The Bear’s Lair: The long-term cost of dopey government

The Honourable Robert Grimston

Queen Victoria’s tech titan

Benjamin Disraeli’s 1868 nationalization of the British tech sector does not get a mention in Robert Blake’s 800-page biography, yet it has had deeply damaging repercussions for Britain’s well-being over the 150-plus years since it happened. That illustrates our most important hidden problem: government’s regulatory meddling, utterly without regard to economic principles, may well produce results that destroy wealth not only now but a century into the future. A regulatory bonfire today should thus be combined with steep safeguards against future such lunacy.

Disraeli is the most heavily overrated of all Queen Victoria’s prime ministers, although Sir Robert Peel runs him close. Blake’s 1966 biography of him is a true classic, generally regarded as one of the masterpieces of 20th century biography. Yet, typical of biographies written by non-economic historians, it completely missed a huge economic policy blunder: the Telegraph Act, 1868. Doubtless that Act made only modest headlines at the time, but it demonstrated Disraeli’s utter ignorance of even the simplest economic principles and has bedeviled the British tech sector ever since, especially in 1945-70, a century after it was enacted. Furthermore, this Disraeli blunder cost taxpayers twice as much as his investment in the Suez Canal, to which Blake devotes ten pages.

There were two telegraph systems worldwide in the 19th century; the Samuel Morse (1791-1872) system with which we are familiar today and an earlier system invented by Sir William Cooke (1806-79) and Charles Wheatstone (1802-75), which was first installed on the Great Western Railway between London and West Drayton in 1838, six years before Morse’s first Washington-Baltimore installation. The Cooke/Wheatstone system, which used an indicator to point out successive letters in a message, initially used five wires to transmit information, and its final iteration, with one wire, was more difficult to use than Morse code, so Morse’s system eventually prevailed worldwide, but the Cooke/Wheatstone system remained dominant in Britain and its possessions until World War II. Cooke founded a company, the Electric Telegraph Company in 1846, initially with only eight shareholders and a capital of £150,000, of which £120,000 was paid for the Cooke/Wheatstone patents.

The Electric and International Telegraph Company (as it became) was consistently profitable and grew until 1868, when it had around 2,200 employees, sent 3.76 million messages and made a substantial profit. In 1862, it had attempted to establish the Oriental Telegraph Company, to provide telegraph service to the whole of India, but the British government had vetoed the idea. Even though the company had several smaller competitors, it was unpopular because of the high cost of sending telegrams, necessary to cover the large overhead in installing and maintaining its dense infrastructure of wires. Its chairman, Hon. Robert Grimston (1816-84, founder of I Zingari in 1845, Surrey County Cricket Club in 1846, President of MCC in 1883 and nephew of Lord Liverpool) wrote an open letter to shareholders in January 1868, begging the government not to nationalize it:

“The telegraphs in Britain have a long history of profitable working, while telegraphs in Europe either made operating losses and were a burden on the public purse or were subsidized by so-called transfer traffic, which merely passed through its circuits, going to and from other countries, often Britain. … There is no telegraph station in the World with which the Electric and International Telegraph Company is not in connexion, and with which they do not interchange communications. And this has been effected by the private enterprise of a few individuals within a period of little more than twenty years. … The life of a Passenger travelling upon a Railway is so protected that not above one passenger out of every Twenty Millions of Passengers conveyed is sacrificed by railway accident – a result mainly due to that system of telegraphy which secures immunity for every train which crosses a line.”

Alas, Grimston’s pleas were in vain, since Disraeli had an election coming up and saw the quick popularity of promising cheaper telegraph rates — while Grimston and Disraeli were both Tories, Disraeli headed the progressive wing of the party, and despised the “backwoodsmen” like Grimston. Hence the Telegraph Act of 1868. At least, shareholders were properly compensated, at 20 times average 1867-68 earnings or about £2.8 million. Including compensation for Electric and International Telegraph’s competitors and the costs of rationalizing the telegraph stations thus acquired, the total cost of the fatuous operation was about £10 million, more than twice the £4 million Disraeli would pay for 44% of the Suez Canal in 1875.

Of course, the Suez Canal was old technology, and as matters proved no more than an 80-year lease anyway, whereas the Electric and International Telegraph Co. was the leading pioneer in information technology, the most important tech sector of the twentieth and twenty-first centuries (maybe 20 times earnings was insufficient compensation after all!) As for Grimston, he was the 19th century equivalent of Elon Musk or Eric Schmidt, although both his distant successors could learn much from Grimston’s robust Toryism and passion for cricket.

The telegraph service was incorporated into the Post Office, where difficulties were created, as Grimston had forecast, by part-time rural postmasters being quite incapable of operating the complex equipment – and in smaller offices, the customers were kept waiting while the postmaster wrestled with it, thus setting a tradition of glacial Post Office customer service that persists to this day. The whole matter was much made worse by an 1880 court judgement (Attorney General v. Edison Company of London Limited) that declared that a telephone was a telegraph, within the meaning of Section 4 of the Telegraph Act, 1868, so private companies had to obtain a 31-year license from the Post Office, which in practice undertook the development of the telephone system itself.

One wonders whether anyone involved in that judgement had even a modest understanding of the technologies involved, let alone their possible future development. One can also imagine Grimston’s roar of exasperation when he heard about this further absurdity – in an alternate universe with better British governments, he would have been the effective founder of a British IT and telecommunications empire that would have dominated the global tech sector to this day, benefiting from the same “network effects” that today prop up into the trillions the share prices of the Magnificent Seven.

The pernicious effects of Disraeli’s folly were not yet done. As I wrote last year, the final knell in the coffin of British industrial dominance came with the Bletchley Park codebreakers’ research on the computer during World War II. The actual construction of the world’s first computer was carried out in the Post Office, repository of Britian’s electronics capability, by a team of engineers led by Tommy Flowers. (As any techie will tell you. building the damn thing is the difficult bit; anyone can faff around with airy concepts of “Turing machines” but the real hero is the guy who gets all 2,400 vacuum tubes to work at once!) Alas, once the war ended, the Top Secret Government Project was dismantled and Flowers went back to delivering letters, or whatever his day job required. Grimston would have turned in his grave!

We thus need a mechanism whereby government regulations and legislation generally can be subjected to a “100-year test” whereby its effect a hundred years hence is carefully considered before the legislation is passed. This requires a collection of legislators who naturally take a 100-year view. Fortunately, such a mechanism exists, and has been much used in the past: a fully hereditary secondary chamber of the legislature, with new entrants strictly limited, so governments cannot pack it.

This “House of Lords” is made up of people whose families will generally be Lords a century hence; thus they are able to take the long view, without short-term electoral considerations. In today’s world, these are not generally the richest people; today’s remaining hereditary peers are often quite poor, earning their livings in the normal way. All that is needed is a full reversal of Tony Blair’s iniquitous 1998 “reform,” booting the useless “Tony’s Cronies” life peers from the Lords, limiting new peer creations to no more than five a year, and restoring the full Lords’ veto that was abolished by the 1911 Parliament Act.

This restored House of Lords would then have the crucially important and explicit responsibility of considering the 100-year implications of all legislation, rejecting measures with excessively adverse long-term effects, however politically attractive they may be in the short-term. With such a House, climate change legislation, for example would be fully considered – and measures that do massive medium-term damage to the economy, such as a “net zero” commitment by 2050 would be rejected – because the Lords would realize that even if “net zero” were necessary it makes little difference in the long run whether it is achieved in 2050 or 2100.

Nationalizing the tech sector would be decisively rejected by such a body given this explicit responsibility. Disraeli would have to go back to writing mediocre novels!


(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)