The British railway system had been built up by more than a hundred railway companies, large and small, and often, particularly locally, in competition with each other. The parallel railways of the East Midlands and the rivalry between the South Eastern Railway and the London, Brighton and South Coast Railway at Hastings were two examples of such local competition.
During World War I the railways were under state control, which continued until 1921. Complete nationalisation had been considered, and the 1921 Act is sometimes considered as a precursor to that, but the concept was rejected; nationalisation was subsequently carried out after World War II, under the Transport Act 1947.
The form of the Act was developed by former North Eastern Railway executive, the Minister of Transport, Eric Campbell Geddes. Geddes favoured privately-owned regional monopolies through amalgamations, and suggested increased worker participation from pre-war levels. Geddes viewed the pre-war competition as wasteful, but was opposed to nationalisation on the grounds that it led to poor management, as well as a mutually corrupting influence between railway and political interests. In his 9 March 1920 Cabinet paper "Future Transport Policy", he proposed five English groups (Southern, Western, North Western, Eastern and North Eastern), a London passenger group, and separate single groupings for Scotland and Ireland.
Geddes' proposals became the 1920 white paper "Outline of Proposals as to the Future Organisation of Transport Undertakings in Great Britain and their Relation to the State" (Cmd. 787). This suggested the formation of six or seven regional companies; additionally it suggested worker participation on the board of directors of the company. The white paper was opposed by the Railway Companies' Association (RCA) and MPs representing railway companies' interests. The move to greater worker participation was strongly opposed by the RCA, but supported by the Labour Party. Worker-directors were not included in the final act, being replaced by agreed negotiating mechanisms.
The regional groups initially proposed were five in England (southern, western, north-western, eastern, and north-eastern), and a Scottish regional group. Railways serving London were intended to form a separate regional group, but this amalgamation was delayed and took place in 1933. (see London Passenger Transport Act 1933).
In 1921 the white paper "Memorandum on Railways Bill" (Cmd. 1292), suggested four English regional groups and two Scottish groups.
Scottish railway companies wished to be incorporated into British groupings, and the RCA proposed five British regional monopolies including the Scottish businesses.
After consideration of the Railways Bill it was decided that the Scottish companies, originally destined to be a separate group, would be included with the Midland/North Western and Eastern groups respectively, in order that the three main Anglo-Scottish trunk routes should each be owned by one company for its full length: the West Coast Main Line and the Midland Main Line by the former group, and the East Coast Main Line by the latter.