Although the arrangement was called “municipal ownership” de jure, in essence it was little different than any other franchise relationship. For example, the local cable company or electric utility is typically a private corporation that operates under a franchise. Often the franchise has a time limit and must be renewed. If the city does not renew the franchise, all of the “property” of the franchisee reverts to the city, the cable lines, etc.

The IRT operated under a nearly identical agreement, except that its “property” was said to be the city’s up-front and the city provided the initial financing by issuing bonds. The city also helped secure rights-of-way, which cities routinely do for cable and electric companies. The lease-cum-franchise agreement of the IRT had a 50-year term, similar to a regular franchise agreement. (Note that once a private franchise agreement is reached, companies find it relatively easy to raise bonds or other financing. In this case, the political risk of operating a subway company given the public’s antipathy towards this type of company would have made raising such money nearly impossible. I suspect that is why the city of New York ultimately provided the financing for the system and emphasized that it was “municipally owned” in their communications with the public.)

As for who bore the risk, the IRT’s lease rate was set to equal the interest repayments, plus a 1% margin (according to the book you cite, p. 19). All or most of the profits or losses after repaying the bonds was borne by IRT’s investors.

At this time there was lots of public hostility towards streetcar companies and by implication their successor subway companies. My guess is that this “municipal ownership” veneer was developed to make the subway politically palatable and, ultimately, financially viable.

Interestingly, that hostility towards the private character of the project manifested itself when the city refused to allow the IRT and BMT companies to raise their nickel fare. That fare rate had been contractually established prior to the massive World War I inflation. The city’s insistence on sticking to that fare was largely responsible (with an assist from the Great Depression) for driving both companies into bankruptcy, which was a political goal of Mayor LaGuardia. As evidence of that goal, the city also constructed itself the “Independent” subway line in the 1930s to compete with the privately operated IRT and BMT lines, and put further pressure on them.

On a side note, I would argue (as a subway rider) that the IRT line is the fastest and most efficient line in the city. The Independent or “IND” line as it is known today is not as nice. But I am willing to arm-wrestle a New Yorker on that one!

I didn’t even bother to check Wikipedia about this, but it wouldn’t surprise me if some machine politics ensured that this was a public enterprise.

The original New York City subway system was built *and* operated by two private companies, the Interborough Rapid Transit Company (IRT) and the Brooklyn-Manhattan Transit Corporation (BMT, originally the Brooklyn Rapid Transit Company).

Here is what Wikipedia says about what happened to the BMT:

“The BMT was pressed by the City administration of Mayor Fiorello H. La Guardia to sell its operations to the City, which wanted to have all subway and elevated lines municipally owned and operated. The City had [a] powerful incentive to coerce the sale:

* [T]he BMT was forced by provisions of the Dual Contracts to charge no more than a five-cent fare, an amount set in 1913, before the inflation of World War I.”

In other words, the city used price controls — keeping the nickel fare fixed despite decades of inflation — to force the BMT into bankruptcy and then take it over in 1940. Source: (Wikipedia article:
http://en.wikipedia.org/wiki/Brooklyn-Manhattan_Transit_Corporation)

The IRT was similarly taken over in 1940 by the city.

The subways were financed by bonds raised by the city of New York in a similar manner to how municipalities today finance private projects with municipal bonds. However, because city transportation was regularly privately financed in those days, as you describe, in all likelihood some form of subway system (perhaps not as large) could have obtained private financing.

Interestingly, shortly after driving the private subway companies into bankruptcy by keeping the fare fixed at a nickel, the city raised the subway fares to a dime. The price control had achieved its purpose.

(Admittedly, my source is Wikipedia, but this fits in with my own knowledge of the subway system.)