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The Business of America


June 2024
6min read

It meant that the government should run the telephone system. And there’s a reason the word is forgotten.

The appearance of a new word in the language often signals to a historian that something was up at that moment and the public consciousness had changed. For instance, although scholars trace the birth of the modern world economy all the way back to the middle of the eighteenth century, when machinery and the factory system began to transform the British textile industry, it was only in 1848, as railroads, the telegraph, and—in Europe—political upheaval were sweeping through the daily lives of the people, that the phrase Industrial Revolution was coined.

Recently, however, I ran across a word that has disappeared from the English language, and its vanishment is eloquent, if silent, testimony to a fundamental change in the American political debate over economic policy. The word is postalization . Today, even without anyone’s knowing exactly what it means, it probably sends an involuntary shudder down the spine of every believer in free markets. In the second decade of the twentieth century, however, to a lot of people it meant “progress.”

Recently Congress voted sweeping changes in the federal law governing communications, designed to ensure maximum competition among local phone companies, long-distance carriers, cable-television franchises, and others. The long-term trend in this direction has already borne much fruit. In 1980 about 200 million overseas phone calls originated in the United States. Only twelve years later, eight years after unbridled competition in long distance commenced and prices began to drop sharply, the number of overseas calls soared to 2.7 billion.

But in the World War I era the debate was not over how to foster competition in the communications industry, then dominated by a few giant companies, notably AT&T and Western Union. Rather it was whether or not to bring all telecommunications under the control of the Post Office and thus extinguish what little competition there was. For one brief, inglorious year it actually came to pass.

Today the telephone industry is in the process of reinventing itself. In the late nineteenth century, however, it had a much harder problem: to invent itself in the first place. One man, Theodore N. Vail, did such a good job of creating a continentwide phone system that it lasted in the form he conceived for a hundred years, avoiding postalization by the sheer quality of the service it offered.

In 1877, the year after Alexander Graham Bell had produced a working model of the telephone, he and several partners, notably Gardiner Greene Hubbard, who became his father-in-law that year, formed the Bell Telephone Company, incorporated in Massachusetts. In 1878 Hubbard hired Vail as general manager. Vail, who had been born in Ohio in 1845 of Quaker parents, had gone to work for the telegraph company and then moved to the railway mail service, where he soon showed his talent for organization by radically improving its operations.

He had been brought to Washington in 1873, when he was only twenty-eight, as assistant general superintendent of railway mail, and three years later he became general superintendent. Hubbard then hired him to run the day-to-day operations at Bell.

From the beginning telephony proved to be a very capital-intensive business, and in 1878 Bell and his partners sold a controlling interest in their enterprise to a group of Boston financiers in order to raise additional money. Because of the limited capital, Vail at first licensed numerous local exchanges, charging them twenty dollars a year per telephone, which allowed a rapid expansion of service at minimum cost to the company. As capital became available, however, the company also began taking an ownership interest and organizing the exchanges into larger, more efficient entities that were regional in scope.

In 1881 Vail purchased Western Electric to manufacture telephone equipment for the company and its subsidiaries. Finally, in 1885, he organized the American Telephone and Telegraph Company, as a subsidiary of Bell, to tie the various operating companies together with long-distance service. (In 1899, in an adroit move to escape the restrictive corporate law of Massachusetts, Bell Telephone became a subsidiary of AT&T, which was incorporated in New York.)

The first long-distance service, between Boston and New York, was initiated in 1884. The following year saw lines installed between New York and Philadelphia. By 1892 AT&T long distance reached as far as Chicago.

By this time the Bell system, with its control of the largest operating companies and its spreading long-distance system, was dominant in the nascent American telephone industry. But while it was increasingly a monopoly, its ever-greater need for capital to expand the system (the number of telephones in operation in the United States nearly quintupled in the 1880s) forced it to be relatively efficient in order both to minimize the capital needed and to be able to sell stocks and bonds.

The Boston financiers who controlled the company, however, were primarily interested in immediate profit, not long-term growth. Vail, a true visionary, wanted to plow profits back into expanding and improving the system. In protest he resigned as president of Bell in 1887.

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.

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