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A History of Computer Communications 1968-1988

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Changing Rules of Competition -- AT&T and the FCC

b.3 The Telegraph and the Information Revolution

 

As is the case with so many entrepreneurs, it is not that they have an entirely unique thought or concept, as important as that may be, but that they are stirred to action and see the thought brought to life, made real. Such is the case with Samuel F. B. Morse and his conceiving of the telegraph. One would never have thought such a thought would have struke Morse, for he was an artist, a painter, not an engineer or scientist strugggling with a technical problem. Nevertheless, as time will reveal, one can trace the origins of the telegraph, and thus the beginnings of the information revolution, to the mind of Morse who was somewhere over the Atlantic Ocean. Morse was returning home aboard a steam-powered passenger ship traveling from Europe to the United States after he had been studying abroad hoping to perfect his skills as a portrait painter. It happened out of the blue, one might say, after dinner one night after a particularly stimulating dinner conversation. Morse[60] wrote in his journal that night:

 

"If ...the presence of electricity can be made visible in any desired part of the circuit, I see no reason why intelligence might not be instantaneously transmitted by electricity to any distance."[61]

 

Morse had a vision of how the transmission of information could be radically transformed -- and intelligence transmitted. How? Over a communications link, a connection, a metal wire, a channel through which electrical signals could be sent and heard. Telegraphy was made possible by the simultaneously advancing science of electricity -- known in the vernacular as "lightning"[62] By 1838, sixty-two competitive claims contested Morse's discovery of the electric telegraph.[63]

 

Morse imposed intelligence on electricity by representing letters and numbers, as short and long bursts of electricity that could be heard as sounds, i.e. Morse code -- actually first conceived by Alfred Vail.[64] The telegraph then was both a system to send and receive modulated electrical signals over long distances through a wire, and a coding scheme to impose meaning on the signals. As much of a breakthrough as the telegraph was, it was inherently constrained by the modulation scheme -- dots and dashes with pauses in between -- and the bandwidth of the human ear, which is limited to approximately four thousand vibrations, or cycles, per second. (The success of the telegraph, however, drove innovation of communication technologies, as well as other information technologies, to use the eye, rather than the ear, because of its much higher bandwidth.)

 

Morse spent years perfecting the telegraph, but eventually exhausted his access to funds. Concerned that the technology might fall into the wrong hands, he solicited the Federal government to assume responsibility for the telegraph. In 1838, Morse demonstrated his system to President Van Buren and his cabinet.[65] A favorable reaction won no support in Congress. He was awarded a patent -- but without resources, again tried to garner Congress's support in 1842. This time, on recommendation of the House Committee on Commerce, $30,000 was appropriated to construct an experimental telegraph between Baltimore and Washington. The recommendation read, in part, to:

 

"seize the present opportunity of securing to itself the regulation of a system which, if monopolized by a private company, might be used to the serious injury of the Post Office Department...your committee....earnestly recommends the adoption of it by the Government of the United States."[66]

 

The Supreme Court contributed to the growth in national commerce in 1842 as well. In Swift v. Tyson,[67] the Supreme Court fundamentally changed how the rules of commercial law would be decided. Up to then, the Supreme Court attempted to resolve interstate commercial disputes by reference to the laws of the states in which the events transpired. No longer the Court proclaimed. It would now look to the norms of commercial behavior for the rules to settle disputes. Aggrieved citizens could sue across state boundaries to access this safe harbor from objected-to state laws. It was known as "diversity." Diversity motivated states to bring their commercial rules into conformance with each other. If they did not, commercial rules could be decided by agencies of the Federal government -- something no state cared to have happen.

 

Diversity rights were limited to citizens however. For corporations to have rights of diversity meant a shift in how they were treated under the law; even though they were the agents causing interstate disputes. In 1844, the Court, in Louisville, Cincinnati, and Charlestown Railroad Co v. Letson, ruled corporations could seek refuge in Federal courts, a right that the Constitution had only granted to citizens.[68]  (The Court came very close to making foreign, or out-of-state, corporations citizens.) The Letson decision proved controversial, with the Court itself seeming to change its mind in cases over the next two decades.

 

The telegraph was by now about to prove again the importance of communication infrastructure to growing market demand. The Federal government's experimental line between Baltimore and Washington D.C. was first demonstrated on May 24, 1844; the Washington site was the Supreme Court's chamber.[69] An article reporting the event three days later in the New York Tribune read: "The miracle of annihilation of space is at length performed."[70] Commercial service began on April 1, 1845; the charge -- one cent for every four characters sent.[71] After the first three months of operations, revenues totalled $193.56, and expenses were $1,859.05. The second three months barely improved. Meanwhile, Morse and his three partners -- Leonard D. Gale, Alfred Vail, and  F. O. J.. "Fog" Smith -- the owners of the Morse patents, formed the Magnetic Telegraph Company (MTC) and began negotiating licenses with private parties to build telegraph connections between other cities. MTC negotiated for an equity interest in all licensees. Then in December 1846, the Government threw in the towel on being venture capitalists,[72] especially with something that most Congressmen did not understand. The telegraph's future was to be decided by the "productive capacity," or "natural liberty," of market competition. In the spring of 1847, the Baltimore and Washington line became part of MTC.

 

Now it would be seen if the entrepreneurial energies of market competition could accomplish what the Government would not -- a national telegraph system. Said another way, could private interests bring about a public good where public efforts had failed? The entrepreneurial process received a big boost in April 1848, New York State passed a general incorporation law for telegraph companies.[73] "Any number of persons" could now organize a telegraph company without having to obtain special legislature approval. A true expression of Jacksonian egalitarian principles and disdain for the practice of special charters, New York became a mecca to the entrepreneurs who saw unlimited economic potential in instantaneous communications.  Telegraphic lines between cities grew like weeds, connecting markets that but days before took weeks for communications to exchange.  By the early 1850's, it was total telegraphic warfare.[74] Fifty telegraph companies emerged to compete.[75] The technological alternatives had been winnowed, however, from sixty-two to three: Morse's, Bain's and House's.[76] Use followed as the intense competition drove prices downward -- three-way competition between Boston and New York resulted in prices of one cent per word.[77] By 1851, in only five years, most large cities in the United States were interconnected.[78]

 

With interconnection came market growth. The first beneficiaries of lightning communications were the press. The information they made available enabled economic agents in the local markets to begin connecting to each other, expanding markets instantaneously, making them larger than anyone had ever imagined. "The lightning brought us quite a budget of news last night," so reported a Pittsburgh newspaper in January 1848.[79] News included prices of cotton, flour, breadstuffs, wheat, rye, pork, and southern oats; money market conditions in England; and railroad schedules for freight shipments.

 

An industrial economy gained critical momentum in the United States between 1851 and 1853. That is not to say that what came before was not important, only that in the space of those three years a number of events marked the acceleration of "take-off,"[80] when the engines of commerce powered the transistion to an industrial economy. Two events were just mentioned: by 1851, all the major cities had been connected together by telegraphs, and the news press had significantly lowered information costs, thus stimulating economic exchange as trade arbitraging pricing and demand inequities. In so doing, economic exchange networks began to build strictly local markets into state, and even regional operations. In addition to the telegraph and news press, the critical mass causing the emergence of competitive capitalism included the railroads and the Supreme Court.

 

The railroads revolutionized transportation. In 1853, a few years after the telegraph, the railroads provided connection to Chicago, making product exchange feasible on a new scale. The 1850's were a period of rapid growth in the number of miles of rails in operation, as the Exhibit 2.1 Railway Mileage 1830-1890 shows:


 

Exhibit 2.1 Railway Mileage 1830-1890

 

                       Year                                              Railway Mileagea

                       1830 .........................................                  23

                       1840 .........................................             2,818

                       1850 .........................................             9,021

                       1860 .........................................           30,626

                       1870 .........................................           52,922

                       1880 .........................................           93,262

                       1890 .........................................         167,191

 

The railroads[81] were no cheaper than waterways -- lakes, rivers and canals. As late as 1868, to ship a bushel of wheat from Chicago to New York by lake and canal cost 22.8 cents versus 42.6 cents by rail.[82] But  the railroad more fully integrated locations, and markets not proximate to water, and began making faster and more reliable connections routine, especially during the winter.

 

The Supreme Court almost anticipated the crisis of institutions still on the horizon when it decided Cooley v. Board of Wardens (1851). Chief Justice Taney single abstention occurred when "his" Court applied Marshall's doctrine of dormant powers[83] -- a power he strongly disagreed with -- and enunciated the principle of a "uniform system:"

 

"Whatever subjects of this power are in their nature national, or admit only of one uniform system, or plan of regulation, may justly be said to be of such a nature as to require exclusive legislation by Congress."

 

Congress has the exclusive authority to regulate national, or natural, monopolies -- uniform systems.

 

And then came the Civil War. In the context of this reconstruction, the Civil War forced the coming together of markets by economic forces, unleashed first by the telegraph and then the railroads. The War had too many effects to enumerate here, but important to the relationship of economic growth were the beginnings of the states merging into a truly unified common market, a tremendous surge in industrial infrastructure investment, the creation of new personal networks, the disruption of existing relationships, Northern political authority to impose stiff tariffs, and changed Constitutional Law. In 1868, the Fourteenth Amendment became effective and, while meant to apply to slaves, its due process doctrine would prove important to capitalism:

 

"Nor shall any State deprive any person of...property, without due process of law;"

 

After the Civil War, the telegraph prompted government activity to intervene in the economy to foster competition. In 1866, competition in telegraphy ended when MTC reorganized into the Western Union Telegraph Co. (WU), swallowing its last real competitor, as it had all others before it. (See Appendix 2.0 Western Union Telegraph Merger History.) Congress reacted. Within months, two separate, and competitive solutions to the "telegraph problems" of high prices and the perceived power of WU were proposed.[84] The one by Senator B. Gratz Brown, Missouri Republican, would have the government operate a telegraph system in competition with WU. The alternative by Senator John Sherman, Ohio Republican, sought authority to promote a competitive private company. In Congressional deliberations, three issues loomed large: pricing, lack of information, and stock "watering."[85] While the high prices of WU's service motivated much contempt in Congress, it lacked political punch. Those using telegraphs were primarily businesses and the news presses[86] who were more interested in timely and accurate transmission than costs. WU's costs seemed almost inconsequential to them when compared to communication costs pre-telegraph.[87] The lack of information made Congress unsure of itself -- What were the facts? But the only source of information was WU, the monopoly, making any information they provided seem suspect. A compelling argument for starting a competitive service to WU was for information to inform future legislation. More generally, Congress realized regulation meant having to have information, a lesson to re-emerge to inform the future.

 

Stock watering was more complicated -- and reflected deep misunderstanding of what was required to raise private risk capital. Watering referred to the practice of corporations issuing more stock than that for which it received payment, and had two causes. The first was the costs of raising "venture" capital. For example, the charter of the corporation formed by Morse and his associates in 1845, Magnetic Telegraph Company (MTC), read: "For fifty dollars paid in by subscribers.....a certificate for one share of one hundred dollars shall be issued by the Trustees."[88] In essence, the subscriber was given a one hundred percent return, on paper, as incentive to risk investment, as well as a promised current return as dividend payments. What Congressmen seemed unwilling to acknowledge was that high risk necessitated high return.[89] Government had proved unwilling to finance the risky investment of building telegraphs (1846), why should private investors be any more willing to throw their money away?

 

Corporations also watered stock when shares were issued to inventors and management as incentive to be successful. Again, from the MTC charter: "Contemporaneously certificates of stock in the same form, and to the same amount, shall be issued to the Grantors of the Patent Right, to each in proportion to his interest, so that the amount of stock issued to them and to the subscribers respectively, shall always be the same."[90] Insiders, MTC's grantors, would own half the corporation as would the investors. If the project went well, they would be rewarded along with those who had invested capital.[91]

 

In 1866, Congress passed the Postal Roads Act in response to Sherman's efforts to promote a private company.  (See Appendix 2.1 Postal Roads Act of 1866) This Act did not create a company to compete with WU, but made public land and resources thereon available to anyone who wanted to offer telegraph service as incentive to do so. It gave telegraph companies the:

 

“right to construct , maintain, and operate lines of telegraph through and over any portion of the public domain of the United States, and over and along any military or post road of the United States.”

 

Still meaningful competition did not emerge to challenge WU, so efforts again were made in Congress to curtail WU’s power. In 1868, two new bills were introduced; one on behalf of an enterprising citizen, Gardiner G. Hubbard, that called for Federal incorporation of a private corporation -- the United States Postal Telegraph Company. Hubbard envisioned this new company only transmitting messages between post offices, with post offices accepting and delivering the messages. WU, wiser to managing legislation from the 1866 experience, successfully blocked both bills in early 1869.[92] Hubbard's also went down in defeat because Congress was unwilling to grant "special privileges...to realize a large profit.."[93] In 1870, a new bill was introduced to buy WU by mid-1872.[94] It failed. Hubbard also continued to press for legislation, but, in 1873, he was again stymied. In 1875, legislation came up again, and failed. WU's monopoly continued.[95] Congress proved it too was protecting private property rights.

 

Just as Congress proved unwilling to grant privileges and immunities of incorporation, the states themselves were beginning to change how incorporations were granted. Most states had by now passed "dual incorporation systems,"[96] making small incorporations available on demand. Even so, the legislatures remained involved in most grants of corporation charters. For example, by 1875, New Jersey had had a dual incorporation system for twenty three years, during which time 2551 incorporations required legislation and 982 did not. In response to popular will, the New Jersey legislature passed a law drastically curtailing its control over corporations; one so radical, a special election of the people of the state was called. It received "decisive approval. The amendment provided that 'the legislature shall not pass private, local or special laws ....Granting to any corporation, association, or individual any exclusive privilege, immunity, or franchise whatever."[97] The people had spoken -- at least those of New Jersey -- no one should receive privileges or immunities in preference to anyone else. Everyone had equal opportunity to form and create corporations.

 

In the 1870's, the railroads also began feeling the outrage of the public. Railroads had been the beneficiaries of generous public largess -- land grants, loans, mail contracts and even purchases of common stock[98] -- so when they began operations, and posted rates that were viewed as monopolistic pricing, cries were heard that they had violated the public trust. The western agricultural interests began forming Granger organizations in 1867 and pressed for state laws regulating railroads. Numerous interest groups joined the Grangers: western Pennsylvania oil companies, eastern merchants, and oddly enough, the railroads themselves.[99] (The railroads, engaged in ruthless competition, sought government regulation as a way for those holding property to protect what they had. And one way was to restrict market entry, a privilege they would enjoy for agreeing to be regulated.) A series of court challenges were mounted to these regulatory laws, culminating in 1877 with the Supreme Court decision in  Munn v. Illinois.[100] The Court ruled states had the right to regulate businesses "affected with a public interest," or that created "a common charge or burden upon the citizens," or which were "a practical monopoly, to which the citizen is compelled to resort."[101]  The Court confirmed the right of the states to control commerce, although the issue of interstate regulation was left unaddressed.[102]

 

Also in 1877, in Pensacola Telegraph Co. v. Western Union.,[103] the Supreme Court ruled that telegraphy was affected with a public interest. The case involved a Florida chartered monopoly, Pensacola Telegraph, that had sued to enjoin the Pensacola and Lousiville Railroad from granting WU telegraph right of ways that effectively circumvented its monopoly. Citing the Sherman Act of 1866, the Court ruled that a railroad could grant telegraph rights to anyone as long as they did not interfere with another's physical lines. Furthermore, the Court extended the concept of public interest to the telegraphs, ruling that the Federal Government had the power to regulate an innovation that "has changed the habits of business and become one of the necessities of commerce." The Federal Government "legislates for the whole nation, and is not embarrassed by State lines. Its peculiar duty is to protect one part of the country from encroachments by another upon the national rights which belong to all."[104] Ironically, the Court cited the 1866 Act that had been meant to encourage competition against WU as reason WU had the right to extend its network to the disadvantage of its competition.[105]

 

In 1877, in two cases decided but months apart, the Supreme Court had ruled that the states could regulate businesses with a public interest, and, yet, the technology of the telegraph was such a necessity of commerce, thus affected with a special, as if over-riding public interest, that it came under Federal authority. Where was control of monopolies affected with a public interest to be situated? Who was going to decide the balance of public good and private interest, the Federal government or the states? And if the Federal government, what were the respective roles of the legislature, executive, and judiciary to be? And who was to decide what businesses were affected with a public interest? And for those not holding public interest, did their fates rest simply with market competition among corporations? The institutions of competitive capitalism were straining at their logical seams.

 


[60]George P. Oslin, "The Story of Telecommunications," p.13. "Morse's heritage and education strongly influenced his telegraph activities. He was born April 27, 1791 in  a parsonage at the foot of Breed's Hill (where the battle of Bunker Hill was fought in 1775) in Charlestown, Massachusetts (now part of Boston). His father was Jedediah Morse, D.D., Congregational pastor, author of the first geography printed in America, and a friend of George Washington and Daniel Webster. The Morses were Federalists, who believed the government should be guided by men of intellect and wealth."

[61]Robert Luther Thompson, "Wiring a Continent," p. 8

[62]"Canst thou send lightnings, that they may go, and say unto thee, Here we are?" --Job xxxviii. 35.

[63]Olsin, p. 19

[64]They could also be received as marks on paper.

[65]Olsin , p. 22

[66]White, p. 456. House Report 17, 27th Cong., 3d sess., p. 3 (Dec 30, 1842).

[67]See Tony Allan Freyer, "Forums of Order: The Federal Courts and Business in American History" for a thorough discussion of Swift v. Tyson. "With the dislocation created by the Panic of 1837 and subsequent years of depression, it became apparent that the federal judiciary's effectiveness in reducing the uncertainties of interstate business was threatened unless the Supreme Court established some general rule governing federal authority over the commercial law.....Joesph Story speaking for a unanimous Court, construed section 34 so as to uphold the discretionary authority of federal judges in commercial cases...From 1842 on, it was the explicit policy of the Supreme Court that federal judges could apply their own judgment in the settlement of commercial cases, irrespective of the local law of the states." p. 168

[68]Freyer, "Forums...p. 92

[69]Confirming the personal knowledge the Judges had of yet another force promising to integrate the functioning of the country.

[70]Oslin, p. 33

[71]Thompson, p. 31

[72]It is thought, although not conclusively known, that the Government turned down an offer to buy Morse's patent for $100,000. It is known that on July 5, 1845, F. O. J. "Fog" Smith, offered Morse $100,000 for his patents rights, and was refused. Source: Oslin, p. 36

[73]On May 13, 1845, the legislature had passed an Act granting construction rights to the "proprietors of the patent right of Morse's electro-magnetic telegraph."

[74]DuBoff, p. 463

[75]TBD

[76]Both Bain and House had tried to get Morse, and the company he formed in 1845(?), the Magnetic Telegraph Company (MTC), to work with them, on some form of sharing basis. Morse would have nothing to do with them. See......TBD

[77]Olsin, p.41  From Edwin N. Asmann, "The Telegraph and the Telehphone Their Development and Role in the Economic History of the United States The First Century, 1844-1944: Using a telegraph was not easy however. In the Boston Business directory of 1853, seven telegraph offices were listed:

            Albany and Boston Printing Line

            Boston and Portland Line

            House Letter Printing Line

            Magnetic Morse's

            Merchant Line

            Northern Telegraph (Morse's)

            Vermont and Boston Line

[78]It should be remembered that in 1850 only 236 cities had populations greater than 2,500 people.

[79]Richard B. Du Boff, "Business Demand and the Development of the Telegraph in the United States, 1844-1860.", p.468

[80]This expression was made famous in W.W. Rostow's "The Stages of Economic Growth," Cambridge, 1960 Rostow dated take-off from 1843-1860. p. 38

[81]The railroad story is well known. The reader is referred to ..........TBD

[82]Statistical Abstract 1891, p. 273

[83]Felix Frankfurter, "Taney.......p.1288

[84]For a full accounting of these events see: Lester G. Lindley, "The Constitution Faces Technology: The Relationship of the National Government to the Telegraph, 1866-1884.

[85]Lindley, p. 45

[86]See Du Boff

[87]Both efforts tried to equate a telegram with a piece of mail to justify regulation, since postal service was covered in the Constitution, but this argument failed: "the telegraph if altogether a different matter." Lindley, p.115

[88]Thompson, p. 448

[89]At the time, the institution of capital markets did not yet exist for corporations such as telegraphs; investors earned a return by being paid dividends, not by going public.

[90]Ibid

[91]Watering must have seemed preferable to state grants of monopoly, such as to Livingston-Fulton.

[92]Lindley, p. 107

[93]Ibid., p. 192

[94]Ibid., pp. 138-140

[95]David A. Wells, "The Relation of the Government to The Telegraph: or, A Review of the Two Propositions Now Pending Before Congress for Changing the Telegraphic Service of the Country."

[96]John P. Davis, "Corporations," 1961, Capricorn Books, New York, p. xi, Abram Chayes 1960

[97]Harold W. Stoke, "Economic Influences Upon the Corporation Laws of New Jersey," Journal of Political Economy 38 (October 1930):  pp. 566 note 48

[98]ICC p. 3

[99]TBD Cite references for all

[100]The Supreme Court ruling was confirmed and extended in the Granger Railroad Cases in 1877. Schreiber p. 105

[101]Scheiber p.105 Also Max D. Paglin (Editor), “A Legislative History of the Communications Act of 1934,” Oxford University Press 1989 : “The phrase “public interest” first entered the English legal vocabulary with Lord Hale’s seventeenth-century treatise on seaports (De Portibus Maris), whence it was imported into American legal usage by Justice Waite in Munn v. Illinois, 94 U.S. 113 (1877).” p. 15

[102]EL p. 685

[103]See Gerard Carl Henderson, "The Position of Foreign Corporations in American Constitutional Law," Harvard University Press, Cambridge, 1918, pp. 114-116 "It was in Pensacola Telegraph Company v. Western Union Telegraph Company that the real struggle between the state transportation monopolies and the Commerce Clause took place."

[104]Scheiber p. 102

[105]Lindley, p.236 "Western Union thus tied antipathy against legally established monopolies to larger, illicit, or certainly questionable, practices springing from an exclusive legislative grant. In the end, sustained by the highest court, Western Union, the large, extensive de facto monopoly overshadowed the small, independently-operated company owning lines only forty-seven miles in length."