10 NOVEMBER 1866, Page 5


rpHE easiest and the surest way of preventing frauds in the management of Railways is to appoint an official Director- General, with a seat at every Railway Board. We made that suggestion incidentally a few weeks since in connection with the affairs of the London, Chatham, and Dover Company, and we now repeat it as a carefully considered proposition. No other of the many plans hitherto proposed appears to meet so exactly the public need, no other requires so little disturbance of the existing machinery. New penal laws may be necessary, though they will not remove the obstacle which prevents the execution of those already existing, namely, the difficulty of

Prosecutor, with powers limited like those of the Queen's Proctor in the Divorce Court, with advantage to the cause of justice; but neither sterner laws nor easier modes of prosecution can prevent frauds, and it is prevention as well as punishment which the public desires. One form of fraud,- the over-issue of debentures, might be stopped by the registration of the bonds, and another, the creation of fictitious shares, by making a receipt from the Bank of England an essential part of the declaration required by statute. But nothing except the pre- sence of an official witness could cheek impositions such as those which have been committed on the public by some officials of the North British Railway, and it is impositions of this kind which injure the public interest. If one-half of the statements made by the Committee of Investigation are true, that Company or its chairman have committed acts towards the public which, in the range of their mischief, the area which they cover with ruin, the multiplicity of persons and classes of persons whom they injuriously affect, are almost without a parallel, even in that long register of energy and villany, the railway history of Great Britain. It is possible that some of those statements may be explained away, but as the chairman has replied to the report, it may, we think, be justly assumed that the facts which he leaves untouched are primd facie cor- rectly stated. It appears, then, that Mr. Richard Hodgson, Chairman of the North British Railway, a company with 781 miles of railway and 22,000,000/. of capital, has for years conducted an internecine war with- a rival under- taking, the Caledonian Railway. A man of high ability and extraordinary courage, Mr. Hodgson has monopolized power in the Company until the general manager, the secretary, and some of the directors appear simply his servants or his screens, and he has used his absolutism in many respects extremely well. The Company has grown under his auspices from a tenth-rate concern to one of the foremost associations in the kingdom. Its lines have been well built at reasonable, though "expensive," rates, its vast contracts fairly managed, its popularity with the public steadily maintained. Business has been attracted in great masses, and the receipts have been only just inadequate for profit. It does not appear that Mr. Hodgson himself ever sought any pecuniary advantage. from his management, and we should not be surprised in the least to hear that his administration had brought him personally nothing. Indeed his fidelity to his Company comes out in his defence in the most strikingly unconscious way. Tried, dismissed, disgraced, in danger of criminal prosecution, injured it may be in purse, certainly injured in character, the chairman's one real regret, which comes cropping out at every turn, is that the exposure will give the Caledonian the victory. With his last breath in his final report, which is practically a con- fession, he advises, pleads, almost prays that the men who are crushing him will not make peace with the enemy except through victory. If we may judge a character from docu- mentary evidence, Mr. Richard Hodgson must be a man like Paterson, fit to head great enterprises, resolute, remorseless, and one-Head, a man utterly unscrupulous when needful, yet always strictly economical of unscrupulousness. He was not going to create fictitious shares, or over-issue debentures, or play small tricks on capitalists' credulity. He understood credit better than that, saw like a statesman that if he could but make his lines seem to yield a steady, unfailing dividend, capital would come fast enough, and he did it. For years he deliberately, knowingly, systematically falsified the accounts, in order to make his railways seem to yield what-10 per cent., 8 per cent., 5 per cent. v—no, and it was the master stroke of a true financial genius, a dividend fluctuating only from 2 to 3 per cent. "The system which the accountants trace in the Company's books is not merely one of general deception of the shareholders and misrepresentation of the Company's affairs; it is not merely deliberate falsification of the accounts from year to year, so as to show to the share- holders and divide among them a revenue which was not in existence, and was known not to have been earned ; but it was, as shown in the report appended hereto, a careful and most ingenious fabrication of imaginary accounts, began and carried on from time to time, for the purpose of supporting the falsi- fied half-yearly- statements of revenue, and the general mis- representation of affairs."

The modus operandi of the process is well understood. Pay- ments chargeable to revenue were carried to capital, the "suspense aceount " was enormously enlarged, the secretary was told to keep the finance committee in ignorance—" a little knowledge,' wrote Mr. Hodgson to him, "is a dangerous

thing, and in some cases much knowledge would be much more dangerous "—and the accountant was, in at least ene eager ordered blankly "to make the accounts show a dividend of" 2f per cent." The dividend was the point, and as it was not earned by the work it was taken out of capital. A %MI variously estimated, but certainly not less than 300,000/., wa.s dis- tributed to the proprietary as earnings out of their own pro-. perty. That, it may be argued, may be deception, but it is scarcely fraud, as Mr. Hodgson may have believed it absolutely necessary for the interests of his conati- tuents to trick them into a belief that an indispensable- war was not ruining them ; but there is an effect - beyond the Company itself. Every man who purchased- shares on the faith of the dividend was done out of some portion of his money, as much done as if he had bought an unsound horse on a warranty of soundness. Every loan raised upon such shares, and there must have been thousands of loans, every distribution of property including them, every- estimate of assets by or for a holder of them, every banker's statement including them as securities, every bankrupt's dividend with them to sell, must have contained an unseen: fraud. In fact, in every commercial transaction into which.L any portion of this twenty-two millions of capital entered in- any way whatsoever, the seller unconsciously, but still really, plundered the buyer. Even this does not show the whele extent of the evil. The North British Railway entered into- engagements with other railways on the strength of their- imaginary dividend, and in every railway which was so induced to subscribe for their projects every transaction in shares involves pro tanto unfair gain to the seller, unfair loss to the buyer. The public, which knew, and can know, nothing of the interior of railwa3r3, bought and sold property valued at twenty-two millions, completed, that is, many scores of thousands of transactions, believing that a dividend was a kind of " Hall mark," and the wrong to them is as great as ifthe Hall mark had been forged. If the Committee's report

is correct it was forged. -

For this kind of deception, so widely ruinous, there can, we-- believe, be but one. preventive—the presence in the board- room of one absolutely' independent and even hostile mind:, armed with no power of interference, but with full 'right-- to demand every kind of information, and to explain to rill_ the shareholders every transaction which appears to him tri, transgress the letter of the law. No person appointed by the, directors can possibly assume this attitude, no official ap.. pointed by the shareholders could possibly retain it Owing: to the system of proxies, the shareholders in a railway company are, as long as affairs seem smooth, only the directors over again, the directors often only the nomi- nees of the chairman, who can refuse any one of thent his re-election. Auditors are utterly useless, having, first, a direct interest in conciliating directors, and secondly, an in- vincible belief that if the "accounts" are right all is well. If an account shows 50,000/. paid to Mr. Contractor, and Mr. Contractor has not sent in a receipt, then the auditors flame very properly into indignation, will not, unless very dexterously deceived indeed, sign the accounts. But if the account and the receipt tally, then the 50,000/. may have been paid for bottled moonshine, for aught the auditors care, or indeed know, as to the matter. No other person is even presumed to be- independent, and a mere outsider would be thwarted at every turn. By law any shareholder can see the interior accounts of his own property, but just let any shareholder try to exer- cise his right in the teeth of the chairman's opposition. He . will see a book or, two, will detect something or other, will- rise and declare that the books show only 30,000/. spent on grease, whereas the report shows 60,0001., and will be calmly told by the chairman, amidst universal tittering, that he should. learn arithmetic before he turns auditor, for he has confounded the main line with the general undertaking. "His excellent friend" smiles the chairman, "is most honourable and vigilant; but he is perhaps just a little silly, hasty, credulous, and given to suspieion." Shareholder sits down smashed, and very properly smashed, for he has undertaken the impossible ; and chairman, with a calmly resigned air, and a sense of duty well performed, goes on with his fictions. The independent mem- ber must be appointed by the State, with a position high enough to snub, instead of being snubbed, and the mind, to- speak broadly, of a high-caste ,ferret. Sir Benjamin. Hall„ for example, when he was not Lord Llanover and a Lord-Lieu- tenant, and careful whether Jones called himself Herbert or - no, would have been just the man for such, a post,—would have seen everything, known everything, abstained from interference,. but- made the life of any incompetent or tricky chairman a perpetual rburden to him If men like him are unattainable, any Mr,. Neverberni will do, any strong, narrow-minded, self- willed official, who thinks fraud "low," and would sit down on a hedgehog if that seemed to be his "duty to his depart- ment." It is useless •to say such a system would not work, for it does work in the Indian Railways, some seventy millions of capital being expended under that arrange- ment; and the India Companies getting very good directors indeed. Mr. Crawford, for example, is not a• man sup- posed to be unduly careless, of dignity or fond of re- sponsibility without power, but he works on very well indeed; under-the knowledge that a State officer can investigate at any moment the most, private books of the East India Railways Of course the " Great Railway Interest" will protest, for thatinterest represents everything except shareholders and the publie;.but a Reform Bill will rid us of a few, of those gentlemen, and if it does not, they have not yet succeeded either in buying or coercing the Pears. Let the Peers insist on an,Officinl Director, and non-official directors, mindful of coming projects, will vote according to their consoiences, instead of what they, are pleased to,eall, in the Lower House, their convictions,