recommendations of the 
 Royal Commission led Parliament to insert a clause in the Rail- 
 way Companies Act, 1867, 18 giving to the shareholders a control 
 through the auditors, and imposing on the auditors a respon- 
 sibility which they never had before. This clause provided, as 
 briefly stated in a previous chapter, that no dividend should be 
 declared by a company until the auditors had certified that the 
 half-yearly accounts contained a full and true statement of the 
 financial condition of the company, and that the proposed divi- 
 dend was bona fide due after charging the revenue of the half- 
 yearly with all expenses which might be paid out of such revenue 
 in the opinion of the auditors. The auditors were empowered 
 to examine the books of the company at all reasonable times, 
 and to call for such further accounts, vouchers, papers, etc., as 
 they saw fit. They were also empowered to refuse to certify 
 any accounts or statements of the company until the directors 
 and officers of the company had produced the required accounts 
 and given their assistance as far as they could. Furthermore, 
 the auditors might at any time add anything to their certificates 
 or issue to the shareholders independently at the expense of the 
 company, any statement respecting the financial condition and 
 prospects of the company which they thought important for the 
 information of the shareholders. 
 
 Under the existing circumstances when every imaginable mys- 
 tification was thrown over the declaration of dividends, when 
 auditors never disclosed any of the numerous serious irregular- 
 
 16 Ibid f> 1867, p. xlv. 
 
 17 Economist, May 18, 1867. 
 is 30 & 31 V. e. 127, s. 30. 
 
181] STATE AUDITING AND INSPECTION 181 
 
 ities, and when general confusion seemed to hang over the finan- 
 cial affairs of the whole system, it was natural that the clause 
 was highly valued at the time of its passage. It was expected, 
 not without reason, that henceforth the auditors would no longer 
 have any excuse, when actions were brought against them for 
 neglect of duty. 19 
 
 So far so good. But in the act a further provision, as re- 
 ferred to before, 20 was made to the effect that in the declaration 
 of dividends and auditing of accounts, if the directors differed 
 from the judgment of the auditors with respect to the payment 
 of any expenses of the company, such difference should, ' ' if the 
 directors desire it, " 21 be stated in the report to the sharehold- 
 ers, "and the company in general meeting may decide thereon, 
 subject to all the provisions of the law then existing, and such 
 decision shall for the purpose of the dividend be final and bind- 
 ing." This provision proved to be a loop-hole through which 
 the expected usefulness of the system of auditing, as shown in a 
 previous chapter, was practically nullified. . *' 
 
 As the systems of auditing adopted in 1845 and 1867 both 
 failed to be effective enough to restore confidence, it was sug- 
 gested that a committee of investigation might be effective in 
 settling the existing difficulties. But it was at onoe compre- 
 hended that the nature and composition of such committees of 
 railway companies would prevent them from doing anything 
 effective. They could be composed in all kinds of ways, they 
 could lay down every species of doctrine, and they could accept 
 as well as deny all sorts of statements. The investigation of 
 railway affairs was recognized as a difficult task even for an ex- 
 pert, and the task wholly surpassed the power of any untrained 
 man. 22 
 
 Moreover, experience had taught that a committee of investi- 
 gation was almost never both able and impartial. All the com- 
 petent people in a railway company, it was told, took a side 
 either for the directors or against them, and they would go into 
 the committee with a bias in their minds. Thus, in practice, the 
 
 is London Times, November 13, 1867, p. 4. 
 
 20 Cf. supra, p. 216. 
 
 21 Italics are mine. 
 
 22 Economist, December 21, 1867. 
 
182 RAILWAY FINANCE IN ENGLAND [182 
 
 reports of committees of investigation were either questioned or 
 denied. They often would "not settle so much as they unset- 
 tle. . .," and they would "only add a new disputant and a 
 new set of contested figures" to the controversy. 23 
 
 Therefore, it appeared that the true remedy for the lack of 
 confidence was an independent audit of all the railway ac- 
 counts. 24 The government was urged to exercise what philoso- 
 phers called the "function of verification." The railways, by 
 which alone people could travel and traffic could be conveyed, 
 were regarded not only of sufficient magnitude to justify the 
 action of the government, but so important that the state would 
 be to blame if it did not act. The government was held as the 
 only uniform authenicator possible the only one which could 
 apply the same measure with the same weight to all railways in 
 the country. The shareholders themselves were reported to be 
 desirous of having a system of government audit and were 
 ready to share the expenses. "An optional audit of petitioning 
 railways is," said the Economist, 25 "both on grounds of theory 
 and reasons of practice, the sole outlet from the existing diffi- 
 culty." In fact, during the early part of 1867 several proposals 
 were presented to the Board of Trade, which, though varying 
 much in detail, contained the common recommendation that an 
 auditor should be appointed by that department to audit rail- 
 way accounts. 26 Consequently in the Regulation of Railways 
 Bill of 1868, provisions were made for a more effective system 
 of auditing and inspection. When the bill was introduced, it 
 was generally conceded that a system of government audit of 
 railway accounts would do much toward restoring confidence. 
 But it was also recognized that in this very matter of restoring 
 confidence lay the danger of the system. The public might place 
 too much faith in the system. They might be led to believe that 
 the soundness of a company's proceedings and finance were 
 certified and even guaranteed by the government. Again it was 
 recognized that it was by no means an easy work for the gov- 
 ernment to audit efficiently and effectively the accounts of the 
 
 23 /bid., December 28, 1867. 
 
 24 Ibid., 
 
 25 Economist, December 21, 1867. 
 
 26 Hansard, 187 : 1590. 
 
183] STATE AUDITING AND INSPECTION 183 
 
 railway companies. An audit of business "from without " must 
 be such as would be of avail against directors who desired to 
 deceive. The details which auditors in such cases would have 
 to look into and the minuteness of the evidence they would have 
 to inspect, it was urged, could hardly be properly appreciated 
 by any but those who had practical experience in such matters. 21 
 
 On account of the possible dangers and the great difficulties 
 which might arise from a system of government audit, it was 
 suggested that railways themselves might constitute a central 
 board of audit, and that they might for that purpose make use 
 of the existing machinery of the Railway Clearing House. 28 
 Such a board under the control of the railways themselves, it 
 was believed, would be less likely to give false security than an 
 audit under the government. 29 
 
 The most important question which arose during the discus- 
 sion, however, was that as to what should be the scope of the 
 audit. An ordinary audit, such as the mere comparison of 
 payments and vouchers, was an operation which did not give 
 the protection which shareholders sometimes fancied it did. 
 On the other hand it did not appear politic to interfere too much 
 with the policy of railway companies. If the government should 
 give guarantee to all the railway accounts presented to the 
 Board of Trade, the various companies of other pursuit might 
 make similar demands. 30 
 
 After much debate, provisions were made, in the act of 1868, 
 to repeal the restriction imposed by the Companies Clauses Act, 
 1845, that auditors should be shareholders, for the reason that 
 it had proven desirable in some cases to have independent audi- 
 tors who should be entirely unconnected with the company. 31 
 
 But what was entirely new and of great importance was the 
 provision for the appointment of auditors by the Board of 
 Trade. According to this provision, the Board of Trade, upon 
 application made in pursuance of a resolution passed at a meet- 
 ing of the directors or at a general meeting of the company, 
 
 27 Economist, May 18, 1867. 
 
 28 Sir Geo. Findlay 's book on the Working and Management of an Eng- 
 lish Railway has an excellent treatment of the Clearing House. 
 
 2 Hansard, 187: 1591. 
 so Ibid., 191: 1538. 
 si Hansard, 190: 1858. 
 
184 RAILWAY FINANCE IN ENGLAND [184 
 
 might appoint an auditor in addition to the two auditors of the 
 applying company, and such government auditors were to be 
 paid, by the applying company, a reasonable remuneration pre- 
 scribed by the Board of Trade. The government auditor was 
 to have the same duties and powers as the companies' auditors; 
 and the company might declare a dividend only when the 
 majority of these three auditors had certified that such dividend 
 was properly earned according to the rules laid down in section 
 30 of the Railway Companies, 1867. 
 
 It was regretted, however, that the act provided for only one 
 government auditor in each case where the company had two. 
 As a majority was to decide when a dividend might be declared, 
 it was apprehended that the official auditor might be overruled. 
 Then he would only have the liberty, according to the act, of 
 printing his protest at the expense of the company. Even ad- 
 mitting that the possibility of such a protest would be an ob- 
 stacle in the way of improper dividends and that the govern- 
 ment auditor might receive more consideration than those of the 
 company, nevertheless it remained a fact there were many dis- 
 putes in which the shareholders and the capitalists might be 
 indisposed to give the government auditor their proper sup- 
 port. 32 
 
 It was also urged both in and out of Parliament 33 that audit- 
 ing alone was not sufficient to prevent disorders in railway 
 finance, for frequently the books of unreliable companies were 
 well kept. The root of the evil was in the charging of the vari- 
 ous items in the books. 
 
 Another important provision contained in the Railway Regu- 
 lation Act of 1868 was that in case there were any difference of 
 opinion between the auditors, then it should be imperative, in- 
 stead of permissive, as was originally provided in the bill, that 
 the dissenting auditor should issue to the shareholders, at the 
 cost of the company, a statement containing the grounds on which 
 he differed from his colleagues and prepare such other state- 
 ments respecting the financial conditions and prospects of the 
 company which he deemed material for the information of the 
 shareholders. 34 
 
 32 Economist, March 21, 1868. 
 
 33 Hansard, 190 : 1960, and London Times, November 22, 1867, p. 6. 
 a* Hansard, 190: 1962. 
 
185] STATE AUDITING AND INSPECTION 185 
 
 To strengthen the position of the securities-holders, the act 
 further provided 35 that the directors, or two-fifths of the holders 
 of shares, stocks, or preference shares, or half of the creditors, 
 might apply to the Board of Trade to appoint inspectors to ex- 
 amine a company's affairs, in case they produced evidence to 
 satisfy the Board of Trade. In so applying to the Board of 
 Trade the applicants, however, were required to meet all ex- 
 penses incurred in connection with the inspection, unless the 
 Board of Trade should direct the same or any portion thereof 
 to be borne by the company, and they might also be required to 
 give security for the payment of such expenses. 
 
 The government inspectors were empowered to examine all 
 the company's books, documents, etc., as well as to administer 
 oath ; and the directors, officers and agents of the company were 
 required to produce, for the examination of the government in- 
 spection, all such books and documents. The latter were also 
 required under penalty 36 to render to the government inspectors 
 all reasonable facilities for discharging his duty. 
 
 Upon the conclusion of the examination, the inspectors were 
 to report their opinion both to the Board of Trade and the com- 
 pany, the latter being required to print and deliver a copy of 
 the same to the Board of Trade as well as to every applicant who 
 held any securities of the company. 
 
 Furthermore, the companies were authorized to appoint, on 
 their own accord, at any extraordinary meeting inspectors for 
 the purpose of examining into the company's affairs, and such 
 inspectors of the company were to have the same powers and to 
 perform the same duties as those appointed by the Board of 
 Trade. 
 
 This system of inspection was adopted for the purpose of 
 helping the shareholders to bring into their proper light without 
 involving the assumption of any serious responsibility by the 
 government. 37 Such inspection of private business did not es- 
 tablish any new principles, as a similar system had been intro- 
 
 ss 31 & 32 V. c. 119, as. 6-10. 
 
 36 In ease any director, officer, or agent of the company should refuse to 
 produce any books or documents, or to deny the facilities necessary for the 
 inspection, he should be held liable to a penalty of 5 for every day during 
 which the refusal continued. See sections 8 & 10, 31 & 32 V. c. 119. 
 
 37 Hansard, 190 : 1958. 
 
186 RAILWAY FINANCE IN ENGLAND [186 
 
 duced by the Companies Act of 1862, in the case of ordinary 
 joint stock companies. 38 
 
 The defect of this system of government inspection, as was 
 pointed out at the time, 39 was that the inspection was contem- 
 plated only in extreme cases. The limitations placed upon the 
 application for government inspection were said to be too cum- 
 bersome. It was urged that since the applicants were required 
 to give security for the cost of any government inspection, Par- 
 liament could have well afforded to require the consent of a 
 smaller proportion of the shares or debentures of a company for 
 any inspection. 40 It would be almost impossible to make any 
 such inspection if a directorate objected to it. The demand for 
 an examination of a company's affairs, according to the pro- 
 vision, would be a penal proceeding which the directors would 
 always resist. It would be made, therefore, only when a railway 
 came to grief, while what was needed was a government inspec- 
 tion when the soundness of the company was not suspected and 
 not merely an inquiry when troubles had taken place. 
 
 Moreover, in spite of the great responsibility placed upon the 
 Board of Trade, no principle was laid down to guide that body, 
 as to what reasons were sufficient to justify an inquiry. Neither 
 was there any specific rule as to the kind of evidence on which 
 it should insist. Thus, it was apprehended that "the act might 
 be wholly unworkable if the Board of Trade were judicial and 
 exacting, and looked too narrowly into prima facie cases. ' ' 41 
 
 It was, however, conceded that the provision for the appoint- 
 ment of government inspectors would generally be of some use 
 in that the possibility of a searching inquiry would have much 
 indirect influence over directors. 42 
 
 In spite of its defects, however, the system of government 
 audit and inspection was recognized to be a forward movement 
 in the regulation of railway finance. The holders of the securi- 
 ties of the companies were at least afforded a chance to get 
 government auditors and inspectors to act with their own, thus 
 bringing pressure to bear upon the directors. All good compan- 
 
 39 Economist, August 29, 1868, p. 992. 
 
 40 Ibid., March 21, 1868. 
 
 41 Ibid., August 29, 1868, p. 992. 
 
 42 Economist, March 21, 1868. 
 
187] STATE AUDITING AND INSPECTION 187 
 
 ies would gain by taking advantage of the provisions of the 
 act; and the "fashion" being once established might compel 
 companies to follow the example. The discredit arising from 
 shutting out the light might be even worse than the discredit of 
 the unwelcome truth itself. Although the system of government 
 audit and inspection has been resorted to only occasionally, it 
 appears to have proven beneficial. Parliament has not only re- 
 tained the system of impartial audit, but has given it special 
 emphasis. 43 Indeed, as said a member of the New York Bureau 
 of Economic Research in 1901 before the United States Indus- 
 trial Commission, 44 the English auditors are independent and 
 form "almost a fourth body a fourth cog in the wheel of 
 government." The fact that the government has the power to 
 appoint its own auditors to audit the accounts and to appoint 
 inspectors to examine the affairs of the companies seemed to 
 have considerable influence in preventing railway companies 
 from many irregularities. Thus it appears that the mere reser- 
 vation by the government of certain important privileges may 
 often prove quite effective in checking misconducts, even if such 
 privileges are seldom made use of. 
 
 It may be added that as years progressed, things became more 
 settled to normal or ' ' standard ' ' conditions. While the accounts 
 of some companies do not give as much as is desirable, they are 
 generally known to be true and straightforward, and seldom 
 make any attempt at dishonest concealment of vital points. The 
 general practice is that they are audited half-yearly. Besides 
 appointing professional auditors on behalf of the shareholders, 
 many companies have an audit committee appointed for the lat- 
 ter body, which meets regularly for the purpose of supervising 
 the accounts. Perhaps these measures taken by the companies 
 may to a certain extent explain why the privilege given by the 
 government for appointing government auditors has not been 
 taken advantage of by the shareholders. 
 
 43 In the "saving" clause of the Coventry Bailway Bill, 1910, as to 
 general Railway Act, the only two topics which received special emphasis 
 were the impartial audit of accounts and the revision of the maximum rates. 
 See sec. 43, p. 17 of the Coventry Railway Bill, 1910. 
 
 **Eeport of the United States Industrial Commission, 1901, Vol. IX, 
 p. 93. 
 
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190 RAILWAY FINANCE IN ENGLAND [190 
 
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 Railways, their capital and dividends, 1855-1856. 
 
 Churton, Ed., Railroad book of England, Lond., 1851. 
 
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 Findlay, Sir George, The working and management of an 
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 Railway problems, Longman, Green & Co., 1887. 
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INDEX 
 
 Abandonment of railways act, 1850, 
 p. 32 n, 35, 56, 57, 87 
 
 Accommodation bills, 69 
 
 Accounting, railway, 15, 21, 25-26, 
 149-174 
 
 Act, abandonment of railways, 1850, 
 p. 32 n, 35, 56, 57, 87; canal, 17, 
 23, 82 n; clauses consolidation, 
 19; companies, 1862, p. 48, 107 n, 
 124, 155; companies arrangement 
 and debenture holders, 1867, p. 
 24; companies clauses, 1845, p. 20, 
 21, 32-33, 37, 47, 55, 57, 85, 86, 
 107, 124, 150, 175, 183; companies 
 clauses, 1845, 1863, p. 14, 21, 36, 
 37, 38, 39, 45, 63, 79, 90, 110 n, 
 125; companies clauses, consolida- 
 tion, 1845, p. 52, 100, 104, 105; 
 companies, 1862, p. 186; com- 
 panies securities, 1866, p. 22, 153; 
 Coventry railway, 1910, p. 124; 
 Croydon, 1837, p. 46, 56, 149; 
 lands clauses, 1845, p. 32 ; lands 
 clauses consolidation, 1860, p. 88- 
 89; London and Croydon railway, 
 1837, p. 31, 54, 103 ; London 
 and Northwestern Railway, 1851, 
 p. 60; Midland, 1897, p. 134 n; 
 of 1863, p. 68; railway accounts, 
 1911, p. 15; railway and canal 
 traffic, 1888, p. 131; railway 
 clauses, 1845, p. 151 ; railway com- 
 panies, 1864, p. 37 n; railway 
 companies, 1867, p. 14, 24, 48, 77- 
 79, 125, 180; railway companies, 
 1868, p. 77 n; railway companies, 
 1911, p. 28; railway companies 
 (accounts and returns), 1911, p. 
 171-172; railway companies se- 
 curities, 1866, p. 14, 66, 114, 116 
 
 n, 117, 118; railway construction 
 facilities, 1864, p. 33 n, 45, 48, 99- 
 100; railway regulation, 1844, p. 
 19, 150; railway regulation, 1868, 
 p. 184; railway regulation, 1871, 
 p. 14, 26-27, 28; railway construc- 
 tion facilities, 1864, p. 123; regu- 
 lation of railways, 1844, p. 85; 
 regulation of railways, 1868, p. 14, 
 26, 41, 42, 154, 165-168, 173 ; reg- 
 ulation of railways, 1871, p. 131 
 
 Adams, C. F., 18 
 
 Audit, uniform system of govern- 
 ment, advocated, 21 
 
 Auditing systems of state, 175-187 
 
 Beauchamp, Earl, 123 n 
 
 Belmore, Earl of, 113 
 
 Bill, Brighton railway, 125; com- 
 panies clauses, 1863, p. 99; Cov- 
 entry railway, 1910, p. 187 n; 
 joint stock companies accounts, 
 1868, p. 158; model, of the house 
 of lords, 1909, p. 100 n; railway 
 and joint stocks companies ac- 
 count, 1868, p. 155; railway audit 
 of accounts, 1867, p. 158; railway 
 companies, 1867, p. 73-77; railway 
 companies arrangement, 1867, p. 
 73; railway companies securities, 
 1866, p. 114; railway debenture 
 holders, 1867, p. 70-71, 73; regis- 
 tration of railway debentures, 
 1865, p. Ill, 112-113, 114; regu- 
 lation of railways, 158-165; regu- 
 lation of railways, 1868, p. 121, 
 182; West Hartlepool harbor and 
 railway, 109; model, of the house 
 of lords, 1909, p. 94 n 
 
 Brecon and Merthyr railway com- 
 pany, 45 
 
 193 
 
194 
 
 RAILWAY FINANCE IN ENGLAND 
 
 Brighton and Chichester railway, 31 
 
 Brighton railway, 49, 125 
 
 Brighton railway bill, 125 
 
 Caledonian railway, 46, 76 n, 128 n 
 
 Calls, 33, 35-36, 47, 122 
 
 Canal acts, 17, 23, 82 n 
 
 Capital, control of borrowing power 
 of, 53-121; method of raising and 
 spending additional, 44-51 
 
 Cardigan and Carmarthen railway, 
 
 105 n 
 
 Chatham, London and Dover rail- 
 way, 65, 66, 101, 105 n, 125 n; 
 land case of, 67 
 
 Chichester and Brighton railway, 31 
 Clauses consolidation acts, 19 
 Clanricarde, Marquess of, 97 n, 112 
 Clyde and Forth Navigation Com- 
 pany, 46 
 Commission, royal, on railways, 11, 
 
 25, 26, 42 
 
 Committee appointed in parliament 
 to investigate railways, 1836, p. 
 17; 1839, p. 35; 1840, p. 17; 1844, 
 p. 18, 19, 84; 1848, p. 87; 1849, 
 p. 20; 1863, p. 22, 63, 98-99; 1864, 
 p. 22, 63, 64 n; departmental, on 
 railway accounts and statistics, 
 1909, p. 168 n, 170; Lords', 1849, 
 p. 44; committee, Lords, 1864, p. 
 
 106 n, 107 n, 108, 109 n, 111 n, 
 114, 119 n, 120 n ; on railway bills, 
 31; on railway borrowing powers, 
 1864, p. 83 ft, 95 n, 96 n, 105 n; 
 select, 1849, p. 154, 176, 179; 
 select, 1882, p. 50 n; select, 1890, 
 129 n, 135, 137, 138, 142, 143, 
 146; standing, of accountants, 
 173 ; Ways and Means, 129 
 
 Companies act, 1862, p. 48, 107 n, 
 124, 155, 186; arrangement and 
 debenture holders act, 1867, p. 24 ; 
 clauses act, 1845, p. 14, 20, 21, 32- 
 33, 37, 47, 55, 57, 85-86, 107, 124, 
 150, 175, 183 ; 1863, p. 21, 36, 37, 
 38, 39, 45, 63, 79, 90, 110 n, 125; 
 1869, p. 126; clauses consolidation 
 
 act, 1845, p. 52, 100, 104, 105; 
 clauses bill, 1863, p. 99; securities 
 act, 1866, p. 22, 153 
 
 Company, Brighton railway, 125; 
 East India, 57; lands improve- 
 -ment, 109 
 
 Consols, 72 
 
 Cork and Yanhol railway, 105 n 
 
 Coventry railway bill, 1910, p. 187 
 n; railway act, 1910, p. 124 
 
 Crawford, E. W., 71 n, 73 
 
 Croydon and London railway, act, 
 1837, p. 17, 31 n, 43 n, 46, 54, 56, 
 103 n, 149 
 
 Croyden, railway to, projected, 19 
 
 Debenture, 22, 24, 30, 46, 50 n, 53- 
 80, 91, 92, 93, 98, 102, 105, 106, 
 107, 108, 109, 110, 111, 112; hold- 
 ers bill, railway, 1867, p. 70-71, 
 73; shares, 121, 137, 138; stock, 
 21, 22, 25, 45, 53, 90 
 
 Departmental committee on railway 
 accounts and statistics, 1909, p. 
 168 n, 170 
 
 Donong, Earl of, 105 
 
 Dover and Chatham railway, 125 n 
 
 Dover, London, Chatham and, rail- 
 way, 65, 66, 101, 105 n; land case 
 of, 67 
 
 Dowlais and Ivor railway, 46 
 
 East India Company, 57 
 
 Eastern Section railway, 65 
 
 Ten duty, 89 
 
 Finance companies, 23 
 
 Forth and Clyde Navigation com- 
 pany, 46 
 
 Great Eastern railway, 65, 101, 125 n 
 
 Great Northern railway, 40, 43, 101, 
 126, 126 n 
 
 Great Western railway, 101 
 
 Ground annual, 89 
 
 Hartlepool, West, harbor and rail- 
 way company, 92, 99, 105 n, 109 
 
 Hassard, M. D., 110 
 
 Hunt, Sir William, 155, 158 
 
 Interstate commerce commission, 171 
 
 Insecurities, 105 
 
INDEX 
 
 195 
 
 Investors, protection of, 12 
 Ireland, registration of deeds in, 113 
 Isle of Wight railway, 128 n, 142 
 Ivor and Dowlais railway, 46 
 Joint stock companies accounts bill, 
 
 1868, p. 158 
 Land clauses act, 1845, p. 32 n; 
 
 clauses consolidation act, 1860, p. 
 
 88-89; improvement company, 109 
 Legislation on railway finance divid- 
 ed into three periods, 14 
 Lloyd's bonds, 22, 65-66, 78, 94-98, 
 
 111 
 Lean capital, 53-80; attempts of 
 
 parliament to make safe, 53-56 
 London and North-western, 40, 101, 
 
 179 
 London and North-western railway 
 
 act, 1851, p. 60, 101, 179 
 London and South-Western railway, 
 
 42, 128 n, 141 
 
 London, Chatham and Dover rail- 
 way, 65, 66, 101, 105 n; land case 
 
 of, 67 
 Lords' committee, 1849, p. 44; 1864, 
 
 p. 106 n, 107 n, 108, 109 n, 111 n, 
 
 114, 119 n, 120 n 
 Manchester railway conference, 
 
 1868, p. 161 
 Mersey railway, 101 
 Merthyr and Brecon railway com- 
 pany, 45 
 
 Metropolitan railway, 101, 125 
 Meyer, B. H., 10 
 Midland act, 1897, p. 134 n 
 Midland railway, 101, 134 
 Model bills and clauses of the house 
 
 of lords, 1909, p. 42 n, 94 n, 100 
 
 n 
 
 North British railway, 126 
 North Eastern railway, 101 
 Panic of 1844, p. 18; of 1865, p. 66, 
 
 70; of 1867, p. 23 
 Pitlake, railway to, 17 
 Preference shares, 27, 30, 39-40, 121, 
 
 122 
 Pre-preference stock, 76 
 
 Eailway: see specific names 
 
 Railway accounts act, 1911, p. 15; 
 and canal traffic act, 1888, p. 131; 
 and joint stocks companies ac- 
 count bill, 1868, p. 155; audit of 
 accounts bill, 1867, p. 158; clauses 
 act, 1845, p. 151; companies act, 
 1864, p. 37 n; companies act, 
 1867, p. 14, 24, 48, 77-79, 125, 
 180; companies act, 1868, p. 77 ; 
 companies act, 1911, p. 28; com- 
 panies (accounts and returns) act, 
 1911, p. 171-172; companies ar- 
 rangement bill, 1867, p. 73; com- 
 panies bill, 1867, p. 73-77; com- 
 panies securities act, 1866, p. 14, 
 66, 114, 116 , 117, 118; com- 
 panies securities bill, 1866, p. 114 ; 
 construction facilities act, 1864, 
 p. 33 n, 45, 48, 99-100, 123; de- 
 benture holders bill, 1867, p. 70- 
 71, 73; regulation act, 1844, p. 
 19, 150; regulation act, 1868, p. 
 184; regulation act, 1871, p. 14, 
 26-27, 28 
 
 Redesdale, Lord, 22 n, 41, 62, 73, 87, 
 117, 125 
 
 Registration of railway debentures 
 bill, 1865, p. Ill, 112-113, 114; 
 railway securities, 103-120 
 
 Regulation of English and American 
 railways similar, 9-10; railway 
 finance by two sets of rules, 13- 
 14; railways act, 1844, p. 85; 
 railways act, 1868, p. 14, 26, 41, 
 42, 154, 165-168, 173; railways 
 act, 1871, p. 131; railways bill, 
 158-165; railways bill, 1868, p. 
 121, 182 
 
 Richmond, Duke of, 24, 41, 73, 121 
 
 Royal commission on railways, 1867, 
 11, 25, 26, 42, 119 n, 132, 154, 157, 
 179, 180 
 
 Select committee, 1849, p. 154, 176, 
 179; 1882, p. 50 n; 1890, p. 129 
 n, 135, 137, 138, 142, 143, 146 
 
196 
 
 RAILWAY FINANCE IN ENGLAND 
 
 Shares, 30-52; act relating to, 21; 
 cancellation and surrender of, 36; 
 method of raising additional, 37; 
 preference, 27, 30, 39-40; pre- 
 ferred and deferred, 40-52; regis- 
 tration of, 33-35; transfer of, 33- 
 35 
 
 Sheffield railway, 125 n 
 
 Somerset, Lord, 19, 47, 124 n 
 
 SdUth Coast railway, 41 
 
 South Coast railway bill, 1868, p. 41 
 
 South Eastern railway, 66 
 
 Standing committee of accountants, 
 173 
 
 Stocks, debenture, 90 
 
 Stocks, pre-preference, 76 
 
 "Stock splitting," 40-43 
 
 Stock-watering, 15, 27, 42, 121-148 
 
 Taff Vale railway, 126-127, 128 
 
 United States industrial commis- 
 sion, 187 
 
 Wandsworth, railway from, 17, 19 
 
 West Hartlepool harbor and railway 
 company, 92, 99, 105 n, 109 ' 
 
 Yanhol and Cork railway, 105 n 
 
I 
 
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