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Watered Stock and Control of Telegraph Rates: Early Proposals for Regulating a Public Utility
Published online by Cambridge University Press: 11 May 2010
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- Summaries of Doctoral Dissertations
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- Copyright © The Economic History Association 1972
References
1 Phillips, Charles F. Jr, The Economics of Regulation: Theory and Practice in the Transportation and Public Utility Industries (Homewood, Illinois: Irwin, 1965).Google Scholar The first two parts of this book are especially relevant to the issue, i.e., pp. 1–440. Sharfman, I. L., The Interstate Commerce Commission: A Study in Administrative Law and Procedure (three volumes in four, New York: Commonwealth Fund, 1931–1936).Google Scholar The two largest parts of Sharfman's work, Vol. Ill, Parts A and B, are devoted almost exclusively to this issue. On p. 114 of III-A, Sharfman noted that “What is sought … is a rate base, as a means of regulating earnings, rather than value, as a mere reflection of earnings.”
2 Telegraph bills were introduced from 1866 through the remainder of the century. However, I shall deal only with those introduced immediately after the Civil War, that is from 1866 through 1868. Some of the later bills differed in detail from these early bills, but by and large the issues were clarified by these first bills.
3 I use the term “political economy” here to mean the relationship between the government and the economy.
4 Gabriel Kolko argued recently that railroad leaders had struggled for internal self-government for years, but having failed turned to the national government “to put its house in order.” He contended that railroad leaders’ fears of state legislatures forced them to turn to the national authority to assist them in accomplishing what they could not do themselves. Railroads and Regulation, 1877–1916 (Princeton: Princeton University Press, 1965), pp. 3–4.Google Scholar Whatever validity this argument may have, it has no relevance for the telegraph industry. Telegraph officials were able to achieve a high degree of self-control within their industry, as reflected by the success and rapidity of the consolidation movement.
5 This does not mean that Western Union dominated all telegraph enterprises. After the middle of 1866 Western Union was the only national telegraph company. Small, local companies continued to exist but they were dependent upon Western Union if they had to send telegrams out of their section, which frequently meant out of their town or county.
6 If one telegraph company charged exorbitant rates, it would be checked through the lower rates of another company.
7 For my understanding of the Jacksonian period I have relied on Taylor, George R., The Transportation Revolution: 1815–1860 (New York, Toronto: Harper and Row, 1951)Google Scholar; Meyers, Marvin, The Jacksonian Persuasion (Stanford: Stanford University Press, 1957)Google Scholar; Bruchey, Stuart, The Roots of American Economic Growth, 1607–1861 (New York and Evanston: Harper and Row, 1965)Google Scholar; Miller, Perry, The Life of the Mind in America: From the Revolution to the Civil War (New York: Harcourt, Brace and World, 1965)Google Scholar; Van Deusen, Glyndon G., The Jacksonian Era: 1828–1848 (New York: Harper and Row, 1959)Google Scholar; Hofstadter, Richard, The American Political Tradition and the Men Who Made It (New York: Knopf, 1948)Google Scholar; and Hurst, James W., Law and the Conditions of Freedom in the Nineteenth-Century United States (Madison: University of Wisconsin Press, 1956)Google Scholar; I found Meyers’ study on the Jacksonian Persuasion to be a special assistance.
8 Brown introduced his in February before final negotiations for the consolidation were complete. Sherman introduced his bill early in June.
9 Senator Sherman, for example, informed the Senate that Western Union had “nominally fifty millions capital,’ but only “ten or fifteen millions of property; the rest is accumulated profits or water.” Congressional Globe, 39th Congress, 1st Session, p. 3429 (June 27, 1866).
10 The possibility of regulating Western Union through employment of the Constitution's commerce clause was never broached. Whether it was Brown, Sherman, Washburne or Hubbard supporting regulation, none of them seemed to think it was employable, even though they all agreed that Western Union had become a national institution, beyond control of New York state.
11 The plan was modeled on the mail system where contracts were let put for delivery of mail between post offices.
12 The alternatives they proposed were simply hopeless. Meyers contends that Jacksonian views of political economy were reactionary even for the 1830's and ‘40s, to say nothing of trying to use them in the post-war period. Jacksonian Persuasion, pp. 6–7.
13 Each of these telegraph “reformers” uncritically imputed distorted and historically incorrect meanings and connotations to past capitalization practices. Telegraph entrepreneurs had not watered their stock as an immoral conspiracy to bilk the public. Stock watering had been a distasteful, necessary expedient undertaken only after the national government had refused to provide capital for telegraph development. After governmental refusal to assist, private entrepreneurs initially found it difficult to secure private investments.
To overcome investors’ reluctance Magnetic Telegraph Company, chartered in 1845, included a provision in its Articles providing that “for fifty dollars paid in by subscribers … a certificate for one share of one hundred dollars’ would be issued. Shares would thus be worth twice the amount paid for them. The company's subscription goal for building a line between New York and Philadelphia was fifteen thousand dollars, meaning an actual stock issue worth thirty thousand. The patent holders would receive an additional stock issue of thirty thousand. “In other words,” the historian of telegraph development concluded, “the value of the line was estimated at four times its cost, so that an actual outlay of $15,000 was to be represented by a capitalization of $60,000.” Thompson, Robert L., Wiring a Continent: The History of the Telegraph Industry in the United States, 1832–1866 (Princeton: Princeton University Press, 1947), p. 42.Google Scholar Thompson has appended the Articles of Association of the Magnetic Telegraph Company to his work, pp. 447–51.
Telegraph entrepreneurs in 1845 knew over-capitalization was a necessity for mobilizing capital. Economically the government experimental line between Baltimore and Washington had been a fiasco. From April to October 1845 the lines' operating costs were nearly four thousand dollars; revenue produced by its operation was slightly over four hundred. Consequently, the government withdrew its support from the line. U. S. Congress, Senate, Report of the Postmaster General, December 1, 1845, Senate Document 1, 29th Congress, 1st Session, p. 860. The revulsion against government involvement in internal improvement projects following the panic of the 1830's also affected the telegraph industry. Goodrich, Carter, “The Revulsion Against Internal Improvements,” The Journal of Economic History, X, 2 (Nov., 1950), 145–69.CrossRefGoogle Scholar Private entrepreneurs were thus confronted with a glaring failure; over-capitalization would overcome that failure, they rightly reasoned. Investors might be enticed with the promise that greater risks could mean potentially greater returns on their investment. Thus unable to secure continued government support, they accepted the stockwatering expedient.
Subsequent telegraphers accepted similar funding methods. To consolidate and eliminate unwanted competition, they were forced to purchase patent rights and competing lines, all increasing capitalization costs. In the final 1866 consolidations Western Union, in merging with American Telegraph, issued over eleven million dollars of stock in exchange for approximately four million of American stock. Thompson, Wiring a Continent …, pp. 259–88, 424.
Telegraph managers accepted these great capital expenditures assuming that patent ownership and expanded lines would increase earning power, and consequently their company s value. And, although the cost might be high, consolidation eliminated the conditions of ugly chance and violent fluctuations which had characterized the industry its first two decades. While the industry developed, these funding methods were accepted without question. However, once it reached maturity, as it had by 1866, what had been necessities for entrepreneurs now took on an illegitimate aura in reformers’ eyes. Patent rights had either expired or were expiring as Brown pointed out in the Senate. Now that these rights and the need to buy competing lines were things of the past it was easy to forget or discount past problems. Congressional Globe, 39th Congress, 1st Session, p. 980 (February 23, 1866).
14 In 1910 Congress amended the 1887 Interstate Commerce Act with the Mann-Elkins legislation. This amendment brought telegraphing under the authority of the Interstate Commerce Commission. The initiative for rate-setting remained with telegraph companies but rates, the act stipulated, had to be reasonable. The Commission had authority to review rates and change them if it thought such action necessary.