Postalization

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By the turn of the century, AT&T had assets of $120 million, while all independent phone companies together had assets of only $55 million. But the independents were expanding fast as the telephone began changing from a luxury to a necessity. To counter the new competition, AT&T was forced to slash rates and become much more customer-friendly. Still, it often acted like a monopoly in other ways. It refused to allow independent companies to connect with it, so these companies could not offer long-distance service. As a result some cities had two different phone companies, one Bell, one independent. Increasingly the Bell system used its monopoly of long distance as a lever to force the takeover of these independents.

But this rapid expansion stretched the company’s finances and forced it to issue ever-increasing quantities of stocks and bonds. J. P. Morgan became a major buyer of these securities, and by 1907 he had wrested control of the company from the Boston financiers. Morgan, a visionary like Vail, immediately asked Vail to return to the presidency that he had resigned twenty years earlier.

AT&T had more than three million phones in service by this time, but the company finances were in terrible shape, as was its public image—thanks to often poor service and a still highhanded attitude. Staff morale was also very low. Vail set to work correcting these problems by creating a nationwide communication system that would be second to none.

He raised additional capital by offering securities at a discount to stockholders, a tactic the company would use over and over again as the Bell system expanded by a factor of thirty in the ensuing decades. He greatly increased spending on research and development, pointing the way to the establishment of Bell Laboratories in 1925. He required all employees to be polite, something that Americans who have never had to deal with a government-owned phone company tend to take for granted.

He also set out, with Morgan’s help, to control all telecommunications in the United States, buying 30 percent of Western Union as well as continuing to buy up independent phone companies. He often made use of Morgan’s influence on Wall Street to squeeze their credit until they came to terms.

But antimonopoly pressure, especially after the Wilson administration came to office, forced Vail to retreat. In 1913, after Morgan’s death, he sold Western Union and, for the first time, allowed the independent phone companies to connect with AT&T long-distance facilities.

Despite the changes Vail initiated at AT&T and its continuing technological improvement, antimonopoly pressure continued. And in the peculiar tenor of the time, it was increasingly believed that the private quasi-monopoly enjoyed by AT&T should be converted into a complete public one, run by the Post Office. In the Wilson cabinet the leading advocate of this idea, not surprisingly, was Albert Sidney Burleson, the Postmaster General. He began to lobby Congress to authorize a takeover.

Several liberal congressmen took up the cry. Notable among them was David J. Lewis of Maryland, who formally called for the “postalization of telephones and telegraphs.” Naturally this caused the prices of AT&T securities to tumble, but Vail, in his annual report for 1913, advised his stockholders to “rest quietly.” Vail admitted that AT&T was effectively a monopoly, but he also pointed out, with a logic the Left has never been able to grasp, that “all monopolies should be regulated. Government ownership would be an unregulated monopoly.”

A government takeover was not a serious possibility until the country’s entrance into World War I changed everything. The railroads were taken over temporarily in December 1917, and congressional hearings were held in July 1918 to consider a similar takeover of communications. Postmaster General Burleson was heard at length; AT&T was not invited to testify. A joint resolution passed easily, and Wilson quickly took possession of “each and every telegraph system, and every part thereof, within the jurisdiction of the United States, including all equipment thereof and appurtenances thereto.”

As a practical matter the Post Office in effect hired AT&T to run its old business. But while AT&T had had to ask to change rates, the Post Office could simply do so. It immediately did, and sharply upward, despite the fact that one of the primary goals of government control was supposed to have been lower rates. In addition to higher rates, the government inaugurated a service-connection fee.

Public support for a permanent takeover evaporated with the increased rates and the end of the war. AT&T (and other telecommunications companies) were returned to their owners only slightly more than a year after the takeover. Consequently, the United States continued to enjoy the finest, cheapest phone service in the world.