government takeover of all telephone systems

On July 22, 1918, the U.S. government declared that it was taking possession and control of all U.S. telegraph and telephone systems:

I, Woodrow Wilson, President of the United States, … do hereby take possession and assume control and supervision of each and every telegraph and telephone system, and every part thereof, within the jurisdiction of the United States, including all equipment thereof and appurtenances thereto whatsoever and all materials and supplies.[1]

The U.S. had entered World War I in April, 1917, and in December, 1917, the U.S. government took over the railroads.[2]  Railroad operations depended heavily on the telegraph system.  However, neither this dependency, nor any other specific wartime need, clearly justified taking over all telephone systems.  Upon taking possession and control of telephone and telegraph systems, the Postmaster General declared that every effort would be directed to improving service to the public.[3]

Government ownership of the U.S. telephone system was widely and vigorously debated prior to World War I.  Leading U.S. advocates of government ownership argued for comprehensive government control of all means of communication.  For example, a 1913 report to the U.S. Senate, prepared under the direction of the U.S. Postmaster General, declared:

The founders of this nation were keenly alive to the importance of keeping exclusively under Government control all means of communication, and therefore provided in the Constitution that “the Congress shall have the power * * * to establish post office and post roads.”

The framers of the Constitution probably never dreamed of postage stamps, railway postal cars, canceling machines, pneumatic tubes [used for delivering mail in Manhattan], telegraphs, telephones, aeroplanes, and radio equipment.  They specified nothing concerning means of transportation or methods of distribution, but wisely left to future generations a broad provision under which they would have the right to avail themselves of such improved means of communication as might be discovered and developed.  It was clearly their intention that the Government should control all means for the transmission of intelligence.

[We recommend] That Congress declare a Government monopoly over all telegraph, telephone, and radio communication and such other means for the transmission of intelligence as may hereafter develop.[4]

Freedom of the press was a central issue in the founding of the U.S.  The founding fathers wrote freedom of the press into the first amendment to the U.S. Constitution.  How could freedom of the press be reconciled with government control over all means of transmission of intelligence?

The press seems to have been in a different conceptual category from other means of communication.  Print undoubtedly was a means for the transmission of intelligence.  The educational use of books, the construction of libraries, and the circulation of newspapers and magazines were publicly prominent uses of print for the transmission of intelligence.  A U.S. government monopoly over the printing press would have been inconceivable.  This political reality apparently was so obvious that it didn’t need to be considered in arguing for government control of all means of communication.

The proclamation of government possession and control deprived telephone companies of important aspects of legal due process, but affected little their practical freedom.  The government formally took over about 53,000 telephone companies.[5]  Exercising systematic, useful government control over all these companies would have required a large government organization with expertise in running telephone companies.  Since the government had no such organization, the Postmaster General declared upon assuming formal control:

Until further notice the telegraph and telephone companies shall continue operation in the ordinary course of business through regular channels.  Regular dividends heretofore declared and maturing interest on bonds, debentures, and other obligations may be paid in due course, and the companies may renew or extend their maturing obligations unless otherwise ordered by the Postmaster General.  All officers, operators, and employees of the telegraph and telephone companies will continue in the performance of their present duties, reporting to the same officers as heretofore and on the same terms of employment.[6]

An order directed to mutual telephone companies on November 18, 1918, underscored the government’s discretionary power:

Until otherwise ordered by the Postmaster General, any firm, company, or association, whether incorporated or unincorporated, owning or operating telephone systems, system, or part of a system as a cooperative enterprise and receiving no revenue either directly or indirectly from any source other than from its own partners, stockholders, or members as assessments or dues, shall not be required to comply with the orders of the Postmaster General[7]

This order did not return the relevant telephone companies to the prior regime of legal due process under which they had operated. The order merely specified more finely the address of Postmaster General orders.  With the proclamation of government possession and control, the government could legally direct ad hoc orders to specific companies.  In fact, Postmaster General orders discriminated against Clarence Mackay’s Postal-Telegraph and Commercial Cable system.  The Postmaster General described Mackay’s company as a “parasite” and transferred its operational control from Mackay to his commercial rivals.[8]

Under government control, telephone companies received rate increases that would have been difficult for them to achieve as private companies.  To control customer churn, the Bell System had been seeking for years to introduce a telephone service connection charge.  Because such a charge legally was an intrastate charge, state-level regulatory agencies needed to approve it.  Federal government control of all telephone systems allowed the federal government to enact the telephone service connection charge.  In an order issued only about a month after taking control of telephone systems, the Postmaster General established a service connection charge across the U.S.[9]

Subsequent government orders raised a variety of telephone rates more quickly than than they would have risen otherwise.  Regulated companies typically suffer during general price inflation because regulated prices tend to change less rapidly than other prices.   U.S. consumer price inflation from mid-year 1917 to mid-year 1919 was equivalent to 17% per year.[10]  A Postmaster General order raised long-distance rates about 20% effective January 21, 1919.  On March 19, 1919, the Postmaster General approved a “comprehensive scheme of changes in the local exchange rates” in the Bell System.  The scheme increased Bell System local telephone revenue by about 14%.[11]   Achieving such rate increases across all states would have required from the Bell System a huge regulatory effort.  The Postmaster General enacted these increases for the Bell System relatively easily.

In addition to enacting rate increases for telephone companies, the government also paid them compensation for deficits incurred under federal control.  The Bell System received $9.2 million in compensation from the government.  That amounted to 13% of its 1919 total income excluding compensation.  Another $5.2 million was allocated to compensation for other telephone and telegraph companies.[12]  In setting up these compensation contracts, the government essentially insured the telephone companies against financial losses.

The U.S. government’s takeover of all telephone systems worked out quite well for telephone companies.  The managers of telephone companies retained effective control of the companies.   In addition, telco managers gained the powerful tool of federal wartime authority to raise telephone rates, including intrastate rates.  Telco stockholders and bondholders got a government insured financial return from the government takeover.   The historical record doesn’t clearly indicate whether AT&T supported the government takeover.  But sources with widely divergent biases agree: the government takeover benefited AT&T.[13]

The U.S. government’s takeover worked out quite badly for the government.  The rate increases generated vehement public criticism:

This [rate increases] created a furor throughout the country, in and out of Congress, among both Republicans and Democrats, seldom equaled in intensity and bitterness.  The Republicans charged inefficiency, and Democratic Senators decried Burleson’s [Postmaster General Albert S. Burleson’s] “grasping” and “domineering” methods.[14]

The government’s management of labor issues infuriated organized labor.   Labor leaders accused Postmaster General Burleson of “introducing into public office the traditional labor policy of the antebellum Southern plantation.”  Samuel Gompers, the President of the American Federation of Labor, declare that the Postmaster General “needs only a wider field and a better opportunity to fit him for succession to some of the world’s best known but unlamented ex-dictators.”[15]  The initial refusal of telegram companies to carry a New York World article sharply criticizing the Postmaster General became a proof-text for expressing concerns about government censorship.  The Postmaster General had expected government control of the telephone companies to last at least three years.  But by mid-1919, public support for government ownership of the telephone system had largely evaporated.  The government relinquished possession and control of all telephone companies as of August 1, 1919.[16]

Despite having a broad factual basis, public debate over government ownership of the telephone early in the twentieth century didn’t produce intelligent public policy.  Public debate consistently under-appreciated the extent to which telephone service developed through the growth of both publicly owned and privately owned telephone systems.  The exceptional growth of telephone service in the U.S. through competition among non-government telephone companies also was under-appreciated.  Complicated international comparisons of rates and operational efficiency generated more discussion than simple comparisons of telephone prevalence.[17]  Ultimately, the government took control of all telegraph and telephone companies under a conceptually bizarre ideology and without clear operational goals.

Democracy worked through experience.  Taking possession and control of all U.S. telephone systems in 1918 did not work out well politically for government officials.  After a year of government control, all U.S. telephone systems were returned to their non-government owners.  The U.S. experiment in government control of the telephone system could have failed much worse.

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Notes:

[1] Presidential Proclamation, 40 Stat. 1807, July 22, 1918, effective Aug. 1, 1918, reprinted in U.S. Post Office (1921) pp. 45-7.

[2] The order taking over the railroads was Presidential Proclamation, 40 Stat. 1733, Dec. 26., 1917, effective Dec. 28, 1917.

[3] The Postmaster General’s public statement is reprinted in U.S. Post Office (1921), p. 47.  It declares:

Under the President’s order conditions are changed and greater opportunity is afforded to effect improvements and economies and a larger use by the people of these facilities which have become an imperative need in their everyday life.  Whether advantage can be taken of these opportunities to improve this service to the public remains to be disclosed by experience.  Every effort of the department will be directed to the accomplishment of this end.  It will be the purpose of the Post Office Department to broaden the use of the service at the least cost to the people, keeping in mind that a high standard of efficiency must be maintained.

Just as was true for the telephone systems, war requirements did not clearly justify government takeover of all telegraph systems.  See May (1989) pp. 1, 27-45.

[4] U.S. Post Office (1913) pp. 7, 13.   In testimony to Congress on July 2, 1918, Joseph Daniels, Secretary of the Navy, also urged permanent government ownership and control of all means of communication:

I would have the Government control and own telegraph, telephone, and all means of communication permanently. … I say communication ought to be a Government monopoly, both for the security of secrecy in war and continuous operation, and for the control of communication. It is just as important for the Government to control communication by telephone and telegraph as it is by mail.

See Federal Control of Systems of Communications, Hearing Before Committee on Interstate and Foreign Commerce, House of Representatives, July 2, 1918, p. 27.  Danielian (1939) pp. 244-6 quotes these views with apparent approval.  The British government takeover of the British telephone system in 1912 spurred interest in the U.S. in taking similar action.   Here’s a discussion of U.S. federal regulation of radio communications.  For evidence of the scope of the debate over government ownership, see Judson (1914).

[5] The government seems not to have clearly known how many telephone companies it took over.   U.S. Post Office (1921) p. 7 indicates that 981 telephone companies had annual operating revenues of $10,000 or more.  The Census of Telephones for 1917 (published in 1920) showed 1118 such companies.

[6] Public Statement of Postmaster General, July 23, 1918, reprinted in U.S. Post Office (1921) p. 47.

[7] “Release of Mutual Telephone Systems,” Postmaster General Order No. 2411, Nov. 18, 1918, reprinted in U.S. Post Office (1921) p. 52.   Arguments for government ownership stressed advantages of scale and of having a unified system.  These arguments applied with greater force to the many small telephone companies that the government first pushed out of its attention.

[8] See May (1989) pp. 46-8.  Mackay’s company focused on major markets.  That business focus today might be disparaged as “cream-skimming”.

[9] “Service Connection Charges,” Order No. 1931, Aug. 28, 1918, in U.S. Post Office (1921) p. 64.  Subsequently, Bulletin No. 8, “Service Connection Charges,” Sept. 14, 1918, clarified the service connection charges, and Bulletin No. 15, “Modified Service Connection Charges,” Nov. 18, 1918, modified the service connection charges.   See id. pp. 65, 68-70.

[10] Change in consumer price index for urban consumers, not seasonally adjusted, July 1917 to July1919, equivalent annual growth rate.

[11] Bulletin No. 22, “Toll Rate Schedule,” Dec. 13, 1918, in U.S. Post Office (1921) pp. 75-81.  See also Order No. 2797, “Amendment of Toll Rate Schedule,” Feb. 17, 1919, id. pp. 83.84 .  Toll (long-distance) percent increase from Danielian (1939) p. 256.  May (1989), p. 45, describes the rate increase as “18 to 20 percent.”  U.S. Post Office (1921) doesn’t include the orders raising local rates.  AT&T described the total rate increases as amounting to $40 million, or approximately 12% of revenue.   The toll rate increase totaled $10 million.  See Danielian (1939) pp. 256, 264.  Total local-exchange revenue was about twice toll revenue.  See AT&T Annual Report, 1919, p. 40.   These figures imply, on a revenue-weighted basis, a 14% increase in local rates and a 9% increase in toll rates.   State regulators appealed the federally ordered changes in intrastate rates and succeeded in getting state courts in 11 states to block some of the rate increases.  Under the interpretation of the Commerce Clause in 1918-1919, the Federal government’s normal authority to regulate intrastate telephone rates was not clear.  But the Supreme Court did not apply judicial review to federal government actions in time of war.   The U.S. signed the Armistice ending World War I on Nov. 11, 1918.   A legal issue was whether intrastate telephone rate increases enacted after the Armistice were a valid exercise of federal war power.   In Dakota Cent. Telephone Co. v. South Dakota, 250 U.S. 163 (decided June 2, 1919), the Supreme Court ruled that the federal action was valid.  Hence the rate increases went into effect across the appealing states.

[12] Compensation amounts for a number of companies, including AT&T, are listed in U.S. Post Office (1921), pp. 21-22.   AT&T annual income for 1919 is from AT&T Annual Report, 1919, p. 39.

[13] See, e.g. Danielian (1939), pp. 243-44, 265-70 (“The undertaking [government control] was highly successful from the companies’ point of view, if not the public’s. … The Bell System benefited handsomely”) and Coon (1939) p. 151-4 (“the results of Federal control must have been very gratifying to them [Bell officials]”).

[14] Danielian (1939) p. 269.

[15] Quotations from May (1989) p. 50, apparently from newspaper reports.

[16] Id. pp. 50-4 (regarding censorship).  U.S. Post Office (1921) p. 10 noted:

When these properties were taken over on August 1, 1918, it was generally assumed that they would be in the possession of the Government for at least three years, one additional year of war, one year before the proclamation ot peace, and one year allowed for adjustment and settlement should Congress at the close of the war require the return of the properties.

The conditional phrasing “should Congress…require the return of the properties” hints at hopes for permanent government control.

[17] See “Postalization of the Telephone,” testimony of Rep. David J. Lewis to the House of Representative’s Committee of Post Office and Post Roads, Jan. 15, 1915, and AT&T, “Government and Private Telegraph and Telephone Utilities: an Analysis,” excerpted in  Judson (1914) pp. 129-56.  International comparisons of telephone rates and telephone company efficiency are quite complicated, but international comparisons of teledensity are simple and quite telling.  Neither AT&T and supporters of non-government telephone systems nor supporters of government ownership had much regard for the value of competition.

References:

Coon, Horace. 1939.  American tel & tel; the story of the great monopoly. New York: Longmans, Green and Co.

Danielian, Noobar R. 1974 / 1939.  A.T. & T.: the story of industrial conquest. New York: Arno Press.

Judson, Katharine B., compiler.  1914.  Selected Articles on Government Ownership of Telegraph and Telephone.  Debaters’ Handbook Series.  White Plains, N. Y.: The H. W. Wilson Co.

May, Christopher N. 1989.  In the Name of War: Judicial Review and the War Powers since 1918. Cambridge: Harvard University Press,

U.S. Post Office. 1913.  Government Ownership of Electrical Means of Communication, Report to the Postmaster General by a Special Committee of the Post Office Department, Nov. 25, 1913, sent to the President of the Senate, Jan. 31, 1914. Washington: Government Printing Office.

U.S. Post Office. 1921.  Government Control and Operation of Telegraph, Telephone and Marine Cable Systems, August 1, 1918, to July 31, 1919.  Washington: Government Printing Office.

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