Post Office Group

30 St. James’s Square
London SWIY 4PY
United Kingdom
(071) 490 2888

State-Owned Company
Incorporated: 1969
Employees: 207,438
Sales: £4.72 billion (US$9.11 billion)

The Post Office, the largest carrier of mail and parcels in the United Kingdom, is organized as a group with three separate business divisions. Royal Mail, with its monopoly of the letter service, is profitable; Parcelforce, which competes with private firms in the delivery of parcels, makes a loss; and Post Office Counters makes a modest profit both from selling the group’s own services to the public and from acting as an agent to the government in paying state pensions, licensing motor vehicles, and so on. For most of its existence, the Post Office was a civil service department headed by a politician, the Postmaster General, but since 1969 it has been a public corporation on the lines of other nationalized industries such as British Railways.

The Post Office developed from the needs of the crown to carry messages and dispatches. Although the service was intended for the use of the crown, it was unofficially used by private individuals, and in 1635 the situation was clarified by the creation of a public service under the control of Thomas Witherings. Witherings lost his monopoly in 1637, however, and a period of confusion followed as rivals vied for the profitable privilege. In 1653 the crown decided to sell the postal monopoly to the highest bidder, who could then derive profit from the various fees and perquisites within a framework of rates laid down by the government. The practice of delegating the service to a contractor for a fixed sum under government control was continued for some time after the Restoration; the rates were fixed by an act of 1660, and the contractor paid £21,500. Charles II retained part of the income to pay pensions to his mistresses, and assigned the remainder to his brother, the Duke of York. When the latter succeeded Charles as James II in 1685, the revenue of the Post Office reverted to the crown, and it remained an important element in royal finances until 1760 when George III surrendered it to the government as part of his financial settlement with Parliament.

The Post Office at first only provided a service along the main routes out of London, and it was left to the private initiative of a merchant, William Dockwra, to establish a penny post within the metropolis in 1680. This threatened the monopoly of the Post Office, and in 1682 the courts ruled against Dockwra. Shortly afterwards, the Post Office itself created a postal service for London at a rate of one penny (1d) which was extended to the suburbs in 1794 for the payment of a further 1d. London was for a long time the only city with an internal postal service, and it was not until 1765 that penny posts were permitted elsewhere in Britain. During the 18th century, the importance of the main post roads which radiated from London was complemented by a growing traffic within the provinces. The traffic was difficult to control from London, and much of the revenue was lost. In 1720, the management of this business was given to Ralph Allen, the Postmaster of Bath and the owner of the quarries used to supply stone to the growing city. He acted as contractor for postal services between provincial centers until his death in 1764, and was largely responsible for improving the national coverage of the mail service.

Further improvements were made from 1784 by John Palmer, who owned theaters in Bath and Bristol. Allen relied upon horse posts, and Palmer argued that a better service could be supplied by fast mail coaches on the improved turnpike roads. The coaches were owned by a firm in London which was paid a mileage rate by both the Post Office and the operator; the operator, who supplied horses and drivers, was paid a mileage rate by the Post Office, took the revenue from passengers, and was exempt from tolls on the roads. The new system was introduced between London and Bristol in 1784, and in 1786 Palmer was appointed Surveyor and Comptroller General of the Mails at a salary of £1,500 with a commission of 21/2% of any increase in the net revenue. The mail services had been improved, yet their administration was complex. There were separate offices for inland and London district letters; there was a host of private interests within the service, with individuals receiving salaries and taking profits from office; and the revenue was charged with a large number of pensions.

The government saw the Post Office as a source of revenue to finance the wars with France during the 18th century, and William Pitt had welcomed Palmer’s improvement to the service as a justification for raising postage rates. In 1711 rates were fixed at 3d for a single sheet up to 80 miles, and 4d for longer distances; by 1815, the rates were 4d for distances up to 15 miles, rising to 14d for up to 500 miles. In London, the 1d rate was replaced by a 2d rate in 1801. These higher rates proved counterproductive. The net revenue of the Post Office increased from about £200,000 in 1784 to £1.6 million in 1815, and then stagnated; it was only £1.5 million in 1835. There was a widespread evasion of postage. The privilege of Members of Parliament to frank mail for free transmission was widely abused, and a large number of letters ignored the Post Office monopoly. An expanding network of stage coaches and common carriers handled “contraband” mail, which was perhaps greater in volume than the mail carried by the Post Office.

In the 1830s the Post Office faced demands for reform, associated in particular with Rowland Hill’s pamphlet Post Office Reform of 1837 which argued for a reduction in the postage rate to 1d, regardless of distance. Hill was reflecting a general sentiment. There was already a select committee considering Post Office matters, and Henry Parnell had commented in On Financial Reform in 1830 that “when a tax has been carried to an excessively high point, the reducing of it is not necessarily followed by a reduction of revenue.” The experience of cuts in duties on tea, coffee, and sugar had suggested that demand increased, and the revenue was not affected. Hill believed that high rates of postage were similarly reducing demand for the mail services, and that lower rates would lead to an increase in traffic by five and a quarter times. He argued that the cost of conveying a letter was minimal, so that the postage rate could be the same regardless of distance. Most of the cost arose from administrative charges, which resulted from the need to inspect each letter to determine the distance it was traveling and the number of sheets of paper it contained, and to calculate the charge. The payment of the postage was usually made by the recipient, which meant that the delivery of letters was a time-consuming business. Costs were further inflated because there were separate offices and staffs for inland letters, foreign letters, and the London district service. Hill proposed a sweeping change in administration in order to reduce costs: letters should be prepaid by the use of postage stamps, and the offices amalgamated. Greater economy of administration, and an increased volume of mail, would allow the net revenue of the Post Office to be maintained.

Hill’s program had the backing of a number of groups, including City merchants who would benefit from cheaper postage, and the radical publisher Charles Knight who saw the usefulness of the Post Office in creating a wider market for his literature. Knight published Hill’s pamphlet, and they were both involved in the Society for the Diffusion of Useful Knowledge. Hill was on the fringes of the utilitarian reform movement, and his allies mounted an impressive campaign which succeeded in 1839 when an act was passed to introduce a penny post throughout the country in 1840. Many remained skeptical of Hill’s logic. They wondered whether the price elasticity of letter writing was as great as Hill assumed, and argued that distance was the key to the value of the service to the consumer. Above all, the fiscal situation around 1840 made a reduction in postage rates problematic. Income tax had been abolished at the end of the Napoleonic wars, and the highly regressive tax regime that followed was threatening social unrest. There was a fear that a reduction in postage rates would be at the expense of other tax reductions with greater popular support. The result was much as the skeptics warned. Although the number of letters did rise from 75.9 million in 1839 to 168.8 million in 1840, the net revenue fell from £1.63 million to £500,789. The government’s budget slid into deficit, which contributed to the fall of the Whig administration in 1841.

Hill was, like Allen and Palmer, an outsider who forced the Post Office to reconsider its entrenched attitudes, and the circumstances of his appointment to oversee the new penny post did not help him to gain acceptance. He was given a two-year appointment at the Treasury, and had to work with the Secretary of the Post Office, W.L. Maberly, who felt that Hill’s scheme was misconceived. The budget crisis weakened Hill’s position at the Treasury, and in 1842 he left the service of the government. It was only in 1846, with the return of the Whigs to power, that he obtained a position in the Post Office, as Secretary to the Postmaster General. He started to enforce strict controls over costs and in 1854 he at last obtained the position he wanted: Secretary to the Post Office as the sole permanent head of its administration. The introduction of income tax had solved the budget crisis, and the net revenue of the Post Office was increasing; Hill was transformed into a national benefactor. Until his retirement in 1864 he ran the Post Office in a high-handed and autocratic manner, with scant regard for the fact that he was in theory answerable to the Postmaster General who was the political head of the department.

By the early 1860s Hill was becoming an unpopular figure within the Post Office, increasingly reliant upon his brother Frederic as his only dependable ally. The need to reduce expenditure obsessed him, which led him into conflict with railway companies, shipowners, and the work force. When Hill argued for a reduction of the postage rate to one penny, he was adamant that uniformity of charge be justified by uniformity of cost; he argued that the actual cost of carriage of letters was so insignificant that it need not influence the charge. However, this argument was applied only to the main distribution between towns, and he felt that delivery to other areas should be paid for by the local authority. Although Hill abandoned this distinction between the primary and secondary distribution in order to secure the introduction of penny post, he firmly opposed any further concession. He was deeply hostile to any cross-subsidization between services, and was, indeed, opposed to the postal monopoly for he felt that the Post Office should be competitive with any rival. Increasingly, his colleagues in the Post Office felt that he was jeopardizing the operation of the mail services in his blind pursuit of economy. His younger colleagues such as John Tilley and Frank Scuda-more wished to move into new directions. To them, the Post Office was more of a social service, and they were willing to utilize the profit from the letter service in order to cover loss-making ventures. In the later 19th century, Hill’s emphasis upon strict economy was overturned.

The penny post was gradually extended to wider areas, with the introduction of an imperial penny post in 1898 and its extension to the United States in 1908. These services made a loss, and the principle of uniformity could not be justified by cost. Hill had been willing to accept the introduction of a parcel post operated in conjunction with the railway companies, and this was finally introduced in 1883. What would have horrified him was that the service made a loss. The railway companies received 55% of the postage on rail-borne items, which did not leave sufficient revenue for the Post Office to cover its costs. There was no monopoly on the parcel service and the Post Office insisted on charging a uniform national rate, with the result that competitors were able to cream off the profitable local traffic.

The Post Office also moved into financial services. Money orders had been provided as a private venture by employees of the Post Office in 1792, with official sanction, as a means to remove the need to send bank notes through the post. The money order business was taken over by the Post Office in 1838, and made a loss. The problem was the low commission on smaller orders, and Hill’s solution was to develop the more profitable larger orders with a higher commission. Here he ran foul of the Treasury, which was wary of competing with commercial banks, and Scudamore, who argued that the Post Office had a moral duty to assist workers in transmitting small sums. In 1881 the solution was the introduction of postal orders, a cheaper means of sending small sums. In 1861 the financial services were again extended to provide the Post Office Savings Bank. Hill was skeptical, but the opportunity was seized by Scudamore. The supporters of the POSB hoped that it would encourage thrift amongst the working classes, while at the same time solving two pressing political problems. The existing Trustee Savings Banks which were provided by the middle class imposed a financial drain on the state, and were outside the scope of government regulation; Gladstone hoped that they would gradually be replaced by a government system of banks with a national coverage. He also hoped that the deposits of small savers in the Post Office Savings Bank (POSB) would be directed to the reduction of the national debt. Gladstone believed that the POSB would encourage both private morality through thrift and self-help, and public morality by reducing the burden of the state on enterprise. Unfortunately, these expectations were not realized. Most depositors were not working class, and in the late 19th century the Bank started to make a loss. The rate paid to depositors was fixed at 2½%, and the POSB was obliged to purchase government stock which paid a lower rate at the end of the century. There was some discussion of extending the Post Office’s interest in remittance services and savings banks into a giro bank such as that developed in Austria. However, it was felt that the state should not enter into competition with the commercial banks, and the introduction of a giro bank was delayed until 1968. These financial services have subsequently been removed from the Post Office.

The financial services were important additions to the services of the Post Office; even more significant was the movement into telecommunications. The nationalization of the telegraph system was approved by Parliament in 1868, and the private companies were transferred to the Post Office in 1870 when a program of rapid expansion was started under Scudamore. His eagerness to expand the public sector led him into serious error. He diverted funds from the POSB for use in the telegraph service, in order to circumvent the control of Parliament and the Treasury. There was some virtue in his argument that he could not have undertaken the task if he had waited for approval, and many other Post Office officials were to be frustrated by the obfuscations of the Treasury. Unfortunately, Scudamore had misjudged the economics of the telegraph service, and the telegraph service was overcapitalized and unprofitable. The Post Office was given a monopoly of the telegraph service, and in 1879 the courts ruled that this also covered telephones. The Postmaster General consequently had control over the new technology, and licenses for 31 years expiring in 1911 were awarded to the telephone companies in return for a royalty of 10% of gross receipts. The Post Office had the right to purchase at fixed intervals, and in 1892 decided to purchase the trunk lines and leave the local exchanges to the private companies. In 1898 this policy of cooperation between private and public enterprise was abandoned, and the Post Office decided to move into direct competition or to grant licenses to local authorities in order to force the private company into selling its plant on reasonable terms when the licenses expired. In 1912 the Post Office acquired the telephone system whose development had been distorted and frustrated by the previous 30 years of policy. There was little improvement after nationalization. Telecommunications were the poor relations of the Post Office. In 1930-1931, for example, the postal services had a surplus of £9.85 million, whereas the telegraphs had a deficit of £1.01 million which was only partly covered by a surplus of £340,000 on telephones.

By 1914 the Post Office had become a huge organization and was facing problems. It was conservative, a creature of habit and routine; its ethos was largely that of a mail service, with a lack of sympathy for telephones. It was the largest single employer in the country, and the negotiations with unions, which were recognized in 1906, took up ever more time and energy. The administration was highly centralized in London, with a lack of initiative and a stultifying grip of routine. Not surprisingly, it was suggested in 1928 by the Lever Committee—appointed by the Postmaster General “to inquire into the Inland Telegraph Service”—that telegraphs and telephones should be removed from the Post Office and civil service traditions in order to permit more active development, but no action was taken. A large part of the effort of the administration was devoted to persuading the Treasury of the justice of any expenditure, however minor. The entire surplus was handed over to the Exchequer, which made it difficult to formulate an investment program, especially for telephones. Clement Attlee in 1931 drew a conclusion from his experience as Postmaster General in the Labour government: Treasury control “is wholly incompatible with the flexibility necessary in the conduct of a business concern,” and he argued that “long ago, a bargain should have been made definitely limiting the amount of the contribution to be made to the State by the Post Office.” The 1932 Bridgeman report, the outcome of an enquiry on the Post Office under the chairmanship of Lord Bridgeman, accepted the force of these criticisms, and in 1933 it was agreed that the Post Office should pay a fixed contribution of £10.75 million to the Exchequer, with a degree of autonomy in decision making. The triumph of this “self-contained finance” was short-lived, for it was suspended during World War II and was only reintroduced in 1956. The administrative structure of the Post Office also underwent considerable revision, with an attempt to create a regional structure to break down the excessive over-centralization of power. The revision was not complete until 1940, when the Post Office was overtaken by other issues.

After World War II the postal services barely broke even, and there was a serious crisis for this labor-intensive business during an era of full employment and wage inflation. By the late 1960s there was a deficit on the postal services and attention increasingly turned to attempts to reduce labor costs. Traditionally, the Post Office had been able to cover its peaks in sorting and delivery by the employment of part-timers who did not receive the full benefits of established civil servants. However, the union had secured the abolition of casual labor, and the solution was to spread the workload over the day. In the 1950s and 1960s the Post Office moved towards the mechanization of sorting in a few large offices, which required the introduction of post codes in 1965 and a two-tier service in 1968 which allowed second-class mail to be handled during the slack period of the day. In many ways the program was mishandled. Public acceptance of postal codes was poor, and the relations with the unions broke down. It seemed to many that the Post Office had lost the will to manage, and was trapped into a circle of consultation with the unions which had led to a dead-end. The unions were not willing to cooperate in improving productivity, with the result that wages lagged, and labor relations deteriorated with a national postal strike in 1971. There was a vicious circle of increasing postage rates, declining traffic, and deteriorating productivity, which was at last addressed in the 1980s by more aggressive marketing to increase mail volumes and to improve productivity by tackling entrenched work practices. The result was a considerable improvement in the performance of the Post Office in the 1980s. It proved possible to produce a surplus and to finance a large investment program.

Meanwhile the reforms of the 1930s were extended. In 1960 Post Office finances were treated in a similar way to a nationalized industry, with the creation of a Post Office Fund into which all revenue was paid and from which expenditure was met. The conclusion was drawn in 1966, when the Labor government decided to shift the Post Office from the civil service and to make it a public corporation like other nationalized industries. In 1981 the recommendation of the Lever Committee was finally implemented, when the Post Office was split into two separate corporations with the formation of British Telecommunications. The result was closer to the ideal laid down by Rowland Hill: an organization that was concerned about profit and productivity, concentrating upon the mail services and competing with its rivals in a more aggressive way, free of direct political and Treasury control. The mail monopoly, which Hill felt was an unnecessary interference with free competition, still remains; whether it will continue is one of the crucial issues facing the Post Office in the 1990s.