Natural Monopoly and Universal Service:
Telephones and Telegraphs in the U.S. Communications Infrastructure,
1837-1940
Preface
Robert E. Kahn, President
Corporation for National Research Initiatives
March 1995
"Natural Monopoly and Universal Service" describes the
development of the telegraph and telephone systems in the United
States and is the second in a series of explorations into the
history of specific infrastructures, commissioned by the Corporation
for National Research Initiatives (CNRI). A not-for-profit organization,
CNRI was created in 1986 to foster research and development for
the National Information Infrastructure (NII). Among CNRI's major
goals is to identify and nurture infrastructural technology and
services that can unlock the world of information and knowledge.
Although the components of the evolving information infrastructure
represent new technical, social and economic challenges, there
is much to be learned from historical precedents. This volume
addresses a dimension of the communications infrastructure.
The studies that make up this series are framed by several basic
questions:
In this volume, Dr. Friedlander brings together a wide range of
historical, economic, and technical perspectives to provide practical
insights into these and other important topics in technology and
culture. The past is, in many ways, a foreign country, but in
other ways, it is surprisingly familiar. The combined story of
telegraphy and telephony resonates with contemporary issues, as
inventors and entrepreneurs gradually solved problems that arose
from developing and disseminating new communications technologies.
In so doing, they transformed their present and set up our tomorrow.
Abstract
This study examines the history of the telegraph and telephone
industries in the United States from the perspectives of technology,
corporate strategy, politics, and economics. Under the aegis of
the Bell Company and its successors, the telephone followed a
path similar to that pioneered in the 1860s by the telegraph giant,
Western Union. Indeed, the telephone itself was invented in the
1870s as an unanticipated product of efforts to solve technological
limitations of telegraphy. Like Western Union, Bell targeted communications
among urban, commercial interests (as opposed to private residential
and/or rural users). And, like Western Union, Bell was eventually
organized as a private sector monopoly. Limitations in telephone
transmission capability in the 1870s and early 1880s initially
confined the telephone company to local service, while telegraphy
remained the only means of long distance communication. After
1885, Bell also began to move toward long distance service by
forming a subsidiary, American Telephone and Telegraph (AT&T).
However, technology represented a constraint on long distance
service until the introduction of the loading coil in 1900-1901.
What drove AT&T's research and development in long distance
telephone technology in the late 1880s was the coming expiration
of key patents in 1894, when AT&T foresaw intense competition
that did, indeed, occur. Between 1894 and 1907, independent telephone
companies proliferated to meet consumer demand that AT&T (re-structured
in 1899 as the holding company of regional operating companies)
had ignored. This partially organized independent movement challenged
the Bell companies in key regions, notably the Midwest and the
North Central states. To counter it, AT&T through its affiliates
similarly expanded its scope of service. AT&T gradually assumed
technological and organizational control of an integrated system
of local and long distance service through a policy of interconnections
with selected independent companies as well as through acquisitions,
mergers, and (after 1907) a willing acceptance of state and federal
regulation. Although dual service (i.e., access either to the
Bell System or to telephone service offered by an independent
company) persisted into the 1920s, the independents operated within
the technological standard set by AT&T.
The telephone system was not fully extended to provide potential
access to the entire population, particularly the dispersed rural
poor, until the Rural Electrification Act (REA) and other federal
programs provided the incentive after World War II. Thus, state
and federal programs, which were designed for other purposes,
were also instrumental in the expansion of telephone service to
serve national needs.
Amy Friedlander
Power and Light: Electricity in the U.S. Energy Infrastructure, 1870-
1940
Amy Friedlander, 1996
Preface
Robert E. Kahn
President, Corporation for National Research Initiatives
January 1996
"Power and Light" is the third in a series sponsored
by the Corporation for National Research Initiatives (CNRI) on
the historical development of large-scale infrastructure in the
United States. It concerns the technology and infrastructure of
electricity.
CNRI is a not-for-profit organization, formed in 1986 to foster
research and development for the National Information Infrastructure
(NII). Among CNRI's major goals is a program of research to identify
and nurture infrastructural technologies and services that will
unlock the world of information and knowledge and enhance the
nation's productivity, particularly in science and engineering.
The NII will probably take shape over time through a Brownian
motion of competing interests, largely but not exclusively from
the private sector, with sources and applications ranging from
entertainment to medicine to geophysics. In this sense, the developmental
model is an evolutionary one, and it is reasonable to ask the
historical question, how have other large-scale infrastructures
evolved? In their separate ways, the volumes in this series answer
that question.
Each of these studies begins with the same set of questions:
In this survey of the literature on electricity and electrification,
Dr. Friedlander traces the inter-relationships among technology,
economics, society, and politics. These dynamics have often been
conveniently reduced to the adage, "technology push; demand
pull." But as the following discussion will show, the "push"
and the "pull" are two extremes in a complex continuum
in which electrical technology was pushed to meet demand even
as advances in technology increased expectations.
Not too long ago, the Chronicle of Higher Education (July
7, 1995) ran a cartoon showing a travel agent confirming reservations;
the caption reads, "let me see if I've got this -- tropical,
lush, remote, unspoiled, king-size bed, Internet access."
As we build the information infrastructure of tomorrow, we can
expect advancing technologies to offer similar opportunities and
choices.
Abstract
After disparate experiments in the U.S. and abroad, beginning
with Michael Faraday's in 1831, electricity owes its origins as
an energy infrastructure in the U.S. to Thomas Edison's work in
the late 1870s. Edison was not just exploring the properties of
electricity. Rather, he and the members of his laboratory were
examining the attributes of electricity in the context of solving
a particular problem: devising a system of interior illumination
that was competitive with gas. The gas companies also provided
Edison with his model of organization, distribution, and delivery
of services to prospective customers. Thus, he conceptualized
a specific product -- lamps -- in terms of a technological and
an organizational system that contained generation, transmission,
regulation, and delivery of electrical power together with a mass
production manufacturing process and a corporate management structure.
Quickly, however, electric illumination split off into separate
but related companies that manufactured and sold appliances and
equipment or provided services to power users. Eventually, power
generation and distribution itself divided into the power producers
(whether hydro or coal), the electrical transmission companies,
and the local utilities. Separate from these companies were the
financiers. Most of these entities formed interlocking relationships
that culminated in the organization of holding companies after
1910.
The advantages of the holding companies were that they stabilized
financially precarious small utility companies and supplied management
and engineering expertise, thus implicitly standardizing operations
and equipment. The disadvantages were that they tended to reduce
competition and were said to be unresponsive to local needs. Moreover,
since the companies were highly leveraged, a tremor in one part
of the organizational system could and did have far-reaching repercussions
for consumers. Samuel Insull's electric power holding company
controlled and generated one-eighth of the nation's power in 1931,
and when the company failed, it affected over 1 million stock
and bond holders as well as 41 million customers.
Unlike gas, electricity cannot be effectively stored in large
quantities. Thus, plant size was a function of maximum or peak
demand. Despite decentralized alternatives offered by batteries
or self-contained generating plants that served one or two buildings
or perhaps an industrial complex, the American model was central
station generation and distribution on an increasingly expansive
scale. The focus on central station electric power generation
and distribution derived partly from Edison's vision and partly
from Insull's strategy, which called for encouraging energy use
to achieve greater production capacity and increased revenues,
while passing off savings to the consumer in the form of lower
prices to stimulate even greater consumption.
Edison's system had been based on direct current (DC), which had
a practicable transmission range of about one mile. From 1880
to 1920, most of the innovations, including the use of alternating
current (AC), were designed to increase the range, scale, and
capacity of the central power station concept. Indeed, the Niagara
project (1895) demonstrated the possibility of a regional system
based on a hydroelectric generating station, high voltage transmission
lines, substations, and local distribution. Improvement in coal-fired,
steam-powered generators achieved similar increases in capacity.
In the 1920s, inter-connection of generating plants and distribution
systems together with pooling of energy sources enabled transmission
grids to integrate coal- and hydro-powered generating plants into
an expansive distribution system that served a diverse range of
demands.
Interior electric illumination in the 1880s was initially a luxury
for the average consumer. It was introduced first into commercial
establishments, like theaters and department stores, as well as
into affluent residences. Electricity was first adopted by industry
in small, labor-intensive and new industries, which took advantage
of its fractional attributes -- meaning that the same system could
support small machines, which used motors of less than 1 horsepower,
and larger ones, such as motors of 1 to 10 horsepower. Central
power station delivery allowed them to pay only for what they
consumed and did not have to meet the relatively high threshold
cost of installing and maintaining a self-contained power source,
like a steam engine or an independent electric power plant nor
find a means of exhausting the generated heat. Electricity was
subsequently adopted by the large scale, heat-intensive industries,
such metallurgy or food processing, in which the thermal properties
possessed value for the industrial process. Electrification of
industry led to substantial re-engineering of the industrial plant
to achieve ancillary benefits in the form of more efficient uses
of space as well as unit drive systems (i.e., one energy source
per machine).
The 1920s were the era in which electricity permeated the home.
By then, occupants of cities and burgeoning suburbs had access
to multiple energy technologies. Although electricity continued
to be most intensively used by the affluent, the presence of interproduct
competition from gas and oil meant that prices for electricity
tended to stay low. Falling prices, increased wages, and the decrease
in the number of servants willing to staff middle and upper-middle
class households fundamentally increased the material standard
of living for the working class, while increasing the burden of
housework for many women. With improvements in several household
energy systems, which brought about gas and electric ranges, hot
water heaters, irons, vacuum cleaners and refrigerators, Americans
began to enjoy and to expect a cleaner personal and environmental
standard. Laundry, which in an earlier time might have been sent
out or assigned to a laundress who came in once a week, now became
a routine household chore for the lady of the house.
From Edison's lab in New Jersey to John Ryan's copper mines in
Montana, electrification was largely a private sector phenomenon.
Cities, of course, were among the earlier consumers, and municipal
regulation was a constant from the 1880s onward. From experience
with both water and gas, which predated the Civil War (1861-1865),
it was obvious that municipal franchises, which implied a degree
of regulation, would be necessary to obtain access to rights-of-way
within which to construct the conduits. State regulation of electric
utilities was instituted in 1887 in Massachusetts, and state regulation,
exercised through setting rates, has remained the dominant form
of public oversight.
For the most part, industry executives pursued a cooperative policy
toward state regulatory agencies, with the savings they achieved
through improved technology passed along to consumers in the form
of lower rates. Interproduct competition from gas and oil for
heat (if not for interior illumination) as well as the specter
of public regulation or even public acquisition became powerful
incentives for cooperation with regulatory agencies as well as
for price discipline by the utility companies themselves. Regulation
tended to manifest itself primarily through setting rates, and
the rate structure itself became a marketing tool, designed to
attract large, industrial users who might otherwise have installed
self-contained, independent plants which potentially competed
with central station power. Although residential consumers paid
more per unit of power on average than large industrial consumers
did, and, indeed, generated more profitable revenues for the power
companies, stable or falling prices relative to higher wages,
particularly in the 1920s, muffled consumer discontent.
Federal New Deal programs were aimed toward dismantling holding
companies and limiting interstate operation of electric holding
companies. Regulation was believed justified in order to protect
the public from widely perceived abuses. It is unclear how successful
this regulatory function has been, based on studies of consumer
prices and the extent to which early regulatory agencies in fact
protected power companies from competition. It is, however, evident
that federal intervention, in particular, was instrumental in
expanding electric power to underserved, predominantly rural populations
through the REA and other New Deal and Truman-era programs.
Amy Friedlander
Preface
"In God We Trust" All Others Pay Cash
Amy Friedlander, 1996
Preface
Robert E. Kahn, President
Corporation for National Research Initiatives
December 1996
"In God We Trust" is the fourth in a series sponsored
by the Corporation for National Research Initiatives (CNRI) on
the historical development of large-scale infrastructure in the
United States. In this volume, we look at the notion of banking
infrastructure, which includes the cooperative arrangements along
with the shared assumptions and procedures that enabled funds
to flow (actually information about funds, to be precise) among
banking institutions and across regions. The banking area is of
particular interest in that it was not derivative of a particular
technological innovation or group of innovations.
CNRI is a not-for-profit organization, formed in 1986 to foster
research and development for the National Information Infrastructure
(NII). Among CNRI's major goals is a program of research to identify
and nurture infrastructural technologies and services that will
unlock the world of information and knowledge and enhance the
nation's productivity, particularly in science and engineering.
Banking offers us a clear example of a technology-independent
industry in which there were positive incentives to develop cooperative
arrangements and hence to invent forms of organizational networking.
Inextricably linked to evolving political and economic processes,
its history has much to tell us that is relevant to understanding
the possible development of the NII.
Prior studies of railroads, telephones and telegraphs, and electricity
hinted at the importance of finance in the development and diffusion
of technology, Here, Dr. Friedlander steps back one level and
asks the question, how did the system of finance itself evolve,
and what role did non-technological infrastructure play in the
process? She concludes that the information infrastructure of
banking rested on the idea of money as a "currency of information
exchange". Its beginnings lie deep in the past, but like
so many American institutions, it came across the Atlantic and
grew up with the country.
Abstract
This paper is the fourth in a series of historical discussions
of large-scale infrastructures in the United States. It is based
on three questions: When and how did take-off occur? What were
the public and private roles? And, how did an infrastructure--characterized
by access, "shareability," and economic advantage--emerge?
It argues that banking is inherently a system of information
transactions rather than a technology-driven infrastructure.
Although its form and function has changed and expanded, banking
is basically an information infrastructure, and has been a feature
of economic life in the U.S. since the eighteenth century when
it provided credit and was a mechanism for transferring the collective
savings of the population into large and small-scale investments.
Subject to chronic stability, banks runs, and panics, commercial
banks gradually evolved systems of cooperation among banks and
other financial institutions, which tended to reduce the instability
and hence to increase their respective profitability. Over time,
federal interventions came to dominate the distinctive American
system comprising concurrent state and federal banking systems,
brokerages, investment houses, and financial concerns that evolved
piecemeal over the nineteenth century. Of these, commercial banks
have historically been the most important.
At the national level, Alexander Hamilton's proposal to organize
the federally chartered but privately owned First Bank of the
United States set fundamental terms of American banking: it would
use privately owned banks to serve a public mission, namely, the
stabilization of the national debt and the management of currency
(or the money supply). The First National Bank of the U.S. also
helped fan the controversy in the early 1790s over the extent
of federal power, which led to the formation of the first political
parties. The bank's charter expired in 1811, and the Second Bank
of the United States was granted a federal charter in 1816, but
the bank did not become operational until after a panic in 1819.
During this period, from the 1790s onward, the states also continued
to charter banks. Between the expiration of the charter of the
Second Bank of the United States in 1836 and the passage of Civil
War-era banking and currency reform legislation in the early 1860s,
the country was served only by state banks. This was the period
of so-called "free banking" in which banks that met
legislated criteria could go into business without obtaining individual
charters or licenses.
Although minting money in the form of coin was reserved to the
federal government by the Constitution, the circulating medium
was largely paper. Prior to the introduction of checking in the
1850s, the ability to issue widely accepted paper money or notes,
backed by specie reserves, was critical to banking. The net result
was a plethora of paper currencies of varying value. Both the
First and Second Banks of the United States attempted to stabilize
the monetary system, but the efforts of these institutions do
not appear to have been as consistently successful as cooperative
structures developed by the banks themselves. Domestic money
markets provided a means of winnowing weak bank notes from the
strong, and published discount rates provided information on levels
of risk, captured in the discount rate, which was associated with
various instruments (e.g., promissory notes). Interbank arrangements
that were intended to stabilize the value of money, and hence
to stabilize banking, included the Suffolk System in New England
1818-1858); state-mandated and voluntary insurance programs in
New York, Michigan, Vermont, Indiana, Ohio and Iowa between 1829
and 1860; and the clearinghouse system, which originated in New
York in 1853. In all of these enterprises, cooperation was in
the immediate self-interest of the participants, because it appears
to have increased public confidence in the banking system,
and therefore reduced the likelihood of a panic. On the other
hand, increased interdependence in the form of the bankers' balances
and fractional reserve system also meant that sudden demands on
one bank might be easily transmitted to others.
Yet another component in the emerging financial system that directly
affected the stability of banking was the call loan market, a
mechanism whereby funds deposited in commercial banks were made
available for short-term investment in the securities market.
Hierarchical, correspondent relationships and bankers' balances
deposits by one bank in another resulted in pooling funds in the
major cities, with New York at the apex; this emergent set of
relationships was, in fact, codified by the Civil War banking
legislation. Commercial banks habitually invested the bankers'
balances in the call loan market where investors and brokers sought
short-term capital for which they were willing to pay high interest
rates.
It became evident in 1857 that tremors on Wall Street--resulting
from any one of a number of sources, from international gold prices
to bad news from Washington--were transferred to commercial banks.
And increased demand on city banks from country banks, which were
required to maintain minimum reserves in the face of unexpected
demand from their depositors, might force city bankers
to call in their loans and/or drive up the cost of money on Wall
Street, resulting in sales of bonds and stocks in a weak market,
tight money, or both. Thus, reserve requirements, which had been
invented to safeguard first notes and then deposits, actually
contributed to instability during periods of high demand by compelling
country banks to withdraw their deposits from their city correspondents
and by setting a threshold on the assets that a bank might liquidate
for short-term use. This was to some degree ameliorated by clearinghouse
strategies that made short-term loans available to their members
so that sudden demands for liquidity might be more easily met.
Over time, public authority over banking increased in part to
stabilize periodic dislocations in the system--panics--and in part
to help it work more smoothly. Substitution of a national currency,
for example, eliminated efficiencies that resulted from intrastate
money markets. But many of the features of federal banking legislation
were based on the experience of the states, particularly New York,
and the federal banking structure did not, therefore, offset inherent
weaknesses. For example, hierarchical interdependent relationships,
which obligated banks to deposit funds on account with other banks,
meant that tremors in a few key markets might be more easily transmitted.
More over, banks continued to operate under state banking laws
and to make investments in real estate mortgages and other instruments
that were legislatively closed to the federally authorized national
banks. And indeed, some of the most recent research suggests
that the least stable sector of the commercial banking industry
in the 1920s were the state-insured state banks, which might choose
to remain outside of the Federal Reserve system, and which were
most heavily invested rural mortgages at a time when agriculture
was slowly collapsing.
Even the Federal Reserve Act (1913), which created a lender of
last resort, perpetuated many earlier forms, such as the clearinghouse
and hierarchical interdependence. The Federal Reserve also relied
on a fairly weak regulatory approach that created incentives for
banks to conform rather than mandates to which they must comply.
New Deal legislation in the 1930s marked a significant departure
from what had proceeded by positing a series of requirements that
state and national commercial banks were obligated to meet in
order to do business and by separating commercial from investment
banking. But although bank reform in the 1930s reflected the
New Deal's positive obligation to ensure a minimum threshold of
financial stability, banking reform under FDR maintained the long-standing
commitment to executing public goals through privately owned banking
institutions.
Amy Friedlander
