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The Telephone Problem and the Road to Telephone Regulation in the United States, 1876–1917

Published online by Cambridge University Press:  14 October 2011

Jeffrey E. Cohen
Jeffrey E. Cohen
Affiliation:
University of Illinois-Urbana
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Extract

Between 1876 and 1917, government philosophy toward telephone regulation began moving away from laissez-faire and toward some kind of involvement in economic affairs. However, while some early studies of regulation suggest business hostility to that policy, AT&T actively sought regulation, jogging government and the public in that direction. But this study is not just a restatement of the interest-group-capture theory, as offered by such economists as Stigler or historians as Kolko. Regulation resulted from the convergence of interests of many affected players, including residential and business telephone subscribers, the independent telephone companies that competed with AT&T, and the state and federal governments, as well as AT&T. I employ a multiple interest theory to account for telephone regulation, but unlike other studies using such a framework, I suggest that government is an independent actor with impact on the final policy outcome, and not merely an arena where private interests battle for control over policy outcomes, as is so common among other multiple interest studies of regulation.

Type
Articles
Information
Journal of Policy History , Volume 3 , Issue 1 , January 1991 , pp. 42 - 69
Copyright
Copyright © The Pennsylvania State University, University Park, PA. 1991

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References

Notes

1. Stigler, George J., “The Theory of Economic Regulation,” Bell Journal of Economics and Management Science 2 (1970):3–21CrossRefGoogle Scholar; Kolko, Gabriel, Railroads and Regulation, 1877–1916 (Princeton, 1965)CrossRefGoogle Scholar, and idem, The Triumph of Conservatism (Glencoe, IL, 1965).Google Scholar

2. For instance, see Thomas W. Gilligan, William J. Marshall, and Barry R. Weingast, “A Reconsideration of the Railroad Problem: The Economics and Politics of the Interstate Commerce Act,” Working Papers in Political Science P-86–4, the Hoover Institution and Stanford University, and Pratt, Joseph and Galambos, Louis, The Rise of the Corporate Commonwealth (New York, 1988).Google Scholar

3. Alan Stone provides a good discussion of the role of changing conceptions of the public interest with regard to telecommunications in Wrong Number: The Breakup of AT&T (New York, 1989).Google Scholar

4. A good discussion of the trade-offs between social efficiency and equity, discussed in terms of competition versus universal service, in the postdivestiture period can be found in Ithiel de Sola Pool, “Competition and Universal Service: Can We Get There from Here?” in Shooshan, Harry M. III, ed., Disconnecting Bell: The Impact of the AT&T Divestiture (New York, 1984), 112–31.Google Scholar

5. There are a number of major histories of the period, all relying on roughly the same time scheme. The seminal work is Stehman, Warren J., The Financial History of the American Telephone and Telegraph Company (Boston, 1925)Google Scholar, who first offered the tripartite period breakdown. Others employing it or variants of it include Danielian, N. R., AT&T: The Story of Industrial Conquest (New York, 1939)Google Scholar, which is based heavily on the FCC; idem, Proposed Report: Telephone Investigation (Washington, D.C., 1938)Google Scholar; Coon, Horace, American Tel and Tel: The Story of a Great Monopoly (New York and Toronto, 1939; rpt. Freeport, N.Y., 1971)Google Scholar; Brooks, John, Telephone: The First Hundred Years (New York, 1976)Google Scholar; and Garnet, Robert W., The Telephone Enterprise: The Evolution of the Bell System's Horizontal Structure, 1876–1909 (Baltimore, 1985).Google Scholar See also Kenneth Bickers, “The Problem of Governance and Institutional Change in the American Telecommunications Industry, 1876–1984,” paper presented to the 1986 Conference Group on Political Economy in conjunction with the American Political Science Association, esp. 4–30; Gable, Richard, “The Early Competitive Era in Telephone Communication, 1893–1920,” Law and Contemporary Problems 34(1969):340–59CrossRefGoogle Scholar; Bornholz, Robert and Evans, David S., “The Early History of Competition in the Telephone Industry,” in Evans, David S., ed., Breaking Up Bell: Essays on Industrial Organization and Regulation (New York, 1983), 7–40Google Scholar; and Stone, Wrong Number, 34–58.

6. It should be clear here that laissez-faire refers to policy at the state and/or federal government levels. Prior to the onset of commission regulation of telephony, municipalities often held wide powers under their local franchise and certificate of public convenience and necessity powers. Sometimes those powers were used to regulate rates and issue exclusive franchises to operate, but nationally, local regulation presented a crazy-quilt pattern. On the variance of local regulation of telephones prior to the onset of state and federal regulation, see Lipartito, Kenneth, The Bell System and Regional Business: The Telephone in the South, 1877–1920 (Baltimore, 1989), esp. chap. 6.Google Scholar

7. During the early years of telephony Bell defended its patents in some 600 lawsuits against various claimants. Herring, James M. and Gross, Gerald C., Telecommunications: Economics and Regulation (New York, 1936), 47. In 1888 a case combining five patent suits against Bell reached the Supreme Court, and the Court, by a vote of 4–3, affirmed Bell's patent rights, thereby securing the patent strategy of the monopoly period (126 U.S. Reports 1). See Bickers, “The Problem of Governance,” 13.Google Scholar

8. Garnet, The Telephone Enterprise, 44–54, and Stone, Wrong Number, 36–37.

9. Gable, “The Early Competitive Era,” 351–52, estimates Bell's net earning during those years at 46 percent.

10. The figures are calculated from Garnet, The Telephone Enterprise, 160–63. See also Gable, “The Early Competitive Era. Gable (350) offers other figures but the same story of rising and falling expansion timed to the industry's competitive structure.

11. Stone, Wrong Number, 38–39, 69–71. On the details of building an integrated network, see Garnet, The Telephone Enterprise. For the history of vertical integration, see Smith, George David, The Anatomy of a Business Strategy: Bell, Western Electric, and the Origins of the American Telephone Industry (Baltimore, 1985).Google Scholar On long-distance operations, see Langdale, John V., “The Growth of Long Distance Telephony in the Bell System, 1875–1907,” Journal of Historical Geography 4(1978):145–59.CrossRefGoogle Scholar

12. These figures are computed from Garnet, The Telephone Enterprise, 160–63.

13. Ibid., 61.

14. The major history of the independent movement is MacMeal, Harry B., The Story of Independent Telephony (Chicago, 1934).Google Scholar This study, however, was financed by the Independent Telephone Association and hence is a self-serving history. One good study of the structure of competition between AT&T and the independents, as well as among the independents themselves, in the years between 1900 and 1917 is Barnett, William P. and Carroll, Glenn R., “Competition and Mutualism Among Early Telephone Companies,” Administrative Science Quarterly 32(1987):400–421.CrossRefGoogle Scholar They found that the noncommercials, the small mutual companies, exhibited a mutualism structure, that is, their fortunes were tied together as a group (the death and survival rates of mutual companies were related). However, commercial companies—Bell and the larger urban independents—engaged in strong competition with each other. And they also found that symbiotic mutualism existed between the commercials and the mutual companies. Little competition existed between these two market segments. Lipartito, The Bell System and Regional Business, is useful on these points.

15. Gable, “The Early Competitive Era,” 345.

16. Bureau of the Census, Department of Commerce, Telephones and Telegraphs and Municipal Electric Fire-Alarm and Police-Patrol Signalling Systems, 1912 (Washington, D.C., 1915), 35–36.Google Scholar

17. Actually, the cost of service provision in urban areas was higher than that in rural areas, but that was due mainly to the higher quality of service offered in urban areas. In fact, one reason why the independents competed so successfully in the nonurban areas was that they offered a lower-quality product at a lower price than AT&T, a product-price combination more in demand in the rural areas than AT&T's offering. On this see Lipartito, The Bell System and Regional Business.

18. On the promotional activities of southern governments and commissions toward utilities, see Lipartito's, Kenneth “The Telephone in the South: A Comparative Analysis, 1877–1920,” Journal of Economic History 48(1988):419–21CrossRefGoogle Scholar; “System Building at the Margin: The Problem of Public Choice in the Telephone Industry,” Journal of Economic History 49(1989):323–36CrossRefGoogle Scholar, esp. 331–35; and The Bell System and Regional Business.

19. Herring and Gross, Telecommunications, 61–62.

20. Gable, “The Early Competitive Era,” 346.

21. Herring and Gross, Telecommunications, 63.

22. “Plan Big Telephone Merger,” New York Times, 11 July 1909, 3.

23. “Competition Really Hurts,” New York Times, 15 July 1909, 9.

24. Garnet, The Telephone Enterprise, 117–18.

25. Gable, “The Early Competitive Era,” 349–56.

26. These approaches are reviewed in detail in Mitnick, Barry M., The Political Economy of Regulation: Creating, Designing, and Removing Regulatory Forms (New York, 1980), 84–154.Google Scholar

27. Gilligan, Marshall, and Weingast, “A Reconsideration of the Railroad Problem.”

28. Some procompetitive sentiment among residential users existed, but it was concentrated in rural areas that the independent telephone companies served. See Lipartito, The Bell System and Regional Business.

29. Much of this discussion and that to follow is based upon an investigation of telephones by the New York State legislature in 1910. State of New York, Documents of the Senate of the State of New York, 133d sess., 1910, vol. 23, no. 37, part I (hereafter Senate Document—Compilation); and Mosher, William E., “Public Utilities and Their Early Regulation,” in History of the State of New York in Ten Volumes, ed. Flick, Alexander C. (New York, 1935), 8:225–26.Google Scholar

30. Gable, “The Early Competitive Era,” 348.

31. Cited from the Senate Document, 277–78, on 2 December 1909.

32. MacMeal, Story of Independent Telephony, 183.

33. Bickers, “The Problem of Governance,” 18.

34. The best study of AT's public campaign in support of regulation is Long, Norton, “Popular Support for Business Policy: The Bell System as a Case Study,” in Long, Norton, ed., The Polity (Chicago, 1962), 109–22.Google Scholar

35. The earliest article in the popular periodical press was by Clark, W., “Telegraph and Telephone Properly Parts of the Post Office System,” Arena magazine, March 1892, 464–71.Google Scholar A series of articles in Arena in the early 1900s by Clark and Frank Parsons also advocated nationalization and merger with the postal system. A useful compendium was compiled by Judson, Katherine B., Selected Articles on Government Ownership of the Telegraph and Telephone (White Plains, N.Y., 1914).Google Scholar

36. Excerpts from the Burleson Report can be found in Judson, Selected Articles, 115–19, as well as the actual research conducted by the Post Office department committee, 88–114. The research is well documented and relies heavily on statistical comparisons of rates and service between the United States and nations with government ownership of the telephone. Burleson was not the first postmaster general to suggest that the telephones be regulated. Taft's Postmaster General Hitchcock also did so, but the Burleson Report was taken more seriously.

37. The date of the speech is 13 December 1913; it is reprinted in Judson, Selected Articles, 41–87.

38. It should be noted that President Wilson did not support nationalization. See his comments on government regulation more generally as reprinted in Judson, Selected Articles, 166–67.

39. For one exception, see Bickers, “The Problem of Governance,” 23.

40. The government did experiment with nationalization during World War I. AT&T, under the direction of Postmaster General Burleson, cooperated with the government's war efforts, but disputes arose over rates. Soon after the war ended, however, AT&T reverted back to private control. While not a failure, government nationalization never again surfaced as a policy option. For more on this experience, see Bickers, “The Problem of Governance,” 24–25, and Brooks, Telephone, 150–51, 156–57.

41. Herring and Gross, Telecommunications, 213.

42. Garnet, The Telephone Enterprise, 130–31. There is some debate over AT&T's preference for state versus federal regulation. Garnet suggests that AT&T preferred state regulation, but Bickers, “The Problem of Governance,” 23, argues that it preferred federal regulation in order to avoid nationalization. My reading is that AT&T preferred state regulation but did not oppose federal regulation. For instance, in 1908 AT&T issued a public statement that it did not object to federal supervision but objected to a commission (the ICC) having the power to fix rates and tariffs and to prescribe fixed forms of accounting (“Federal Control of Telephones,” New York Times, 20 December 1980, 16). As it happened, by 1910 AT&T was beginning to be supervised by both government levels.

43. Long, “Popular Support for Business Policy,” 115.

44. It is difficult to determine definitively when states began regulating telephones and the nature of that regulation. For instance, the 1984 National Association of Regulatory Utility Commissioners (NARUC) report on carrier says that Massachusetts began regulating telephone rates in 1851, which is impossible, as the telephone was not invented until 1876. See NARUC, 1984 Annual Report on Utility and Carrier Regulation (Washington, D.C., 1985), 437.Google Scholar Further, Holmes states in an 1890 essay that “the telephone business [is] not yet under the supervision of commissioners, but selectmen and mayors and alderman may establish reasonable regulations” (1890, 423). What we do know is that the early Bell companies were incorporated in Massachusetts and therefore came under the general corporation regulations noted above. The 1911 NARUC study noted that Massachusetts was then investigating only whether or not to regulate telephones (see NARUC, Proceedings (Washington, D.C., 1911), 211–18). The 1910 New York State compilation of statutes relating to telephones and telegraphs found that Massachusetts regulated telephones under the authority of the Highway Commission. That authority, however, was not granted ratemaking power and much local control still prevailed in the state at that time (see Senate Document—Compilation, 113–25).

One last major study of early state regulation is Lipartito, The Bell System and Regional Business; also idem, “System Building at the Margin.” Lipartito focuses on the South, especially Virginia, North Carolina, Georgia, and Florida, and a few scattered northern states: Vermont, Illinois, and Massachusetts. While his studies are useful, his concern is regional (southern), while mine is national. Also, he focuses on the role of regulation in promoting the corporate policy of an integrated network, I am more interested in the motivations and preferences of the various actors involved in setting a regulatory policy course.

45. The six comprise a varied lot: Arkansas, 1935; Delaware, 1949; Iowa, 1963; Kentucky, 1935; Rhode Island, 1969; Texas, 1976.

46. The succeeding paragraphs are based on that report, Senate Document— Compilation. Another valuable source is the National Civic Federation. 1913. Commission Regulation of Public Utilities: A Compilation and Analysis of Laws of Forty-three States and of the Federal Government for the regulation by Central Commissions of Railroads and Other Public Utilities. New York: National Civic Federation, Department on Regulation of Interstate and Municipal Utilities. The Federation report compiled all statutes as of 1913 concerning regulation of utilities by commission. It is well indexed and cross-referenced.

47. Bickers reports that by 1919 thirty-four state legislatures had passed laws requiring interconnection between competing companies (21).

48. There is little about promotion of telephony, but Du Boff does a good job describing southern promotion of the telegraph. As telegraphy and telephony are so closely intertwined during the era, it is quite likely that programs similar to those for telegraphy were used to promote telephony. Mostly they tended to be grants of right-of-ways arrangements with railroads, sometimes subscribing to stock issuances. See Du Boff, Richard B.. 1984. “The Rise of Communication Regulation: The Telegraph Industry, 1844–1880,” journal of Communication, 34:52–65CrossRefGoogle Scholar, especially 60–64. Also of relevance are Lipartito, “The Telephone in the South,” “System Building at the Margin,” and The Bell System and Regional Business.

49. Gable, “The Early Competitive Era,” 357.

50. Ibid.

51. Herring and Gross, Telecommunications, 64.

52. Much of this discussion of the Kingsbury Commitment is taken from Temin, Peter with Galambos, Louis, The Fall of the Bell System (Cambridge, 1987), 9–11; Herring and Gross, Telecommunications, 65; Stone, Wrong Number, 48; Gable, “The Early Competitive Era,” 353; Robert Britt Horwitz, “For Whom the Bell Tolls: Causes and Consequences of the AT&T Divestiture,” Critical Studies in Mass Communications 3(1986):11–54, esp. 123; Bickers, “The Problems of Governance,” 27; Brooks, Telephone, 135–36.CrossRefGoogle Scholar

53. Herring and Gross, Telecommunications, 65.

54. Horwitz, “For Whom the Bell Tolls,” 123.

55. Gable, “The Early Competitive Era,” 353.

56. Stone, Wrong Number, 48. State PUCs also tended to approve of AT&T acquisition policy.